A Decade of Near-Zero Rates Is Over
From 2009 through to early 2022, the Bank of England base rate sat at or below 0.75%. For most of that period it was at 0.1%. Corporate treasury in that environment was straightforward, if frustrating: you held cash in instant-access accounts, earned effectively nothing, and directed your attention elsewhere. The concept of optimising yield on corporate cash had largely disappeared from the CFO agenda.
The rate cycle that began in December 2021 changed that entirely. Fourteen consecutive rate increases took the base rate from 0.1% to 5.25%, where it remained through mid-2024. A company holding £5m in a current account earning 0.1% was, by mid-2024, potentially leaving £250,000 of annual yield unrealised relative to what a well-structured money market fund or notice account could deliver. At £20m of cash, that figure rises to £1m per year. For businesses that raised large rounds of institutional capital in 2021 and 2022 and are managing a significant cash runway, the cash management decision has real P&L consequences.
The rate cycle is now turning. The Bank of England cut rates to 5.0% in August 2024 and further cuts are widely expected. This creates a second dimension to the cash management question: not just where to place cash to earn yield today, but how to position the portfolio for the falling rate environment ahead, and whether to lock in current rates through fixed-term instruments before they become unavailable.
The Investment Options: A Structured Overview
Corporate cash management involves a relatively constrained set of options compared to investment portfolios. The governing principle for corporate treasury is capital preservation first, liquidity second, and yield third. This ordering distinguishes corporate treasury from fund management and should be reflected explicitly in your cash management policy.
Instant-Access Bank Accounts
The default option for most businesses. Characteristics in mid-2024: yields are typically SONIA minus 0.25% to 0.5% (around 4.5% to 4.75%); FSCS protection applies up to £85,000 per institution per depositor; liquidity is same-day. The critical limitation for most businesses with material cash balances is the FSCS protection limit. A company holding £2m at a single bank has £1,915,000 of unprotected cash. For businesses that raised institutional capital of £5m or more, the FSCS threshold is effectively irrelevant as a protection mechanism unless cash is spread across multiple institutions.
Notice Accounts
Notice accounts (typically 32-day, 60-day, or 95-day notice periods) offer slightly higher yields, usually SONIA minus 0.1% to 0.2%, in exchange for reduced liquidity. They are appropriate for the portion of cash that represents a genuine buffer — funds you are unlikely to need at short notice but want to keep accessible within a quarter. The FSCS limit applies equally. Notice accounts are a useful middle tier in a tiered cash management structure for businesses with balances in the £500,000 to £5m range where FSCS protection is more meaningful.
Money Market Funds: LVNAV
Low Volatility Net Asset Value (LVNAV) money market funds are the institutional-grade equivalent of instant-access cash. They are regulated funds that invest in a diversified portfolio of short-term, high-quality money market instruments (bank deposits, commercial paper, government securities) with a weighted average maturity of 60 days or less. Characteristics: yield is typically SONIA minus 5 to 15 basis points (materially higher than most instant-access bank accounts); liquidity is same-day or next-day; they maintain a stable price of £1 per unit (hence "low volatility"); they carry AAAm ratings from at least one major rating agency (S&P or Moody's); they are not FSCS protected. The absence of FSCS protection is the key distinction from bank deposits. MMF investors hold units in the fund, not deposits at a bank. In a stress scenario, the fund's assets are separate from the fund manager's balance sheet, which is a different form of protection.
UK Government Securities
UK Treasury bills (3-month, 6-month, and 12-month) offer yield at or above SONIA with zero credit risk, as they are obligations of His Majesty's Government. They are not FSCS protected, but they carry no credit risk in the conventional sense. Liquidity is available via the secondary market, though bid-offer spreads apply and same-day settlement is not always possible. UK gilts at longer maturities are also available but introduce duration risk. For a corporate treasury, T-bills are an attractive option for the intermediate cash tier, particularly for businesses that have received large capital raises and wish to demonstrate prudent cash stewardship to their board and investors.
Fixed-Term Deposits
Fixed-term deposits (one-month, three-month, six-month, twelve-month) offer the highest yields of all standard options, typically 10 to 30 basis points above comparable maturity gilts, in exchange for complete illiquidity during the term. Breaking a fixed-term deposit early typically incurs penalty interest. They are appropriate only for cash that you are confident will not be required during the deposit term. In a falling rate environment, they offer the additional benefit of locking in current rates.
Duration Risk in a Falling Rate Environment
Duration risk is the exposure to interest rate changes that arises when you commit cash to a fixed-rate instrument. A business that places £1m in a twelve-month fixed deposit at 5.25% in July 2024 is making an implicit bet that rates will fall during the term. If rates fall to 3.5% by July 2025, the business has locked in a rate 175 basis points above what it could obtain at that future date, which is financially beneficial. The "duration risk" in this scenario is actually upside.
