When your business has a cash surplus, it’s a great opportunity to make that money work for your business.
What is a Cash Surplus?
If your business has a cash surplus, it has more money or liquid assets than the company needs for daily operations.
How do I Work out Surplus Cash in my Business?
There is no specific formula for working out if you have a cash surplus.
What’s the Problem With Holding a Cash Surplus?
You’d think having a stack of money would be a good thing, and while it is good to have a reserve of cash, it may mean you are not optimising it to grow your business.
When cash is sitting idle, it can lose value because of inflation. You may also have a higher tax liability, as large cash sums can impact corporation tax planning.
What to do With Surplus Cash in a Limited Company?
A good way to make use of surplus cash is to use it for wealth management investments.
Why? Here are a few reasons:
Tax Optimisation
You can reduce your tax bill by investing in various tax-efficient investments.
Grow Your Business
Reinvesting in your business can enhance your business and bring in more revenue in the long term. You can also do this by diversifying into other securities and assets for multiple revenue streams.
By using cash surpluses to reinvest, it means you don’t have to get this money from borrowing, which would include interest payments.
Cash Flow
Investing your cash surplus can strengthen your business’s cash flow. You can offset future outflows with the returns from investments.
Investment Ideas for Surplus Cash
These are just some of the ways you can optimise your money to enhance your business.
Reinvest
Using your cash surplus to reinvest in your business is a good way to drive future revenue growth. In the early stages of a business, it’s common to reinvest a larger portion of revenue to fuel growth. As your business grows, you may have more flexibility to save and scale back on reinvestment.
Restructuring
Restructuring your business model to take advantage of tax advantages is another way to use your cash surplus.
You may want to set up a holding company or create a group structure, which can mean significant tax efficiencies.
Pension Contributions
Using the cash surplus to voluntarily pay pension contributions can mean tax savings, and they are National Insurance-free! There are also other tax-efficient ways of using your cash surplus, such as Capital Allowances, which means you invest in qualifying business assets to reduce taxable profits.
Invest in the Stock Market
For limited companies, you can invest in stocks and shares. The interest can add to your incoming cash to help with operating costs.
Considerations for Investing
Before you invest, there are several factors to consider:
Liquidity
Do you have enough money to cover all your operational expenses first before using the money for something else?
Level of Returns
What level of return you want will depend on how you invest your money.
Risk
While investing your cash surplus can be beneficial, you should accept that you may lose money. Different investments have different levels of risk; for example, short-term, low-risk options include high-interest savings accounts and money market funds. Longer-term and higher-risk options would include business acquisitions.
How Long you Need to Invest
If you want to have access to your cash again soon, then you won’t want to invest it in any long-term investments such as savings accounts that can’t be touched for years.
How to Choose the Right Investment
You should consider what your goals are and which investment would best help you to achieve those goals.
Once you have done that, you should determine what the available funds are, ensuring you are still able to operate efficiently.
When investing, set clear return on investments, timelines and have regular reviews.
Invest in your business first by reducing debt, having an emergency buffer, or reinvesting in your business. Once you have done that, then look at other ways you can invest.
If you’re worried about using your cash surplus, then contact a business accountant to help you with your strategic investment accounting and keep everything on track.
Recent Comments