A healthy business generates cash. But what to do with your earnings can be a more challenging question. For too many small business owners, cash not yet paid out for expenses just sits around in a checking account, or perhaps a passbook savings account.

That’s OK if you need quick access to that money. But with just a little bit of inquiry you could do much more with it, and earn a little more money in the process.

So where do you park your money?

The first thing to consider is how soon you need the money you’re parking. “People need to know their business and their business cycle,” says Jerry Love, a certified public accountant in Abilene, Texas. “Just the fact that you have money today does not mean you’re not going to need it 30 days from now or six months from now.”

 

Look at Cash Flow

So take a close look at your cash flow budget. Your month-to-month bills — payroll, fuel, supplies, insurance — should be fairly predictable. Your monthly gross revenue may be a bit less so. But if you look over the last year, you should be able to estimate how much you need on hand to meet your expenses in any given month.

“If you’ve got to have that money six months from now, you need to know that,” says Love, president and CEO of the accounting and consulting firm Davis, Kinard and Co. Love has another tip: Start very close to home in your search for a cash-management solution. “In most cases, small businesses are best served by going in and sitting down with the banker they already have a relationship with.”

Whatever you put cash in, it should be as secure and easy to get at as possible. That means, not the stock market. Because stocks can go down as well as up, they’re best investments made with a long time horizon, and even then, you may be better off picking a broad-based mutual fund rather than individual stocks.

“The general consensus is, don’t go to the stock market with something you need in less than five years,” Love says. The good news is you have other options.

 

Consider CDs

Certificates of deposit, or CDs, are short- and medium-term savings instruments available at the bank. They pay higher interest than almost any savings or checking account, and like your bank account, they’re insured by the federal government.

CDs have one big drawback, though. They’re for a set time period, and if you suddenly need the money before they mature, you’ll pay a penalty. At the very least, you may be forced to forgo the interest you’ve earned, and depending on the policies of the institution, you may have to pay an additional fee.

Still, for medium-term savings, they’re a safe haven. You could even view the penalties as an advantage, if you need that kind of a roadblock to keep you from spending otherwise ready cash impulsively.

You can also make your money a little more accessible by purchasing several small CDs that expire at different times, instead of buying one big CD. “Laddering” CDs in this way makes at least some of the money available at almost any time.

 

Money Market Checking

A money-market checking account doesn’t pay as much as a CD, but it offers an important advantage: The money is immediately accessible. Money market accounts usually carry minimum deposit requirements. If your account falls below the minimum, you get no interest and may be charged a maintenance fee.

Bond Funds

Various kinds of bond funds may be an option if they don’t tie up your money for longer than you can realistically afford. “If you've been through a full business cycle and you’re confident that you’ve got so much money or more available to you, then you might look into moving into a bond instrument that would give you a bit higher return than CD rate,” says Love.

Use caution, however. Bonds are safer than stocks, but they aren’t risk-free. Pick a bad one and you could end up losing money. Also, like CDs, they’ll lock up your money for a time.

If, after consulting with your financial advisor, you decide bonds make sense, you have one other question: taxable or tax-free? Various kinds of municipal or government bonds pay less interest than private-sector bonds, but their tax-free earnings can actually make some of those funds a better deal.

 

Sweep Accounts

Banks offer these accounts to people with substantial amounts of cash. A sweep account is one that lets the bank put your money overnight into a money-market fund. Essentially, the bank is borrowing money for very short-term investments, using the cash to oil the wheels of commerce. You get the money back, along with an interest payment, by the time business opens the next day.

 

Ask Questions

Web sites such as www.money-rates.com can give you ready access to information about the best deals on these and other accounts nationwide, but it’s important to be sure that you’re doing business with an institution that allows you easy access — to its personnel and to your money.

“You’re still going to need to move money back and forth,” Love points out. “You need to make sure that you know something about them.” You’ll also need to make sure no single bank account you carry exceeds the federal limit for deposit insurance.

Never make a change in your current banking and investing arrangements without first understanding your alternatives and the risks and benefits of the change you plan to make. As Love notes, your existing banker is a good place to start.

Indeed, if you move money to some other bank chasing a higher rate, you may find your current bank, where you may hold a line of credit or have a good loan history — will hike your lending rate in the future, because you’re no longer a favored customer.

But don’t let those warnings turn you away from exploring all possible alternatives. After all, you work hard in your business. Your cash should, too.