How should I invest surplus liquidity for my business?

Managing cash flow is a vital part of running a business. Cash demands do not always come evenly or predictably, and every business needs to make sure it has enough cash to see it through unexpected events. However, this often means managing surplus liquidity. How can businesses do this to best effect, ensuring they maximise the return on their spare cash while ensuring money is available to meet cash flow needs?

The cash status of every business is different. Spare cash can come from a variety of sources, including retained earnings, accumulated reserves, or surplus funds from financing that haven’t yet been deployed in the business. Before deciding how to use any surplus cash, you should determine how much cash is really available, and how much may be required in the future.

Every business has three main types of cash. The first is operational cash – funds needed for the day-to-day running of the company, to pay employees and suppliers, repay borrowing and conduct other transactions required to keep the business going. This is usually kept in a business current account, on which the rate of interest paid is liable to be (very) low.

The second type of cash can be classified as reserve cash. This consists of longer-term reserves being held back for requirements in the future in areas such as taxation, debt repayment and employee bonuses. Usually it will be clear in advance when this cash will be needed, so businesses can manage their liquidity around those requirements.

The third category consists of strategic cash. This may have no immediate purpose, but could be used to invest in business growth for the longer term, or as an emergency fund in the event that you need to cover unexpected costs such as replacing machinery or hiring temporary staff quickly to keep the business operational.

Every business has three main types of cash: operational cash, reserve cash and strategic cash.

Cash flow management and forecasting

Cash flow management and forecasting can help determine how much of the company’s liquidity falls into each of these categories. Once cash has been earmarked for the various requirements, a clearer timeline should become evident for each segment. In general, the longer a company is willing and able to lock up its cash, the higher the interest rate it will receive if well-invested.

By managing each segment to maximum effect, the capital of the business can be protected against inflation. While inflation has been falling since its surge in 2022 and 2023, by mid-2025 it was hovering around the European Central Bank’s target level of 2%, and there’s little reason to expect it to fall to the near-zero or and even negative levels of the 2010s. Attention is required to ensure that the cash in your business is not being surreptitiously eroded by rising prices and wages.

Attention is required to ensure that the cash in your business is not being surreptitiously eroded by rising prices and wages.

Operational cash requires full liquidity and the ability to access it at any time. The second category, reserve cash, offers slightly greater flexibility, but in general businesses should calculate on needing it within the next six months. The final element, strategic cash offers the greatest flexibility.

But in all these cases, there are likely to be significant trade-offs between the conditions attached to different types of account, and business owners should be looking for the highest possible rate of interest to maximise the return on the funds they have available, within the constraints of the access terms they need.

Should we pay off debt?

The first consideration for business owners with a surplus is whether they should pay off debt on which higher interest charges are accumulating. This has a number of advantages – it can improve the cash flow of the business, and reduce costs, freeing up more revenue for investment. Banks always charge a higher rate of interest on loans than they pay on savings accounts, so it usually makes sense to pay down debt first. A lower level of debt can also help a business negotiate better terms with lenders and creditors.

The next consideration will be the options available for the business’s bank account. Although interest paid on balances in current accounts, whether for individuals or companies, is generally low, there is competition on rates that can make a significant difference to companies with large cash balances.

Money market funds can be a good option for second-tier capital. These are liquid investments that tend to pay a higher rate of interest and are useful for companies that are likely to need access to their cash in months rather than years. Funds invest mainly in short-term debt instruments, such as sovereign debt, certificates of deposit or corporate bonds. The yield will typically be somewhere between a current account and a term deposit.

A term account is the next step up – savings accounts with a term of anywhere between six months and five years. At the end of the term, the holder receives their original deposit plus the interest payment. Under EU rules, holdings of up to €100,000 are guaranteed – as with current accounts – and some member states have other deposit guarantee schemes in place offering greater protection, for example those managed by industry groups for different types of bank, as in Germany. Term deposits offer business owners capital security and a higher interest rate, but funds are inaccessible for the duration of the deposit.

Term deposits offer business owners capital security and a higher interest rate, but funds are inaccessible for the duration of the deposit.

Government and corporate bonds

With the remaining capital, it is possible to take a little more risk, though this probably should not extend to the latest small-cap technology fund, seductive though the promised returns may be. Government bonds are a possibility and are a little like term accounts – they have a fixed maturity date, an upfront interest rate, are redeemed at face values and guaranteed by the issuing government.

A higher-risk option might be short-term corporate bonds, issued by companies to raise capital at an interest rate depending on the company’s perceived risk. Short-term bonds generally mature in between one and five years. The risk is that if the issuing company defaults, bondholders may only get back only a fraction of their initial investment. However, it is possible to mitigate the risk by holding a diversified portfolio of bonds. Short-term bonds are less liquid than savings accounts or money market funds, so business owners should be prepared to hold them to term if necessary.

In some cases companies may consider a more broadly diversified investment portfolio incorporating bonds, equities and alternative fund assets, though this is suitable only for cash with a time horizon of five years or more. A broadly-based portfolio should deliver a higher rate of return and, importantly, is likely to provide better protection against inflation. But these higher-return assets come with greater risk; even when balanced by a diversified portfolio of bonds, stock markets can be highly volatile, and diversification can help reduce, but not eliminate, these risks.

Commercial property investments might also be an option for businesses with a longer-term investment horizon; office buildings, retail space or warehouses can generate rental income and potential capital growth, although they too carry the risk of a market downturn that could result in capital losses.

If your business is fortunate enough to have surplus liquidity, there is a balance to be struck between ensuring it is invested for maximum return and the availability of cash when you need it. Careful segmentation is critical to striking that balance.