How to make your money work harder

By David Prosser

Is your organisation managing its cash effectively?

Look in detail at where and how you hold cash and the answer may well be no; charities, small businesses and other organisations frequently underestimate the returns they may be missing out on by not looking at how they can make their cash work harder.

United Trust Bank’s own research in this area is worrying. Two years ago, it published a study warning that small businesses were missing out on almost £1bn of interest each year by leaving cash in deposit accounts paying poor rates of interest – or no interest at all.

Other studies published since then suggest that figure may now be even higher.

These are not trivial sums – many organisations are missing out on thousands of pounds’ worth of interest each year.

Cash that is sorely needed is going begging simply because this issue is being overlooked.

Why managing cash is difficult

One problem is that organisations aren’t shopping around for the best possible deal on deposit accounts.

The Competition and Markets Authority, the UK’s competition regulator, estimates that 95% of small businesses have a current account with one of just five banks.

While the CMA doesn’t publish separate data on savings accounts, many organisations default to their current account provider when they have cash to deposit, rather than looking elsewhere for a higher rate of interest.

The problem with that is that the banks that dominate the current account market rarely offer competitive interest rates.

For example, the best easy access deposit account for businesses currently available from a high-street bank pays less than 2% in annual interest according to data from analyst Moneyfacts; the best deals, by contrast, pay more than twice as much.

However, there’s also a second issue causing problems for many organisations– they’re not thinking about how to optimise their cash management to secure the best possible returns.

All their surplus cash is held in one place – either their current account or a single deposit account – even if much better interest rates are available elsewhere.

It’s an entirely understandable approach, particularly in the current economic environment.

In times of uncertainty and volatility, organisations naturally want more or less instant access to their cash – to be able to get hold of money quickly and easily to deal with an unforeseen situation.

Charities, for example, have grown increasingly worried about the outlook for their finances.

Research published last year by the Charities Aid Foundation found less than half were confident they would be able to continue meeting the demand for their services.

Small businesses also remain anxious.

The latest data from the Federation of Small Businesses suggests that while confidence has improved somewhat in recent months, there are still more businesses that feel pessimistic about their prospects than negative.

Another challenge is that working out which deposit accounts offer the best deal isn’t straightforward right now because the future direction of interest rates remains far from clear.

While most economists expect the Bank of England to begin cutting rates this year, predictions about when this process will actually begin keep being pushed back.

The Bank’s chief economist recently hinted that summer rate cuts are now much less likely.


How to secure a better deal

The secret to overcoming these issues is twofold.

First, organisations need to be more proactive about finding a better deal; that means not simply opting for what happens to be on offer from their bank.

And second, they need to manage their money in a more nuanced way, with a portfolio approach to their cash.

In practice, this means working out what cash you definitely need to keep on hand, and what cash you can afford to tie up for a period.

With the latter, you may even be able to create several different pots of cash – perhaps reflecting the short-, medium- and long-term needs of your business.

Once you’ve done this work, you can allocate your various pots of cash to savings accounts and other vehicles with different return profiles.

For example, if you’re prepared to tie up some of your money for longer periods, you may be able to earn higher rates of interest on this part of your cash.

For example, when it comes to charity savings account, charities depositing money with United Trust Bank can currently earn 4.1% Gross/AER* variable on deposits where they are prepared to give 40 days’ notice of withdrawals.

However, if they feel comfortable with a 200-day notice period they can earn 5% Gross/AER* variable.

In practice, savings accounts come in different shapes and sizes, with different accounts offering a better or worse deal at different times.

Fixed-rate bonds, for example, pay a fixed rate of interest over a set term – anywhere from three months to five years.

Longer-term bonds currently pay lower rates because of expectations that interest rates are set to drop – but that won’t always be the case.

It’s therefore important to keep your savings portfolio under review, regularly checking to see whether your strategy remains appropriate.

Don’t be afraid to move money around if doing so will net you a higher return – though check whether you need to pay penalties or forego interest before making any switches or withdrawals.

Equally, don’t assume you need to stick with conventional deposit accounts.

It also makes sense to investigate options such as money market accounts and certificates of deposit, which may offer better returns at certain times.

Get this portfolio approach right and you can generate substantially higher returns for your organisation – it’s all about making your money work harder.

There is a balance to strike between speed of access and higher returns.

You may even need to take professional advice on how to accurately map your short-term cash and liquidity requirements, so that you don’t tie up money you need to have close at hand.

Equally, taking too cautious approach could mean missing out on longer-term opportunities.

* AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year. Interest is calculated daily and paid annually on 31st October. A minimum balance of £5,000 is required.

Although this article may contain helpful information and tips, it is not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances.