Business owner options for surplus cash on deposit

Statistics vary but there is currently an eye-watering amount of hard-earned company cash held on bank deposit by the business community in Ireland.

 

Why this remains the case in such a high inflationary environment could be down to any number of things:

 

Surplus cash on deposit is required by businesses to cover ongoing operating expenses and company directors are comfortable with the Deposit Guarantee Scheme. 

 

Or there could be a lack of awareness of investment options for businesses, simple inertia or even the remnants of a poor personal investment experience quite possibly with bank shares or a rental property for example.

 

Either way the banks must be laughing all the way to the bank.

 

Of course, every business needs to retain a percentage of their cash on deposit to cover short term business needs but anything beyond that offers zero protection against inflation and diminishes the future purchasing power of your company’s assets.

 

So, what are the general options for a business holding excess surplus cash on deposit?

 

1. Leave your surplus cash on deposit and continue earning zero return. Your bank manager will only be too delighted to lend your money to other businesses at 7%+ p.a. at least.

 

2. Explore your investment options with your bank but be aware that banks are Tied Agents. What does this mean? It means that your bank may lack the ability to present you with an appropriate suite of investment options. They can offer the investment products of one provider. Bank of Ireland is a Tied Agent of New Ireland whilst AIB, Permanent TSB and EBS are tied with Irish Life.

 

3. Have an exploratory conversation with a financial advisor or broker who is not a tied agent and has access to an appropriate number of investment solutions for surplus business cash.

 

Your advisor will make you aware of other low risk deposit offerings in the market with capital security and minimum return amounts. One such deposit product currently offers 9%+ return for a 3-year fixed term or 18%+ for a 5-year fixed term. This does not include policy and provider fees which can be expensive.

 

Alternatively, your advisor may well direct you to an easy access investment bond where your surplus business cash is placed in several well diversified investment funds with a proven track record of high performance and collective exposure to hundreds of blue-chip global companies.

 

Or your advisor may in fact work alongside you to build a bespoke investment portfolio that you are comfortable with, or even discuss your scope to invest surplus cash to fund your retirement either through an Executive Pension or Personal Retirement Savings Account (PRSA)

 

The Finance Bill 2022 has resolved that old thorny issue of PRSAs for business owners, where company contributions attracted benefit-in-kind (BIK). That is now disapplied and with seemingly no funding limits.

 

Like all investors, it is crucial for company directors to take several variables into account when considering what to do with surplus cash and any future surplus cash flows. Your advisor should tease out the following alongside you:

 

1. Time horizon: How long do you plan to invest your company’s cash and when will you likely need access? Generally, time smooths out investment volatility so the longer you are invested the better.

 

2. Expected returns: Are you expecting a 3%, 6% or even 10% annual return? Note that €100k invested at 6% over 8 years will grow to €160k for example.

 

3. Risk Profile: How much risk are you willing to accept in order to grow your investment? How would you react if your investment falls by 10% over a 6-month period for instance. Would you panic and sell your investment just as the market recovers or would you realise that ‘timing’ the market is generally futile when compared to ‘time in’ the market.

 

A good advisor will be ideally positioned to sit down with you and your accountant and explain the options, the risks and tax implications on investment gains for example. They will also be mindful to address any fears that you may hold regarding investment of company surplus cash.

Your accountant may also have other considerations – particularly for businesses that are preparing for sale or intergenerational transfer and what effects investing surplus cash may have on business valuation and various tax reliefs.

 

Yes, you may go through a short period of exploration and subsequent form filling to get your new surplus cash investment strategy over the line, but don’t you owe it to the business you’ve worked so hard to build.

 

Please feel free to book an Investments & Savings Consultation with MOJO Finance at www.mojofinance.ie

Business owner options for surplus cash on deposit