Is your business sitting on too much cash?

For many business owners, having cash in the business provides reassurance.

It offers flexibility, helps cover unexpected costs and can provide confidence during periods of economic uncertainty.

There's nothing wrong with holding cash.

The question is whether all of that cash needs to be sitting in your current account earning very little return.

As businesses become more established and profitable, it's common for surplus cash to build up over time. Before long, there could be tens or even hundreds of thousands of pounds sitting in the company.

If that's the case, it may be worth asking a simple question.

Is all of that money actually working for your business?

Keeping cash for the right reasons

Every business needs a level of liquidity.

Working capital is essential for paying suppliers, meeting payroll, funding VAT and corporation tax liabilities and dealing with unexpected expenses.

The amount that's appropriate will differ from one business to another.

However, once you've identified the cash your business genuinely needs to operate comfortably, it's worth considering whether any surplus could be put to better use.

Start with your cash

One of the simplest places to start is reviewing where your cash is held.

Many businesses leave substantial balances sitting in their day-to-day current account simply because that's where the money has always been.

Business savings accounts and fixed-term deposits may offer significantly higher rates of interest while still allowing you to keep funds within the company.

If you know certain funds won't be required for six or twelve months, separating operational cash from longer-term reserves could help your money generate a better return without changing your overall strategy.

Could some of your surplus cash be invested?

If your business has built up cash that isn't expected to be needed for several years, investing may also be worth considering.

Rather than leaving long-term surplus funds exposed to inflation, some companies choose to invest in a diversified portfolio held in the company's name.

This won't be suitable for every business.

Unlike cash deposits, investments can rise and fall in value, so it's important that any money invested isn't needed to support the day-to-day running of the business.

The length of time the funds can remain invested, the company's future plans and its appetite for risk should all be considered before making any decisions.

For businesses with genuinely surplus capital, however, investing may provide greater long-term growth potential than holding everything in cash.

Don't overlook pensions

Another option that is often overlooked is making pension contributions directly from the company.

Employer pension contributions can be one of the most tax-efficient ways for many business owners to extract profits while building wealth outside the business.

Over time, this can help reduce reliance on the eventual sale of the company to fund retirement, something we explored in our previous article.

As with any financial planning decision, contribution limits and tax rules need to be considered, but for many directors it can form an important part of a wider strategy.

It's about balance

There is rarely a single right answer.

Some businesses may benefit from keeping a larger cash reserve because of future expansion plans, acquisitions or seasonal fluctuations in income.

Others may find they have accumulated more cash than they realistically need.

The important thing is understanding the purpose of each pound held within the company.

• Cash needed for day-to-day operations should remain readily accessible.
• Short-term reserves may be better placed in business savings or fixed-term deposit accounts.
• Longer-term surplus funds could potentially be invested.
• Profits that aren't needed within the business may be suitable for pension contributions as part of a wider financial plan.

A strategy, not a one-off decision

Managing surplus company cash isn't about chasing the highest interest rate or trying to time investment markets.

It's about ensuring your company's assets are aligned with your business objectives and your personal financial goals.

As your business grows, your cash strategy should evolve alongside it.

A question every business owner should ask

If your company has built up substantial cash reserves, do you know exactly how much needs to remain available, how much could be earning a better return and how much could be helping fund your future instead?

If you're unsure, it may be time to review how your business capital is being used.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. An investment in equities and shares will not provide the security of capital associated with a deposit account with a bank or building society. However, please bear in mind that over the long-term inflation will erode the purchasing power of your capital.