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Written by Matt Kirk Published: May 6 2020 Investments
There are times when business owners find themselves with a cash balance they don’t immediately want to put to use in company operations.
An unexpectedly good trading season or close attention to debtors can mean cash has built up and although the owner/s has growth plans, the money doesn’t have to be spent immediately.
At the same time, it’s important to make the cash work, by ensuring it earns the best interest rate.
That doesn’t mean keeping the money in a low-interest transaction account, particularly if partners and managers are discussing options or the future growth of the business. It’s going to take time to order new equipment or to find bigger premises and the money won’t be needed straightaway.
Term deposits make sense in this scenario. You can choose a term to suit, as short as one month, knowing the return when the deposit matures.
The investment is secure because the capital and return are guaranteed. There are no transaction fees and at maturity you have the flexibility to withdraw the money or choose another term. Since the money is earning interest there is less pressure to “do something” until you are sure of the decision.
Even if a major purchase is planned, the full amount may not be needed for a few months, giving you the opportunity to take advantage of higher rates currently on offer for three to 12-month term deposits.
This can suit owners whose businesses have reached the stage where major decisions are needed to set the company’s long-term direction. These discussions will likely involve your accountant and possibly lawyers and consultants as well as family members, so the outcome won’t be settled overnight.
The money can be sitting in a term deposit earning the highest rate possible while giving the decision makers in the business flexibility to invest when they are ready to move.