Ten Principles of Cash Management
Taylor Bollinger·
Cash, to paraphrase Warren Buffett, is like oxygen: never thought about when it is present, the only thing in mind when it is absent.
Consider a hypothetical family, the Aldens. On a Monday in September, their consolidated report shows $1.4 million in cash and cash equivalents across eleven accounts. By Friday they owe $400,000 on a private equity capital call and a $260,000 estimated tax payment. On paper, the week is covered twice over.
Then the details arrive. $520,000 of that cash sits in an irrevocable trust for the children, with an independent trustee and a distribution standard that says nothing about funding the parents' commitments. $210,000 is inside IRAs, where every dollar withdrawn is taxable income and subject to withholding. $150,000 in the joint account is already committed to a Treasury purchase that settles today. $90,000 belongs to the family's operating company, and only the company can direct it. A $600,000 distribution from that same company, which everyone assumed would land Wednesday, slips two weeks because the company's lender wants to review a covenant first.
Count again, and the Aldens can reach $430,000 of settled, permissible, uncommitted cash by Friday against $660,000 due.
Nothing in that gap was hidden. The trust agreement was in the file. The withholding election was on record. The Treasury trade was on the blotter. The only true surprise was the distribution, and it never should have been counted as cash.
Every dollar of the shortfall was knowable. No one had put the pieces together. That is what makes cash management deceptive.
A balance tells you what a client owns. Liquidity tells you what a client can do. Operating principles close the distance between the two. They are the discipline that carries a decision from the first signal through judgment, approval, execution, and confirmation, and leaves a record that holds up to scrutiny.
With that discipline, a funding gap becomes a decision. Without it, the gap becomes a deadline, and the deadline decides.
Every cash decision comes down to three variables in tension: access (how fast the money moves when you need it), yield (what it earns while it waits), and protection (how exposed it is to loss). Optimizing any one in isolation is where the mistakes in this piece start.
1. Count only the cash this need is allowed to use
The first question in any funding decision is not "how much cash does the client have?" It is "which dollars can fund this obligation, by this date, on this person's instruction?"
A household view shows the full set of options. But before a balance counts toward a specific need, it has to pass four tests.
- Ownership. Whose money is it, legally? Trust assets belong to the trust. An entity's cash belongs to the entity.
- Authority. Who can instruct its movement, and is that authority documented? Discretion to trade an account and authority to send money out of it are separate grants. Know which one you hold.
- Condition. Is it settled, unencumbered, and free of prior claims? Pending purchases, pledged collateral, earmarks, and early withdrawal costs all reduce what is truly available. Retirement cash arrives net of tax and withholding.
- Timing. When can it move, and how long will it take to reach its destination?
Call these the Four Tests. No dollar counts toward a need until it passes all four.
In practice, classify every material balance as available now, available with action, restricted, or committed. Anything that cannot be classified with confidence is treated as unavailable. And never count a single reserve against two independent needs, which is the most common way a household looks liquid on a report and turns out not to be.
The failure here is rarely dramatic in the moment. Someone tells a client a transfer will be simple. The trustee is traveling, the entity needs a resolution, or the IRA distribution arrives 20% lighter than expected. The problem surfaces at exactly the moment there is no longer time to solve it cleanly.
2. Forecast the low point, not the ending balance
A client can finish a quarter cash positive and still miss an obligation in the middle of it. Net flows hide the sequence, and the sequence determines whether a payment clears.
Build a rolling forecast that keeps every material receipt and disbursement on its actual date: estimated taxes, capital calls, required distributions, tuition, premiums, debt service, and large purchases. Grade each receipt by its certainty. A Treasury maturity is contractual. A pension is scheduled. A business distribution is expected. A liquidity event is hoped for. Test fixed obligations against the scenario in which uncertain receipts arrive late or not at all.
