The importance of cash management

22 May 2024 / Insight posted in Article

Entering 2024, there was widespread anticipation of significant interest rate reductions unfolding throughout the year. However, these expectations have been continuously postponed, casting doubt on the timing of the first rate cut until well after the summer – and the path beyond this much less clear.

While this delay may disappoint those with mortgages or other borrowing needs, it presents valuable opportunities for individuals, businesses and charities with substantial cash reserves.

In an environment where banks are struggling to pass on the benefits of higher interest rates to their customers, coupled with the increasingly cumbersome process of opening accounts, effectively managing cash has become more challenging than ever. The necessity of holding cash remains unchanged, yet the task of maximising returns while aligning with liquidity requirements and minimising risk for larger holdings has become increasingly complex.

Our cash management service assists in the following ways:

  • Safeguarding your cash
    One way to protect your funds is by spreading them across multiple accounts. In the UK, the Financial Services Compensation Scheme (FSCS) provides protection for individuals and small companies, but there are limits on the amount protected. By diversifying your cash across banks, you can ensure that significant amounts are fully protected under the FSCS, mitigating the risk of overexposure to any one institution.
  • Maximising your return
    Given the dynamic nature of bank rates, it’s unlikely that any single institution will consistently offer the most competitive rates. Our service enables you to easily switch accounts, ensuring you always benefit from the best available rates.
  • Reduced administration
    Our cash management service allows access to over 30 different institutions and hundreds of accounts, simplifying the process of building a diversified cash portfolio aligned with your financial goals. With a streamlined application process, opening a new account can be as simple as a few clicks. Furthermore, with no additional onboarding requirements, switching between banks and accounts is hassle-free.
  • Enhanced visibility
    Our cash management service offers 24/7 access to a secure client portal, providing consolidated statements for all your deposits. Additionally, you receive an annual summary of interest earned, facilitating seamless tax reporting.
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Cash management for individuals

In today’s financial landscape, clients have compelling reasons to hold cash as part of their overall financial strategy. With the promise of higher interest rates, you no longer need to sacrifice returns to maintain liquidity. Here are several key reasons why clients should incorporate cash into their financial planning:

  • Emergency fund
    Cash reserves act as a safety net for unexpected expenses, ensuring immediate access to funds without selling other investments.
  • Short-term goals
    Cash is used to finance short-term objectives like buying a car, making a down payment on a house, or saving to cover upcoming tax liabilities (particularly important for Partners or the self-employed), providing liquidity without market risk.
  • Income needs
    Retirees or those reliant on investment income hold cash to cover living expenses, ensuring a stable income stream regardless of market conditions.
  • Opportunistic investments
    Cash enables clients to seize investment opportunities during market downturns or when asset prices are low, capitalizing on potential higher returns.
  • Risk management
    Cash buffers against market volatility and unforeseen financial challenges, promoting stability alongside other investments.
  • Psychological comfort
    Holding cash offers peace of mind and security, providing reassurance during times of financial uncertainty or market turbulence.

While current interest rates may be favourable, cash is generally not considered a suitable long-term investment class and may struggle to keep pace with inflation over time. Nonetheless, the multitude of reasons for clients to hold cash underscores its importance. Securely managing cash holdings while maximising returns remains crucial in any financial plan.

Our cash management service streamlines the process of managing your cash by providing access to a diverse range of accounts from multiple institutions – all conveniently accessed through a single platform. With our streamlined approach, private clients can optimise their cash management strategies, ensuring their funds work harder for them while minimising hassle.

