In South Africa’s current economic climate, treasury management is no longer just about keeping the lights on and ensuring liquidity. It’s about making sure every rand of cash, especially idle or excess cash, earns a return that meets or exceeds the company’s cost of capital. If it doesn’t, the business is quietly losing value.
This article breaks down how South African firms can manage cash more strategically, compare cash returns to their cost of capital, and make better decisions about whether to save, invest, or deploy capital into the business.
- Understanding the Trade-Off: Return on Cash vs Cost of Capital
At the core of treasury management lies a simple question:
Is the return on your cash higher than the cost of holding it?
Your cost of capital is the combined cost of equity and debt, essentially, the rate your business must earn to justify how it is funded. For South African firms, this depends on factors such as:
- Gearing ratio (debt-to-equity mix)
- Cost of debt (interest rates on borrowings)
- Shareholder return expectations
For example, a South African firm may have a cost of debt of around 8%, with total returns needing to exceed this once shareholder expectations are factored in.
If your cash is sitting in a low-yielding account earning less than this implied rate, the business is effectively destroying value, even if the cash is “safe”.
- The Hidden Cost of Idle Cash
Treasurers often keep cash buffers to ensure liquidity, but too much cash comes at a price.
Idle cash has an opportunity cost equal to your cost of capital.
For example:
If your cost of capital is 10%, but your cash is earning 5% in a basic deposit account,
you are losing 5% in value every year.
This “silent erosion” is one of the biggest challenges in corporate treasury management.
The goal is not to eliminate liquidity but to ensure that buffers are right-sized, and that excess cash is not left earning returns below its economic cost.
- Where South African Treasurers Typically Park Cash
Because South African treasurers must balance liquidity, capital preservation, and return, they tend to use:
✔ National Treasury Retail Bonds
Secure and predictable returns, often outperforming standard bank deposits.
✔ Money Market Instruments
Including money market funds or fixed deposits with competitive short-term yields.
✔ High-quality bank deposits with credit adjustments
Benchmarked against the risk-free rate (government bonds), adjusted for the bank’s credit profile.
These instruments offer better returns without compromising liquidity or exposing the business to unnecessary risk.
- How Treasury Evaluates Cash Deployment Decisions
Treasury teams must answer a critical question:
Will investing this cash create more value than holding it?
To do this, they apply capital budgeting tools such as:
- Net Present Value (NPV):
Determines whether a project or investment will generate value above the cost of capital.
- Internal Rate of Return (IRR):
Compares the expected return of a project to the company’s cost of capital.
If the IRR of a project is below the company’s weighted average cost of capital, then holding cash, or investing in money market instruments, may actually be the better long-term decision.
If the IRR is above the company’s cost of capital, deploying cash operationally becomes the value-maximising choice.
- What Smart Treasury Looks Like
Effective treasury management in South Africa requires a coordinated approach:
- Compare cash returns to your cost of capital
If returns fall short, value is being diluted. - Optimise idle cash using liquid, secure instruments
Government bonds and money market products often offer the best balance of risk and yield. - Use capital budgeting techniques for deployment decisions
Ensure every investment, project, or cash reserve decision passes the value-creation test. - Maintain liquidity but avoid unnecessary hoarding
Keep buffers intentional, not excessive.
Closing Thoughts
Treasury management is ultimately a strategic balancing act. South African businesses must protect liquidity and ensure that cash earns returns aligned with, or better than, their cost of capital.
By treating cash as an active financial asset rather than a passive safety net, treasury teams can protect value, strengthen financial performance, and make more confident capital allocation decisions.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.