Owning a business in these turbulent times is not for the faint-hearted. The world seems to become more unpredictable with each passing month and businesses need to be increasingly resilient just to survive.
So, what does it take to be a resilient business? A good place to start is by ensuring you have as much of a financial cushion as possible – whether it’s to mitigate any cash flow problems you may face, or so you can grow your business through a future cash injection.
One way to create this financial cushion is to take any surplus funds you may have sitting in your business bank account and invest them earning you higher returns. How you invest these funds will depend on the type of business you are, what your investment horizon is and what your specific cash flow requirements might be. One predictable, low-risk option is to put it in a ‘near-cash investment’ – that is, an investment that is relatively easy to convert to cash when you need it.
Two examples of near-cash investments are fixed deposit accounts and notice deposit accounts. Both of these offer higher interest rates than a call or savings account, yet they still make it relatively easy to access your cash should you need it (although certain penalties may apply in the case of early withdrawal/ redemption).
Fixed and notice deposit accounts are low risk compared with other investment vehicles such as equities. Equity markets can fluctuate significantly on a daily basis and are often impacted by what happens in global markets. So, while you could make good returns, if the markets move against you, this could negatively affect your investment return while eroding your capital at the same time. While returns on a fixed or notice deposit may end up being lower than with an equity investment, you don’t run the risk of potentially losing your capital overnight.
While a fixed deposit and a notice deposit account are similar in many ways, each one offers slightly different advantages, depending on what your ideal investment horizon is. The table below shows the main differences between the two:
|Fixed deposit account||Notice deposit account|
|Returns||Typically gives a better rate than a notice deposit account, especially over longer investment periods.||May give you a higher return than a fixed deposit account, typically over shorter investment periods.|
|Interest rates||The interest rate is fixed for the investment period, and therefore is not affected by any changes in interest rates. So, if the repo rate goes up, you will not get the benefit of that rate increase, while if interest rates go down, you have the advantage of being locked into a higher interest rate until maturity.||The interest rate is variable as it is linked to the repo rate, and therefore directly affected by changes in interest rates. If the repo rate increases, you would benefit from the deposit repricing and the higher interest rate. Similarly, if the interest rate goes down, your notice deposit reprices downwards immediately.|
|Investment term||You specify your investment term – whether that is three, six, 12 or 24 months, or longer depending on the Bank’s product offering, after which your cash is returned to you plus the interest you have earned.||Your investment period is indefinite, and you give notice of when you want to withdraw your funds. Typically, you need to give 32 or 60 days’ notice (linked to the bank’s product offering) to withdraw your cash without incurring penalties.|
|Partial withdrawals||Not normally possible. So, for example, if you have invested R1000 and you want to cancel your account, you will need to withdraw the whole amount.||You can do a partial redemption. For example, you can give notice to withdraw R100 of your original R1000 investment, where your R900 remains invested.|
|Early redemptions/ withdrawals||Early withdrawal penalties apply, linked to capital amount and the remaining investment term.
Depending on specific circumstance these are typically higher than for notice deposit accounts.
|Early withdrawal penalties apply, linked to the amount withdrawn and the remaining investment term.
Depending on specific circumstance, these are typically lower than for a fixed deposit account.
The amount you invest will very much depend on your individual needs in terms of how much cash you need to be available for day-to-day operations versus how much you can afford to put away. So, first work out how much cash you need to be available and what surplus you can safely invest.
For both fixed deposit and notice accounts, early redemptions are available should you need your cash immediately. However, penalty fees might apply, although they are calculated slightly differently.
For a fixed deposit account, penalties are calculated as follows: Capital amount x penalty rate / 365 days x remaining period of the fixed deposit term
For example, let’s say you have invested R1000 in a three-month fixed deposit account with a penalty rate of 2%. If you decide after one month that you want to withdraw your cash, your withdrawal penalty would be calculated as: R1000 x 2% / 365 days * 60 days = R3.28
For a notice deposit account, penalties are calculated as follows: Notice amount x penalty rate / 365 days x remaining notice period of the notice deposit
With a notice account, the cash is typically more accessible as you can give notice at any time, e.g., 32 days (depending on the Bank’s product offering). Should you however require access to your funds immediately and are unable to serve the full notice, early redemption is possible. Using the example above, your withdrawal fee on a 32-day notice account will be: R1000 x 2% /365 * 32 days = R1.75
Comparing these calculations, it becomes clear why it’s typically cheaper to withdraw your funds early from a notice deposit account, as the remaining period is calculated as only 32 days versus 60 days in the examples above. This is true as long as redemption or withdrawal amounts are the same and the remaining term of the fixed deposit is longer than the remaining notice period of the notice deposit account.
While investing in a fixed or notice deposit account is relatively low risk, there are some downsides:
Any investment you make should be shaped around your cash flow needs. That is why a cash flow function in a business is so important: it allows you to understand where your cash ‘pressure points’ are so you can plan accordingly. If you can get this right and can identify cash that you can put away for the short to medium term, a fixed deposit or notice account can both be worthwhile investment tools to consider.
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