Effective cash management strategy is central to the success of any business. Through good cash management, you can preserve liquidity and collect interest payments to provide for day-to-day expenses, purchase equipment, and even acquire investments on behalf of the business. As part of your cash management plan, it is important that you understand how FDIC insurance works. For business accounts, FDIC coverage follows the same guidelines as it does for consumer accounts.
Define Banking Deposits
The FDIC guarantees business and consumer deposits and accrued interest at insured banks. Bank deposits include certificates of deposit alongside money market, checking, and savings accounts. FDIC coverage does not extend over investments, such as stocks, bonds, and mutual funds. Be advised that a money market mutual fund is distinct from a money market deposit account. A money market fund is classified as an investment — so it does not feature FDIC guarantees.
FDIC Insurance Limits
As of 2010, The FDIC insures $250,000 worth of deposits per customer, per bank. If you operate a large business, you will divide your cash amongst several banks to insure the whole amount. For example, you could divide $800,000 into eight separate $100,000 deposits at eight different banks to guarantee your entire balance. If you put the same $800,000 into one bank as a lump sum, you would leave $550,000 without FDIC insurance.
Risks Versus Rewards
You will earn minimal returns on FDIC-insured banking products, in exchange for safety of principal and accrued interest. These minimal returns expose you to inflation risks, or rising prices for goods and services that erode cash purchasing power. According to the Bureau of Labor Statistics’ Consumer Price Index, domestic inflation runs at an average 3 percent clip each year. The low returns on FDIC-insured products also expose you to opportunity cost risks. Opportunity costs describe relative returns from competing investments. For example, 3 percent returns on a CD will appear even more paltry, if you could have spent the money on new equipment that would have increased business sales by 25 percent.
Cash Management Strategy
To manage risk, you should maintain cash balance totals of six months worth of committed business expenses at all times. Committed business expenses, such as rent, labor costs, and minimum debt payments are necessary to keep your business up and running. You can divide your cash balances between checking deposits, money market accounts, and CDs. Cash that exceeds six months worth of committed expenses can be spent on expansion — through marketing campaigns, computer purchases, or new staff hires.
Business Accounts and FDIC Insurance, Source:
FDIC: Deposit Insurance
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