NEWS

Using excess cash in your business

June 28, 2022
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BSc ACA, Audit Partner
East London



Using excess cash in your business



NEWS

Using excess cash in your business

Image


BSc ACA, Audit Partner
East London


Using excess cash in your business

Many businesses will find themselves thriving and growing and may begin to accumulate cash in the business. There are different options available to using excess cash in the business, but how you do this will depend on whether your goal is business growth, increased personal wealth or business exit.

In this article I explore the ways in which you can effectively use excess cash in your business.

 

Working capital vs excess cash

There is no magic formula that tells you when you have excess cash in your business. A lot of it will be down to forecasting and truly understanding if indeed the cash in your business bank account is excess or it’s needed for working capital.

Accurate forecasting will allow you to understand exactly how much money you should retain as working capital. Following the uncertainty of recent years, many business owners are retaining more working capital in their businesses to cover any unforeseen circumstances, so you may consider this before you work out the amount of excess cash you currently have.

 

Funding business growth

If you’re planning to continue growing your business then you could consider using the excess cash to fund this growth, either through acquisition or by investing in new plant, machinery, people or products.

Purchasing new plant and machinery is an attractive option now for many owners because of the introduction of the Super Deduction Scheme, allowing businesses to claim 130% capital allowances on new equipment.

Investing in recruitment now could also be another way to utilise excess cash. Maybe you want to bring in new skills or services to the business to grow you offering or diversify. With a buoyant job market, you may need to utilise the excess cash to attract and retain the right people in the business to allow you to grow.

Many business owners consider a business acquisition as a quick way to grow their business. Having excess cash in the business will give you the option to fully fund or part fund a new acquisition and be prepared when the right opportunity comes along.

 

Tax efficient business restructuring

If you’re business is currently holding excess cash, then now may be the time to consider restructuring your company. You may want to consider setting up a holding company and creating a group structure. This can create significant tax efficient benefits if set up correctly.

Creating a holding company may protect you from trading risks and creates a flexible environment for your trading and investment activity.

There are various options when it comes to group restructuring, some which may require HMRC clearance, but it will all depend on what you are trying to achieve.

 

Increasing personal wealth

For many owners, having excess cash in the business is an opportunity to increase their own personal wealth and whilst most business owners will already be taking advantage of tax efficient salary and dividend payments, they look to other ways to personally extract cash from the business tax efficiently.

Paying into a pension is one of the most tax efficient ways to extract cash from the business. If you haven’t utilised your annual allowance, then now may be the time to use the excess cash to pay into shareholders pensions. If you haven’t utilised the full allowance in the past three years, you may have the opportunity to increase your allowance in the current year.

 

Preparing for business exit

If you’re planning to exit the business in the coming few years, then maintaining a strong balance sheet will be important when it comes to increasing business value. You could consider using excess cash to invest in tangible assets for the business, for example new equipment or property and thereby increasing the long-term value of the business and benefiting from this on sale.

 

Summary

Having excess cash in the business may seem like a good problem to have but utilising excess cash isn’t straightforward and will depend on the directors’/shareholders ultimate goals. It’s critical that you seek professional advice to consider all your options to utilise this cash tax efficiently and to achieve those goals.

Contact us to advise you on how best to utilise excess cash in your business.

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PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.