When profits are under pressure, don’t forget the cash.

In an increasingly competitive and challenging business environment, smart management of working capital could be the most efficient method to significantly improving business outcomes.

Working capital management - particularly when it comes to idle cash in a business – is the best kept secret to improving the bottom line. In the current environment you will be hard-pressed to find a business leader who is not focused on productivity in the workplace. 

Good productivity means achieving what you want with the least amount of effort. We have found that the focus is almost always on improving the productivity of people or machinery, when a simple commitment to smart allocation of working capital could achieve immediate and long-lasting results. For example, parking surplus cash at higher yields is such an easy win and consistent with a culture of productivity. 

The lack of confidence due to economic uncertainty has resulted in many companies sitting on large cash balances that are not being put to the most productive use. 

The first step is managing the working capital to work favourably for the corporate. A subset of this is to ensure that the cash component of the working capital is not lazy. Money must work too. This is accounting 101! From our experience, in numerous cases, working capital is not well converted to cash, especially at mid-size corporates, and when it eventually is, the cash is often not optimally allocated according to the yield, liquidity and risk requirements - or even offset against debt. 

This is the business equivalent of keeping cash under the mattress. While the rationale to keep cash reserves in the current environment is understandable, it is crucial this capital is still put to the most productive use in the meantime. There are very attractive investment options available to CFOs who are looking to maximise the yield on their cash reserves without compromising on access to funds, risk or convenience, especially now that interest rates are rising. 

Money market funds with higher yields, high credit quality and excellent liquidity provide an ideal tool to maximise growth on cash. Money Market funds offer a lucrative, convenient and “more productive” alternative to call accounts and operate in a highly regulated environment, and are often independently rated. 

In the past year there has been a noticeable increase in corporates making use of Money Market funds to take advantage of the additional yield on their cash balances. 

Notably Assets under Management (AUM) in the local Money Market industry were R361 billion at June 2022, and pay an average yield of 6.9% . It is estimated that the Money Market fund industry pays out around R3b in additional interest to their users annually, over and above the best call rate in the market, and users still have same day access to their funds – i.e. no fixing. This is a significant ‘boost’ for Corporate South Africa’s earnings when they really needed it, but there is still more scope for productivity in cash. 

Treasurers should analyse their current situation and calculate how they could benefit from smarter allocation of working capital. Even a difference of 1 or 2 percent yield on large average cash reserves is significant, particularly in times of such low earnings growth. 

Many big corporates still do not benefit from the best call rates and could achieve much better yields in a money market fund. Multi-national companies especially, who would be expected to operate the most efficient treasury functions, are often the guiltiest of unproductive cash, as their rigid, one size fits all, banking policies offer little flexibility when it comes to parking surplus cash. 

There is also a perception that higher Money Market fund yields are only available for large corporates. However, for any company looking to improve productivity, it is clear that working capital, and especially cash, is a good place to start.  

Money Market funds have not only proven to beat the best bank call rates available in the market, but these higher Money Market fund yields are available to anyone with surplus funds that need to work until deployed – not just for large corporates.