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Cash Management in volatile times
In a period of prolonged turbulence driven by a series of major global events, it’s understandable for people to take solace in the adage that ‘cash is king’.
Our financial resilience, first unexpectedly tested by the pandemic, has been further stretched by rising inflation and escalating costs triggered partly by the conflict in Ukraine. This has forced many into a rethink of how their finances are positioned, and how well-placed they are to protect their businesses, their families and themselves into the unknowns of the future.
In this context, the appeal of a building up a strong cash balance is clear. Indeed, Bank of England data shows that in the 12 months following the outbreak of the pandemic in March 2020, the total savings deposited by Britons rose by £180 billion from £1.5 trillion to £1.68 trillion. Separately, corporate cash holdings rose by £152bn, or 29%, between the end of 2019 and October 2021.
However, calculations carried out by the Centre for Economic and Business Research (CEBR) on behalf of Shawbrook reveal that SME firms alone are leaving £4.2 billion in extra interest on the table each year by not managing their cash more effectively.
Here, we look at the key considerations for savers who find themselves in a stronger cash position.
Having a healthy cash balance undoubtedly provides a degree of financial security, but it should be remembered that the real-terms value of any cash sum is relative. With inflation expected to nudge over 13% in 2022 and to “remain at very elevated levels throughout much of 2023”, according to the Bank of England, cost of goods and services are increasing at an accelerated rate. As such, the value of cash is effectively decreasing over time if it is unable to generate growth at an equivalent level.
In light of inflationary pressures, interest rates have been elevated in recent months, and the Bank of England is facing pressure, particularly from business leaders, to continue to use this lever to manage rising costs and return inflation to its long-term 2% target.
Even so, interest rates remain at levels well below their historical highs, which means that savers continue to generate comparatively low levels of interest growth from their cash savings. This point is underlined if they are held in easy-access current accounts where rates are generally lower than, for example, fixed-rate accounts.
Unenthused by this situation, many savers are simply opting to keep their cash in place. They see little point in going out in search of higher returns – a two-pronged challenge that demands both an assessment of the best options available and then fulfilment of any paperwork associated with switching accounts.
For those with sufficient reserves, however, there are technology solutions available to help maximise the interest-earning potential of cash. Using a Cash Management platform, individuals can access a market-wide view of the best available rates from deposit accounts that meet their saving criteria. These platforms can then allow administration to be handled via a single, simplified interface, even providing alerts when preferential rates are available.
Using the right Cash Management platform, cash allocation is diversified across multiple deposit accounts. This not only provides access to a potentially higher rates of return, it can also reduce exposure to risk, since savings can be distributed in amounts that do not exceed the level protected by the Financial Services Compensation scheme (FSCS) – currently up to £85,000 per eligible person, per bank, building society or credit union and up to £170,000 for joint accounts (in the event that a firm fails after 1 January 2017).
CASHFLOW AND LIQUIDITY
When it comes to optimising cash management, there is often a trade-off between levels of accessibility and available rates of return. As such, seeking out the best rates can have implications for cashflow and liquidity, and these factors must be considered when selecting an appropriate deposit account or, indeed, when establishing a portfolio of accounts.
Ultimately, how you decide to approach cash management must be balanced within your own financial planning parameters and your personal appetite for risk. It is understandable to regard cash as a static asset, but it is also possible to adopt a more proactive, technology-enabled approach that aims to maximise returns while keeping your cash safe.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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