Your Company Has RM1 Million. Why Not Put It All in an FD?

Picture a building-materials trader who moves all RM1 million of his company's cash into a 12-month fixed deposit. His reasoning is simple: “It's sitting there anyway — at least it earns interest.” Three months later, a RM380,000 supplier invoice falls due, and his biggest customer pays six weeks late. He has to break one of the FDs early, losing much of its interest under the bank's terms, and draws on his overdraft to cover the rest.

This is more common than it sounds. His mistake wasn't an investment mistake. It was a timing mismatch: money that might be needed within three months was locked into a twelve-month instrument.

Ask “when will we need it?” before “where should it go?”

The cash on a company's balance sheet looks like one number. In practice it is several pots of money stacked together: next month's payroll, next quarter's tax instalments, the machine due for replacement in six months, and the genuine surplus that won't be touched for years.

When I sit down with a business owner, I start by splitting it into three layers:

• Layer 1 · Operating cash: payroll, suppliers, rent, loan instalments, tax instalments. Needed at any time; the test is whether it can be paid out today.
• Layer 2 · Short-term reserve: late customer payments, seasonal stock, unexpected repairs. Possibly needed within weeks or months; the test is whether it arrives in your account when promised.
• Layer 3 · Strategic surplus: money you are confident you won't need for a year or two. The test is earning more efficiently at a level of risk you can accept.

FDs suit Layer 3 well, and sometimes part of Layer 2. They don't suit Layer 1. The problem is never the FD itself; it is putting everything in at once without separating the layers.

An easily missed fact: PIDM cover has a ceiling

Malaysia's deposit insurance (PIDM) covers up to RM250,000 per depositor, per member bank. A company counts as one depositor.

If a company keeps its whole RM1 million at a single bank, everything above RM250,000 sits outside that protection. Bank failures are rare, but this ceiling is worth knowing before you arrange your cash. Spreading deposits across a few banks is the cheapest risk management there is.

The rate gap is smaller than it feels

Most conversations about “idle cash” start with squeezing out a little more interest. Let's put the numbers on the table:

Illustration: RM500,000 with a 0.6 percentage-point rate difference is roughly RM3,000 a year, before tax.

RM3,000 isn't nothing. But if chasing it leaves the company short in payroll week and you end up drawing on an overdraft, the interest on that overdraft eats the gain quickly. So my order is always the same: make sure Layer 1 is enough first, then talk about efficiency in Layers 2 and 3.

What can go into Layer 2

Layer 2 money has one job: to be in your account when you need it. Common options include current or short-term bank deposits, shorter-tenure FDs, and money market funds as a category.

Money market funds are often compared with FDs, but three things need to be clear first:

• They are not deposits and are not covered by PIDM;
• Their returns vary: past yields don't predict future ones, and in extreme markets the unit price can fall;
• Redemption timings such as “T+0” or “T+1” depend on cut-off times, amount limits and exceptions in the official documents, not on a few letters in a brochure.

Whether one fits your company depends on your cash forecast, your board's risk policy and its approval process. There is no universal answer.

So how much operating cash should you keep?

There is no standard ratio. “Keep three months of expenses” is the rule of thumb you hear most, but a company with 90-day receivables and large quarterly import payments needs a very different buffer from a cash retail business.

A more reliable approach is a 13-week cash forecast: list, week by week, the receipts you expect and the payroll, tax, supplier and loan payments you must make. Find the week with the lowest balance and set a safety line above it. Then test a few stress scenarios, such as a major customer paying a month late or revenue dropping 20%, and see which week the gap appears in.

Once that is done, “where should the RM1 million go?” usually answers itself, and it is an answer you can explain to your directors, your accountant and your bank.

Why is there always less cash than the accounts suggest? Read: RM20 million in revenue, so why is the company short of cash? →

If this sounds familiar

If your company holds idle cash but has never split it by purpose and timing, I can run a corporate cash review with you, starting from the forecast and the layers. Even if the conclusion is “keep it at the bank,” you will know why. Anything involving tax we confirm together with your tax agent.

I work primarily on advisory engagement fees; if implementation involves a specific product and a commission arises, it is fully disclosed before you decide.

More questions? Read: Corporate cash management, 15 questions business owners ask most →

Registered Financial Planner (RFP) · JMarc
This article is general financial education. All figures are illustrative. It is not investment, tax or legal advice and does not recommend any specific product. Money market funds are not deposits, are not protected by PIDM, and past performance does not indicate future performance. Check PIDM coverage on the PIDM official website.