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. After all, there is no market risk with cash. Capital is guaranteed and that is exactly what businesses need right now – guarantees.
Businesses are finding themselves in a rapidly evolving market – one that is currently difficult to plan for in the long term. After all, many found themselves facing an unprecedented reduction in revenue with small, medium and even large businesses finding themselves with insufficient cash reserves to replace the cash flow lost. 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.
Running a business is a challenging task, and even more so when the economy is in a recession and reeling from lockdown. And while having a plan, understanding what the key drivers for the business are and how to make them work have always been important for businesses, in a recession it is non-negotiable. If we consider the credit downgrade to non-investment grade and the current cost of borrowing, there is an unavoidable impact on businesses – and their customers – and as such, the following needs to be considered:
Opportunity for growth is there, but the territory is difficult.
Customers are further tightening their belts – so differentiation and service become more critical.
More prudent business decisions need to be made – there is no room for error.
Very importantly, it becomes crucial to start looking at your business differently, at how you view debt, and critically, at how best to maximise available cash. If your cash or investments are not working for the business, it is a wasted opportunity and in this market, opportunity is everything!
We know that ‘cash is king’, but understanding where to put it can be a difficult exercise.
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 offering new growth opportunities. However, in difficult economic times where you are having to work extra hard just to maintain market share and margins, or where growth opportunities are hard to come by, this is not always a viable option.
So how do you build business savings for future growth when cash is not flowing? How do you ensure accessibility without sacrificing earnings and a decent return and how do you mitigate risk with any cash investment now – given security and guarantees are hard to come by in such a volatile market?
First, take the time to understand the business’s cash realities and what this cash strategy could look like. This will go a long way in making the cash work harder for the business. Second, look for a cash investment product that can help you get the best possible return on your cash − but more importantly, understand how to structure this investment to ensure you are able to not only get the best possible return but also the flexibility. Of course, the rate you choose for a cash investment product will depend heavily on your business’s unique cash flow requirements.
It is also important to note that there are different products out there that perform differently in different rate cycles, so you should shop around. In a decreasing-rate environment, it may also be prudent to look into a money market-linked account such as MoneyFund Tracker for your business – which does all the hard work for you. It tracks the daily rates of an entire basket of qualifying money market funds and gives a great money market-related interest rate that approximates the average of the top qualifying money market funds without the volatility of being exposed to one single money fund.
Very importantly, look for a cash solution that is as unique as your business. A big lesson learnt through this crisis is that many companies realised that they had insufficient business savings to carry them through a cash flow crunch like we have just experienced and that in order to survive, fundamentals need to be put into place − not only to thrive but when times are tough, to survive.
And as the dust settles, the focus needs to turn to building resilience: not only to get through and rebuild after the crisis, but also to buffer against the next one. Businesses face widespread disruption and to ensure business continuity, cash is a critical component that needs to be examined.
Even in difficult economies, companies are growing and diversifying. Many companies grow significantly during difficult financial times because they have set aside the resources to not only survive but to expand when others waver.
The views expressed are those of the contributor at the time of publication and do not represent the views of Investec. These views do not constitute a recommendation or advice and should not be treated as such.
AUTHOR | Sean Jackson, Head of Business Cash Solutions at Investec
