Business PlanningCash Flow Management

How to Manage Surplus Cash in a Limited Company

How to manage surplus cash in a limited company
How to manage surplus cash in a limited company
How to manage surplus cash in a limited company

How to manage surplus cash in a limited company.

If your company is in the fortunate position to have surplus cash, and as banks are paying very low interest rates, then this article it directed at you.

Certain banks, like Natwest have even muted about charging to hold monies on deposit!

There are a few options open to you of how to manage surplus cash, and depending on the time-frames you need to hold the cash, will depend on the options open to you.

Before I begin with the options open to you, it’s important to establish that this article is not providing investment advice. This article should only be read for information purposes only. If you are going to invest your funds, you should always seek professional investment advice.

How much surplus cash does your limited company have?

This question is directed at working out how much free cash you have. This means you have cash which is over and above your working capital requirement.

Working capital is the amount needed by the company to cover the monthly ups and downs in the cash balance to cover the on-going liabilities.

“How to manage surplus cash in a limited company. Don’t leave it sitting in a low-rate deposit account.”

This on-going surplus is there to also cushion any delays in customer payments to the company.

It is important to retain enough surplus cash in the business current account or short-term deposit account to meet the company’s various liabilities as and when they fall due.

When you calculate the working capital requirement, don’t forget to include liabilities that fall due on a semi regular basis. this would include VAT (usually paid quarterly) and Corporation Tax (normally paid 9 months after the year end).

Once you’ve ascertained the company’s cash flow requirements, and where you find that you have a surplus of cash over and above this, your options are as follows:

  • Leave the funds in short term deposit accounts
  • Use higher interest paying deposit accounts or bonds
  • Take a directors loan from the company
  • Distribute the funds as dividends
  • Make company pension contributions
  • Invest the cash in longer term investments like stocks, shares and possibly property.

This list is not a comprehensive list of options, but it does include the main areas  of investment opportunity open to you.

that will be of interest to clients. Each option is explained in more detail below.

Leave the funds in short term deposit accounts

This option is fairly self explanatory and involves not doing much other than moving your funds to a deposit account.

Certain banks will offer an automatic system to keep the minimum of funds in the current account. Where this is available, funds will be switched to and from a deposit account for you.

For example, Barclays Bank Plc offer this service and you can set the limit at say £500. In this example, the current accountwill always be held at £500, with the surplus over £500 being transferred to deposit.

However, at present you’ll be lucky to even get quarter of a percent interest paid on deposit monies held in this way.

Use higher interest paying deposit accounts or bonds

To obtain a higher interest rate, you may be required to set the money aside for a longer period. So you will need to make sure the funds are surplus to cash flow requirements, as with all the options explained below.

By transferring funds to a longer term deposit account, you will be able to secure a slightly higher interest rate.

However, rates in longer term deposit accounts or bonds are still extremely low as I write this article.

What you’ll usually have to agree to is to lock the funds up for a specific period; e.g. 30 days, 60 days, 90 days or longer.

You may still be able to access the funds, should you need them in an emergency, but beware there is normally a penalty for doing so, before the agreed settlement date.

Take a directors loan from the company

I wouldn’t recommend using this option, as it will involve potential tax liabilities on directors P11D benefits at the end of each tax year.

Plus there are other tax implications where the director is also a shareholder (or participator) in the limited company.

So care should be taken if this is the approach you are going to use.

But please always seek professional tax advice on this.

Distribute the funds as dividends

Instead of retaining the profits in the company and investing the funds within the limited company, you may want to consider declaring them as a dividend.

It would be a good idea to do this to utilise your various tax rates where the directors salaries are kept low for other reasons.

Please make sure you seek professional tax advice on this area too.

Dividend tax has recently been changed too by the current Conservative Government, which was counter small business, so be sure to understand the full tax implications of declaring a dividend.

Please note that dividends can only be paid from distributable company profits.

Make company pension contributions

Where you have a decent company pension scheme, it is always worth topping this up with surplus cash.

The added advantage of this is the tax relief afforded to the company on the contributions made (please check the restrictions on pension contributions for companies).

Bowraven are not authorised to provide specific investment advice. In which case we recommend you speak with an independent financial adviser, before you make this type of decision.

Invest the cash in longer term investments like stocks, shares and possibly property.

If you would like to earn a higher rate of income from surplus company funds, you could look at higher returning assets like stocks, shares or even property.

However, you should also be more cautious with these type of investments, as the underlying asset could fall in value. Whereas money held in a deposit account will not do this. Unless of course the bank concerned goes into liquidation.

You can earn some very good rates on shares on the London Stock Market with certain stocks returning 5%+.

However, seek specialist advice from a stock broker on this. Funds for this type of investment must definitely be surplus to requirements. Although you can usually convert shares back to cash quite easily, the stock markets fluctuate quite frequently. Shares that you’ve invested in could be down at a point when the funds are required…so be careful.

Property is a long-term investment. Property can be used as an investment for future cash flows of rent. Alternatively, you could invest in a property for the company premises instead of renting. However, where you invest in a property, this must be for the longer term, as property is not a very ‘liquid’ asset (i.e. not easily converted into cash).

If this is what you want to do with your surplus company cash, then we not only advise you to seek professional advice, but also to decide on an investment strategy between the directors and ratify this strategy in a board meeting.

You should also take great care if you decide to start investing company funds, especially where you have significant funds and begin investing in property, as you may put at risk your trading status.

This could impact you in the future if you wish to consider claiming entrepreneur’s relief when you sell the company.