Holding cash vs. investing: What businesses should consider

Deciding whether to hold cash or invest it depends on your business’s current financial situation, long-term goals and the unique circumstances it faces. Cash can be essential for short-term needs, like payroll and unexpected expenses. But investing your surplus funds may offer higher returns over time.

So how can you ensure you’re making the right decision for your company’s financial position? Here are a few key factors to keep in mind to help you balance your capital expenditures and savings strategy—so your business can keep growing while remaining financially stable.

What you’ll learn:

• Businesses typically hold cash to cover ongoing expenses, handle emergencies, manage cash flow and take advantage of short-term investment opportunities.

• Business investments can help support your company’s growth, stay competitive, diversify risk and create efficiencies.

• When your business has built up cash reserves and has predictable, stable cash flows, it may be time to use some of that surplus cash to invest in the company.

Your business may hold cash for several strategic reasons, including:

Emergencies can happen at any time—unexpected expenses are part of running a business. Make sure your company is ready for them by maintaining a healthy cash reserve. If you don’t have enough capital on hand, consider opening a line of credit to help you cover emergency expenses when they come up.

Cash reserves aren’t just for emergencies. Cash can be essential for covering ongoing business expenses such as payroll, taxes, rent, utilities and marketing. Many financial experts recommend maintaining at least three to six months’ worth of operating expenses in cash to provide stability.

Keeping cash on hand can provide a buffer during economic downturns or when sales dip. Monitoring cash flow closely can help you anticipate shortfalls, manage timing gaps and plan for upcoming expenses. 

It’s often more important to monitor cash flow than to focus solely on revenue. For example, a company generating $1 million in revenue and maintaining enough cash to cover expenses for two months may be more viable than a company making $10 million that can’t cover its expenses for more than a couple of weeks.

Holding cash can make it easier to move quickly when investment or acquisition opportunities arise—whether that’s a strategic investment in securities or assets, or expanding operations by purchasing new equipment at a discount.

Holding cash equivalents—such as short-term certificates of deposit (CDs), money market accounts, Treasury bills or other short-term bonds—can help your business preserve liquidity while still earning modest returns. While they may not generate the same returns as stocks, they typically offer greater stability and can be converted to cash when your business needs it.

Business investments can help your company grow while staying competitive and innovative. Here are a few reasons your business may consider investing surplus cash:

Capital expenditures, like purchasing new equipment, upgrading technology or investing in building improvements, can help you take advantage of growth opportunities. These investments may allow you to expand into new markets, increase production capacity or improve service offerings. As a result, you might see an increase in revenue while also improving your ability to adapt to market fluctuations.

Markets evolve quickly, and businesses often need to adapt based on supply and demand trends and shifting priorities. Investing in your company by adopting new strategies, innovations and technologies can help give your business the competitive edge it needs to stand out.

You can reduce risk by diversifying across investment types so no single asset class, holding or market shift significantly impacts your overall returns. Losses in one area may be offset by gains in another, helping protect your company’s surplus cash while still supporting long-term growth.

Investing in processes and automation can help improve operational efficiencies within your company—and generate long-term returns. For example, automating invoicing, improving inventory tracking or streamlining internal approvals can help reduce errors, cut costs and improve productivity over time.

Business investments can help your company earn higher returns on its surplus cash. Holding idle funds may lead to a loss of purchasing power over time, since inflation may outpace the interest earned on cash holdings. Strategically investing surplus cash can help support your business’s growth through long-term returns while still maintaining enough liquidity for any short-term needs.

If you’re weighing the benefits of holding cash versus investing, it may be a good idea to review your business’s financial strategy. You may consider investing excess cash in your business when:

• You’ve built sufficient reserves and your short-term obligations are covered.

• After inflation and taxes, your cash holdings aren’t earning a significant return.

• High-return opportunities have arisen that align with your strategic goals.

• Your company is growing and has predictable cash flows.

Evaluate your company’s operations and weigh the costs and benefits of holding cash versus investing it. Balancing liquidity and growth is an ongoing process. If you understand your company’s financial position, you’ll be able to make informed adjustments as conditions change. This can help you create a resilient and sustainable plan for the future.

If you’re looking for ways to reinvest in your business, Capital One offers several business credit cards you can use to support your business’s growth. You can see what you’re pre-approved for before applying, with no impact on your credit scores.