6 Ways To Manage Surplus Cash in Your Limited Company
Business
Apr 2, 2024

6 Ways To Manage Surplus Cash in Your Limited Company

If you are a UK business that has made a nice profit for the financial year, the odds are you are having an internal discussion on what to best do with your surplus cash, and are exploring both traditional and modern approaches to cash management.

But given how every business has unique objectives and obligations, what to do with surplus cash is for the most part highly a discretionary matter. So whether you want to leverage your extra capital to fuel growth, improve business processes, or maintain stability, there really is no set way of doing things. That being said, knowledge is power, and if you are a new business that has had its first cash surplus, or one that has struggled to use extra cash efficiently in the past, then knowing what options are available to you can prove to be very useful.

For this reason, this article will delve into 6 avenues for utilising surplus cash, offering a comprehensive guide for businesses looking to optimise their financial resources.

Let's get right into it!

What is Meant By Surplus Cash in A Limited Company?

Surplus cash in a limited company (LTD) is the financial capital that is available to you once your company has fulfilled all of its obligations, including operational expenses, corporation tax, and any other expenses that are mandatory under HMRC.

In other words, this is the leftover money that is just sitting in your business account, and isn't needed for immediate use for liabilities or the day-to-day running of your company.  

Potential Risks of Doing Nothing With Surplus Cash

Below are some potential risks that could arise by holding surplus cash it in a bank account without it doing anything.

Inflation: A key issue to consider is inflation. As inflation rises, the real value of money sitting in bank accounts tends to decrease, essentially diminishing its purchasing power. This scenario suggests that if you're depending on a surplus of cash for unforeseen expenses, inflation could significantly limit your financial flexibility over time.

Stagnant growth outlook: Holding too much cash on the balance sheet might be interpreted by investors and the market as a sign that the company is struggling to find worthwhile investments, potentially casting doubts on its ability to grow. This situation could attract unwelcome scrutiny and pressure from both shareholders and business partners.

Cybersecurity and fraud risks: In a world where online banking and transactions are the norm, keeping large sums of money in bank accounts can heighten a company's vulnerability to cyber attacks and fraudulent activities. Businesses with sizeable account balances are prime targets for cybercriminals. The consequences of these breaches extend far beyond the direct financial hit, encompassing potential legal challenges, harm to the company's reputation, and a decline in confidence among stakeholders.

Regulatory and compliance risks: In some regions or sectors, businesses with significant cash reserves might find themselves under the regulatory microscope. This attention often focuses on whether the cash is allocated for particular purposes. Authorities could delve into the origins of these funds, their planned uses, and their conformity with taxation and anti-money laundering standards. Facing such examinations can result in expensive compliance processes, legal disputes, and even financial penalties for any regulatory breaches identified.

Neglecting opportunity cost: Finally, overlooking the opportunity cost is a critical risk tied to excess cash reserves. Money that isn't allocated to growth initiatives, like expanding operations, investing in research and development, or pursuing strategic acquisitions, isn't contributing to enhancing the company's market value. This lack of investment can lead to a substantial discrepancy between the company's current standing and the heights it might have reached with more strategic financial management.

As can be seen, there are potential risks with holding you excess cash. However, it's important to be aware that highlighting risks isn't to say that holding excess cash is always bad.  It simply means that a business owner needs to be aware, as failure to do so can result in a lack of preparation to deal with the aforementioned risks. 

6 Ways You Can Manage a Cash Surplus (Not Investment Advice) 

If the previous section has resonated with you, and you don't want your surplus cash lying around doing nothing, then the good news is that there are opportunities available for you to make use of this extra capital.

Below are some ways that businesses can put their surplus cash to work here in the UK.*Please note, this is not investment advice, and you should not act based upon the contents of this article. The purpose of this article is to simply act as an educational resource*

1) Reinvest in Core Business Operations

Reinvesting surplus cash into the main operational side of your business has the potential to facilitate growth and efficiency. This is because you can build upon existing strengths, and explore new innovation opportunities. So by allocating spare capital to things like marketing, research and technological enhancements, you are essentially putting your spare cash  to work in a tax efficient manner. Moreover, such reinvestment can qualify for corporation tax relief, reducing your overall tax liability and further optimising your financial resources. This cycle of reinvestment not only propels your business forward but does so in a manner that maximises financial benefits and supports sustainable growth.

