How UK Treasurers Can Protect Corporate Cash Reserves in a High-Inflation Environment

As a treasurer in the UK, you see the £2 million in cash reserves on the balance sheet. A year ago, it was a comforting sign of stability. Today, it’s a source of persistent anxiety. With inflation remaining a stubborn feature of the economic landscape, that cash pile is silently shrinking in real-terms value every single day. The standard advice—find a high-interest business account—often feels inadequate, barely keeping pace with the erosion and failing to address the fundamental need for both liquidity and capital preservation.

The challenge is that corporate cash is not investment capital. It must be secure and accessible for operational needs, payroll, and strategic opportunities. This creates a difficult balancing act. Many treasurers, focused on the core business, default to the path of least resistance: leaving substantial funds in a current account with a major high-street bank, sacrificing yield for perceived safety. However, this inaction carries its own significant, albeit hidden, cost.

The solution isn’t about chasing the highest, riskiest rate. It’s about a paradigm shift: moving from passive cash holding to engineering a robust and dynamic liquidity framework. This approach treats treasury management as a strategic function, not an administrative afterthought. It involves a systematic, risk-aware architecture designed to protect purchasing power while ensuring funds are available precisely when needed. It’s about understanding the specific tools available to UK corporates and deploying them intelligently.

This guide will walk you through the construction of such a framework. We will begin by quantifying the precise cost of inaction before moving on to the practical mechanics of building a deposit ladder, evaluating different financial instruments, managing counterparty risk, and making strategic decisions on everything from foreign exchange to capital expenditure. This is your blueprint for transforming your cash reserves from a depreciating asset into a resilient and optimised component of your financial strategy.

To navigate this complex but critical area of financial stewardship, this article breaks down the essential strategies into a clear, actionable plan. The following sections provide a comprehensive roadmap for any UK treasurer looking to actively manage and protect their company’s cash reserves.

Why Leaving £1m in a Current Account Is Costing You £40k a Year?

The most significant risk to your cash reserves today is not market crashes, but the slow, corrosive effect of inflation. Leaving a substantial sum like £1 million in a standard business current account, which typically yields 0% or close to it, is an active financial decision that guarantees a loss in real-terms value. This isn’t just a theoretical problem; it has a tangible, calculable cost that directly impacts your company’s purchasing power.

Let’s quantify this cash erosion. With forecasts suggesting an average inflation rate of around 3.5% in the UK for 2025, a £1 million cash pile will lose £35,000 in purchasing power over twelve months. In addition to this, there is the opportunity cost—the return you could have earned by placing the cash in a low-risk instrument. Even a conservative return of 0.5% after tax represents another £5,000 lost. Combined, the total annual cost of inaction approaches £40,000.

Some might point to strong corporate balance sheets as a reason for complacency. Indeed, analysis from the Bank of England notes that in aggregate, the corporate net debt to earnings ratio is at a 20-year low. However, this aggregate health masks individual vulnerabilities. A strong balance sheet is the very reason to practice prudent treasury; it provides the foundation upon which to build resilience, not an excuse to ignore the silent erosion of your most liquid asset.

Failing to act is equivalent to accepting a predictable, five-figure loss on your company’s assets each year. The first step in effective treasury management is acknowledging this cost and committing to a strategy that actively mitigates it. This means moving beyond the default option and structuring your cash to work for the business, not against it.

How to Build a Deposit Ladder to Balance Access and Interest?

The core of a dynamic liquidity framework is the deposit laddering strategy. This technique rejects the all-or-nothing approach of holding cash in a single account and instead segments your reserves into different “rungs” or tiers based on liquidity needs. The goal is to match the term of the deposit with the expected timing of cash requirements, thereby optimising yield without compromising access.

A typical ladder might have three main tiers. The first is the liquidity tier, holding cash needed for immediate operational expenses (e.g., the next 30 days of payroll and payables) in an instant-access account. The second is the tactical tier, for funds required in the 1-6 month horizon, placed in notice accounts or short-term deposits. The final, strategic tier, holds true surplus cash with no foreseeable need, which can be locked into longer-term deposits of up to 12 months to capture the highest interest rates.

This structure ensures that you earn a blended rate of return that is significantly higher than a current account, while a portion of your cash remains accessible at all times. As a deposit on a longer-term rung matures, the cash can be reinvested at the same term or moved to a shorter-term rung if liquidity needs have changed, making the ladder a dynamic and flexible tool.

For a UK treasurer, the options for building this ladder are diverse, ranging from government-backed instruments to commercial bank products. A recent analysis of UK monetary policy tools provides a clear view of the landscape.

Money Market Funds vs Term Deposits: Where is Corporate Cash Safe?

