For over ten years Finance Directors across the UK have been used to extremely low levels of interest rates. Typically, the fiscal purpose of low interest rates is to encourage business spending and drive growth in the economy. Really, what’s the point of keeping excess cash if you earn nothing from it? That’s the theory anyway. History would suggest that low interest rates are an infrequent occurrence but several events including the global financial crisis, Brexit and COVID have led to a long period of near zero interest rates in the UK. For many FD’s 10 years is a huge part of their career and as such, managing excess working capital has never been on their to-do list. So, during that time, surplus cash typically sits in the business current account at their clearing bank earning next to nothing. We answer why that needs to change.
The interest rate landscape has changed and changed very quickly. The COVID pandemic coupled with the ongoing war in Ukraine, has seen unprecedented inflation that has led to the Bank of England driving interest rates higher to combat it. That means increasing interest rates has been the principal tool to combat inflation. Whilst malaise in earning interest on surplus cash was justifiable for the past 10 years it should now be an area of focus for many companies. Surprisingly, earning interest is not a natural reward for having surplus cash. Most banks treat money in a current account as “sticky” money and don’t pay competitive interest rates. UK Finance Directors need to hunt for better rates outside of their clearing bank but it’s not a simple exercise and many don’t have the time or insight. They often seek a broker, like Birchstone Markets, to help them source the right product with the right rates.
For a company with £2m of surplus cash, leaving their money in their current account would still earn next to nothing and quite often nothing at all. Whilst a sensible strategy would need to be implemented for a company’s working capital cycle there could be smarter ways to manage that excess cash. For example, if the company put the same £2m on a 1-year fixed term deposit they could earn approximately 2.75% which would earn them £55,000 per year in interest alone. That’s at least another headcount in their finance team or one hell of a Christmas party!
In conclusion, there are easy ways for a business to earn more interest on their cash, the bank won’t make that easy, but the financial rewards are very appealing for the businesses that can optimise their cash management. You need a partner that will help you find the right product, with the right bank, at the right rates.
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