What strategy should management use to ensure cash flow while still earning interest on reserves?

Maintaining a savings account for liquidity is a strategic approach that allows management to ensure cash flow while still earning interest on reserves. By keeping funds in a savings account, the company can access liquid assets when needed, which helps to manage short-term cash flow demands. This strategy provides a balance between having immediate cash availability for operational expenses and also benefiting from interest earnings on the cash reserves.

A savings account typically offers higher interest rates than a standard checking account, thus allowing the company to earn some return on its reserves without exposing itself to the higher risk associated with stocks or other aggressive investment strategies. This method ensures that the company has funds readily available for unexpected expenses or opportunities while still enhancing cash reserves through earned interest.

Investing all cash into high-risk stocks can jeopardize the company's financial stability, especially if market conditions change. Making large purchases to reduce cash reserves could lead to liquidity issues in the future. Keeping cash solely in the operating fund limits the company’s ability to earn interest on excess funds. Therefore, maintaining a savings account is the most effective way to balance liquidity needs with interest earnings.