Key Takeaways
Excess cash is a timing problem. Match each dollar to the date you will need it, and you protect operations while giving the rest a chance to grow.
- Match every business dollar to a deadline, then pick the account that fits that deadline.
- Count the full cost of idle cash: lost yield, inflation, and possible accumulated earnings tax.
- Split capital three ways: operating reserves, mid-term fixed income, and long-term growth.
- Your entity type decides which tax rules apply, so settle that with your CPA before you move money.
Excess cash builds up in a healthy business faster than most owners expect. A few strong quarters, a delayed equipment purchase, or a large client who pays early, and your operating account holds far more than the business needs. That balance feels safe. Left alone, it usually is not.
Cash that sits earns little and loses ground to inflation every year. Move too much into investments, and you can come up short when payroll lands. Give every dollar a job and a deadline.
What Idle Cash Actually Costs You
Holding $2 million in a business checking account that pays 0.10% earns about $2,000 a year. At a 4% yield in Treasury bills or a money market fund, it would earn roughly $80,000. Over three years, that gap tops $230,000 before taxes. It never appears as a line item. Rates move, so check current yields. (TreasuryDirect)
Inflation takes a second bite. At 3% a year, $2 million holds about $1.83 million in purchasing power after three years and $1.73 million after five. Nothing left the account, but what it buys shrank. (Investopedia)
Then there is tax. A C corporation can face an accumulated earnings tax on profits held beyond the reasonable needs of the business. A minimum credit tied to $250,000, or $150,000 for certain service corporations, covers smaller balances but phases out as retained earnings build. Past that, only a documented business purpose protects the balance. Ask your CPA where you stand.
Make Your Excess Cash Work Harder
Every dollar has a different job depending on when you need it. Sort by timing, then pick accounts to match.
Start by sizing your operating floor
Multiply your fixed monthly costs by three to six months, depending on how steady your revenue is. Then, add the tax payments due over the next four quarters and any capital purchase already on the calendar.
Say fixed costs run $250,000 a month. Four months is $1 million, plus $400,000 of tax for the year and $300,000 of equipment next spring, so your floor is about $1.7 million. Those last two sit outside the window because they are dated bills, not run-rate. Everything above is surplus. For more, see how much cash your business should keep in reserve.
Short-term homes for money you may need within a year
Access and stability come first. A high-yield business savings account keeps cash liquid and pays more than standard deposit rates. Mind the limit: a corporation’s deposits are generally covered only to $250,000 per insured bank, with its accounts at that bank combined. (FDIC) Larger balances belong across several banks or in a sweep, and the kind matters: a deposit sweep stays insured, a money fund sweep does not.
Treasury bills mature in four weeks to one year and carry U.S. government backing. Their interest is exempt from state and local income tax if you hold it personally. Utah taxes corporations through a franchise tax that can reach Treasury interest, so check with your CPA before assuming it applies inside a C corp. Money market funds add flexibility but carry no insurance.
Mid-term homes for money you need in one to three years
This is the bucket most owners skip. Money for an expansion or a key hire two years out is too far off for savings and too close for stocks. Short-term bonds, Treasury notes, and CDs timed to that date fit here. You trade yield for certainty.
Long-term homes for money you will not touch
When money can sit for three years or more, the job shifts from safety to growth. Bonds pay income with moderate swings. Broad-market stock funds do most of the long-term compounding. All of it can lose value along the way, so only money you can leave alone belongs here.
Where you hold it matters as much as what you buy
Interest is generally taxed at ordinary rates. If your business is an S corp, partnership, or LLC, income lands on your personal return, where qualified dividends and long-term capital gains are usually taxed at lower rates. Inside a C corporation there is no preferential rate; investment income is taxed at the flat 21% corporate rate. So your entity decides whether asset location helps at all. Settle it with your CPA and fiduciary advisor, alongside tax planning.
A Real Example: A Utah Owner With $3 Million in Idle Cash
A Utah distribution company owner in his early 60s came to us with about $3.2 million in his C corp’s operating account, earning almost nothing. His household held roughly $8 million in investable assets, about 60% in taxable accounts, and he was weighing a sale in four or five years.
