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What should you do with your business’ cash?

I understand your frustration. As a business owner and entrepreneur, every financial decision you make for the business has its opportunity costs. Holding money in a current account, or any savings and investment vehicle, where you earn below inflation, let-alone no yield, exposes you to the following risks:

  • Cost risk – which is the erosion of your capital due to costs and fees incurred to maintain the account.
  • Inflation risk – which is not being able to grow your capital or funds in excess of inflation and eroding your purchasing power over time.
  • Asset allocation risk – which is your capital not being exposed to an optimum mix of asset classes through different investment cycles that can offer the optimal return for a given level of risk.

Like an individual investor, a business should be clear on articulating their short-, medium- and long-term financial objectives and the quantum of funds needed to achieve these. In other words, be clear on how much cash flow is needed to meet the daily operational expenses of the business as well as what potential capital expenditure is required for future projects. These should be invested differently.

Depending on your business’s cash flow cycle, you may find that there is excess cash in the business account from time to time. It’s therefore a good idea to decide on the minimum balance that you’re comfortable having there.

As you indicated, the challenge in deciding how much liquidity you are comfortable with is key. Having a clear plan for the business in the short-, medium- and long-term and reasonable estimates of the costs associated with each will help you to make this decision.

This is on the assumption that the capital currently sitting in your business account is intended as working capital. As a first point of call, banks offer a savings facility attached to your business account.

These come in various forms, for example, money market call accounts or fixed term deposit accounts. The conditions of returns, liquidity and costs will vary with each product. The average yield on a money market call account with one of the four big banks is between 3% and 6% per annum. At these yields, you are barely fending off the inflation risk.

There are, however, alternatives to having your capital lying in your business account. There are many local investment managers that have fixed-income unit trusts that utilise enhanced cash and cash equivalent instruments. These solutions are designed to offer similar levels of liquidity, flexibility and preservation to a money market account, but with the opportunity to earn higher yields of between 5% and 7% per annum.

In conclusion, your business needs to be clear on its minimum cash flow requirements. Traditionally six, eight or 12 months’ average operational expenses should be held in cash depending on the nature of your business.

Ask your bank or another financial services provider how you can incorporate a savings facility within your business account.

Articulate the short-, medium- and long-term financial objectives of the business and align cash flow accordingly.

Divert excess capital in the business account to an alternative savings or investment vehicle, ideally one which gives you exposure to various asset classes.

Always consider the risk factors when making these financial decisions.

Explore consulting a certified financial planner to perhaps create a holistic investment strategy for the business.