Then test the risks together, because that is how they tend to arrive. A market decline, slower private distributions, a delayed payout, and a higher-than-planned tax bill are each manageable alone. What forces a sale at a bad price is several of them in the same quarter. For private investments, model calls and distributions separately; modest net outflows can conceal a large funding need if the distributions stop.
Work backward from the date money is needed, not forward from today's balance. Most U.S. securities trades have settled T+1 since May 28, 2024, so a sale placed today generally will not fund a wire due this afternoon. Add approvals, trustee signatures, transfer cutoffs, and currency conversion, and the real lead time is often longer than the trade itself.
The useful output is not a chart. It is the projected low point, the date it occurs, the funding action required ahead of it, and the person responsible for taking it.
3. Choose the funding source before choosing the security
When a client needs a specific amount by a specific date, the reflex is to find something to sell. That skips the more important decision: where the money should come from.
A common answer is a fixed order: settled cash, then maturities, then redirected income, then borrowing, and a sale last. As a universal rule it breaks in predictable places. Settled cash may be the contingency reserve. A maturity may already be committed. Borrowing can be cheaper today and far more expensive under stress. And sometimes a sale is the best first choice: when the position is overweight, sits at a usable loss, or was already slated for diversification.
The default should be a sequence of questions, not a sequence of accounts. For each candidate source:
- Is it available in time, and permissible for this need?
- What does it cost in total, including tax, trading costs, interest, and forgone yield?
- What does it do to the portfolio that remains?
- What does it leave for the next need?
- How reversible is it?
Required minimum distributions show why this matters. A client who must take an RMD anyway can often use it to fund spending instead of selling in a taxable account, but withholding means the gross distribution and the spendable receipt are different numbers. And the deadline has teeth: the IRS excise tax on a missed RMD is 25% of the shortfall, or 10% if corrected in time.
Write down the firm's default approach and expect advisors to explain departures from it. That is a policy choice, not a regulatory requirement, and a good one, because the explanation is where judgment becomes visible. When the obvious source is skipped, someone should have decided to skip it.
4. Judge every withdrawal by the portfolio it leaves behind
Raising cash changes what the client owns.
The Aldens' $3 million taxable account holds $900,000, or 30%, in a single low-basis stock. They need $400,000 to fund the capital call from the introduction. Selling diversified holdings with modest gains looks tax-efficient, and it is. It also raises the concentrated position to nearly 35% of what remains. The cash request was fulfilled perfectly, and the Aldens are now meaningfully less diversified.
Before approving sales, compare the post-withdrawal portfolio with the client's target allocation, risk limits, and restrictions. Check concentration across accounts and through funds, and whether selling liquid assets leaves an outsized share in private investments that cannot be sold.
Tax-lot selection belongs inside that analysis, not in front of it. The smallest embedded gain is not automatically the best sale; the answer depends on gains and losses elsewhere this year, carryforwards, and expected income. Verify basis before treating an estimate as decision-ready, and put any resulting tax bill into the cash forecast now. Any loss realized also needs a wash-sale check across the household, including IRAs and dividend reinvestment, a discipline the next installment of this series covers in full.
Sometimes realizing a gain is the right price for reducing risk. Sometimes preserving a position is justified. Neither conclusion should emerge by accident from a process built only to hit a dollar amount.
5. Size reserves to the client's exposures, not to a rule of thumb
A familiar rule of thumb calls for three to five years of net spending in low-volatility assets. It has respectable roots: it guards against selling growth assets in a drawdown, and it can keep clients from panicking at the worst moment. It fails as a universal rule for two reasons.
First, the cost varies enormously. For a family spending 2% of its portfolio a year, five years is 10% of assets. For a family spending 5%, it is 25%, most of a balanced portfolio's fixed-income sleeve. Whether that reserve sits inside the target allocation or on top of it changes everything.
Second, the evidence is more mixed than the rule implies. Javier Estrada of IESE Business School tested bucket strategies across 21 countries from 1900 through 2014 and found that simple rebalanced allocations outperformed them, because rebalancing buys assets after they fall while buckets mostly avoid selling them. None of this makes reserves wrong. Their behavioral value is real. It means the size should be decided, not inherited.
