Managing excess liquidity requires finding the balance

For most businesses, having extra cash on hand can feel like a good problem to have. However, in today’s environment, holding onto too much liquidity can come at a price.

When business leaders let too much money sit idle in accounts earning little or no interest, that money often benefits them less than it could elsewhere. “If you’re not actively managing those balances, you’re likely missing opportunities,” said Marisa Famariss, treasury services market manager for BOK Financial® in Colorado. “That could mean earning more interest on excess cash, paying down debt more strategically or simply putting that capital to better use.”

“They’re leaving money on the table,” agreed Steve Richins, regional director of commercial banking for BOK Financial in Arizona.

However, even though business leaders may understand that they should be putting their money to work for them, they might not know how much liquidity they need.

Liquidity, to put it simply, is the cash a business can access quickly. It’s there whenever needed, whether to cover payroll, pay down debt or respond to new opportunities. The real challenge, though, isn’t understanding what liquidity is. It’s deciding how much is enough and what to do with the rest.

“Most companies have a sense of what they need day to day,” Famariss said. “Anything beyond what’s required to cover those near-term obligations is what we’d consider excess liquidity.”

Know your cash flow

When it comes to liquidity optimization, BOK Financial’s experts all agree that it’s best to begin with understanding your cash flow. That means having a clear handle on what’s coming in, what’s going out and—just as important—when.

“Really managing the timing is key. When does it come in versus when does it have to go out,” Richins said.

Without that visibility, businesses risk making decisions in the dark. They also may err on the side of holding too much cash because they’re unsure of what they’ll need.

It’s one of the most common mistakes Richins, who covers both the Colorado and Arizona markets, sees among business leaders. “They just don’t plan or don’t know what their cash levels are going to be,” he said. “They don’t have their finger on the pulse of what their cash flow cycle looks like.”

A simple framework: Think in buckets

Excess liquidity isn’t a fixed number. It’s whatever is left over after a business has accounted for its obligations—payroll, payables, debt and expected expenses.

Once that figure is identified, the next step is thinking about it in tiers, or “buckets,” based on timing and purpose, said Rob George, BOK Financial director of deposit pricing strategy and analytics.

One bucket holds highly liquid funds, the cash a business may need at a moment’s notice. This money might sit in a traditional business checking or savings account or another easily accessible option.

A second bucket might be held in interest-bearing accounts or short-term investments and earmarked for mid-term needs, such as capital projects expected in the next one to three years. Due to the longer horizon, businesses can accept slightly less liquidity in this bucket in exchange for higher returns, he explained.

Beyond that second bucket, longer-term capital is often best deployed back into the business itself, George said.

Managing the timing advantage

In addition to where cash sits, how it moves can be just as important. At its heart, liquidity management is about timing: collecting money sooner and paying it out later.

“What you’re trying to do is speed up receivables and slow down your payables,” Richins said. That can mean encouraging faster payments through electronic methods instead of checks or using tools like credit cards and payment terms to extend outgoing cash flow.

Famariss said treasury tools can play a key role in that process. “We’re always looking at both sides of the equation—how to accelerate inflows and better control outflows,” she said. “That gives businesses more visibility and more flexibility in how they use their cash.”

The goal: hold onto cash longer and put it to work in the meantime.

Putting excess cash to work

For many businesses, the simplest step is moving excess funds into interest-bearing accounts or setting up automated sweeps that shift unused balances into higher-yield options.

From there, options can expand depending on the size of the excess and the company’s goals—from short-term instruments to broader investment strategies.

No one-size-fits-all solution

If there’s a single takeaway in all of this, it’s that liquidity management isn’t static, experts agreed.

Industry, market conditions, growth plans and risk tolerance all play a part.

In more volatile environments, holding additional liquidity can provide flexibility, allowing businesses to move quickly when opportunities arise. “When times are volatile, there are a lot more opportunities where you can quickly deploy that liquidity,” George said.

However, volatile environments don’t last forever and, when conditions calm, it may be time to reassess liquidity. After all, liquidity management isn’t a “one-size-fits-all program,” George said.