Is Cash Really King? Mastering the Art of Financial Fluidity

Welcome back to another exciting episode of Wealth Pathways with Jeremy, where vital wealth management insights and concrete solutions that help you to achieve financial independence are unravelled. In this edition, we will focus on a fundamental part of financial health: Liquidity. Having cash on hand offers a comforting sense of security, but managing it wisely can be a challenge for anyone, regardless of where you are in your investment journey.

Liquidity has long been regarded as a key component of financial stability. But is Cash Really King? The reality is more complex, even though the answer might seem obvious. Cash reserves are a safety net, preventing unexpected setbacks and permitting adaptability during emergencies. Adequate liquidity is important for individuals and businesses to meet short-term obligations and handle unforeseen expenses. Essentially, this ensures financial stability, avoids costly borrowing, and supports growth.

However, what is the optimal amount of cash to have on hand, and how can people and companies efficiently manage their liquidity needs? Let's examine the important role that cash reserves play and how cautious planning for liquidity can guarantee financial security for both personal and company finances.

Personal financial planning involves managing financial resources to achieve specific life goals. For individuals, particularly high-net-worth individuals (HNWs), maintaining liquidity is essential. I recommend setting aside 3-6 months’ worth of living expenses in cash or cash equivalents. Why is this so important? With the UK's year-on-year inflation rate dropping to 1.7% in September 2024 from 2.2% in the preceding month, now seems like the ideal time for households to start or grow their emergency savings, as a third (32%) have reported1 having less than ￡500 saved, and 13% of Brits admit they have no financial safety net. Life can be unpredictable, emergencies can arise suddenly. Having accessible cash ensures you can cover essential costs without needing to sell long-term investments or assets at unfavourable prices.

Source: Lowellbusiness (2024)2

As visualised above, 59% of adults in the U.K. have less than ￡5,000 saved for emergencies, with 32% having less than ￡500 and 13% having no savings at all. Many people are forced to rely on high-interest credit cards or loans in times of need because they lack savings, which makes them financially vulnerable and unable to pay for even small unforeseen expenses.

You may face increasing financial stress and debt without a healthy emergency fund. Missing important payments or straining to handle unforeseen bills might worsen your predicament. That is why setting up an emergency savings account should be your priority.

Setting up a portion of your money each month allows you to protect yourself against life's surprises and avoid falling into the trap of pricey borrowing. Create an emergency fund today and take control of your financial destiny. It's the most effective strategy to be resilient and retain financial stability.

Financial planning for businesses is estimating future performance and creating plans to reach targets. The procedure is essential for small and medium-sized businesses (SMEs) to manage cash flow, create budgets, and obtain capital. SMEs should ensure that they have enough cash to enable them to last for more than 6-months due to its importance in the cash flow cycle.

Sometimes referred to as an operating reserve, I also recommend holding a reserve amount that can cover between three to six months of operating costs in the event of emerging obstacles in the marketplace and organisational operations. A survey3 of 1,001 SME owners and decision makers in the U.K., including micro-business owners, revealed that a significant majority, 79%, have an emergency buffer in place to support their business in times of struggle. However, the findings also highlight some concerning trends. Nearly 1 in 5 businesses (approximately 20%) reported not having an emergency buffer, 30% of businesses identified financial stress as their biggest challenge, and 2% of respondents were unsure about the existence of a financial safety net for their business.

Start-ups and SMEs are critical to the U.K. economy, accounting4 for 99% of all businesses and employing over 60% of private-sector workers. However, they are vulnerable to external shocks like the 2007-09 financial crisis and the Covid-19 outbreak. Maintaining a strong cash flow is critical. Late invoice payments might impede progress, so make sure you settle invoices on time.

Invoice finance is another alternative that allows firms to borrow against outstanding invoices, offering rapid access to capital and assisting with cash flow management. Cutting costs can be as simple as renegotiating supplier contracts, as many are willing to offer better terms to retain clients. A budget is essential for determining available cash, eliminating wasteful expenses, and planning for the future.

