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Many South African businesses are falling into the lazy balance sheet cycle or the trap of saving for a rainy day. While certainly keeping a level of healthy working capital is critical, especially in a volatile business market, lazy money or money sitting in low-earning call accounts that sacrifice earnings on a decent return means limiting potential growth.
Think of cash as an employee. A business could have an employee in their employ, but if they are not putting them to work and getting maximum return, they are wasting an asset. The same can be said for cash.
If cash or investments aren’t working for the business, it is a wasted opportunity. And in this market, opportunity is everything, especially for small- and medium-sized enterprises (SMEs).
If we consider the established SME market for example, often optimising surplus cash is a neglected part of the business. Of course, when businesses think of surplus cash, they automatically assume it refers to additional money – but rather when we talk surplus cash, we are talking about purpose-driven pockets of savings or investments, whether for staff bonuses or a new asset for example. Many businesses put money away for these events, or even just to keep on hand for emergencies, but opt to put them in low-earning call accounts or business current accounts, allowing for immediate access.
However, these accounts yield very little interest. Rather businesses should be looking at tailored cash product solutions that provide a balance between the benefit of a higher interest rate but, also immediate liquidity in line with the requirements of the business.
In some cases, the impact of the rate a business is currently earning versus what they could be earning could be equivalent to one to two employee salaries – imagine the impact!
Customising liquidity for business opportunity is critical as a one-size approach doesn’t work. Businesses need to think ahead and find a banking partner that asks the right questions and is willing to build a relationship that allows them to truly understand the business, its cash flow cycles and external market influences, and then able to structure a portfolio correctly – giving the business flexibility, security, guaranteed returns and very importantly, access to the funds when they are needed most.
Good business and the bottom line will always be linked and as the age-old adage goes, cash is king. Indeed, it is – but if the business equity isn’t on the chessboard being utilised or being invested in, and if it isn’t being protected and managed correctly – the business could be facing a stalemate or even worse, a checkmate.
This article was originally published on CFO South Africa on 2 October 2019.