Cash management for businesses

In the dynamic world of business finance, maintaining optimal cash reserves is essential for ensuring liquidity, managing operational needs, and capitalising on strategic opportunities. From meeting day-to-day expenses to fuelling growth initiatives, businesses hold cash for various reasons, each serving a vital function in sustaining financial health and driving success. Here are some key motivations behind businesses holding cash:

  • Working capital needs
    Cash is necessary to finance inventory purchases, manage accounts receivable, and meet short-term liabilities, ensuring smooth business operations.
  • Emergency funds
    Businesses need cash reserves to weather unexpected emergencies, such as equipment breakdowns, supply chain disruptions, or economic downturns.
  • Capital expenditures
    Cash is earmarked for funding capital projects, such as equipment upgrades, facility expansions, or technology investments, enabling business growth and innovation.
  • Debt service
    Cash reserves are allocated for servicing debt obligations, including interest payments and loan principal repayments, to maintain financial health and creditworthiness.
  • Strategic opportunities
    Holding cash enables businesses to capitalise on strategic opportunities, such as acquisitions, mergers, or market expansions, providing flexibility and agility in a dynamic marketplace.
  • Risk management
    Cash buffers against financial risks, such as fluctuations in revenue, unforeseen expenses, or changes in market conditions, enhancing financial resilience and stability.
  • Tax liabilities
    Businesses hold cash to fulfill tax obligations, including payments for corporation tax, income tax, VAT, or other tax liabilities.
  • Dividends and bonuses
    Cash reserves are set aside to fund shareholder dividends or employee bonuses, rewarding investors and staff for their contributions to business success and fostering shareholder and employee loyalty.

Regrettably, accessing market-leading rates has become increasingly challenging for businesses. Rising due diligence and onboarding demands, coupled with a decline in banks’ willingness to serve certain client segments – particularly smaller businesses – have left many enterprises with suboptimal returns on their cash.

Our cash management service addresses these challenges by offering access to hundreds of different accounts across over 30 different institutions – all through a single platform. By streamlining the process and expanding options, we empower businesses to optimise their cash holdings and maximise returns with ease.

Cash management for charities and nonprofit organisations

In the realm of charitable finance, effective cash management is crucial for ensuring financial stability, fulfilling organisational missions, and supporting the members, communities or other beneficiaries served. Charities hold cash for various reasons, each serving a vital function in sustaining their operations and advancing their objectives. Here are some key motivations behind charities holding cash:

  • Emergency funds
    Charities need cash reserves to address unexpected emergencies, such as program disruptions, funding gaps, enabling them to respond swiftly and effectively to crises and maintain their services.
  • Program expansion
    Cash is allocated for funding program expansions, new initiatives, or community outreach efforts, allowing charities to extend their impact and reach more individuals in need.
  • Capital projects
    Cash reserves are earmarked for financing capital projects, such as facility renovations, equipment purchases, or infrastructure improvements, enhancing the charity’s capacity to deliver its services effectively.
  • Supporting long-term investment goals
    Cash reserves are strategically held to support long-term investment goals, providing liquidity for future opportunities, such as asset acquisitions, endowment building, or funding sustainable growth initiatives, ensuring the charity’s financial sustainability and impact over time.
  • Risk management
    Cash buffers against financial risks, such as fluctuations in donations, unforeseen expenses, or changes in funding sources, ensuring financial resilience and stability for the charity’s long-term sustainability.
  • Trustee duties
    Trustees have a responsibility to ensure the charity’s money is held securely and managed prudently. This includes taking proper care to grow the charity’s funds to support its goals while adhering to legal and ethical standards.

In the current financial landscape, accessing favourable rates and managing cash effectively has become increasingly challenging for charities and non-profit organisations. Rising due diligence requirements, coupled with limited investment options tailored to charitable needs, pose significant challenges for maximising returns on cash reserves.

Our cash management service addresses these challenges by providing charities with access to a diverse range of accounts across multiple institutions – all conveniently accessed through a single platform. By streamlining the process and expanding options, we empower charities to optimise their cash management strategies, ensuring their funds are prudently managed and effectively utilised to support their missions and serve their members, communities or other beneficiaries.

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Contact us if you would like to further discuss the importance of cash management and how Moore Kingston Smith’s Financial Planning team can help you.

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