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Press Offices > Banks & Building Societies

First National Bank
Press Office Feature : Silly Season profits can make or break your business

Company: First National Bank
Author:Lwazi Stuurman
Email:[email protected]
Posted:19 Dec 2013

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The holiday season is the busiest time of the year for many coastal business owners

For the business owner, it is also the highest cash flow quarter of the year.

According to Theunis Fourie, Head of Liabilities at FNB Commercial Banking, "A decision on where your holiday profits should go, and how you can grow that cash in your business, may well make or break your business in 2014."

"Money, spent unwisely, could put your business in a worse position by creating more business expenses or personal overheads."

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?

"Sometimes, businesses end up collecting payment from clients early, before they have paid for essentials such as: raw materials, inventory and labour, that will be needed to produce a product or deliver a service."

"In this case, the extra money in the 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.

There are three main objectives to consider when managing excess cash, including the following:

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 Within these parameters, generate the highest possible return on the funds.

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 carefully balance the three primary objectives noted here when it comes to investing excess business cash.

Theunis 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 therefore 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."

He 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."

There are a number of options to consider when planning investing that excess capital.

Some of these options 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.

For more guidance and assistance, you may want to talk to an Investment Specialist to help you analyse your cash flow cycle, determine an appropriate minimum balance for your operating account, and choose the right investment vehicle for excess cash.

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