Where are corporates hoarding their cash?

Treasure

The UK has so far defied the pessimists over Brexit, and done remarkably well in its recovery from the latest recession.

The fast-growing FinTech sector is doing particularly well, and the government has identified it as a priority area, saying it provides 60,000 jobs and contributes around $9 billion to the economy.

According to trade body, Innovate Finance, $564 million of venture capital poured into British FinTech companies in the first half of 2017. That’s up 37% from the first half of 2016.

More than half the investment came from outside Britain, with a third coming from venture capital firms based in the United States.

Worldwide, FinTech investment for the first half of the year stood at $6.5 billion. Just over half that went into US startups and $1 billion into China. That places the UK third for global FinTech investment.

The UK figure still lags behind 2015, when a record $676 million was invested in the first half of the year and over $1.3 billion for the entire year. However, from July 1 to July 23, UK FinTech has already raised another $155 million.

Abdul Haseeb Basit, Innovate Finance’s Chief Financial Officer, told Reuters: “Things have slowed but we’ve seen an improving recovery since the referendum last year.”

But it’s not all good news.

  • Unemployment has fallen to a 40-year low (however, inflation-adjusted wages are significantly below the level they were ten years ago)
  • The UK has been the second fastest growing economy in the G7 for the past two years (however, growth is based on household and government consumption, not investment and net trade)
  • Business investment as a share of GDP is virtually back to pre-crisis levels (however, it is still low by international standards and seems to have plateaued. In manufacturing, it fell by 6.6% last year)
  • Profit margins in the first quarter of 2017 rose to a post-recession high (however, companies are choosing to save, rather than invest)
  • Sterling has lost value since the Brexit vote (however, instead of improving their export prices or investing for productivity, UK firms are banking the extra profit in low-interest or no-interest deposit accounts)

Productivity is the ‘magic pill’ that raises economic output per worker and leads to higher wages and living standards – but productivity growth is lower.

One of the reasons for the UK’s weak productivity, is poor levels of investment.

Cash deposits by private non-financial corporations were up by more than 10% last year, reaching 648bn. That’s equal to four times annual business investment and nearly a third of annual GDP.

Corporate cash

Samuel Tombs, chief economist at Pantheon Macroeconomics, says business investment would surge if firms spent just a small proportion of their stockpiled cash.

With uncertainty hanging over the UK economy, it seems that companies are looking to invest more abroad, particularly in the eurozone, and less at home.

Chancellor Phillip Hammond, has reportedly said that we must hold our nerve and stick to the plan for bringing the public finances back into balance.

SMEs are the bedrock of growth, and underpin our economy. We therefore support the calls for the Chancellor to make Britain the best place in Europe to invest, by offering tax incentives and any other measures.

Meanwhile, businesses should be using cash planning tools to generate income from their surplus cash. By moving it into accounts with the best interest rates, they could earn enough to employ a new staff member for improved productivity, or to launch a marketing campaign that drives further business growth.

Akoni helps businesses make the most of their cash. Register for free at AkoniHub.com

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Are you making these cashflow mistakes?

Banana skin

According to a recent study by a global Bank, 82% of small businesses fail because of poor cash management skills or poor understanding of cashflow. Don’t let yours be one of them!

Here are four common – and costly – cashflow mistakes. Are you making any of these?

1. Omitting to analyse your expenditure

You should review your expenses regularly, including rent, inventory, salaries and wages, taxes and debt payment. What’s right for your business will depend on what you do. For example, a local B2C business might choose to pay high rent for a prime location with high footfall, while a B2B wholesaler can save on rental costs by choosing a cheaper out-of-town location.

Benchmark your spending against competitors and other companies of a similar size and life cycle. Consider the potential return on every penny you spend, and trim any unnecessary expenditure.

Create a strategic forecast to help guide your budget. Record the amount and date of all your upcoming cash outlays. Create a separate line item for every significant cost.

