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Even when you’ve excess cash, it’s not easy to maximise returns on your deposits with today’s low rates. John Ramage, Director of Liquidity & FX Solutions at Lloyds Bank, explains a strategy to get more value from your cash - with the quick access you need
Corporate cash accumulation is one of the most talked about aspects in today’s trying market environment. But it begs a key question: are companies actually short-changing themselves on return with this natural instinct?
This cash preservation behaviour itself is wholly understandable. Nervousness about the markets, and the consequent drive for protection against the unexpected, are the most obvious reasons why businesses prefer the need for instant cash access, and why they hesitate about placing surpluses for longer terms.
As a result of such behaviour companies are likely to be forfeiting solutions for getting the most value from their surplus cash. Cash may be sitting in accounts that are offering little or no interest, so opportunities are being missed to use the cash as a source of additional income or indeed for future investments. The critical issue for businesses is what kind of returns they can expect on short-term investments in today’s exceptionally low rate environment. Is return still achievable?
A revolving fixed-term deposit strategy makes it possible to improve your return potential, without locking away funds for long periods of time. If you compare an overnight deposit rate to even a three month rolling programme, for example, you may be able to significantly increase your return.
The key to this is account flexibility - the ability to stagger the deployment of various Fixed Term Deposit (FTD) accounts - to meet changing needs while simultaneously reflecting market rate movements and offering rate surety.
A property managing agent with client funds of £500,000 is looking to maximise interest return potential on this sum. They are able to place deposits up to three months but have a need to access the funds every two weeks to meet potential cash flow requirements.
“A revolving fixed term deposit strategy makes it possible to dramatically improve your return without locking away funds for long periods of time.”
The below diagram illustrates a typical deposit programme using a series of staggered deposits, enabling fortnightly access to funds at three month rates. Five equally weighted FTDs are placed for two weeks, one month, six weeks, two months and ten weeks respectively. The final FTD placed is the largest sum amount for the longest period to enable optimized returns. At each maturity date the deposit is rolled over into a three-month FTD. The staggered structure is maintained going forward and this enables access to funds every fortnight while also maximizing returns.
This approach resonates thoroughly with the current need for so many organisations to maximize the return on their cash deposits. It’s an essential component of the way companies are quite rightly pushing cash management right up their operational agenda.
Today, that increasingly means having fast, reliable electronic access to exactly the market intelligence you need to manage your deposits effectively. That’s the aim, for example, behind Lloyds Bank’s new e-solution - Arena. In the coming months Lloyds Bank clients will be able to create their own FTDs on Arena. This will allow customers to instantly access their deposit solutions, print their own confirmation notes and use economic commentary to confirm market movement and pricing to maximise their returns.
What’s more, in the next few months, Arena’s transaction banking elements will be enhanced offering our clients balance and transaction reporting along with cash flow forecasting functionality. They’ll be able to view the balances and transactions for accounts registered in Arena, including those held with other banks, giving more control over their cash balances.
Whether as a buffer against sudden changes in trading conditions or the means to support strategic decisions, cash is still king. Companies are now more focused than ever on the need to have banking partners equipped with the most appropriate cash management products.
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