01 Sep 2020

SMEs – how not to miss out on the ‘bounce back’

Sean Jackson

Head of Business Cash Solutions at Investec

Post the liquidity squeeze caused by Covid-19, how can businesses best maximise their cash as the economy opens up?

There is no doubt that the Covid-19 pandemic has had a devastating effect on many businesses. The extended lockdown has resulted in an unprecedented reduction in revenue for the majority of small, medium and even large businesses with many having insufficient cash reserves to replace the cash flow lost during this time - creating an enormous stress on liquidity and job security.

 

Of course, we know that typically, cash falls into one of three categories - operational, savings and emergency cash, and while many businesses plan for unforeseen emergencies, no one could have planned for a pandemic. As a result, many businesses have not only eaten away at their operational and emergency cash, but, critically, their savings have been used during lockdown. As businesses start to reopen and pent-up demand emerges, as well as consumption increases, it will become critical that these businesses protect their liquidity position and focus on core competencies. This will mean deciding how best to maximise their available cash to ensure they don’t miss out on the rebound.

Cash for more rainy days

If we examine the road to recovery and way forward, businesses need to look at their cash. Shutting down was hard, but reopening can be just as hard. We know that ‘cash is king’ but understanding where to put it can be a difficult exercise, especially as businesses try and figure out if the needs of their customers have changed. And importantly, if customers’ needs have changed, how can business adapt to map to these new demands. As such, while it’s important not to rush any decision, strategies for growth have to be examined – but, as always, these depend on their business and its needs.

 

Specifically, as a business owner you need to understand where the cash in your business is going, what you need to save for, and how long you can put some cash aside for. The better you know your business, its ebbs and flows, the better you will be able to make these decisions.

 

Ideally, businesses should channel any extra cash into investments within new growth opportunities. However, in difficult economic times, where you’re having to work extra hard just to maintain market share and margins, or where growth opportunities are hard to come by - this isn’t always a viable option. As a result, keeping some cash aside for further rainy days – or a growth opportunity once the economy starts to improve – isn’t a bad idea.

Sean Jackson, Investec
Sean Jackson, Investec Business Cash Solutions head

We know that ‘cash is king’ but understanding where to put it can be a difficult exercise, especially as businesses try and figure out if the needs of their customers have changed. And importantly, if customers’ needs have changed, how can business adapt to map to these new demands. 

Comparing apples with apples

Deciding on a cash investment product can help businesses get the best possible return on their cash - but understanding how to structure this investment it critical and will ensure you are more likely to get the best possible return – and the most flexibility – which in this market is paramount.

 

Of course, the rate you also choose for a cash investment product will depend heavily on your business’s unique cash flow requirements, which is why it is important to ensure you examine all options and take into consideration the market conditions and your investment horizon.

 

One of the main challenges when comparing cash investments is that you may be quoted a different kind of interest rate, on the same product from different providers. One offering, may advertise a nominal interest rate, while another could refer to an annual effective rate or even a yield rate.

 

These different interest rates all vary in terms of the period over which earned interest is calculated – which means you are not comparing ‘like with like’. For this reason, it’s crucial to be clear on what you are actually being quoted, so you can work out the actual returns you’ll get on your capital.

 

Taking the time now to understand the cash realities and what this cash strategy could look like, will go a long way in making this cash work harder for the business, so they are ready for the ‘bounce back’ when it comes. 

 

Another popular misconception is that small businesses with a relatively small amount of cash won’t get as good a return as say a large company with huge funds available to invest. This isn’t necessarily the case, now with Basel III requirements, banks must understand the nature of the underlying depositor – not the size. This has a different impact on what they can and can’t do with the cash that is invested with them, meaning you are likely to still get a very competitive return.

 

In this turbulent time, businesses face widespread disruption and to ensure business continuity, cash is a critical component, that needs to be examined. No matter the business environment, and the amount of available cash coming off this weaker base, businesses should always be thinking about their cash strategy - and how they can use this to get better returns.

 

Taking the time now to understand the cash realities and what this cash strategy could look like, will go a long way in making this cash work harder for the business, so they are ready for the ‘bounce back’ when it comes. 

This article originally appeared in the print edition of Business Brief.

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