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Johannesburg - Savvy business owners strive to manage excess cash for maximum return while minimising risk and maintaining adequate liquidity. However, it’s essential to establish whether it is indeed excess cash, an expert says.
The head of liabilities at FNB Commercial Banking, Theunis Fourie, says: “Sometimes, businesses end up collecting payment from clients early, before they have paid for essentials such as raw materials, inventory and labour, which will be needed to produce a product or deliver a service.
In this case, says Fourie, the extra money in your operating account isn’t excess cash at all — it’s just a temporary bump in the account balance until payables for cost-of-goods sold are disbursed.
"This money should usually be kept safely in the operating account to pay expenses as they become due," says Fourie.
Annual turnover
There are three main objectives to consider when managing excess cash:
o Invest the money in safe investments that suit your risk appetite;
o Keep the funds as liquid as needed so they can be accessed to meet operating expenses, if necessary;
o Generate the highest possible return on the funds within these parameters.
In today’s environment of ongoing economic and business uncertainty, coastal business owners who rely heavily on the year-end season for their annual turnover should balance these three primary objectives carefully when it comes to investing excess business cash.
Fourie cautions that no investment is risk free: “Some can give a low yield and sometimes less than inflation, in which case you’ve lost money, and in extreme cases you could even lose the capital.
"Such a decision requires proper planning for you to understand what you will ultimately be using the money for, and when you will need it to be available to you.
"This will indicate your investment goals and timing projections, and whether you should be going for a long- or short-term investment.”
Find the right investment notice period
Fourie says: “For instance, given the overall ebbs and flows of your business cash flow cycle, decide on the minimum cash balance that you’re comfortable with. To do this, you need to determine how much working capital is necessary to meet your company’s ongoing operating expenses.”
Fourie points out that you should consider a number of options when planning to invest any excess capital. Some allow you 100% of your excess cash from day one (at a cost) and at no cost after giving 45 days' notice, and multiple notices are permitted.
Fourie says it is always a good idea for business owners to talk to an investment specialist to help analyse cash flow cycle, find the right minimum balance for their operating account and choose the right investment vehicle for excess cash.
- Fin24
The head of liabilities at FNB Commercial Banking, Theunis Fourie, says: “Sometimes, businesses end up collecting payment from clients early, before they have paid for essentials such as raw materials, inventory and labour, which will be needed to produce a product or deliver a service.
In this case, says Fourie, the extra money in your operating account isn’t excess cash at all — it’s just a temporary bump in the account balance until payables for cost-of-goods sold are disbursed.
"This money should usually be kept safely in the operating account to pay expenses as they become due," says Fourie.
Annual turnover
There are three main objectives to consider when managing excess cash:
o Invest the money in safe investments that suit your risk appetite;
o Keep the funds as liquid as needed so they can be accessed to meet operating expenses, if necessary;
o Generate the highest possible return on the funds within these parameters.
In today’s environment of ongoing economic and business uncertainty, coastal business owners who rely heavily on the year-end season for their annual turnover should balance these three primary objectives carefully when it comes to investing excess business cash.
Fourie cautions that no investment is risk free: “Some can give a low yield and sometimes less than inflation, in which case you’ve lost money, and in extreme cases you could even lose the capital.
"Such a decision requires proper planning for you to understand what you will ultimately be using the money for, and when you will need it to be available to you.
"This will indicate your investment goals and timing projections, and whether you should be going for a long- or short-term investment.”
Find the right investment notice period
Fourie says: “For instance, given the overall ebbs and flows of your business cash flow cycle, decide on the minimum cash balance that you’re comfortable with. To do this, you need to determine how much working capital is necessary to meet your company’s ongoing operating expenses.”
Fourie points out that you should consider a number of options when planning to invest any excess capital. Some allow you 100% of your excess cash from day one (at a cost) and at no cost after giving 45 days' notice, and multiple notices are permitted.
Fourie says it is always a good idea for business owners to talk to an investment specialist to help analyse cash flow cycle, find the right minimum balance for their operating account and choose the right investment vehicle for excess cash.
- Fin24
