Brexit… a (nearly) hung government… Donald Trump’s antics…
All in all, there are a lot of factors that are understandably creating uncertainty for managing directors and business owners. One consequence of this uncertainty is that you may not be investing.
“Whilst not investing might make you cash rich, if you’re not putting money back in, you’re strangling your growth.”
Do you have the cash to invest?
Although this article is about the benefits of investing, remember that you need to have the cash available. A good business plan will contain key metrics to help you determine the fund available. This should include a forecast of your costs and you will need to consider how much money needs to be available to fund future purchases. It may be that other options such as an overdraft facility, hire purchase, or a mortgage are appropriate in some circumstances.
Remember, ‘cash is king’ and that VAT, PAYE and Corporation Tax will be due, so cash in the bank doesn’t necessarily equate to the amount you have available to invest.
But, if you DO have cash to invest, what next? What are the options for surplus cash in your business? Once you’ve established how much cash is available, you can review your choices.
The six main options for surplus cash are:
1. Do nothing
You can of course simply leave the money in the company bank account where is it easily accessible and ‘safe’. However, extremely low interest rates’ inability to keep pace with inflation, means your money’s purchasing power is dwindling. External shareholders may not be happy with this scenario as they don’t believe that the company’s assets are being used effectively.”
2. Utilise High Interest Accounts/Bonds
This is another ‘safe’ option. Although interest rates on these types of accounts are also currently low and often tie your cash up for a considerable period of time.
3. Director’s Loan
Although this is an option, it is not normally advisable due to the potential tax liabilities involved.
4. Distribute as Dividends
Rather than retaining the profits in the company, you may decide to declare them as dividends. Do consider the tax implications of this.
5. Company Pension Contributions
It may be that retirement is on your horizon, in which case you may decide to make contributions directly into your pension fund. This is often a tax efficient method of extracting funds, although one that ties the money up until retirement.
6. Invest in Stocks and Shares
If you want to use your surplus cash to grow your company then investing has historically provided a way to outpace inflation and grow wealth.
Why Invest in Stocks & Shares?
At minimum, a company needs to invest their cash in something that keeps pace with inflation. If they don’t do this then their purchasing power, and consequently their true wealth, will decrease over time. For a small business, investment in other companies can help to create partnerships and form relationships, leading to benefits such as:
1) New Markets
Companies sometimes invest in other companies in order secure future earnings from a company that may one day require your products and/or services.
2) Access to Resources
Through investment, you may be able to gain access to elements you need for production, such as land, labour, capital and natural resources at a lower cost.
3) Developing Strategic Assets
Investing in other companies may assist you in the development of strategic assets, such as distribution networks or new technologies.
Your Next Steps
An investment strategy is an important aspect of growing your business and it’s essential to devote time and effort to research and management in order to make this worthwhile. If you’re looking at stocks and shares, great care needs to be taken before committing yourself to an investment strategy. All investment areas carry an element of risk and it’s advisable to only invest with ‘spare’ cash.
An experienced finance professional can evaluate your investment needs and priorities. At Horus Consulting we help businesses like yours in all aspects of financial reporting, planning and analysis. Together we can create an investment strategy that will help to grow your business.
For an initial chat, call 07947 810 036 or email firstname.lastname@example.org.