We started with the operating floor. Payroll, taxes, and planned equipment came to about $900,000 over twelve months, so it stayed liquid in a business savings account and a Treasury bill ladder. A $600,000 expansion set for year two went into short-term bonds timed to that date, leaving $1.7 million with no job.
With the household already reporting income from mostly taxable accounts, pulling out $1.7 million in one year would have pushed him into a higher bracket. He spread it across two tax years instead, which also cut his reliance on one company.
Every situation is different, and outcomes depend on the details of yours.
Cash Without a Plan Is Not a Strategy
Cash in the business account feels reassuring, but idle capital rarely stays neutral. It either supports your goals or drifts away. The work starts with a date on every dollar.
Deciding what to distribute is the same decision as deciding what to invest inside the company. If a sale is on your horizon, plan those transfers years ahead: what to line up before a liquidity event. A fiduciary financial advisor in Utah reads both sides together, business liquidity and personal investment planning.
If you want to rethink how your company handles excess cash, schedule a conversation with Tencap. We are a Utah-based fiduciary firm.
FAQs
What counts as excess cash in a business?
Excess cash is any balance above what your company needs for routine operations, payroll, taxes, and near-term equipment or capital purchases. Once that operating floor is funded, what is left is working surplus. Most owners are surprised by how much sits above the line once they measure it against the next twelve months of spending.
What is the safest place to hold short-term business cash?
FDIC-insured deposit accounts, within the coverage limits, and short-term U.S. Treasury bills are the two most conservative places to hold money you may need within a year. Both keep your capital stable and accessible. Money market funds add flexibility and often pay competitive yields, but they carry no government insurance, so read what the fund holds.
When should a business owner move excess cash into growth investments?
Only after your operating floor is funded and anything you need within three years is set aside somewhere safe. Money you may need inside three years should not carry stock market risk. Past that point, a horizon of three years or longer gives a diversified portfolio time to work through normal market swings.
What is the accumulated earnings tax?
It is a federal tax that can apply to a C corporation holding profits beyond the reasonable needs of the business, where the accumulation serves to postpone tax for shareholders. A minimum credit tied to $250,000 of accumulated earnings, or $150,000 for certain service corporations, covers smaller balances, but it phases out as retained earnings grow and offers nothing to a company already well past that point. Passing that mark does not trigger the tax on its own. It moves the question to whether you can document a real business purpose for the balance, so ask your CPA how much is defensible.
Do I need a financial advisor to invest my business’s excess cash?
Not for a savings account or a Treasury bill ladder. You likely do once the surplus is large enough that distributing it changes your tax bill or your retirement plan. That is the point where the business decision and the personal one stop being separate. A fiduciary financial advisor in Utah can look at both together.
Disclosure:
- Tencap Wealth Coaching, LLC is a registered investment adviser that only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting.
- The information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of any topics discussed. All expressions of opinion reflect the judgment of the authors on the date of the post and are subject to change. A professional adviser should be consulted before making any investment decisions. Content should not be viewed as personalized investment advice or as an offer to buy or sell any of the securities discussed.
- All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that an investor’s portfolio will match or exceed a specific benchmark.
- Historical performance returns for investment indexes and/or categories usually do not deduct transaction and/or custodial charges, or advisory fees, which would decrease historical performance results.
- Hyperlinks on this blog are provided as a convenience. We cannot be held responsible for information, services, or products found on websites linked to our posts.
- Tax and legal information contained in this publication is general in nature and should not be relied upon as tax or legal advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Tax and pension rules are subject to change at any time.
- We reserve the right to edit blog entries and delete comments that contain offensive or inappropriate language. Comments that potentially violate securities laws and regulations will also be deleted.
- Alternative Investments are not suitable for all investors and present a higher level of risk than traditional investments.
Greg Black is the owner and founder of Tencap Wealth Coaching, an independent investment advisory firm founded on academic investing principles. As a Certified Financial Planner, Greg takes an educational approach to helping his clients be settled and responsible with their financial circumstances. Greg specializes in helping his clients create a proactive plan to minimize the exposure of market conditions while still harnessing the incredible power of global financial markets.
Greg specializes in "complexity" and is skilled at turning a complicated situation into an organized strategy for the families he serves. Greg, and each advisor of Tencap, is a stated fiduciary. You never have to wonder if your best interest is being served. Greg has been transforming the investor experience since 2012.
