Treasury Management for SMEs | Managing Surplus Cash & Debt
How should an SME manage surplus cash alongside borrowing? Explore deposit rates, debt repayment, liquidity, project funding and practical treasury strategy.”
Most business owners understand the importance of cashflow.
A profitable business can still get into serious difficulty if it runs short of cash, which is why cash forecasting, working capital management and maintaining adequate reserves are so important.
But there is another cash management issue that receives far less attention.
What happens when a business has surplus cash in the bank while also carrying significant borrowings?
For many established SMEs, this is where day-to-day cash management needs to evolve into a more strategic approach to treasury management.
The objective is not simply to maximise the interest earned on deposits. It is to make sure that cash, borrowing, liquidity and future investment are all being managed together.
What is treasury management for SMEs?
Treasury management is the process of managing a company’s cash, borrowing, liquidity and financial risks in a coordinated way.
For a large corporate, this may involve a dedicated treasury department.
For an SME, it is often much simpler.
Good treasury management might involve:
- reviewing where surplus cash is held;
- ensuring deposits are earning competitive interest rates;
- maintaining sufficient readily available cash;
- planning for future capital expenditure and projects;
- reviewing the cost and structure of existing borrowing;
- deciding whether surplus funds should be used to repay debt; and
- creating a longer-term strategy for reducing or eliminating borrowing.
The key is that these decisions should not be made independently.
A business can have substantial cash reserves and still have a poor treasury strategy.
Why is treasury management important?
When cash is tight, the problem is obvious.
When cash is plentiful, inefficiency can be much harder to spot.
For example, a company might have several hundred thousand pounds sitting in a current account or low-interest deposit account while simultaneously paying a much higher interest rate on its bank borrowing.
Neither position necessarily looks alarming in isolation.
But put the two together and the business may be carrying a significant unnecessary cost.
Treasury management therefore asks a more useful question than simply:
“How much cash do we have?”
It asks:
“Are we making the best use of the cash we have?”
Should a business repay debt or retain cash?
This is one of the most important treasury management questions for an SME.
At first glance, the answer can seem obvious.
If a business is earning 3% on surplus cash but paying 7% on borrowing, why not use the cash to repay the debt?
Sometimes that will be the right decision.
But not always.
A business may need to retain cash because:
- a major investment project is approaching;
- trading is seasonal or unpredictable;
- there is a requirement for a significant contingency reserve;
- early repayment charges apply to the borrowing;
- a lending facility may be difficult or expensive to replace;
- working capital requirements are expected to increase; or
- the company wants to retain flexibility for acquisitions or other opportunities.
The important point is that holding cash and debt at the same time should be a conscious financial decision, rather than something that has simply developed over the years.
A useful exercise is to calculate the effective cost of holding that position.
If £500,000 of cash earns 3% while £500,000 of borrowing costs 7%, there is broadly a 4% annual interest differential before considering tax and other factors.
That gap equates to £20,000 a year.
That does not automatically mean the loan should be repaid, but it certainly means the position is worth reviewing.
How much cash should a business hold?
There is no universal answer.
The right cash reserve will depend on the nature of the business, its cost base, customer profile, access to finance and future plans.
One practical approach is to divide cash into four categories.
Operational cash
This is the money required to meet normal day-to-day commitments such as:
- payroll;
- suppliers;
- VAT and PAYE;
- corporation tax;
- rent;
- loan repayments; and
- other regular overheads.
Operational cash normally needs to remain readily accessible.
Contingency cash
This is the company’s financial safety buffer.
The appropriate level may depend on the volatility of the business.
A company with predictable recurring revenues and a wide customer base may require a different level of contingency funding from one dependent on a small number of large contracts.
The key question is:
If something went wrong tomorrow, how much cash would we want immediately available?
Cash earmarked for future projects
A business may be planning:
- property refurbishment;
- new equipment;
- technology investment;
- recruitment;
- an acquisition;
- product development; or
- geographic expansion.
Cash reserved for these projects should be identified separately from genuinely surplus funds.
The timing of the expenditure is particularly important because it influences where that cash can sensibly be deposited.
Genuine surplus cash
Once operational requirements, contingencies and committed investment have been allowed for, the remaining funds can more reasonably be regarded as surplus.
Only then does it make sense to consider whether those funds should be placed on longer-term deposit, used to repay borrowing, invested in the business or potentially distributed to shareholders.
How can a business get a better return on surplus cash?
One of the simplest opportunities in treasury management is reviewing deposit interest rates.
Businesses can accumulate large balances in bank accounts that may have been opened years ago and subsequently forgotten about.
Meanwhile, interest rates and available products change.
The difference between earning 1% and 4% on £750,000 is £22,500 a year.
