According to the Banking Association of South Africa, SMEs account for roughly 34% of the country’s GDP with 91% of them making up formalised businesses but, often in this space, the story of “don’t sacrifice high returns for accessibility” is a common acceptance for those that are established and successful.
The question is, though, does this apply to those that aren’t that established and how does this play into current economic factors?
Economic growth in South Africa continues to be strained, having contracted by 3,2% for the first three months of 2019. Everyone is feeling the pinch and there can be no doubt that business – especially growing, smaller ones – need to really consider what it means to have cash accessibility and whether this is going to aid business sustainability and growth in the short- to long-term.
“A major contributor to years of growth that we’ve witnessed with many successful businesses, is having the luxury of a cash buffer to call upon – ideal for channelling that extra cash into investment in new growth opportunities. However, in a tighter economy such as that we are experiencing now where business are working extra hard to maintain market share and margins, and growth opportunities are hard to come by – this isn’t always a viable, or business savvy, option. Keeping some cash aside for a possible rainy day – or a growth opportunity once the economy starts to improve – isn’t a bad idea but this shouldn’t be business as usual,” says Sean Jackson, head of business cash solutions at Investec Bank.
In fact, business cash buffers often sit in low-earning call accounts and the advantage of this approach is that the cash is available on short notice, either to meet an unexpected expense or to take advantage of a business opportunity. Unfortunately, this option leads to sacrificing earnings on a decent return on these funds – leading to what some call “lazy money” or a “lazy balance sheet.”
Jackson notes that in such cases this means that the business ends up carrying a lot of cash and cash equivalents, which otherwise could be used for profitable undertakings or, failing that, returned to shareholders. “Holding on to cash definitely plays to a business’s disadvantage, demonstrating an inability to use its cash efficiently,” he says.
Another alternative would be to consider placing the money in a longer-dated deposit and earn a good interest rate in that way. “However, this would mean locking in the cash for an extended period of time, which would restrict the business’ flexibility and force the business to use an overdraft or other debt facilities more than it may prefer to – and also offsetting whatever returns the business could be earning on its deposit.”
“Luckily, there are cash investment opportunities now available for small and medium enterprises which can help these businesses avoid having to choose between a rock of a ‘lazy balance sheet’ and the hard place of having to borrow,” says Jackson. “With a little bit of planning, businesses can achieve the combined benefits of accessibility to cash, alongside earning a competitive rate,” he adds.
Jackson says flexible notice deposits are a good solution as they allow businesses to bridge this gap between returns and accessibility. “Flexible notice deposits, for example, are ideal for businesses with lumpy cash flows. As money collected at high inflow times of the year can be placed in a high-earning notice deposit, and then drawn on at later intervals.
“Also, unlike typical notice products that lock the capital amount in for a predetermined time frame, flexible notice products allow businesses to benefit from the higher interest rates available on longer term deposits, while at the same time granting immediate access to a percentage of the capital when the business needs it. This is the balancing act that can make a fundamental difference,” he points out.
Businesses today need to ensure there is a level of accessibility – one that provides the freedom to still earn on investments/savings, while making sure that – even if it’s only a portion of the “rainy day” fund is available in times of emergency.
“What is essential though, is the ability of a business to earn off existing funds, instead of letting the unused money become an opportunity cost,” says Jackson. “There are a number of flexible notice products available for businesses, which gives businesses more choice, and they can select a variation that works best for them and taking their unique cash flow requirements into consideration.”
“Despite an under-performing economy; businesses should not back away from identifying growth opportunities. Rather, it is about understanding the balance between how to grow the business in a tough time, without diluting emergency funds available, to carry them through the storm. As such, it is crucial to assess the business needs and find a cash solution partner that will offer the business a good balance between the perfect cash solutions and investment options that will allow the business flexibility and a healthy cash flow for business growth and unlocking potential,” he says.