Why does liquidity come before return for business cash?
Liquidity comes first because a company fails when it runs out of cash, not when it earns a modest rate on its savings. Money tied up in something you can't sell quickly, or can only sell at a loss, is no help when payroll, a tax bill or a large supplier invoice falls due.
The question usually arrives after a good year leaves a large balance in the current account. So do the approaches, from banks, brokers and strangers on LinkedIn. Before looking at any of them, decide how much of the balance is genuinely spare: not needed over the period you're planning for, even if trading turns out worse than expected.
Leaving everything in the current account is a decision too; it's simply one nobody wrote down. Three tiers turn it into a deliberate choice, in the order our safe investing service for company cash follows: safety, then access, then any return.
What are the three tiers of company cash?
Company cash falls into three tiers. Operating cash covers the next few months of outgoings. The reserve absorbs shocks such as a lost customer or a payment that arrives months late. Strategic money is whatever remains once the first two are full, and it's the only part you can sensibly commit for longer.
Tier 1: operating cash
Pays wages, suppliers, rent, tax and loan repayments as they fall due. Held where you can use it the same day.
Tier 2: reserve
The buffer for a major customer paying late, a dip in sales or an urgent repair. Reachable within days or weeks, with little or no risk to the amount.
Tier 3: strategic money
Cash you won't need for a year or more. Only this tier can accept reduced access or some movement in value, and only within limits the board has set.
The tiers fill in order: top up operating cash from the reserve, and refill the reserve before anything goes into tier 3. If the forecast can't fill both of the first two tiers, there is no strategic money yet, however healthy today's balance looks.
How much cash should a business keep in reserve?
There's no single right figure, so size it from your own cash flow forecast. Keep operating cash for the months of outgoings you'd need to cover if receipts were delayed, add a reserve for a realistic bad case and for the bills you already know are coming, and treat only what's left as money you can commit for longer.
Rules of thumb such as 'six months of costs' are a starting point at most. A business paid monthly by hundreds of small customers can run leaner than one waiting on three large contracts.
Start from a forecast
Use a monthly forecast covering at least 12 months, plus a weekly view of the coming quarter; our guide to the 13-week cash flow forecast covers the weekly part.
Choose the operating months
Decide how many months of outgoings tier 1 should hold. Two to three is a common starting point; seasonal businesses usually need more. Use gross outgoings, not net.
Stress the forecast
Run a few bad cases: the biggest customer leaves, sales fall by a fifth, a large invoice is paid three months late. The deepest cash shortfall across those cases is a sound starting point for the reserve.
Ring-fence known commitments
Add what's already decided for the next year: a tax bill, a loan repayment, a planned hire, new equipment. These sit in the reserve tier beside the buffer, never in strategic money.
Treat the rest as strategic
What's left is the most you could commit for longer. You needn't place all of it; holding more in the first two tiers is a valid choice.
What does a three-tier split look like in practice?
Take a fictional services company with $1,200,000 in the bank and outgoings of about $150,000 a month. Three months of operating cash, a reserve sized from a lost-customer scenario and known bills for the year leave $240,000 as strategic money: a fifth of a balance that looked largely spare. Every figure is invented.
| Tier | What it covers | How it was sized | Amount |
|---|---|---|---|
| 1. Operating cash | The next three months of outgoings | 3 × $150,000 | $450,000 |
| 2a. Reserve for shocks | Largest customer lost for six months | Deepest shortfall in the stress case | $360,000 |
| 2b. Known commitments | Tax bill and equipment due within 12 months | Amounts and dates from the forecast | $150,000 |
| 3. Strategic money | Not needed for at least 12 months | What is left | $240,000 |
| Total | $1,200,000 |
Even that $240,000 depends entirely on this company's forecast. Put a second large customer at risk in the stress case and tier 3 could vanish. A business that relies on one customer may never have a tier 3 at all.
Illustration only: a fictional company with invented figures, not a suggested allocation for your business.
Where should a business hold its cash reserves?
Hold each tier according to how soon you might need it. Operating cash belongs in accounts you can use the same day. The reserve suits places you can reach within days or weeks with little risk to the amount. Only strategic money should go anywhere that locks it up for longer or can fall in value.
| Tier | When you might need it | What the policy usually requires | Categories companies often consider |
|---|---|---|---|
| Operating cash | Any day | Same-day access, no risk to the amount | Current accounts, instant-access bank deposits |
| Reserve | Within days or weeks | Short notice, very low risk to the amount | Notice deposits, short term deposits, money market funds, short-dated government bills |
| Strategic money | A year or more away | A clear purpose, plus limits on lock-in and on how far value could fall | Longer term deposits, government bonds, diversified funds, within board limits |
The classic mistake is putting reserve cash into something with a lock-in, an exit penalty or a value that moves. Before any money goes anywhere, ask in writing how you get it back, how long that takes and what leaving early costs.
A promise of high, steady returns with little risk is a warning, not an opportunity; our guide to investment fraud red flags explains why.
Instrument categories are listed for orientation only. Which, if any, suit your company depends on your policy, your jurisdiction and, where needed, regulated advice.
Why set concentration and counterparty limits?
Concentration limits stop one failure from freezing all of the company's cash. If everything sits with one bank, one fund manager or one type of instrument, a single problem can cut off access exactly when you need it. Limits cap how much goes to any one counterparty, instrument type or maturity date.
A workable set of limits usually covers five things.
- A cap per bank or institution, as an amount or a share of reserves, with a lower cap for weaker names.
- A minimum credit rating or financial standing, and what happens when a counterparty falls below it.
- A cap per instrument type, such as funds or fixed-term deposits.
- A maturity spread, so cash comes back in steps rather than all on one date.
- A record of whether deposit protection covers business deposits where you bank, and to what amount. Deposit guarantee schemes differ from country to country, and some don't cover larger companies, so check the scheme's own rules rather than assume.
Spreading cash adds admin, so scale the limits to the company; a small business might use two or three banks. Write the limits down and check them every month. Before opening any account, confirm the institution is authorised where it operates, using the steps in our guide on checking an investment firm.
What should a board-approved treasury policy contain?
A treasury policy is a short document, approved by the board, that sets the rules for company cash. It puts the objectives in priority order and explains how each tier is sized, which instruments are allowed, the limits, who can decide and sign, what the board sees and when the policy itself is reviewed.
| Part of the policy | What it says |
|---|---|
| Objectives | Protect the money, keep enough of it available, then seek a return, in that order |
| Tier rules | How each tier is calculated from the forecast, with minimum amounts |
| Allowed and banned instruments | The categories permitted for each tier, and what is never allowed: borrowing to invest, anything held outside the company's own name, anything the board can't explain in a sentence |
| Limits | Per counterparty, financial strength, instrument type and maturity |
| Authority and controls | Who proposes, who approves, the signatures needed above a threshold, and how new bank details are verified |
| Reporting | Balances by tier, counterparty and maturity date, and how often the board sees them |
| Breaches and exceptions | What happens when a limit is broken, and who can approve a one-off exception |
Bank-detail checks belong in the policy too, because spreading a reserve across four banks doesn't help if a payment from any of them goes to a fraudster. Our guide to invoice and payment fraud sets out the controls.
Run the policy on two clocks. Every month, compare balances with the tier sizes in the updated forecast and move money where a tier is short or over-full. Once a year, review the policy itself, or sooner after a funding round, a new loan or the loss of a major customer. Keep it short enough for a new director to read in one sitting.
Where can you check deposit protection and the institutions you use?
- The deposit guarantee scheme in each country where you hold money: whose deposits it protects, up to what amount, and whether businesses are covered.
- The financial regulator's public register, to confirm that a bank, fund manager or broker is authorised before you open an account.
- Each institution's own terms for notice periods, fixed terms and early withdrawal.
Protection limits and eligibility change over time. Check the scheme's own website before you rely on it.
How can Ledgantic help?
Ledgantic can run this exercise with your team: build the cash flow forecast, size the three tiers from it, set the limits and draft the treasury policy for your board to approve. You keep the spreadsheet and the policy. We don't recommend specific investments, so which products, if any, fill each tier stays your decision.
The policy and tier model come from our safe investing work for company reserves, and the forecast behind them from our cash flow and treasury service. Get in touch with a rough picture of your balance and monthly outgoings; the introductory consultation will establish what your policy needs to cover.