Once you decide to move cash out of a current account, a key decision is the choice of instrument. For corporate treasurers, two of the most common options are Money Market Funds (MMFs) and traditional Term Deposits. While both offer better returns, they serve different purposes and carry distinct risk profiles. The choice is not about which is universally “better,” but which is appropriate for a specific liquidity tier.

A Term Deposit is straightforward: you lock in a fixed interest rate for a set period (e.g., 3, 6, or 12 months). Its primary advantage is certainty. You know exactly what your return will be, making it ideal for the strategic, long-term rungs of your deposit ladder where cash is not needed. The main drawback is the lack of liquidity; accessing funds before maturity often incurs a significant penalty.

Conversely, Money Market Funds (MMFs) are pooled investment funds that invest in short-term, high-quality debt instruments like government bills and commercial paper. They offer daily liquidity and their yield fluctuates with prevailing interest rates, often tracking the Bank of England’s base rate. This makes them suitable for the tactical tier of your ladder. However, unlike deposits, MMFs are investments. While “Short-Term” MMFs aim to maintain a constant net asset value (CNAV), they are not capital-guaranteed and are not covered by the FSCS.

The strategic decision between them often hinges on the interest rate outlook. As the Bank of England has noted, the economic environment is shifting. In their latest report, they state:

Inflationary pressures have moderated across many advanced economies, and headline and core inflation have fallen back from their peaks over the past year.

– Bank of England, Financial Stability Report June 2024

This moderation could lead to rate cuts. A forecast showing the BoE base rate falling towards 3.75% by early 2026 suggests that locking in a higher fixed rate today via a term deposit could be a prudent move. An MMF’s yield, in contrast, would fall in line with any rate cuts. A balanced portfolio often uses both: term deposits for certainty and MMFs for flexibility.

The Diversification Mistake: Holding All Cash with One Struggling Bank

A common and dangerous mistake in corporate treasury is concentrating all cash reserves with a single banking partner. While convenient, this creates a significant and often overlooked counterparty risk. Should that institution face financial distress, accessing your company’s lifeblood—its cash—could become difficult or impossible, irrespective of the bank’s size or reputation.

The primary safety net for UK depositors is the Financial Services Compensation Scheme (FSCS). However, its protection is capped at £85,000 per institution. For a company with £2 million in cash, this coverage is woefully inadequate, leaving over 95% of your reserves exposed in a worst-case scenario. While major UK banks are ring-fenced to separate retail and investment banking activities, a severe systemic shock could still impact even the largest players.

Therefore, a formal diversification policy is not an optional extra; it is a fundamental pillar of responsible treasury management. This involves setting exposure limits for each banking counterparty and spreading deposits across a carefully selected panel of institutions. This not only mitigates risk but also often improves overall yield, as you can take advantage of competitive rates from different providers, including challenger banks who may offer higher returns to attract corporate deposits.

Developing this policy requires due diligence beyond just looking at interest rates. It involves assessing the creditworthiness of each institution and documenting the rationale for its inclusion in your panel. This audit should be a regular, scheduled activity for the finance department.

How to Use Multi-Currency Accounts to Hedge Cash Against FX Swings?

For UK businesses with international customers or suppliers, cash management has an added layer of complexity: foreign exchange (FX) risk. Holding all surplus cash in Sterling (GBP) can leave the business vulnerable to adverse currency movements that can erode profit margins and complicate financial planning. A simple yet effective strategy to mitigate this is using multi-currency accounts.

The principle is to create a natural hedge. If your company has significant and predictable costs in Euros (EUR) or revenues in US Dollars (USD), holding a portion of your cash reserves in those currencies can protect you from FX volatility. For example, by holding a EUR balance, you can pay your European suppliers directly from that account without needing to convert GBP to EUR at a potentially unfavourable spot rate.

This is particularly relevant in the current climate. Post-Brexit, market analysis shows the GBP has exhibited significant volatility against its major trading pairs. Relying solely on Sterling means your business is fully exposed to these swings. While complex hedging instruments like forwards and options have their place, a multi-currency account is a straightforward first line of defence accessible to most businesses.

Managing these accounts requires a disciplined approach. It involves forecasting your foreign currency cash flows to determine the appropriate balance to hold in each currency. The goal is not to speculate on currency movements but to minimise the impact of volatility on your operational cash flows. By matching the currency of your cash to the currency of your liabilities, you effectively remove FX risk from that portion of your operations.

When to Fix Your Interest Rate: Reading the Yield Curve?