Cash forecasting should be a simple activity incorporated into the monthly activities of a business and there are various tools that can assist.

2. Forgetting to focus on the money flowing in

Money in accounts receivable can be a sign of payments to come, but the money still needs to be collected. You can’t spend accounts receivable yet, so don’t treat them as profit.

Create (and follow) a process to keep on top of incoming payments:

  • Issue invoices promptly
  • Implement credit checks on all new non-cash customers
  • Collect a deposit at the point of the initial order
  • Move to payment in advance, or even cash-on-delivery, if possible
  • Track slow-paying customers and don’t delay about contacting them

Monitor ‘Collection days’ (how long you wait to get paid); ‘Inventory turnover’ (how long inventory sits on your shelf); and ‘Payment days’ (how long you wait to pay your suppliers). Negotiate faster payment terms with your clients and slower terms with your suppliers.

Be proactive about collecting late payments. Ensure the contract you have with your clients makes clear what happens when payments are delayed, such as applying a late-payment penalty or stopping work.

Cashflow advice is one of the things you get in your AkoniHub personalised report.

3. Not being realistic

The only constant is change. So don’t assume that receivables will always continue to come in at the same rate. Also, interest rates fluctuate, and payables may not be extended as far as they have been in the past.

It’s impossible to predict the future, so the best thing to do is to prepare for the worst, while hoping and working for the best.

If you find yourself heading for a sticky cashflow situation:

  • Apply for working capital before you run out of money (banks are happier to offer a loan before you need it)
  • Ask your suppliers for extended payment terms (they have a vested interest in your success)

It’s easy to find the business bank accounts with the best interest rate when you join AkoniHub.

4. Growing too fast

Remember, turnover isn’t profit, and profit isn’t cash. Your company will only survive if you generate more cash than you spend. If your outgoing expenses exceed your incoming cash, you have a cashflow problem.

The answer isn’t just selling more stuff, more quickly – because the faster you grow, the more financing you need. You will always need cash to use as working capital.

Don’t take an increase in orders as a sign to increase spending. Don’t build up inventory that you hold in stock for ages. Continue to be ‘lean’ and operate on minimal expenditure as you grow.

Plan ahead and secure appropriate financing to ensure you have sufficient working capital for peak times.

Retailers have to do major purchasing in the run up to busy seasons such as Christmas, but not all patterns are so predictable. If you’re experiencing or facing a growth spurt, remember that production costs increase at the same rate as sales. To avoid increased returns or loss of loyal customers, ensure your customer service is scaleable to cope with increased demand.

In summary

Following these tips will keep investors happy, allow you to make strategic choices, and provide you with a financial cushion in case you need it.

Akoni helps businesses make the most of their cash. Register for free at AkoniHub.com

Business savings: Why it’s worth shopping around

shopping bags

The UK is currently sweltering under a heatwave, and the sun looks set to keep shining for a few more days at least. However, the interest rate climate is uncertain, with rising inflation and the wider economic impact to be considered.

As discussed in last week’s newsflash, rates are bound to rise sometime, although the Bank of England base rate is staying at 0.25% for the time being.

What about the USA?

Rates may soon be on the move if the UK follows the US pattern.

Over the Atlantic, interest rates were held at record lows since the financial crisis. The first increase in nine years came in December 2015, then in December 2016 and again in March this year.

Base rates in America are set using the Federal Reserve funds rate (this is the amount banks and other institutions charge each other to borrow money held at the central bank).

The Daily Telegraph says: “The US Federal Reserve is expected to raise its federal funds target to between 1.00% and 1.25%, from 0.75% to 1.0%.”

Managing your savings while interest rates are low

Businesses are managing and optimising the opportunities and risks presented by Brexit and the current climate. You might have deposited money in the bank to act as a cash reserve, to save for new equipment or to fuel long-term business growth. A sensible business will make their money work as hard as possible, while keeping enough in a current account for effective cashflow.

