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The Cost of Friendship: When Cash Reserves Meet Inflation

Ben Verschuere

As mentioned by Sam in a previous blog post, every business should aim at having at least six months of reserves in order to withstand unexpected events. That war chest will enable companies to not only cope with unexpected events (like this year Covid for example) but also put them in a position to seize opportunities when they arise. As everyone can see, a cash reserve is an important tool to help your company prosper and thrive.  

Inflation: the silent killer

Unfortunately, having that war chest is not the end the story. The next step is to ensure the maintainability of your reserve account so that inflation won’t erode the security of your future. Cash was never meant to be a store of value; its main function is to be a mean of payment and facilitate transactions. As history shows holding large sums of cash has a very clear and guaranteed outcome: losing money. For example, the value of $1 just after World War II has shrunk now to a mere 8ct today…  

The sure way to lose money: hold cash

This historical perspective clearly shows that if money isn’t used it should be held in a store of value. Currently every year inflation is eating away around 2pct of your purchasing power. While it might seems low, this quickly adds up: over 10 years that implies losing more than 20pct on your hard earned cash. Essentially turning a 6 months cash reserve into a dwindling 4 months… Two steps forwards, one step backwards.

Zero yield environment

The compounding problem in the current zero yield environment is the lack of obvious alternatives directly accessible to main street. Savings accounts are currently yielding next to zero, same for Treasury Bills and even money market funds aren’t much better. This begs the question: isn't there something better?

Time to make your idle cash work for you

Alternatives to those zero-yielding products do indeed exist! In order to get access to those you should be seeking professional help for handling the investment of your reserve account. For this, it is important to have a dedicated partner which truly understands your business. This partner should not only help you optimize the level of reserves your company is generating but also maximizing its yield. Being able to achieve both is a crucial step toward increasing the resiliency and efficiency of your company.

Having a reserve account is great, the next step is to make sure this reserve is generating a yield for your business. And this is exactly where Treasure can help you.

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