5 clever ways to manage surplus cash in your business

As you’ll know, managing a business effectively can be a complex and hugely rewarding task. There are many different challenges to consider, from how to build a team that reflects your company’s principles to working out the most effective way to advertise yourself to prospective clients.

Of course, one of the most important parts of doing so successfully is knowing how to manage your company’s finances. This can involve tasks like managing your expenses and establishing a diverse set of income streams.

When you’re running your business effectively, you’re likely to have some surplus cash. If you do, you may be wondering what you should do with it, as you have a variety of different options.

Knowing how to manage spare cash can be an important part of running a business, so read on to find out five clever ways you can manage it.

1. Save it in a high-interest account

One useful option if you have any spare money is to save it in a high-interest savings account and earn some interest. While you may have to take some time to shop around for the highest interest rates, this can be a useful way to grow your cash reserves.

If you choose to do this, you may want to consider spreading this cash between several different banks or building societies.

The Financial Services Compensation Scheme (FSCS) will reimburse you for up to £85,000 worth of losses if your bank were to fail. However, any savings over this limit won’t be protected, which is why it can be useful to spread surplus money across multiple providers.

While this may mean sacrificing a small amount of interest, this can be a good way to protect it.

2. Invest it in the stock market

In recent months, there has been a spike in the rate of inflation. According to figures from the Office for National Statistics, the Consumer Price Index (CPI) rose by 9% in the year to April 2022.

With this in mind, you may prefer to invest any surplus cash your business has, instead of saving it, as this can give it more opportunities to grow and outpace rising prices.

That being said, it’s also important to remember that investing typically carries some element of risk, as the value of your assets can fall as well as rise. Furthermore, this option can pose a problem if you need your cash at short notice, as you would need to sell your investments first to access it.

If you want to know more about whether this option is right for you, you may want to seek professional advice. Working with a planner can help you to weigh up the pros and cons of this decision and make the right choice for your situation.

3. Make a company-to-company loan

One potential, if unusual, way to use your surplus cash is to make a company-to-company loan. As the director, you can lend money to another business as long as you have enough reserves to cover any liabilities while this loan is outstanding.

This can sometimes be an effective way to generate a return on your money, in the form of regular interest payments.

Of course, while this can sometimes be a good way to invest any surplus cash, it can also be highly risky. Since you’re essentially investing in a single business, if they are unable to meet their financial obligations then you could lose the money you loaned to them.

So, it can also be important to do thorough research before you offer a company-to-company loan. Not only can comparing different businesses help you to seek out the highest return for your money, but doing so can protect it against risk too.

4. Withdraw it as an income

You’ve probably put in a lot of hard work to build your business and help it grow as effectively as possible. As such, one option that you have is to withdraw some of the surplus cash as a well-deserved reward for all your effort.

While this may not help your business to grow as much as reinvesting it would, it’s important to acknowledge the long hours you’ve put in. There are several ways you can draw an income from your business, such as directly through dividends, a director’s loan, and of course your salary.

If you want to be able to withdraw money in a tax-efficient way, working with a financial planner can help you to make properly informed decisions.

5. Make additional pension contributions

Another useful way to use any surplus cash that you may not have considered is to make additional pension contributions. This can be a great strategy to extract profit from your business as it is highly tax-efficient.

For a start, you can benefit from tax relief, which can potentially be very valuable, as the amount you can claim depends on how much Income Tax you pay. So, for example, if you’re an additional-rate taxpayer, you could potentially benefit from 45% tax relief on the contributions.

Of course, it’s important to bear in mind that you won’t be able to access these funds until you’re over 55, or 57 from 2028. That being said, this can potentially be a blessing in disguise as this can give it more time to grow.

It’s also worth considering that this strategy can help your company to save money. When you make employer pension contributions from pre-taxed company income, they are typically classified as “allowable expenses” and so can reduce your Corporation Tax bill.

This can make pension contributions an even more tax-efficient choice.

Get in touch

Managing a business in the most effective way can sometimes be a complex task. That’s why, if you want to be able to make properly informed decisions about your finances, we can help at Rosebridge.

Email enquiries@rosebridgeltd.com or call 01204 300010 to find out how we can help you.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.


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