Why leave your cash in business savings accounts that pay little or no interest when you could boost the income you receive by 10 to 12 times when you choose an account paying the highest rate?

UK businesses have £258bn in cash balances and make next to nothing on them – in some cases, businesses with cash holdings are being charged fees by their banks

A business with £2 million cash holdings could generate an additional £30,000 per year. This return could provide for a new marketing campaign or a staff member, contributing to productivity and profit.

Akoni CEO and co-founder, Felicia Meyerowitz Singh, says: “Most businesses sweat all assets, yet cash typically languishes.”

A business savings account is the best place for any surplus funds, because they usually offer higher rates than a business current account. Broadly, you can choose between two types of business savings account:

1. Fixed rate bonds

With a fixed rate bond, you choose a term from one to three years. The rates on business bonds tend to be better than variable rate accounts, and are guaranteed so you know what you’ll be getting.

Generally, the longer you’re willing to lock your funds away, the higher interest rate you’ll receive.

However, there’s no flexibility, and you won’t be able to add funds. Usually, you won’t be able to make any withdrawals before the maturity date. If you do, you’ll have to pay a significant penalty.

You could get 2.2% when you invest £500K in Secure Trust Bank for 60 months, or 2.0% over 48 months*

Check today’s fixed rates on AkoniHub >

2. Variable rate accounts

‘Variable’ means providers can change the interest rate at any time.

With an easy access business savings account, you get instant access to your funds in case of emergency. These accounts are very flexible. The minimum balance is likely to be low, and there will be few withdrawal restrictions, so you can make as many deposits and withdrawals as you wish.

Interest rates are higher with a notice account, but you will have to give notice to your provider before you can withdraw any money. Notice periods generally vary from 30 days to 120. If they allow you to access funds earlier,  there will usually be a penalty.

You could get 1.0% when you invest £500K in ICICI Bank instant access business savings account*

Check today’s variable rates on AkoniHub >

Things to look out for

It’s important to consider the small print as well as the headline rate. Here are some questions to ask:

  • Does the rate include a short-term bonus? If yes, you may need to move your savings when the rate drops
  • Is your type of company eligible? Do you meet the turnover criteria?
  • Is there a minimum investment requirement?
  • Do you need to maintain a minimum balance at all times?
  • How many penalty-free withdrawals can you make each year?
  • Are you restricted to accessing the account only in branch, by phone or by post?

Ensure you’re covered by FSCS protection

The Financial Services Compensation Scheme (FSCS) protects the first £85,000 you hold in each institution with a separate UK banking licence – but only if you’re a ‘small business’ that meets at least two of these criteria:

  • 50 employees or fewer
  • £6.5 million turnover or less
  • £3.26 million balance sheet total or less

To find out more, please see our article: Are your deposits protected?

A note about tax

Interest is paid gross, so remember to notify HMRC of any tax your business owes on its savings interest.

Follow our cash management advice by shopping around to find the best rate, and you’ll be happy to pay extra tax on the extra interest you’ve earned!

*Interest rates correct at time of writing.

Akoni helps businesses make the most of their cash. Register for free at AkoniHub.com

Pound down, inflation up. What does this mean for SMEs?

Keep Calm

What goes up must come down, they say. Either way, there is no reason to panic!

When you put things into a longer context, say five years, you can see that – whatever happens – we’ve probably been there in the past, and will probably be there again in future.

Let’s explore the current situation where we’re seeing a lower pound and rising inflation.

Plummeting pound

Alas! Poor pound. It’s been falling for ages – although it does seem to be making a slight recovery in 2017, as shown on this five-year chart compiled by the FT. (The sudden drop just before July last year was a result of the Brexit referendum vote.)

Pound

A weak pound can benefit small businesses who export their goods and services or sell to tourists. The Guardian recently reported the following success stories:

Wrendale Designs of Lincolnshire source nearly all their materials from the UK, and export greetings cards, home furnishings and giftware to the US. Co-founder, Jack Dale predicts 30% growth in turnover this year.

