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Being Fort Knox

Tuesday, April 07, 2009

3 Steps To Protecting Your Money
By Phillip M. Perr

Cash is the lifeblood of your business. You need a steady supply for everything from paying rent and buying supplies to purchasing inventory and meeting payroll.

Keeping your money safe is critical to survival. But how secure is that bank or money market fund where you park your cash?

Until recently most of us gave little thought to that question. For many decades financial institutions seemed as sturdy as the marble pillars that once graced their porticos.

Times have changed. The housing meltdown eroded the fortunes of such financial giants as Washington Mutual and Wachovia. Hundreds of smaller institutions are also being affected.

And banks are not the only victims. Last year, the nation’s oldest money market fund froze the cash of more than 400,000 customers for an extended period of time.

The harsh truth is this: If your money’s in the wrong hands, you may wake up one day to find you can’t get the cash you need to stay in business.

“When it comes to the health of our financial institutions, we took a lot for granted in recent years because things were running nicely,” says Marilyn J. Holt, a Seattle-based consultant specializing in business planning and mergers and acquisitions. “But today we are in an upheaval so we have to be more vigilant. If you want to be in business in 2020, you need to be very conservative with your money.”

Here are three steps to protect your working capital and your business savings.

Step 1. Put Your Money In An FDIC-Protected Bank
So where’s the safest place to stash your cash?

“You should put your money in banks insured by the Federal Deposit Insurance Corporation (FDIC),” says Norman Katz, managing partner of MCS Associates, a financial consulting firm in Irvine, Calif. “That is the best idea when safety and security of your working capital is paramount.”

The FDIC is a U.S. federal agency that protects you against the loss of your deposit accounts if your FDIC-insured bank fails.

Unfortunately, you don’t earn much interest from the typical accounts at these banks. That’s why many business owners are tempted to invest their working capital where they can get better returns. These include money market mutual funds and stock or bond funds.

These higher yielding investments come with a downside: Your money may not be there when you need it.

“People need to keep reminding themselves that the higher the return, the greater the risk,” says Holt.

So when it comes to picking a financial institution the catch phrase is safety first. But is your own business bank insured by the FDIC? To find out visit the agency’s Web site at www.fdic.gov. Click on “Deposit Insurance” and then on “Bank Find.” Enter your bank’s name in the search field.

Step 2. Use Accounts Eligible For FDIC Protection
Keeping your money in an FDIC-insured bank is important. But here’s an important caveat: Even at insured banks the FDIC only covers certain types of accounts. The three most common ones are checking, savings and certificates of deposit (CDs). Also covered is the money market deposit account.

Avoid confusing the “money market deposit account” with the similarly named “money market mutual fund,” which banks can also sell but which is not eligible for FDIC insurance. This vehicle consists of short-term corporate debt, government securities and similar assets held by the bank on behalf of customers.

Many people confuse these two financial vehicles, so double check your own holdings and confirm your FDIC coverage. Also avoid other accounts that banks sell but that are not eligible for FDIC coverage. These include stocks, bonds and mutual funds.

Step 3. Stay Below The FDIC Coverage Limit
The third step to financial safety is to make sure your deposits in an FDIC-insured bank don’t exceed the limit of FDIC insurance.

In late 2008, the FDIC increased that limit from $100,000 to a new level of $250,000 for each depositor at each insured bank. The new level is effective until the end of 2009, when the limit is scheduled to revert to $100,000.

And what if your total cash on hand exceeds $250,000? One solution is to divide your money among several banks, since each bank will provide you with $250,000 coverage. You must open each additional account at a new bank, not just a different branch of your current bank.

Alternatively, you can arrange to have more than $250,000 insured at a single bank. The trick is to store the funds in more than one account under different ownership categories. For more information see the sidebar, “How Much Does The FDIC Insure?”

There has been another recent development that increases the level of funds you can have insured at any one bank. In late 2008 the FDIC fully insured all noninterest-bearing transaction accounts. Your checking account may be covered by unlimited insurance if your financial institution participates in the FDIC’s Temporary Liquidity Guarantee Program (TLGP). The coverage will last until Dec. 31, 2009.

The guarantee applies to all personal and business checking deposit accounts that do not earn interest, but only at participating institutions.

The program encompasses traditional demand deposit checking accounts that allow for an unlimited number of deposits and withdrawals at any time. (A typical use for such an account is for company payroll funds.) Not covered are negotiable order of withdrawal (NOW) accounts or money market deposit accounts (MMDAs).

Before relying on this insurance, make sure your bank participates in the program. The terms of the TLGP may change at any time. For more information on the program, visit the agency’s Web site at www.fdic.gov and enter “Temporary Liquidity Guarantee Program” in the search box.

Checking and savings accounts are great places to hold cash that you need in the near future. But how about the money you save up for use down the road, such as a future expansion program, new store fixtures, computers or a vehicle? It’s possible to get that money working a little harder for you by selecting investments that offer both safety and higher interest rates.

“You can earn higher interest by investing your working capital in a short-term certificate of deposit,” says Holt. “You can invest in CDs as short as 30 days. If this CD is in an FDIC-insured bank, then your money will be as safe as it is in a checking account. The longer the term of the CD that you have, the higher the interest rate.”

The downside of a CD is that you pay a financial penalty for early withdrawal, says Holt.

“It pays to select CD maturities that coincide with the times you will need your money.”

Other Places To Put Your Cash
Here are some additional places to store your money.

Money Market Mutual Funds
Money market mutual funds are not FDIC insured. The lack of federal insurance would seem to suggest that most business owners would shy away from these vehicles as repositories for cash critical to daily operations.

However, money market mutual funds have traditionally been viewed as nearly as safe as cash because of their short term, and thus very liquid, assets. And they offer higher returns than many other alternative investments.

Are they right for you? You’ll need to make your own judgment call based on your individual risk tolerance.

In late 2008 the Department of the Treasury announced a temporary guarantee program for all money held in participating money market mutual funds. The terms of this program may change at any time. For more details visit the Treasury’s Web site at www.treas.gov.

U.S. Treasuries
U.S. treasuries are considered the most secure of all financial vehicles. Their attraction is safety rather than return.

“Interest rates are so low today that there is not really a lot to be gained,” says Katz, managing partner of financial consulting firm MCS Associates.

Like CDs, treasuries carry maturity dates that you will need to match with your cash requirements. You can buy treasuries directly from the government at www.treasurydirect.gov.

Home Office Safes
Why not lock up your cash in an office or home safe? Many seem to be doing just that.

The Home Depot recently reported double digit increases in the sale of home safes. And the Federal Reserve Board is reporting an increase in the amount of currency in circulation (that is, currency in people’s hands rather than in banks).

Both reports seem to suggest that more people are stashing their cash at home. Clearly plenty of people are concerned about the safety of their corner banks. But, most financial experts believe this level of security is overkill.

“Most people who are putting their money in home or office safes don’t have more than what is protected by FDIC insurance in a bank,” says Katz. “I don’t think it’s a prudent move unless you have a real doomsday fear.”

Doomsday fear, most economists believe, is not the most productive response to the current crisis. It’s smarter to perform due diligence on financial institutions and select the safest ones.

“This is a time for care and caution,” says Katz. “For most small-business owners there are safe and secure solutions to the problem of protecting their cash.”



New York City writer Phillip M. Perry is taking a fresh look at the safety of his own working capital in light of changing times.

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