The decision should rest on explicit criteria:
- Net spending gap: spending minus reliable income, as a share of liquid assets.
- Income reliability: a pension is not the same as business distributions that fall with the economy.
- Dated obligations: taxes, unfunded commitments, and planned purchases.
- Spending flexibility: how much the client could cut, and for how long.
- Other liquidity: including credit, discounted because it shrinks when it is needed most.
- Demonstrated behavior: how this client acted the last time markets fell.
Then separate operating cash, reserves matched to dated obligations, a contingency reserve sized to the stressed shortfall from the forecast, and, for clients drawing on the portfolio, a spending runway in high-quality fixed income. Set replenishment rules in advance: refill in strong markets, draw down deliberately in weak ones, and review at least annually.
6. Settle purpose, access, and protection before chasing yield
The highest quoted yield is useful only after the vehicle satisfies the purpose of the cash. Operating cash, a tax reserve due in 60 days, and a multi-year runway should not compete for the same instrument.
Economics. Compare alternatives net of taxes, fees, and transaction costs over the expected holding period. Treasury interest is exempt from state and local income tax, which can outweigh a few basis points of headline yield in a high-tax state.
Protection. FDIC insurance covers $250,000 per depositor, per insured bank, per ownership category. SIPC applies when a brokerage firm fails, up to $500,000 including $250,000 for cash, and does not protect against a decline in value. When Silicon Valley Bank failed in March 2023, Roku disclosed that about $487 million, roughly 26% of its cash, was held there, largely uninsured. Regulators ultimately protected all depositors, but that was a policy decision made under stress, not a protection anyone could rely on in advance.
Access. Confirm redemption procedures, cutoffs, and settlement. Since the SEC's 2023 reforms, institutional prime and institutional tax-exempt money market funds must impose liquidity fees when daily net redemptions exceed 5%; government money market funds are not subject to that fee. A brokered CD bought for an extra 40 basis points cannot simply be cashed out early. It is sold on the secondary market, and if rates have risen, at a loss that erases the yield advantage. A sound instrument can still be the wrong one for that money.
Incentives. Finally, examine who benefits from the arrangement. In January 2025, the SEC settled charges against three advisory entities at two large broker-dealer firms, with $60 million in combined penalties, for failing to adopt reasonably designed policies around cash sweep programs in advisory accounts. The firms neither admitted nor denied the findings. The lesson is that regulators expect a documented, client-centered basis for every cash option.
7. Borrow only with an exit you would defend in a down market
Borrowing can bridge a timing mismatch and avoid a poorly timed sale. Its appeal depends almost entirely on the repayment plan, which is usually the least examined part of the decision.
A securities-backed line looks safest when the collateral is calm. A client who draws against a concentrated position to bridge a short-term need is exposed if that position falls before the repayment source arrives. FINRA notes that the window to meet a maintenance call is typically two or three days, and that lenders can sell pledged securities without notice. The sale a client borrowed to avoid can happen anyway, at a worse price, on the lender's timetable.
Before the draw, ask:
- What is the all-in cost, including a variable rate that can rise?
- Is the use permitted? Most securities-backed lines are non-purpose loans that cannot fund securities purchases.
- How certain is the repayment source?
- How far would the collateral have to fall to trigger a call?
Do not assume the interest is deductible because securities secure the loan; it generally follows the use of proceeds. Keep undrawn capacity separate from cash in the liquidity plan, because a credit line's conditions tighten as markets fall. And name it plainly when the appeal of borrowing has more to do with avoiding a difficult tax conversation than with the client's interest.
8. Give every inflow a destination before it lands
Without a standing decision about where incoming cash goes, each receipt becomes a decision that can wait indefinitely, and cash that waits indefinitely becomes an allocation nobody chose.