Finally, always repay any borrowed funds from your reserves. Treat it as a personal debt, and consider shifting the reserve to a different account to minimise repeated withdrawals. The rigorous method provides long-term financial security for both personal and company finances. In reality, organisations with large cash reserves are likely to use a variety of tactics based on the needs of the business. However, putting capital in underperforming bank accounts makes little business sense.

Cash is essential5 in both personal and company financial planning, acting as a vital buffer against unanticipated expenditures and promoting stability. Now is the moment to evaluate your financial reserves and execute tactics to improve your liquidity, like creating an emergency fund, limiting spending, or optimising cash flow. We invite you to evaluate your present cash management methods. We would love to hear your opinions and experiences with cash management.

Once you are in a position of comfort with regards to your emergency funds, it is essential to seek opportunities that can provide long term growth provided you are committed to investing for more than five years. We are now in an environment where you can still receive interest in savings accounts of up to 4.5-5% but is this sufficient if you have a long term view? Probably not.? To truly maximise your wealth over time, a more strategic approach is necessary. With careful financial planning and understanding your current circumstances and attitude to risk, you may be able to make your money work much harder over the long term as illustrated in the below chart:

To help you stay focused on the importance of liquidity during uncertain times, here are several key strategies that can guide decision-making and reinforce long-term financial security:

●????? Establish an Emergency Fund – Setting aside cash reserves equivalent to 3-6 months of living expenses ensures financial security for individuals, helping you manage unexpected situations without having to liquidate long-term investments. Similarly, businesses should maintain 3-6 months of operating expenses to cushion against market uncertainties or operational challenges. Having this buffer promotes both personal and organisational stability.

●????? Improve Cash Flow Management – For businesses, efficient cash flow management is critical. Invoice financing can provide quicker access to working capital, helping small businesses maintain smooth operations despite delayed customer payments. Automating collections and using cash flow forecasting can further ensure that companies meet their short-term obligations while planning for future growth.

●????? Monitor and Minimise Expenses – Regularly reviewing your budget is crucial for identifying unnecessary expenditures. Individuals can limit discretionary spending, while businesses can cut costs by renegotiating supplier contracts or optimising operational processes. This approach ensures a healthier balance between expenses and available liquidity.

●????? Diversify Cash Holdings – Instead of leaving excess cash in low-yield bank accounts, businesses can explore short-term and liquid investment options that provide better returns while maintaining easy access to funds when needed. The strategy allows firms to enhance liquidity without compromising the ability to meet immediate financial needs.

●????? Use Debt Wisely – While borrowing can be a useful tool for both individuals and businesses, it’s important to manage debt responsibly. Treat any use of reserves as a loan that must be repaid promptly, and avoid accumulating high-interest debt. For businesses, using debt strategically to finance growth opportunities, while ensuring timely repayments, can support financial sustainability.

Are you interested in telling others about your cash management strategy? I would be very keen to hear about your experiences. Please take a moment to share your thoughts on this newsletter in the space provided below. Your feedback is greatly appreciated and may even serve as an inspiration to someone else.

Don’t forget to subscribe to stay connected with, “Wealth Pathways with Jeremy.” Join me as we dive into practical advice, in-depth strategies, and a clear plan to help you navigate your journey to financial freedom. Get ready, because the road to building lasting wealth begins here! See you in the next episode! ??

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.? You may get back less than you invested.

References

1)???? Hrnews (2024) - 33% of Brits say they have less than ￡500 in emergency savings.

2)??? Lowellbusiness (2024) - A third of UK adults have less than ￡500 in emergency savings

3)??? DOJO (2024) - How UK businesses are managing their finances in 2024 (A survey of 1,001 SME owners and decision makers in the U.K.)

4)?? Economicsobservatory (2024) - Business: How did UK small and medium-sized enterprises manage during the pandemic?

5)?? Investopedia (2024) - Cash Flow: What It Is, How It Works, and How to Analyze It

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