Is Your Working Capital Employed?

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BERLIN – Success hinges on how well you manage your company’s day-to-day cash flow. You need to know you have the cash for inventory, employee compensation and debt payments. And you also need a cushion of cash to get you through those slow periods. But that’s just for starters. In today’s competitive landscape, you need to know your cash is always working hard for your business. That means that your working capital should always be providing you with a decent return – without jeopardizing your principal.

One way to make your working capital work harder for you is by investing it. Your cash can be liquid and earn a yield, rather than sit idle on the sidelines. When you do invest your working capital, however, it’s vital that you weigh the risks of yield versus the benefits of safety and liquidity.

“Safety is at a premium for corporate-cash investors,” said Jacqueline Sullivan, Vice President of Merrill Lynch Commercial Lending & Investment in Boston. “It’s a good idea to have an investment policy statement clearly outlining your objectives, what you will not invest in and who is authorized to make investment decisions.”

“Safety of principal is our primary consideration when we recommend investment vehicles and strategies to our business clients,” said Jana Land, Director of Merrill Lynch Commercial Lending & Investment in Alpharetta, Ga. “They are willing to forgo a higher yield for assurance that 100 percent of their principal will be available when they need it.”

 Not only should your cash be invested in higher-quality investments, but you should also be actively managing the maturity of those investments based on your cash flow needs.

“It’s a laddered approach to investing,” says Land. “We suggest that funds needed for the next month be kept in a money market fund providing daily liquidity. For money you won’t need right away, we may recommend 7- to 35-day Auction Market Securities. These investments can help enhance interest income while making sure that enough funds are available for shorter-term capital requirements.”

Consider also the direction of interest rates. In a falling-rate environment, a 3- to 12-month CD could help lock in an interest rate that may not be available in the near future.

Consult your financial advisor to review your investment options and consider your risk as a business owner before making investment decisions with your working capital.

(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)

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