That is meaningful money.
However, the highest interest rate is not necessarily the best option.
Directors should also consider:
- access periods;
- notice requirements;
- fixed-term deposit periods;
- counterparty risk;
- deposit protection limits where applicable;
- whether cash needs to be spread across institutions; and
- when funds will actually be required.
The objective is therefore not simply to maximise interest income.
It is to optimise return without compromising liquidity.
How should cash be managed when a business has major projects planned?
Treasury management becomes particularly important when a business is preparing for significant capital expenditure.
Suppose a company is planning a £750,000 refurbishment project over the next 18 months.
It may already have sufficient cash to fund the project.
But that does not necessarily mean the entire amount should simply sit in a current account until it is required.
A cashflow model can identify approximately when different amounts will be needed.
Funds required within the next few months might remain immediately accessible.
Cash required later could potentially earn a better return through notice accounts or fixed deposits matched to the expected project timetable.
At the same time, the business should consider whether using all its own cash is actually the best funding strategy.
It may be preferable to combine internal cash with borrowing so that the company retains an adequate liquidity buffer.
This is why project appraisal and treasury management should be considered together.
Should an SME have a plan to become debt free?
For many owner-managed businesses, becoming debt free is an attractive long-term objective.
But it needs to be turned into an actual plan.
Rather than simply hoping that borrowing gradually reduces, directors can model different scenarios.
For example:
- How much annual free cashflow could be allocated to debt reduction?
- What would the outstanding debt look like in three years?
- What would it look like in five years?
- Would accelerated repayment restrict future investment?
- Are there loans that are particularly expensive and should be prioritised?
- Could the existing borrowing be refinanced on better terms?
- Is there a minimum level of cash the company wants to maintain at all times?
This creates a clear route towards a stronger balance sheet without starving the business of investment.
Importantly, being debt free should not necessarily be the objective at any cost.
Borrowing can be a perfectly sensible tool where the return generated from deploying capital is greater than the cost of the funding.
The goal should therefore be appropriate debt, rather than automatically assuming that all debt is bad.
What does a good SME treasury strategy look like?
For most SMEs, treasury management does not need to involve complicated financial instruments or sophisticated banking arrangements.
A good starting point is a simple framework:
- Understand the cash
Know exactly where cash is held, whether any balances are restricted and what return each account is generating.
- Forecast the requirement
Use a rolling cashflow forecast to identify operational needs, tax payments, capital expenditure and future funding requirements.
- Establish minimum liquidity
Agree the level of cash that directors want immediately available to protect the business.
- Review borrowing
Understand interest rates, repayment terms, covenants, maturity dates and early repayment conditions.
- Identify genuine surplus cash
Separate cash required for operations and future projects from money that is genuinely surplus.
- Optimise the return
Consider whether surplus funds could generate a better return without compromising accessibility.
- Build a longer-term debt strategy
Model how borrowings could reduce over time while maintaining sufficient capacity to invest in the business.
How can a Fractional CFO help with treasury management?
For a growing SME, treasury management often falls between different areas of responsibility.
The bank manages individual accounts and borrowing facilities.
The accountant records interest and loan balances.
The management team approves capital projects.
But sometimes nobody is looking at the overall financial picture.
This is an area where a Fractional CFO can add significant value.
The role is not simply to find the highest available deposit rate.
It is to connect:
cashflow + debt + investment + risk + strategy.
That might involve:
- producing rolling cashflow forecasts;
- reviewing banking arrangements;
- comparing deposit returns;
- assessing the true cost of borrowing;
- modelling debt repayment scenarios;
- evaluating the funding of capital projects;
- establishing minimum cash reserves; and
- presenting the options clearly to the board.
Often, there is no dramatic solution.
Instead, value comes from a series of sensible decisions that ensure the company’s money is working harder.
Cash is King — but what is your cash actually doing?
Most business owners are understandably focused on avoiding a cashflow crisis.
But successful businesses should also ask what happens once they have accumulated cash.
Leaving large amounts sitting in the wrong account can be expensive.
Carrying borrowings without periodically challenging whether they are still required can also be expensive.
And investing heavily in projects without integrating those commitments into a wider cash and funding strategy can create unnecessary risk.
Good treasury management is therefore about much more than cash in the bank.
It is about making deliberate decisions over:
liquidity, return, borrowing and investment.
So perhaps the question for business owners and boards should not simply be:
“How much cash do we have?”
It should be:
“What do we need our cash to do for us?”
At Insight Finance Directors, we work with SMEs to bring together cashflow forecasting, funding, debt management, investment appraisal and financial strategy.
The aim is simple: to make sure the capital already within the business is being used as effectively as possible — while keeping the business financially resilient and ready for future opportunities.
