SMEs in a quandary over how to preserve their cash reserves

THE COUNTRY’S low-growth economy has presented small and medium enterprises (SMEs) with a number of challenges, not least of which is how to balance the need to grow and preserve cash reserves for future use in business.

The economy shrank by 0.7 percent in the first quarter of this year on the back of a 0.3 percent contraction in the last quarter of last year.

Managing investment risk while retaining access to funds when they are needed, are also important considerations.

Ancley Jacobs, FNB cash investments chief executive, said last week that most SMEs had three main considerations to keep in mind when approaching the management and saving of their cash reserves.

“The primary consideration for any small or medium business is managing investment risk by ensuring that cash on hand is invested where it is safe and the capital is fully guaranteed,” Jacobs said.

Jacobs also acknowledged that liquidity was a priority for most SMEs. It should not come at the expense of growth, meaning cash should be “parked” in an interest-bearing savings or cash investment account that offered growth to curb the effects of inflation, while still giving instant or quick access to savings.

“Apart from the need to have cash on hand in savings and cash investments with instant or quick access to money, SMEs also need to be able to access cash invested over the medium and longer term for regular planned future expenses, like tax payments and staff costs such as bonuses, as well as large future expenses such as assets or growth projects,” Jacobs said.

“Typically, when it comes to cash savings, the solutions offered by banks are built around a balance between ease of access and term of savings,” he explained, “so a business that is prepared to agree to long lead times when it comes to accessing its cash will typically enjoy a higher growth rate.”

This term-based approach could be well suited as a way of growing cash available to the business that had a clear view of its timeline for future cash needs – which is why – for the SME that was unsure about exactly when it would need to access cash.

“Given that a significant reason for putting your cash into a savings account is to help grow the money during the times that you don’t need it, earning returns that keep up with inflation is important,” he said.