Optimize Your Business Revenue with Bond Portfolios

When Your Reserves Outgrow Your Savings Account

Every business builds cash reserves for slow seasons, planned purchases, and simple peace of mind. Keeping an operating cushion liquid is smart. But once reserves grow beyond what the next year is likely to demand, idle cash has a cost of its own. A diversified bond portfolio is one way to put that surplus to work without taking on stock-market levels of risk. If you haven’t reviewed where your cash is sitting lately, this quarter’s fall cash flow planning article is a good place to start.

How Much Cash Should Remain Liquid?

The first step is deciding how much your business truly needs on hand. That figure should account for operating expenses, payroll obligations, taxes, planned capital expenditures, seasonal working capital needs and an emergency reserve. Once those are covered, the remainder is what you can evaluate for a longer-term strategy.

“One of the biggest mistakes we see is treating all cash the same,” says Tracy Baughman, SVP, Chief Investment Officer. “Some cash may be needed next month, while other reserves may not be needed for several years. Separating those buckets allows business owners to make more strategic decisions.”

Every situation is different, but many businesses begin evaluating bond portfolios once excess reserves exceed $500,000 and those funds are not expected to be needed in the near term. At that level, there is usually enough to build a diversified fixed-income portfolio across multiple issuers, maturities, and sectors while still holding adequate liquidity. 

What Is a Business Bond Portfolio?

A bond is a loan to a government, municipality, or corporation that pays regular interest and returns the principal at maturity. A bond portfolio spreads that lending across many issuers, maturities, and credit qualities.  

“A business with excess cash may want to start investing in a bond portfolio to diversify funds and earn interest,” says Tracy Baughman, SVP, Chief Investment Officer.

For business owners, the appeal is predictability. Fixed-income investments generate dependable interest income, which suits reserves earmarked for future needs. “You can now get roughly 75% of the historical stock market return with less than half of the risk,” Baughman notes. 

A bond portfolio can offer business owners several potential benefits: 

• Regular interest income
• Diversification beyond traditional deposit accounts
• A more conservative risk profile than equities
• Flexible maturity schedules
• The potential for higher income than idle cash balances

Balancing liquidity and yield 

The starting point is deciding how much cash must stay liquid: enough to cover operating expenses plus a cushion for your slow season. That layer belongs in accessible accounts like business savings or money market accounts. Reserves beyond that horizon can accept longer maturities in exchange for more yield. One relationship worth understanding: bond prices move inversely to interest rates. When rates rise, the value of existing bonds falls, and the longer a bond’s maturity, the more sensitive its price is to those swings. Bonds maturing soon barely move; a 30-year bond moves a lot. 

Unlike FDIC-insured deposit accounts, bond investments can fluctuate in value and carry market and interest-rate risk. Fixed income has historically been far less volatile than stocks, but it is not a deposit substitute.

“The key is matching the investment strategy to the time horizon for the funds,” Baughman notes. 

Laddering basics 

A bond ladder spreads your portfolio across staggered maturities, say one through five years. As each rung matures, the principal comes back and can be reinvested at then-current rates or put to use in the business. The ladder gives you regular access to cash and smooths out interest-rate risk, because you’re never locked into a single rate or a single maturity date. That makes it a natural fit for business reserves, where the timing of future needs isn’t always predictable.

A practical example 

Consider a business holding $1.5 million in total cash reserves. After working through operating requirements, management determines that roughly $750,000 is needed for payroll, operating expenses, seasonal swings, upcoming projects and contingency planning. 

The remaining $750,000 becomes a candidate for a diversified bond portfolio built to generate income while preserving reasonable access to capital. The value of the exercise is the separation itself: it forces a clear line between money the business needs and money the business can put to work.

How Croghan’s Wealth Management Team Builds the Strategy

Croghan’s wealth management team starts with your cash flow pattern, sets a liquidity floor, and builds the portfolio mix around it. For smaller accounts, diversification doesn’t require buying dozens of individual bonds.

“We buy a variety of mutual funds to ensure we are able to obtain a diversified mix between the types of bonds, maturities, and credit qualities,” Baughman explains.

Holdings typically span: 

• U.S. Treasury securities
• Municipal bonds
• Corporate bonds
• Mortgage-backed securities
• Multiple maturity ranges
• Various credit-quality segments

“Cash management should not be a one-time decision,” says Baughman. “As your business changes, your investment strategy should evolve as well.”