One of the most critical decisions in managing the strategic, longer-term rungs of your deposit ladder is whether to fix your interest rate or opt for a variable rate. This decision should not be based on a gut feeling but on a calculated view of where interest rates are heading. The most valuable tool for this analysis is the yield curve, which plots the interest rates of bonds (like UK Gilts) with different maturity dates.

A “normal” yield curve slopes upward, meaning longer-term bonds have higher yields than shorter-term ones to compensate for risk over time. An “inverted” yield curve, where short-term rates are higher, often signals that the market expects rates to fall in the future. By reading the curve, a treasurer can form an educated opinion on whether the market anticipates the Bank of England will cut, hold, or raise rates.

As the House of Commons Library notes, the UK has experienced significant rate adjustments:

The MPC’s cycle of rate increases came in response to high inflation. CPI inflation fell below 2% in autumn 2024 before rising to 3.4% in December 2025.

– House of Commons Library, Interest rates and monetary policy briefing

This volatility makes the decision crucial. If the yield curve suggests rates are likely to fall, locking in a high fixed-rate term deposit now is advantageous. If the curve is flat or suggests rates will remain high, a variable-rate product linked to SONIA (Sterling Overnight Index Average) might offer better returns and flexibility. The choice is a trade-off between certainty and opportunity.

The practical implications of this decision can be significant, especially when deploying large cash balances. The following table illustrates a simplified scenario based on data reflecting the current interest rate environment.

When to Delay CAPEX Projects to Preserve Cash Reserves?

In a high-inflation environment, the instinct to preserve cash can lead to delaying major Capital Expenditure (CAPEX) projects. While this can bolster short-term liquidity, it can also be a strategically flawed decision with significant long-term costs. The choice of whether to invest or delay is a complex calculation that goes far beyond simple cash preservation.

A primary argument against delaying is the UK’s highly favourable “full expensing” tax regime. This policy allows companies to deduct 100% of the cost of qualifying plant and machinery from their taxable profits in the year of investment. For a £1 million project, this can translate into an immediate corporation tax reduction of up to £250,000. Delaying the project means forfeiting this immediate and substantial cash benefit, a significant opportunity cost.

On the other hand, there are valid reasons to consider a delay. The UK economy has seen sharp rises in project-related costs. As Statista notes, the period following the pandemic and Russia’s invasion of Ukraine led to significant supply chain disruptions and price rises, particularly in construction and manufacturing. If there is a strong reason to believe that these costs will moderate significantly in the near future, delaying could result in a lower total project cost.

The decision requires a sophisticated analysis. A treasurer must calculate the Net Present Value (NPV) of both scenarios. The “invest now” scenario includes the immediate tax benefit but higher initial costs. The “delay” scenario assumes lower future costs but pushes the tax benefit out and introduces uncertainty. The project with the higher NPV, considering the company’s cost of capital or hurdle rate, is the financially superior choice. Simply hoarding cash and auto-delaying projects is often a value-destructive strategy.

How to Secure Liquidity for Expansion Before You Actually Need It?

Effective treasury management is not just about preserving the value of existing cash; it’s also about ensuring access to future liquidity. The worst time to seek funding is when you desperately need it. The best time is when your balance sheet is strong and credit conditions are favourable. Proactively securing liquidity facilities provides a vital safety net and the strategic firepower for future expansion.

For UK corporates, this means establishing committed credit lines before they are required. A Revolving Credit Facility (RCF) from a panel of your banking partners is a cornerstone of corporate liquidity planning. Even if undrawn, an RCF provides a guaranteed source of funds at a pre-agreed cost, offering immense flexibility to navigate unexpected downturns or seize growth opportunities.

Beyond traditional bank lending, astute treasurers should explore government-backed schemes designed to support UK businesses. These facilities often provide more favourable terms or are available to companies that might not meet the strict criteria of major lenders. Key options to investigate include:

• British Business Bank schemes, such as the Enterprise Finance Guarantee and Growth Guarantee.
• UK Export Finance (UKEF) facilities for companies with an export component to their business.
• Asset-based lending secured against company receivables or inventory.

As VOSCAP Business Recovery experts highlighted in a recent analysis, forward planning is becoming more critical than ever.

2026 is shaping up to be a defining year for UK businesses. Directors are entering a landscape where cash flow strength, financial resilience, and forward planning will be essential for survival.

– VOSCAP Business Recovery, From Crisis Mode to Cash-Flow Confidence

Monitoring metrics like the Bank of England’s credit conditions survey can help identify optimal windows to negotiate these facilities. Securing liquidity is a proactive, strategic exercise that separates resilient businesses from vulnerable ones.

The next logical step is to move from analysis to action. Begin by formally documenting your treasury policy and modelling the deposit ladder structure that best suits your company’s specific liquidity profile and risk appetite.