2) Create or Increase an Emergency Cash Reserve

By creating or adding to an emergency cash reserve/fund, businesses can in theory safeguard themselves against unexpected financial downturns or operational inconveniences. This can prove critical during times of uncertainty, as it provides the cash needed to navigate immediate challenges without taking away from your long-term plans. 

So if you build up an emergency fund, consider allocating towards pension contributions in order to strengthen your employees' future financial security. Not only does this support your workforce, but it may also offer some tax advantages. Additionally, exploring options like business property relief can protect assets tied to your company, potentially reducing inheritance tax liabilities and strengthening your company’s financial foundation. 

It is highly recommended that you use a high-interest business savings account to store your reserves, as this ensures liquidity, and earns you interest.

3) Paying Off Debt or Refinancing

Paying off/reducing an existing debt, or refinancing certain obligations that are accruing a lot of interest can significantly improve your company's financial health. This not only prevents further draining of your cash (due to interest expenses), but also improves your company’s credit rating and frees up more capital for operational use or investing.

Your company may also benefit from tax relief by reducing debt as a result of the interest paid, and this effectively lowers your overall tax burden. Also, a lower interest rate will allow you to refinance on more favourable terms; if you so choose.

4) Distribute Dividends to Shareholders

This will depend whether you have bootstrapped your business, or taken funding, but distributing dividends to shareholders can be a great way to show your investors and target audience that your business is thriving, whilst also keeping shareholders content. 

However, there are tax implications to consider when distributing dividends, as they are subject to income tax for the recipients. So given how you want to keep them happy, planning the timing and size of dividend payments can help maximise shareholder value, ensuring that shareholders receive a favorable net benefit.

5) Invest in Marketable Securities for Flexibility

Putting your surplus cash into marketable securities (for example bonds) offers a combination of flexibility, liquidity and potential returns. This avenue allows businesses to have access to their funds, as they have the ability to rapidly convert investments back into cash; if needed.

Incorporating a mix of securities into your investment strategy can also provide a balance between risk and return, with bonds generally offering a safer alternative to stocks. But be sure to consult with a financial advisor, as this will help to ensure that your investment choices align with your company’s risk tolerance, cash flow requirements, and future financial goals.

6) Leverage a Crypto Strategy Platform like ICONOMI

For businesses seeking an alternative investment approach with potentially higher returns, cryptocurrencies offer a new frontier. However, navigating the complexities of the cryptocurrency market can be challenging. This is where crypto strategy platforms like ICONOMI come in.

ICONOMI provides a FCA-regulated platform that is specifically designed for individuals and businesses to seamlessly invest in cryptocurrencies. 

ICONOMI can offer your business the following:

  • Diversified Portfolios: Build and manage a diversified crypto portfolio to spread risk and optimise returns. ICONOMI offers pre-built crypto strategies, or the flexibility to construct your own.
  • Expert Management: You can benefit from the knowledge and experience of crypto experts who manage the platform's strategies. This reduces the need for your business to develop in-house crypto expertise.
  • Security and Compliance: You can operate with peace of mind knowing ICONOMI offers a dedicated business account solution that prioritises security and adheres to the latest UK regulations.

While cryptocurrency is a high-risk, high-reward asset class, ICONOMI offers a secure and potentially lucrative way for businesses to explore the potential of digital assets. But make no mistake, this is still a speculative financial instrument, and losses can be incurred. For this reason, it's important to conduct thorough research and due diligence, and you should only invest your surplus cash if you can afford to lose it. 

Conclusion

Managing surplus cash effectively requires careful consideration of your company's goals and risk tolerance. This article has explored various strategies, from reinvesting in core operations, to exploring the digital asset space. While traditional methods offer stability, cryptocurrencies present a potential avenue for higher returns.

For businesses seeking a secure and compliant way to navigate the complexities of crypto investing, platforms like ICONOMI offer a compelling solution. With its diverse portfolio options, expert management, and FCA regulation, ICONOMI empowers businesses to explore this new frontier with confidence.

Remember, thorough research and a measured approach are key to success in any investment, including cryptocurrency. By carefully considering your options, you can make informed decisions that propel your business forward.

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