Investing corporate cash: the safety, yield and liquidity trade-off, net of tax
Comparisons of corporate cash investments reason in gross yield and ignore tax, real liquidity and currency. The full method for choosing, with the instrument grid and the questions to ask before signing.
Almost every comparison of corporate cash investments available online is published by a distributor of those same investments. They compare gross yields, which is the only dimension on which a product can be presented favourably without lying. Three decisive elements are systematically absent: corporate tax, effective liquidity, and the treatment of foreign-currency surpluses.
A corporate investment is judged on four dimensions at once: yield after tax, real liquidity, capital risk and accounting treatment. A product that wins on only one of them does not win.
1. Yield after tax, the only comparable figure
Financial income earned by a company is part of its taxable profit. At a corporate tax rate of 25 %, the arithmetic is immediate.
| Headline gross yield | Tax at 25 % | Yield retained |
|---|---|---|
| 2.00% | 0.50% | 1.50% |
| 2.50% | 0.63% | 1.87% |
| 3.00% | 0.75% | 2.25% |
| 4.00% | 1.00% | 3.00% |
That table has an important practical consequence: chasing the last quarter-point of gross yield pays less than it appears, while the risk taken to get it is not reduced by 25 %. The trade-off therefore leans structurally towards prudence, more than gross comparisons suggest.
2. Real liquidity, not headline liquidity
A « liquid » product may not be liquid at the precise moment you need it. Three questions to ask before signing:
- What is the effective time to funds being available — not the order date, the value date in the account?
- What is the early-exit penalty, expressed in euros on your amount, not as an abstract percentage?
- Is there a clause suspending redemptions, and under what circumstances can it be triggered?
3. The instrument grid
| Instrument | Indicative gross yield | Liquidity | Capital risk | Point to watch |
|---|---|---|---|---|
| Interest-bearing current account | 0 – 1.5% | Immediate | None | Interest often conditional on a minimum balance |
| Term deposit | 2 – 3% by maturity | Early exit penalised | None | The headline rate assumes you go to term |
| Money market fund | Close to the ECB short rate | Daily | Very low, not nil | Management fees to deduct from the headline yield |
| Short-dated bonds | Varies with the credit | Poor before maturity | Real | Issuer credit risk, to be assessed |
| Capitalisation contract | Varies | Poor in the early years | Depends on the underlying | Long horizon, unsuited to operating cash |
| Property or private funds | High headline | Very poor | High | This is not a cash investment |
The last two lines come up regularly in commercial proposals put to owner-managers. They belong to long-term asset allocation, not cash management. Putting a precautionary reserve there means confusing two horizons that have nothing in common.
4. Laddering, the technique that resolves the trade-off
The tension between yield and liquidity is largely resolved by laddering: instead of a single 12-month term deposit of EUR 2 million, four deposits of EUR 500,000 at 3, 6, 9 and 12 months.
- A maturity falls due every quarter: liquidity is regular, with no penalty.
- The average yield approaches that of the longer maturities.
- Quarterly rollover smooths your exposure to the rate level, instead of freezing everything on one dated decision.
5. Foreign-currency surpluses
This is the blind spot of every comparison. A stable surplus of USD 900,000 raises a two-stage question, and each stage must be settled separately.
- 1Should you convert?
The answer depends on your future dollar payments. If there are any, converting and reconverting later means paying the FX margin twice — often far more than the yield difference between the two currencies.
- 2Where to invest if you keep the currency?
Currency instruments exist — dollar term deposits, funds denominated in the currency — but availability varies a lot by institution. The short rate of the currency concerned is the benchmark to insist on.
- 3What if you convert?
The conversion becomes an FX transaction in its own right: it is quoted, compared and executed under the same rules as any hedge, not at the counter rate on the day.
A lasting foreign-currency surplus sitting in a non-interest-bearing account compounds two costs: the absence of yield, and an FX exposure nobody decided to take. It is the most expensive configuration, and the most common.
6. The questions to ask before signing
- What is the yield after corporate tax, on my amount and my real holding period?
- What fees come off — entry, management, redemption, custody?
- What is the real time to funds being available on a redemption, in business days?
- What is the early-exit penalty, in euros, on my amount?
- What is the accounting treatment, and does it create a change in value through profit at each closing?
- Who is the counterparty or issuer, and what is its credit quality?
That last question is the one most often skipped on higher-yielding products. A yield above the risk-free short rate does not exist without a counterpart: it pays either for credit risk or for giving up liquidity. You need to know which of the two you are buying.
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Frequently asked questions
The questions finance departments ask most often on this topic
Term deposit or money market fund: which should you choose?
They answer two distinct needs and combine rather than compete. A term deposit offers a guaranteed fixed rate but locks the funds up to earn it: it suits the stable pocket. A money market fund offers daily liquidity and a yield tracking ECB short rates: it suits the precautionary pocket, where you do not know when it will be called on.
What yield should you target on corporate cash?
The benchmark is the risk-free short rate of the relevant currency area, less the product's fees. Consistently targeting above that benchmark means accepting credit risk or a liquidity constraint — which can be a legitimate choice, provided it is explicit and approved, and never on the operating pocket.
Can a company invest its cash in equities?
Legally yes, but that is no longer cash management. Operating cash is meant to be called on at short and uncertain notice: exposing it to market volatility means accepting that you may have to sell into a fall at the very moment the cash is needed. That kind of allocation is only justified on a pocket explicitly identified as long term, outside the operating cycle.
Does invested cash count as a fixed asset on the balance sheet?
It depends on the maturity and the nature of the instrument. Investments under one year and readily realisable sit in marketable securities or cash; beyond that, or when locked up, they may move to financial fixed assets. The distinction is not cosmetic: it changes how working capital reads and the ratios your lenders look at.
Should a dollar surplus be invested in dollars or converted to euros?
If future dollar payments exist, keeping the currency avoids paying the FX margin twice — a round trip routinely costs more than the yield difference between the two currencies over a year. With no future payments in that currency, converting is justified, but it then becomes an FX transaction to be decided and quoted as such.
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