Whether you’re a small micro-enterprise or a large multinational, if you have surplus cash in your business, it will typically fall into one of these three categories:
Operational cash: These are funds used in the day-to-day running of your business, and are usually kept in your business current account.
Savings: This could be any form of saving your business is doing, such as putting money away for end-of-year bonuses, or saving for tax.
Emergency cash: This is extra cash that you may need in an unforeseen emergency, for example if a major piece of machinery breaks down in your factory and you need to replace it in order to continue your production line.
So, how much business cash should you invest in each category, and how long should you leave it there? The answer to this depends on your business, and what the business needs are. 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 need to put it aside.
The better you understand how your business ebbs and flows, the better you’ll be able to make these decisions about your surplus cash.
The next step is to decide on a cash investment product that can help give you the best possible return for the length of your investment. Cash investment products are all designed to help you invest your available funds for future use, but their returns all vary depending on how much money you put away, and how long you intend to leave it there.
For example, you may have R10m of surplus cash available in your business, but you have R8 million to invest in a fixed deposit account while leaving the remaining R2m in your business current account. This gives the business immediate access to the R2m in case an emergency arises.
Pricing options on cash investments
Fixed rates, prime rates, money market rates – what do they all mean, and how do they relate to your long and short term cash investments?
There are products in the market, such as our 32-day money market-linked account, that offer a fair degree of liquidity along with a competitive interest rate. With Investec’s Business Top5 money market linked account, you get immediate access to 20% of your initial investment, without incurring any penalties.
From the example above, that means that if you were to invest R10m of surplus cash into it, you would get a good money market return from the average of the top 5 qualifying money market funds, while still able to access R2m immediately and the balance after waiting the 32 days’ notice period if you also need the remaining R8m.
Another popular misconception is that small businesses with a relatively small amount of surplus cash won’t get as good a return as a large company with a huge amount of funds available to invest. But this isn’t necessarily the case: as a result of the 2008 financial crisis, Basel III requirements now mean that banks have to understand the nature of the underlying depositor. This has a different impact on what they can and can’t do with the cash that is invested with them. In simple terms, if you have less that R12,5m to invest, banks will pay you a very competitive return.
READ MORE: Don’t sacrifice high returns for accessibility
At Investec, our Small Business Call account pays 15 basis points more than call accounts for deposits greater than R12,5m. What is important to note is that any business with R1m in savings accounts can open an account with Investec with no fees or costs.
As a business owner, it’s important to understand how you are structuring your surplus cash today, in order to assess whether or not it will meet your true business needs in the future. The better you understand this, along with the inner workings of your business, the more likely it is that your business cash investment will give you the best possible return – and the most flexibility, should you need it before the investment term is over.
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