How to make the most of excess cash in your business
Expansion & Improvement,
Acquisitions and Disposals
The pandemic has been an incredibly tough time for everyone and many businesses have suffered as a result of lockdowns. However, there are also those who have thrived and are entering this next phase of re-opening with excess cash in their business.
Daniel Morgan outlines the steps you need to take to measure whether you have excess cash in your business and the options available to utilise it whether your goal is growth or exit.
I don’t have a set formula for when cash becomes excess and have found that most owners have a gut feel for when planning should be started. The priorities of each business owner will be different but in the main we are seeing three groups emerging:
- Those who are looking to grow and develop their business
- Those who are looking to maximise personal wealth
- Those who are looking to exit
Forecasting needs to be undertaken
Whatever your ambitions it is vital to undertake forecasting to understand what is truly excess cash and what you should keep back in your working capital.
Many businesses are far more prudent following lockdown and have a much bigger focus on keeping a rainy day fund. Worst case scenario planning should be undertaken to give you a gauge of what cash you can afford to spend and what you need to hold on to.
Growing your business
For business owners who have growth as their goal, there are two routes you can take. Organic growth which will mean investing in equipment, people and products or growth by acquisition.
The new Super Deduction scheme which allows businesses to claim 130% capital allowances on qualifying plant and machinery investments makes new equipment an attractive option for many owners.
There are also other opportunities presented for businesses who can pivot their offering, particularly if they tap into a new sector where businesses have struggled during lockdown. Highly skilled people may now be open to conversations about moving and they could help you tap into these gaps in the market.
However organic growth can be slow. A smart acquisition can help you achieve your growth goals quickly but careful planning and due diligence needs to be undertaken to ensure a smooth transition. Maintaining a high cash reserve within your business is vital here to allow you to strike when the right opportunity presents itself.
Maximising personal wealth
For some owners growth will be taking a back seat to allow them to focus on their personal wealth.
One of the most tax efficient ways to extract cash from the business is through pensions making the most of the £40K yearly allowance. If you haven’t utilised this over the preceding three years you can increase your allowance for this year. You can also make contributions on behalf of your family members which can be useful for protecting generational wealth, subject to their role in the business.
Alternatively you could extract the cash via a salary or dividends. It’s important to watch out for the tax on this although it could be beneficial to have the cash now if tax goes up over the next few years. The money could be invested into an Enterprise Investment Scheme (EIS) which offers attractive tax reliefs for example. There are a few forms of EIS so it is important to discuss your options with an advisor.
Planning your exit
For some business owners the challenges presented over the last year have made them fall out of love with their business and their focus has now shifted to exit. If this is the case for you then maintaining a strong balance sheet will be important when it comes to valuing your business. This can be done by using excess cash to invest in tangible assets for the business e.g. equipment, property or other physical assets.
Reaching optimal Enterprise Value normally takes place over a few years so early planning is important.
Utilising excess cash isn’t straightforward and will depend hugely on each business owner’s personal goals. Speak to an advisor who can act as a sounding board and assist you with careful planning. This can help you efficiently manage your money and make it work for you.
If you want to talk about how to make the most of your excess cash, get in touch.