Liquidity in SMEs: should surplus liquid assets be invested?

Having insufficient liquid assets jeopardizes the existence of a company. But too much liquidity isn’t ideal in the long term either – especially if the money is deposited in a business account with little or no interest or even negative interest. As a result, as soon as inflation exceeds the interest on the account, the money loses its value in real terms. For companies with sufficient liquidity buffers, financial investments may be an alternative worth considering. 

In what liquidity situation should companies consider investing money?

Financial investment is advisable if operating expenses and planned spending on strategic projects (such as expansion plans) are covered by a sufficient contingency reserve at all times. The general rule is that a company can think about investing if it has surplus funds that it does not need for at least six months. Investments must be individually tailored to the company’s planning horizon, liquidity development and risk profile. Expected interest rate trends should also be taken into account in order to choose the best moments for investment or portfolio reallocation. In uncertain times, staggered investments (e. g. with a variety of terms) can help companies to remain flexible and optimize earnings opportunities. 

What liquidity should companies never invest?

Operational resources required for salaries, suppliers, taxes or short-term investments should remain intact. The same usually applies to emergency reserves, provisions and risk buffers. These funds must be available at all times in a secure, risk-free and short-term manner – ideally in accounts or money market instruments that are available on a daily basis. 

Useful information

If a company has to postpone planned investments, e.g. in machinery or equipment, due to trade policy uncertainties, it may envisage temporarily parking the capital earmarked for this purpose in secure forms of investment to bridge the gap. 

What do companies need to bear in mind if they want to invest surplus liquid assets?

Before investing, companies should clearly define the investment horizon and the required availability of funds. Expected risks and returns must correspond to the chosen investment and be realistic. Broad diversification – with a combination of different terms, counterparties and instruments – reduces cluster risks. The creditworthiness and liquidity of the chosen investments should be reviewed on a regular basis. In addition, tax, accounting and regulatory requirements must be observed. Close support from investment experts makes sense in order to assess opportunities and risks realistically and to prevent avoidable mistakes. 

Does it make sense to invest money in light of the current uncertain economic situation?

Yes, provided an appropriate liquidity buffer is actually in place and the investment is adjusted to the risk capacity and the amounts and deadlines of the company’s own liabilities. Maintaining the company’s capacity to act is a priority, especially in uncertain times. Short-term uncertainties should not be overestimated. However, the development of investment risks needs to be closely monitored on an ongoing basis. As the policy rate in Switzerland currently stands at 0 percent, Swiss money market investments offer hardly any returns and should be used only to deposit surplus funds in the short term rather than to optimize returns. Companies with a solid position can invest selectively, for example in low-interest and low-risk alternatives with a manageable term, such as bonds. Depending on the company’s risk capacity and, above all on the funds available over the longer term, a small but diversified proportion of equity or real estate funds is also conceivable, for example.