How to optimize cash investment in business?

Effective cash management is crucial for today's businesses. To optimize their financial returns, it is essential to implement a solid cash investment strategy. How do you navigate this? Is it mandatory to invest your cash? What are the criteria studied?... Enerfip, as a crowdfunding platform dedicated to sustainable projects, is looking into this topic to give you some food for thought regarding your future cash investments.

👉🏻 To learn more about the subject, also watch our video:

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The Role of Cash Investment

🤔 What is excess cash?

Excess cash refers to cash whose income exceeds your expenses. What does this mean? Your company retains additional cash to cover its financing needs and operating expenses. In short, during the fiscal year, your working capital liquidity exceeds your needs, resulting in a potential surplus to invest or save.

In a company's financial management, cash investments play a fundamental role. Why? As proof of your business's good financial health, excess cash can be invested to prevent it from being affected by inflation, but also to make it grow.

To choose the most suitable investments, it is best to establish your criteria beforehand and ask yourself the right questions (Is your surplus temporary? How much should you invest? What level of risk are you willing to accept?...). Once defined, you will be able to optimize the return on your excess cash and thus find the right balance between preserving funds and maximizing profits.

What cash investment strategy for your business?

📈 The steps to follow to optimize your cash investments

1. Create an accurate cash flow forecast.
2. Maximize payment and recovery times.
3. Diversify financing sources.
4. Favor the right tools.
5. Strengthen collaboration with financial partners.

Cash management can be complex, due to fluctuating market conditions, constantly changing interest rates, or regulatory requirements that vary according to new standards or laws. This is why it is essential to establish a cash investment strategy that is aligned with the company's needs and objectives.

The questions that follow when talking about cash investment are obviously the investment horizon.

• What is the amount of stable cash (cash not required for the company's activity)?
• How much of the cash can be invested in the short term (less than 2 years)?In the medium term (between 2 and 8 years)? In the long term (more than 8 years)?
• What level of risk and what level of liquidity (capital blocked or not) are we willing to accept?

To help you in your research, Enerfip offers some advice regarding the following criteria: return, risk, liquidity.

Short-term investment

🤔 What is a short-term investment?

This is an investment whose maturity and liquidity allow you to meet the company's liquidity needs as quickly as possible, while seeking to obtain a moderate return.

Highly liquid, these investments present a lower level of risk compared to medium-term or long-term investments. This is why they are considered ideal when you have excess cash. Short-term investments guarantee rapid mobilization of funds, but also stable and lasting financial security.

Short-term investments include:

• securities accounts:these allow companies to purchase and own financial securities, such as stocks, bonds, warrants, etc.;
• capitalization contracts: this type of investment requires a significant initial contribution (often more than €100,000). As a result, it is recommended for companies with substantial cash flow;
• term accounts:these allow companies to lock in their capital for a fixed period of 3, 6, or 12 months. These term accounts can have fixed or variable interest rates.

Medium-term investment

🤔 What is a medium-term investment?

Any savings maturity between 3 and 6 years (in general) is A medium-term investment. It's a middle ground between short- and long-term investments!

Choosing a medium-term cash investment provides you with a degree of stability while generally offering higher returns than short-term investments. Why? Because they can be diversified into slightly riskier financial instruments, such as high-quality bonds or fixed-income investment funds, and thus increase returns without compromising security. An investment of this type therefore offers greater flexibility.

Medium-term investments include:

• UCITSbonds: supervised by a management company that carries out frequent arbitrages, they are often associated with high management fees;
• ETFs (Exchange Traded Funds): also called trackers, these are indexed investment funds that aim to precisely reproduce the movements of a stock market index, whether upward or downward.

Long-term investment

🤔 What is a long-term investment?

This financial transaction involves saving for a period of between 8 and 10 years. It should be noted that in a long-term investment, the capital may or may not be guaranteed.

Favoring a long-term investment increases potential returns. What does that mean? Thanks to its longevity, it benefits from complete economic cycles and long-term market growth. Fluctuations can, in fact, be offset by periods of long-term growth, which mitigates risk. De facto, long-term investing offers greater financial stability and exponential growth of your investment over time.

Long-term investments include:

• real estate investments:whether commercial or residential, real estate investments offer good prospects for long-term returns, particularly through rents and appreciation in the value of real estate;
• Company pension funds: If you wish, as a company, you can select a company pension plan that invests employer and employee contributions in long-term investment vehicles (stocks, bonds, etc.) to provide future retirement income;
• The capitalization contract: Through this investment envelope, similar to life insurance, each individual can diversify their available cash investments over the medium to long term (4 years minimum), while offering a limited risk of capital loss. By choosing this type of contract, your company can invest its excess cash in euro funds, wealth investment funds, equity and/or bond funds, structured products, or even in real estate companies such as SCPIs (real estate investment companies).

What are the risks?

As any investment carries risks, it is essential to be vigilant about this. Cash flow optimization can also include some such as:

• liquidity risk;
• market risk;
• credit risk;
• operational risk;
• currency risk;
• regulatory risk;
• interest rate risk.

Now you know everything you need to know about optimizing your cash investments in your business! Now, we invite you to share your opinion on the subject in the comments.

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