As a business owner, you’ve probably encountered the problem of what to do with any extra funds in your business. It’s a fortunate situation to be in, but it does require some critical decisions. In this blog post, I have gone into a range of strategies, in no particular order, to handle your surplus cash and ensure it benefits both you and your business.

Reinvestment in Your Business

A common option is to reinvest the excess cash back into your business. This can involve upgrading equipment, expanding your operations, or hiring more staff. This can be an excellent way to fuel growth and to enhance the overall sustainability of the company.

Paying Down Debt

If your business carries any outstanding debt, using excess cash to pay it down can be a smart move. Reducing debt not only saves on interest expenses but also improves your business’s financial stability.

Building an Emergency Fund

Just as individuals need emergency savings, businesses should also prioritize having a financial cushion. In an age where we’ve all felt the impact of rising living costs, it’s important for businesses to be prepared for unforeseen expenses or economic uncertainties. Being financially prepared can be a lifeline during difficult times, allowing you to manage your regular expenditures effectively.

According to the BBC, the number of companies facing financial difficulties in 2023 reached levels not seen since the 2009 financial crisis. This highlights the need for businesses to be proactive in safeguarding their financial stability.

Keeping a portion of your business funds in an easily accessible account can act as an emergency fund. This money can be your safety net when faced with unexpected challenges, such as a downturn in the market or unforeseen expenses. Having such reserves in place can provide peace of mind and the ability to maintain your day-to-day operations even during challenging periods.

However, it’s essential to strike a balance. Holding too much cash can expose your business to inflation risk. Easy-access accounts typically offer low interest rates, which means that during periods of high inflation, the purchasing power of your cash may erode.

Distributing Profits

As a business owner, you can also reward yourself and your team by distributing some of the excess cash as dividends or bonuses. This can be a great way to share the benefits of your success.

Charitable Giving

If you’re inclined to give back, consider making a charitable donation. Your limited company can reduce its Corporation Tax liability by making donations to a charity or a community amateur sports club (CASC).

You can subtract the value of these donations from your overall business profits before calculating your tax obligations. Not only does this support a good cause, but it can also provide tax benefits for your business.

Personal Retirement Planning

Making employer pension contributions for a business owner from company surplus cash can be a smart way to save tax and build wealth for your retirement. Some of the benefits of this include:

• Employer pension contributions are deductible as a business expense, reducing the corporation tax bill. You are however limited to how much you can put into a pension each tax year. This is called the pension annual allowance, and the good news is that the government have been generous and have recently increased the annual allowance to £60,000.
• Employer pension contributions do not count as income (unlike salary and dividends) for the business owner and therefore avoiding income tax and national insurance charges.
• Once the employer pension contribution has been made, the amount can grow tax-free within the pension, benefiting from compound interest and investment returns.
• And once you retire the funds can be accessed tax-efficiently from age 55 (this changes to 57 on 6 April 2028), with 25% of the fund available as a tax-free lump sum and the rest subject to income tax at your marginal rate of income tax.

The right choice for your business will depend on your specific goals and circumstances. It’s often a good idea to consult with a financial advisor or accountant to help you make the most informed decisions. As a Chartered Financial Planner, I can assist you in navigating these choices and making the best financial moves for your business.

Excess cash can be a valuable asset, but it’s essential to put it to work effectively. Whether it’s growth, debt reduction, or securing your financial future, thoughtful financial planning is the key to success.

Get in touch

Have surplus cash in your business and not sure what to do with it? Get in touch for a free, no-obligation consultation. We are based in Tunbridge Wells, Kent, but serve clients across the country.

Risk Warnings

• The value of your pension may go down as well as up. You may also get back less than you invest.
• Past performance is not a reliable indicator of future performance.
• The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
• A pension is a long-term investment. The value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
• This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.