South African businesses urged to eradicate ‘lazy’ balance sheets

South African companies are famous for “lazy” balance sheets, with corporate deposits in South Africa standing at R470 billion in June. With tough economic conditions set to remain the order of the day, it is therefore critical that companies ensure that they are optimising the returns on the cash piles they are sitting on.

This was view expressed by Ian Ferguson and Sean Segar of Nedgroup Investments at a media roundtable held in Johannesburg yesterday Segar, Head of Product: Cash Solutions at Nedgroup Investments says because many corporates tend to restrain themselves in terms of investment and expenditure during tough economic conditions, they tend to build up cash reserves in their balance sheets, while they wait for opportunities to present themselves.

He believes that better allocation of these cash reserves on their balance sheets can have a very welcome contribution to their bottom line.”While the primary focus of every business and its employees should be on fulfilling operational responsibilities, corporates need to put more of a focus on putting their balance sheet to work. In this market environment an extra percent – or even half a percent of earnings - can make a very positive impact on profits,” he says.

According to Segar, money kept in a cheque or savings account will often earn little or no interest. While it is possible to secure higher rates in these types of accounts, these come with additional credit risk and possible lock up of funds, which reduces liquidity.

Segar says investing idle cash into money market funds is one of the safest ways to achieve attractive yields without taking on undue risk. He explains that apart from professional management of the money, the cash investment is also spread across the banks and other credible issuers – thereby significantly reducing the risk. Furthermore, he says figures show that money market funds consistently beat the call rate over time.

According to Segar,since the first Money Market fund was launched in South Africa in 1997, the industry has attracted R270 billion. “Money Market funds have become very popular overseas and exploded here in South Africa.”

Although Segar stresses the importance of achieving optimal returns on cash, he warns corporate investors to be cautious when chasing the highest yield in the market. “It is important to look beyond the rate and not to be taken in by marketing promising high returns. When chasing yield, you need to understand the relationship between risk and yield and make an informed decision. Higher yield means higher risk and in current markets, risk needs to be carefully managed. If it sounds too good to be true - it probably is.”