How to manage company liquidity like Warren Buffett

4 min 277

Warren Buffett is not only one of the best-known investors in the world but has also controlled the fortunes of his company Berkshire Hathaway for over half a century. In addition to over 80 companies, the conglomerate owns a stock portfolio worth over USD 300 billion and over USD 100 billion in cash and short-term financial assets. Buffett, also known as the Oracle of Omaha, and his company are a prime example of how to manage company liquidity in a rapidly changing interest rate environment. This article describes what we can learn from him and how companies can invest their corporate liquidity in a similarly profitable way.

“It’s almost grossly negligent to keep unused capital in the company bank account”

Not Warren Buffett, but a successful medium-sized entrepreneur told us this a few days ago. He was not entirely wrong considering that the European Central Bank’s deposit facility is currently at 4.00%. The deposit facility is the interest rate at which commercial banks in the eurozone can deposit money that they do not need at short notice with the central bank. If, for example, there is €1 million in a company bank account, which typically does not earn interest, you can miss out on up to €40,000 in interest earnings over a year. If you are smarter and have set up a call money account for your company, you will receive an average of 0.80% interest per year. This is not a lot and certainly nowhere close to what the banks themselves receive from the ECB, but at least it’s better than nothing.

It is worth looking at the historical interest rate development of the average overnight interest rate on corporate accounts in the European currency area. Even before the 2007/2008 financial crisis, it was not significantly above 2.00%, and in the years that followed, it not only touched the zero line but even teased with negative interest rates.

Quelle: Europäische Zentralbank (Stand 25 November 2023)

Warren Buffett’s feel for interest rates

Don’t worry, there is no call to invest large parts of company liquidity in the stock market like Warren Buffett does. After all, the central task of corporate liquidity is to fully meet short-term and long-term liabilities. But the Oracle of Omaha does more than just invest money successfully in the stock market. Berkshire Hathaway’s annual reports shed light on this. While Buffett is known for always keeping a not inconsiderable portion of the company’s liquidity in cash: 

“…Berkshire will always hold more than $30 billion of cash and equivalents. We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants, and you to do so as well.” (Berkshire Hathaway annual financial statements 2021)

However, the ratio of cash to short-term US government bonds has changed significantly in recent years. Whereas in 2016 around 30% of corporate liquidity was in cash and 70% in short-term US government bonds, in 2021 the ratio was exactly the opposite at 70% cash and 30% US government bonds. There is a simple reason for this: the low and negative interest rate phase had an increasingly strong impact on yields on short-dated US government bonds in the years after 2016 and reached its low point in 2021 with a yield of just 0.01%. From an interest rate perspective, government bonds were no more attractive than cash itself. 

Today, things are significantly different. The yield on 3-month US government bonds is 5.3%, and what is Warren Buffett doing? He deposits 80% of his company’s liquidity, i.e. USD 125 billion, in short-term government bonds. As a result, his company realizes an annual interest income of USD 6.7 billion, assuming yields remain at this level.

For the German SME sector, the motto is “Dare to Buffet More”

According to the SME association BVMW, there are 3.5 million small and medium-sized enterprises, or SMEs, in Germany. In many areas, SMEs are world market leaders or hidden champions. However, very few SMEs think of depositing company liquidity in German government bonds or on the money market to benefit from the current interest rate policy

If the capital is invested in a money market fund, for example, until it is used for other purposes, companies can currently earn just over 4% interest. One-year Bunds, i.e. government bonds issued by the Federal Republic of Germany, currently yield 3.6%. 

In addition to the attractive interest rate, there is another advantage. If the bankruptcy of Silicon Valley Bank caused turmoil in the global financial system in March 2023, the money in a money market fund will be divided among hundreds or even thousands of issuers. As a result, the company’s capital is no longer held by just one or a few banks but spread across many parties in a well-diversified manner.

A co-pilot for company liquidity 

Unfortunately, there are still hardly any easily accessible offers for SMEs in Germany to invest money on the money market or in short-term government bonds. While blue chip corporations with their large finance departments maintain direct links to investment banks, this is often not economical and too time-consuming for smaller companies. That is why we at UnitPlus are developing a co-pilot for corporate liquidity, which helps to profit from the interest rate environment most simply and flexibly. 

CashPlus KMU is a co-pilot developed via the money market for a company’s liquidity reserves, the interest rate of which is based directly on the key interest rate of the European Central Bank. There are no restrictions, such as a term limit or a minimum or maximum deposit. As interest is paid daily on working days, CashPlus KMU is also suitable for short-term periods and makes optimum use of the compound interest effect. 

The top priority is to build a product that even Warren Buffett would use. The co-pilot for corporate liquidity is set to launch in Q2 2024. If you don’t want to miss the launch, you can sign up for our waiting list.

Fabian Mohr