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How SMEs should optimise their cash savings

Author: ICAEW Insights

Published: 21 Nov 2023

Enterprises have too much spare cash sitting in low- or no-interest accounts, according to a new report. What other options could help SME owners make the most of their reserves?

UK SMEs’ spare cash just isn’t working hard enough, says Allica Bank – one of the finance sector’s most prominent challenger brands.

According to its 23 October study The Great British Savings Squeeze: A report into the state of the UK business savings market, enterprises are currently suffering from an annual interest deficit, equivalent to more than £7.5bn.

While SMEs have managed to put away a total of around £273bn, £149bn of that is languishing in current accounts earning zero interest, the report points out. Meanwhile, the remainder is earning 2% less interest than that typically available to larger corporates.

Allica Bank has written to Treasury Select Committee Chair Harriett Baldwin MP to call for greater transparency in the UK SME savings market and for measures to ensure that UK banks do their best to pass on interest rates to small firms.

However, experts tell us that there are plenty of options that SMEs can explore in the meantime.

Key principle

“As the report suggests, businesses should avoid holding excess cash in the bank because it isn’t doing anyone any favours by sitting there,” says Clare Bowen, a partner at South West accounting and business advisory firm Monahans.

In the wake of the pandemic, Bowen’s firm has noticed that people are increasingly eager to hold on to their cash and ever more reticent about spending it. But while she acknowledges that a solid cash reserve is important, holding on to anything more than around six months of operating overheads starts to become unnecessary, she says. “It makes more financial sense to put it to good use.”

Adam Thrower, Head of Savings at challenger bank Shawbrook, agrees. “Many SMEs have turned to retaining surplus cash to create the headroom and build resilience they need to trade through what may be challenging conditions,” he says. “While this free cash can feel like a sound financial buffer, in an age of high inflation one of the most important things to consider is where to hold it.”

For ABC Finance Commercial Lending Director Gary Hemming, diversification is the key principle behind making spare cash work harder. In his view, optimising that money is “a multifaceted endeavour that requires careful consideration of various factors, including liquidity needs, risk tolerance and the overall financial health of the business”.

ICAEW Head of Business Simon Gray says: “Amid a multitude of economic challenges, cash is in sharp focus for many businesses. Even with inflation easing, maintaining a surplus balance to meet unanticipated cash requirements may provide a level of comfort – but the value of cash reserves held in accounts offering low rates of interest is likely to be eroded over time.”

“Making cash work harder, with higher rates of return, means striking a delicate balance between ease and speed of access. Chartered accountants play an important role in advising businesses on balancing short-term cash and liquidity requirements with long-term investment opportunities.” 

Routes for growth

Steven Englander, Founder and CEO at Manchester-based Accounts Direct, says it’s important for businesses to take into consideration both the upsides and downsides of some of the financial products SMEs could explore to spread their reserves.

High-yield savings accounts: these typically offer higher interest rates compared with standard current accounts, helping to grow cash holdings. However, interest rates could still be relatively low – and there may be minimum balance requirements, too.

Money market accounts: “These tend to provide higher interest rates, liquidity and some banking facilities,” Englander says. “But rates can still be lower than other investments, and you may have transaction limits.”

Certificates of deposit (CDs): while they offer higher interest rates and are relatively safe because the principal is insured, CDs tend to lock up your money for a fixed term – and early withdrawals can result in penalties.

Stocks or bonds: scope for higher returns, further diversification and ownership stakes in other companies – but can be riskier than savings accounts. “Market fluctuations can result in losses,” Englander cautions, “so this route would require specialist guidance or expertise.”

Corporate bonds: relatively safe, with higher returns than savings accounts. However, liquidity can be limited and you may need a significant amount of bonds to diversify risk.

Peer-to-peer (P2P) investments: these can provide higher returns compared with traditional savings accounts, but come with higher risk in the form of potential defaults, lower liquidity and lack of insurance. P2P backing for other businesses or entrepreneurs may earn returns, but their value can be uncertain.

Online savings platforms: the pros are competitive interest rates and flexibility; the cons are account fees and limited customer support.

Cryptocurrencies: “A personal dislike,” Englander notes. “While they have the potential for high returns – especially Bitcoin – they are extremely volatile and saddled with regulatory concerns. Plus, lack of understanding is a risk factor.”

“For businesses with predictable receivables and accounts payable, it may also be worth exploring fixed-rate business bonds that will help to lock in better returns on surplus cash. Currently, these are offering returns of above 5%,” Shawbrook’s Thrower adds.

Greatest asset

However, SMEs should also be alert to more business-based forms of diversification. “Owners never lose money by backing their own firms,” Englander says. “Investing in new equipment or breaking into new markets can provide equal returns – and owners can tweak or stop that spending as the market demands.

“Then we have education and training. Speaking personally, although I’m an accountant, studying law is opening up whole new areas of opportunity.”

Monahans’ Bowen agrees that new equipment or machinery to raise efficiencies is a wise investment. “Given the recent increase in corporation tax from 19% to 25%, anything that can be done to reduce it has the potential to be extremely beneficial.”

Another option is commercial property. “Owners must discuss the long-term tax implications of holding an investment property with their accountant,” she says. “But if a business is paying significant amounts of rent it may well be worth looking into.”

Owners would also do well to investigate more people-based avenues. “The first thing we discuss with our clients, particularly owner-managed businesses, is whether they would like to use spare cash to make pension contributions,” Bowen says. 

“Shareholders and directors can release that money from the business and into their pensions in a tax efficient manner. The downside is that the cash becomes lost to the business and tied up for the directors.”

Owners could also use cash reserves to recognise their greatest asset: their employees. “I’m a keen advocate of employers ensuring that they’re paying their staff enough and looking after them, as a top priority,” Bowen says. 

“You may already offer competitive salaries – but there may be an additional bonus scheme that your spare cash could pay for. This could be put to good use to effectively incentivise your staff to, for example, hit certain targets or KPIs over the next 12 months.”

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