“The US market is doing really well for us,” he says. “We’ve kept our prices constant but obviously the dollars we’re earning convert to around 15% more pounds.”

The Scotch Whisky Experience in Edinburgh has had its busiest year ever, with visitor levels up 9% on last year and the number who take a tour up by 12%.

Julie Trevisan Hunter, head of marketing, says: “The weakness of the pound has made Scotland an attractive holiday destination, particularly for short-haul travellers. At the same time, the value of the pound versus the euro has made staycations more attractive for people from the rest of the UK.”

For fashion brand, Gandys, online international sales are up 21% by volume and nearly 13% in value, while in-store sales in London have seen a 14% boost, largely due to shoppers from overseas.

“We’re doing really well with tourists who are spending a lot more money in our flagship Spitalfields store because they’ve effectively got a 15% discount,” says co-founder, Paul Forka.

International sales have also rocketed for male grooming brand, The Beard and the Wonderful, who sell products online through their own site and via eBay.

Founder, Steve Sanger, says: “Before, around 4/5 of our business was in the UK but now it’s more like a 50/50 split. On lower cost items a 15% discount may only bring your cost down by less than a pound, but it gets you at the top of search results when people prioritise by price.”

Bibby Foreign Exchange allows “hedging” of dollar and euro purchases, where an SME fixes a price a month or two in advance so they know they will have enough in the bank for an upcoming purchase.

MD, Michael McGowan, has seen a sharp rise in SMEs being more comfortable to deal in dollars and euros. Similarly, business is brisk in turning dollars and euros earned abroad back into pounds.

“A few years ago, many British SMEs were resistant to selling in another currency but since the drop in the pound, they’re increasingly willing to deal in euros or dollars,” he says. “You’re effectively getting 15% more margin for the same transaction.”

Soaring inflation

Meanwhile, UK inflation has been rising since 2015. This chart shows the past five years:

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Source: tradingeconomics.com

The Bank of England set an inflation target of 2%. However, in April 2017, consumer prices increased 2.7% year-on-year, following a 2.3% rise in each of the previous two months, and inflation is now running at its highest rate since September 2013.

But why?

According to TradingEconomics.com, the upward trend is mainly connected with the reduced value of sterling since the Brexit vote last year, as well as the rising cost of air fares (due to a late Easter), and electricity prices. With a falling pound, imports are more expensive. At the same time, fuel and food prices are rising.

Ben Brettell, senior economist at Hargreaves Lansdown, said: “Transport costs account for more than a third of the inflation figure. Oil is priced in dollars, and sterling has fallen around 13% since last June’s referendum.”

With the average pay rise at 2.3%, and inflation increasing at the same or higher rates, employees are no better off, which puts pressure on household income and spending.

In BBC reports, the Bank of England said it expects inflation will peak at 2.8%, although some economists think it could rise above 3%.

And what does this mean for interest rates?

Suren Thiru, head of economics at the British Chambers of Commerce, said: “Businesses continue to report that the substantial increases in the cost of raw materials and other overheads over the past year are still filtering through the supply chain, and are therefore likely to lift consumer prices higher in the coming months. However, it remains probable that the current period of above target inflation is transitory in nature, with little evidence that higher price growth is becoming entrenched in higher pay growth. This should give the Bank of England sufficient scope to keep interest rates on hold for some time yet, despite their recent warning.”

Interest rate increases by the Bank of England are uncertain, particularly in relation to controlling prices.

Which means that – if your business has money in the bank – you have to do your best to make the most of it. And that means using your Akoni Hub to find the account paying the best interest on your cash deposits. We also provide a personalised report with best practice relating to cash management, collecting funds owed to you and paying your suppliers.

After that, you can put your feet up, relax, and have a cup of coffee.

 Akoni helps businesses make the most of their cash. Register for free at AkoniHub.com

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