The risk runs the other way if rates rise unexpectedly. A business that locks into a twelve-month fixed deposit at 5.25% and then finds base rates have risen to 6.5% has locked in below-market rates and, crucially, has lost the flexibility to redeploy that cash at higher rates. In a corporate treasury context, the more important form of duration risk is usually liquidity risk: the risk that you need the cash before the term ends and cannot access it without penalty.
"The question is not just how much yield you can earn today. It is how much optionality you are willing to give up in exchange for that yield, and whether your cash policy reflects what your business actually needs, not what would maximise yield if cash flows were perfectly predictable."
In a falling rate environment, the conventional wisdom is that locking in duration is attractive: you secure today's higher rates before they disappear. This argument is correct as far as it goes, but it must be weighed against the corporate cash management principle of liquidity first. A business with an eighteen-month runway that locks all its cash into twelve-month fixed deposits has sacrificed the flexibility it needs to manage unexpected cash demands, accelerate hiring, or opportunistically deploy capital. The yield optimisation decision must always be made within the constraints of the liquidity requirements, not instead of them.
The March 2020 Event: What It Means for Governance
In March 2020, at the onset of the Covid-19 pandemic, significant capital outflows from certain money market funds caused a brief but severe liquidity stress in the sector. LVNAV funds maintained their stable £1 price throughout the episode, but VNAV (variable NAV) funds in the prime and government categories experienced redemption pressures that required central bank intervention to stabilise. The episode prompted regulatory reforms across jurisdictions.
The governance implication for corporate treasury is that MMF selection requires due diligence beyond simply identifying an AAAm-rated fund. Your cash management policy should specify the permitted fund types (LVNAV only for instant-access tier), the minimum rating, the maximum allocation to any single fund, the permitted custodians for T-bills and gilts, and the process for reviewing and updating these parameters. A cash management policy that simply says "funds may be invested in money market instruments" is not a policy; it is an absence of one.
The Association of Corporate Treasurers (ACT) publishes model treasury policy frameworks that are appropriate starting points for businesses building their first formal cash management policy. The key governance elements are: board approval of the policy, an investment mandate that specifies permitted instruments and limits, a concentration limit per counterparty, a regular review cadence (annually at minimum, or when the rate environment changes materially), and a reporting framework that brings cash allocation and yield data to the CFO and board quarterly.
Building a Tiered Cash Management Policy
A tiered cash management approach matches the liquidity profile of each pound of cash to the appropriate instrument. The structure for a business with, say, £3m of cash at mid-2024 rates might look as follows.
The precise allocation across tiers depends on your monthly cash burn, the predictability of your cash flows, any committed capital expenditure, and your board's risk appetite. The policy should be reviewed quarterly and updated whenever the rate environment shifts by more than 50 basis points in either direction. The allocation should also be revisited at key business events: a new funding round, a material contract win or loss, or a planned acquisition.
Practical Steps for the CFO
Implementing a formal cash management policy for the first time requires three things: a platform to execute the strategy, an updated board-approved policy document, and a reporting framework that provides visibility of where cash is held, what it is earning, and whether the policy is being followed. For most businesses below £50m in revenue, this does not require a dedicated treasury function. It requires a CFO who has decided to treat cash management as a priority and has allocated two to three hours per month to monitor and maintain it.
The practical starting point is to open relationships with two or three cash management platforms, direct bank treasuries, or both. Platforms such as Flagstone, Insignis, and Hargreaves Lansdown Active Savings aggregate access to multiple bank accounts and MMFs through a single portal, which removes the operational burden of managing multiple banking relationships and simplifies cash concentration. For businesses above £10m in cash, direct access to LVNAV MMFs through providers such as BlackRock, Fidelity, or Goldman Sachs is straightforward and typically commission-free.
Key Takeaways
- The Bank of England base rate at 5.25% in mid-2024 makes cash management a genuine CFO priority for the first time since the financial crisis. The yield differential between a current account and an optimised cash structure is material for businesses holding more than £500,000 of cash.
- The five main instruments for corporate cash are: instant-access bank accounts, notice accounts, LVNAV money market funds, UK government T-bills, and fixed-term deposits. Each carries a different yield, liquidity, and protection profile.
- FSCS protection applies up to £85,000 per institution. Most businesses with material cash balances need to think beyond FSCS as their primary protection mechanism.
- LVNAV money market funds offer near-instant liquidity at yields close to base rate, with AAAm ratings and fund-level asset segregation. They are the standard institutional instrument for the liquidity reserve tier.
- Duration risk in a falling rate environment cuts both ways: locking in current rates is attractive for cash with a defined future use, but sacrifices flexibility for cash that may need to be deployed at short notice.
- A tiered cash management policy matching maturity to liquidity need is the correct framework. The policy should be board-approved, reviewed quarterly, and supported by a simple reporting dashboard.
- The March 2020 MMF liquidity event is a reminder that even low-risk instruments can experience short-term stress. Diversification across fund providers and counterparties is sound governance.