Maturities show the problem most clearly. In January, the Aldens told their advisor the $300,000 Treasury maturing in March would fund June tuition. That conversation lives in a meeting note. When the Treasury matures, a rebalancing review flags excess cash and invests it in equities. In May the team sells equities to fund tuition, after a decline. No one made a bad decision. The information that mattered was not attached to the cash when it landed.
Decide before the event: roll, hold for a dated obligation, or deploy. For every other inflow, set a destination policy while the client's intentions are clear, whether that is a reserve, a dated obligation, debt paydown, or the portfolio. Where investment is appropriate, use inflows to fill underweights before selling to rebalance.
A material balance awaiting instructions deserves a named owner and a decision date. Holding cash deliberately can be entirely reasonable. What separates a decision from drift is a stated purpose, a review date, and a client who understands the tradeoff.
9. Verify every instruction as if the money cannot come back
Once a wire is executed, getting it back depends on speed, cooperation, and luck. The FBI's Internet Crime Complaint Center received 24,768 business email compromise complaints in 2025, with reported losses of just over $3 billion. Its Recovery Asset Team froze about 58% of the funds in the incidents it worked. Recovery is possible when fraud is reported fast. It is not something a firm can count on.
Wealth management offers attractive targets: large, time-sensitive payments to counterparties the client rarely deals with directly, like a capital call with "updated" wiring instructions. The controls are not complicated. They just have to hold under pressure.
Verify any new or changed instruction by calling the counterparty at a number already on file, never one supplied in the request, which is also the FBI's guidance. Separate the person who receives a request from the person who releases the payment. Confirm the requester's authority for this specific account. Treat urgency as a reason to escalate, not to skip a step. As voice impersonation becomes easier, a familiar voice is weaker evidence than it used to be. Write these controls down and apply them the same way every time, including for the client who is annoyed by them.
10. Own the request until the outcome is confirmed
Execution is part of the advice. An approved trade and a submitted transfer each represent progress. Neither confirms that the obligation was met.
Consider the Aldens' capital call due Thursday. The trustee's signature arrives late, the wire misses the custodian's cutoff, and the receiving bank returns it because the beneficiary name does not match the account's legal title. The money lands Monday, after the deadline. Every person completed their step. Nobody owned the outcome.
Assign one person responsibility for the entire request. Define the outcome at the start: the net amount, the authorized recipient, the destination account and its legal title, and the date funds must be available, not merely sent. Work backward from there, leaving time for the exception that usually appears.
Track status in terms that cannot be confused. Approved is not sent. Sent is not received. Received is not credited. Exceptions stay open with a named owner until resolved. Then close the loop in the record: the rationale, the approvals, the confirmations, and an updated forecast and reserve position. Completion should leave the next person, whether a colleague covering a vacation or a regulator a year later, with an accurate account of what happened and why.
The standard behind the service
Notice where most failures in this article occur: at handoffs. Between a meeting note and a maturity. Between an approval and a cutoff. Between a household report and a trust agreement. Individual expertise rarely fails there. What fails is the connective discipline between people, systems, and steps.
That discipline can be tested. Pull your firm's last ten cash requests of meaningful size. For each, ask whether you could show what was available and why, which sources were considered, what the portfolio looked like afterward, who verified the instructions, and when the funds were confirmed at their destination. The answers will show you exactly where your service standards need to rise.
Sources
Settlement
Required minimum distributions
Cash vehicles and protections
Documented events
Joint Statement by Treasury, Federal Reserve, and FDIC (Mar. 12, 2023)
SEC Press Release 2025-16 (Jan. 17, 2025), cash sweep settlements
Borrowing
Reserves research
Payment fraud
Warren Buffett
Disclaimer
Hypothetical scenarios. All client situations are hypothetical and do not involve Bespoke clients: the Alden household, referenced in the introduction, the capital call shortfall (4), the Treasury maturity (8), and the late capital call wire (10). Illustrative percentages in principle 5 are arithmetic examples, not data.