How Should Companies Invest Their Cash? A Guide to Corporate Investments
Every profitable company eventually faces the same question: where should it invest the cash left over? The answer does not start with the investment offering the highest return, but with the purpose that money still needs to serve and the timeframe within which the company may need it. This is where many corporate investment decisions begin to go wrong.
In the early stages of growth, especially for companies operating under a bootstrapping model, without external capital and reinvesting their own cash, priorities tend to be different: profits go back into the business, whether through hiring, acquiring tools, or expanding into new markets. The question of where to invest corporate cash arises when the business has already funded its growth needs and begins accumulating resources that will not be used immediately.
From that point on, investing is not simply about seeking the highest possible return. It means determining how much cash needs to remain available, how long the rest can stay invested, and what level of risk makes sense for money that belongs to the business.
Want to learn how to make more strategic decisions about your company's cash? Watch the full video on our YouTube channel and explore the key criteria for evaluating corporate investments.
Fixed-Income Investments for Businesses: Cash Liquidity and Security
Fixed-income investments are generally suitable for funds a company needs to keep available in the short term, such as working capital, payroll, supplier payments, and unexpected expenses. Bank-issued certificates of deposit (CDBs), fixed-income funds, and other investment products can serve this purpose, provided their characteristics align with the company's cash requirements and liquidity needs.
The main priority in this case is not to seek the highest return, but to ensure that the money is available when the company needs it. A CDB with a longer maturity may offer a higher return than an investment with daily liquidity, but that difference must be assessed against the withdrawal terms and the point at which the cash may be needed.
The cash reserve can also be planned around predictable financial commitments, such as payroll, the year-end bonus (13th salary), vacation pay, taxes, and seasonal periods when working capital requirements increase. Setting these funds aside in advance reduces the risk of having to rely on credit to cover expenses that could already have been anticipated in the cash flow forecast.
Equities and Other Variable-Income Investments: When Do They Make Sense?
Variable-income investments should only become part of the company's financial plan once the funds needed for operations, working capital, and short-term reserves have been set aside. These are genuinely surplus funds, with no anticipated use in the short or medium term, that the company can keep invested even when markets fluctuate.
The key point is that company funds serve a different purpose from an individual investor's personal wealth. A significant loss on an investment can reduce the resources available to fund operations, limit future investments, or put pressure on cash flow when funds are needed. Before taking on greater risk exposure, the company must therefore assess its financial capacity and investment horizon.
There is also an important distinction: the company is already exposed to business risks. Revenue, margins, valuation, customer concentration, tax decisions, and other factors can affect the company's value and financial capacity. In addition to these internal factors, macroeconomic conditions can also influence investment decisions, the cost of capital, and cash flow.
One example of how to turn this reasoning into a structured process is the policy adopted by hub40: 25% of each semester's profit is allocated to cash reserves until the company accumulates a reserve equivalent to six months of operating expenses. This rule prioritizes building the reserve needed to sustain operations and then establishes an objective criterion for capital allocation decisions.
Key Considerations When Investing Corporate Cash
Before investing company cash, several criteria must be assessed regardless of the amount available or the size of the business. The goal is not to eliminate risk, but to ensure that investments are compatible with the company's liquidity needs, timeframe, and financial capacity.
- Protect your working capital: Funds needed to pay employees, suppliers, taxes, and other operating expenses should not be allocated to investments with maturity or withdrawal terms that conflict with these obligations, even when the advertised returns seem attractive.
- Assess concentration by institution and product: Diversifying investments across institutions and products can help reduce concentration risk. For investments covered by the Brazilian Credit Guarantee Fund (FGC), it is also important to consider the guarantee limits and conditions before concentrating funds in a single institution.
- Evaluate credit risk: The return offered should not be the only criterion. Assess who is receiving the company's money, the risks involved, and the safeguards available for the investment.
- Compare alternatives: Just as with a credit proposal, an investment recommended by a bank does not need to be accepted automatically. Compare products, institutions, fees, liquidity, and terms before making a decision.
- Consider taxation: Net returns are more relevant to the decision than advertised gross returns. Assess how taxes and other costs affect the investment's actual results for the company.
How to Establish a Corporate Investment Policy
An investment policy establishes criteria before any funds are invested. It can specify how much cash must remain available, the minimum reserve the company must maintain, which levels of risk are acceptable, and which types of investments may be used.
It can also define who is authorized to approve each transaction, which criteria must be monitored, and under what circumstances an investment needs to be reviewed. From there, financial performance indicators can help determine whether the strategy is delivering the expected results.
Why Companies Should Review Their Investments Regularly
Investing corporate cash does not end with the initial decision. Changes in cash flow, growth plans, interest rates, and investment terms can affect whether a strategy remains appropriate over time.
For this reason, the investment portfolio should be reviewed periodically to ensure that liquidity, investment horizon, risk, and returns remain aligned with the company's needs. An investment that made sense when the funds were initially allocated may no longer be appropriate after a significant change in operations.
Why Not Always Aim for the Highest Return?
Because returns are only one factor in an investment decision. Corporate cash must be assessed alongside liquidity, investment horizon, and risk, particularly when those funds may be needed to finance the business itself.
Furthermore, the company is already exposed to risks inherent in its operations, including revenue fluctuations, margin pressures, customer concentration, and market changes. Before adding financial risk to surplus cash, it is important to determine whether the potential return justifies that exposure and whether the company can maintain the investment even during periods of market volatility.
Investing corporate cash is not simply a matter of choosing between fixed-income and variable-income investments. The decision begins before selecting an investment, with determining how much money needs to remain available, which financial commitments are already planned, and what portion of the cash can be allocated to medium- and long-term objectives.
When these criteria are clear, the company stops making decisions based solely on the returns being offered and starts considering liquidity, investment horizon, risk, and financial capacity. Rather than finding the investment that promises the highest return, the goal is to build an investment policy that aligns with the company's circumstances and business plans.
Want to make more informed financial decisions? Cash management is just one part of a sound financial structure. To understand how to organize the key pillars that support a company's financial decisions, continue reading hub40's article: Corporate Financial Management: What It Is and Its 5 Key Pillars.
Strategic financial decisions also benefit from exchanging experiences with other leaders. Learn more about our community of business leaders, a select group of professionals who share perspectives and discuss real-world management challenges to broaden the knowledge and insights of those making business decisions.