By David Prosser
It has rarely been so important for small and medium-sized enterprises (SMEs) to manage their money carefully – both to stay on top of day-to-day cashflows and to sweat their cash reserves. And to do that effectively may now require these businesses to take a different approach to how they bank. By getting more sophisticated about cash management, they may be able to simultaneously reduce risk and fund opportunity.
The backdrop is certainly tough, with SMEs facing challenging times. Amid rising costs such as higher national insurance contributions and wage bills, and an uncertain economic outlook both domestically and globally, optimism is in short supply. The latest data from the Federation of Small Business suggests confidence hasn’t been so low since the early months of the Covid-19 pandemic, with many firms reluctant to invest for the future, hire staff or pursue new ventures.
Unlock the value of cash
More efficient cash management could provide an answer. Research published by United Trust Bank (UTB) last year warned that SMEs were potentially missing out on around £2.3 billion worth of interest payments each year by leaving excess credit balances accounts paying uncompetitive rates of interest. There has never been a better time to start thinking about how to unlock this value.
In the past, that might simply have meant moving those excess balances into the business savings account paying the most competitive rate of interest on the market. In today’s uncertain operating environment, however, many businesses will need to take a more nuanced approach.
The dilemma they face is that it has become much harder to define the meaning of “excess”. Businesses naturally want to move cash they don’t need at hand out of their current accounts, which don’t normally pay interest, into savings products that do offer a return. But when trading is so unpredictable, it’s not easy to work out how much cash should be allocated to each pot.
Plan with granularity
One part of the solution to this problem is to implement more accurate and detailed cashflow forecasting – including planning for multiple different scenarios.
That might require increased collaboration and communication between business functions – including sales, marketing, operations and finance. It might need more granular analysis of data – both historical information and forward-look intelligence – potentially making more use of modern accounting tools. It could also involve working harder at receivables and payables management, with more efficient processes for collecting on invoices and reducing delays.
SMEs lacking experience with this level of analysis may benefit from professional help. But there are also a growing number of affordable – or even free – software packages that can help level the playing field between SMEs and larger businesses with big finance teams and expert analysts. The accounting solutions that SMEs already use to keep track of their finances often include excellent tools for forward planning and forecasting.
Put visibility to work
Having put this work into improving visibility of future cashflows, even in these more turbulent times, SMEs can make much better-informed decisions about where to hold their cash. But here too, it is possible to make more intelligent and subtle choices than in the past.
In particular, in the current environment, it makes sense for many businesses to spread their cash across a variety of accounts, rather than moving all cash into one savings solution. This portfolio approach provides a means to maximise interest while retaining flexibility and access to cash.
UTB, for example, offers a range of different savings accounts for businesses (and charities). It’s Easy Access Account currently pays 3.60% Gross/AER* a year in interest but still allows businesses to make withdrawals very quickly – on the same day or the next business day in certain circumstances. By contrast, the bank’s range of fixed-term business bonds and notice accounts offer higher interest rates – up to 4.25% Gross/AER* a year currently – but businesses need to be prepared to commit their funds for the duration of the fixed term or provide the required notice period as per each product’s terms and conditions.
Using a range of solutions, businesses can structure their cash holdings more efficiently. In addition to funds earmarked to support cash flow in their current accounts, they might choose to hold an additional sum in an easy access product, providing an emergency reserve of cash but still earning interest. Cash they feel confident about locking up for a period can then be allocated to accounts that pay even more.
Executing this strategy requires some finely-balanced judgements. Businesses will need to decide exactly how much cash to allocate to each account. And the rates available will vary over time – banks offer interest rates that reflect current market conditions but also expectations of what lies ahead. A notice account, say, may not always pay more than an easy-access product.
More opportunity, less risk
Still, working in this way could be hugely valuable to SMEs trying to cope with today’s challenges. It provides improved risk management, with built-in buffer zones for unexpected difficulties, as well as the prospect of superior returns on cash deposits.
Don’t underestimate the value of additional interest. UTB’s research last year found that SMEs could collectively employ an additional 58,000 people if they recouped all the interest being lost in poor-paying bank accounts. Getting on top of your cash management could make it possible for businesses to pursue growth opportunities even at a time when they are feeling particularly risk-averse.
*AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.
Although this article may contain helpful information and tips, this is not financial advice. You should seek advice from a financial advisor if you are unsure about what is best for your Business’s specific requirements.