You’ve spent years building a successful business. Your company is profitable, the bills are paid, and you’ve accumulated a significant amount of cash in the bank. It’s a reassuring position to be in, but have you ever stopped to consider whether all that money needs to be sitting there?
This is a conversation we regularly have with our business owner clients at Blue Sky. Many have worked incredibly hard to build profitable companies and strong cash reserves, but haven’t necessarily considered what those reserves could achieve beyond providing financial security.
Holding significant cash is not inherently a bad decision. In fact, having readily available funds is essential for most businesses. The important question is whether the amount you’re holding is appropriate for what your business actually needs.
How much cash should your business keep in reserve?
Every business needs sufficient cash to operate confidently. Day-to-day expenses, salaries, tax liabilities, planned investment and unexpected challenges all need to be considered. Some businesses also require larger reserves because of seasonal trading patterns, irregular income or plans for future expansion.
There isn’t a single figure that’s appropriate for every company. For one business, a substantial cash reserve may be entirely sensible. For another, holding the same amount could mean that significant capital is sitting unused, with no clear purpose.
A useful starting point is to ask yourself (and fellow directors) three questions:
- How much cash does the business need to operate comfortably?
- What expenditure or opportunities might require funding over the next few years?
- How much of the remaining cash is genuinely surplus to those requirements?
Answering these questions, ideally alongside your accountant and financial planner, can help establish what money needs to remain readily accessible and what might be available for other purposes like investing.
The potential cost of doing nothing
One risk that rarely enters the discussion is the cost of doing nothing. Holding a sensible cash reserve can provide security and flexibility. However, allowing excess cash to build up without a clear purpose can create challenges over time.
Inflation provides a good example. Even when the balance in your business bank account remains unchanged, its purchasing power may gradually reduce over time if the interest earned fails to keep pace with rising prices.
There’s also an opportunity cost. Significant capital retained in a low interest business deposit account may miss the potential for stronger long-term returns elsewhere. While investment carries risk and values can fall as well as rise, many business owners are surprised by the difference between the returns available from suitable investments and those offered through traditional business savings accounts.
Doing nothing may be the right decision. But it should be a decision you’ve made consciously, having understood all the alternatives.
What can a limited company do with surplus cash?
A client we recently advised had over £1 million in cash with their bank. They had negotiated interest at around 1.5%. They came to us as they wanted to explore their wider options. Through discussions, we understood that there was little appetite for significant investment risk, but there was a desire to find more competitive returns. We helped them identify a more suitable solution and provided access to more competitive deposit rates in line with the wider market, increasing the income generated from their cash while keeping it within a deposit-based environment. This gave them confidence their capital remained readily accessible if they needed it, while allowing some of the money to work harder for the business.
When a business has surplus cash, there are several possible options. The most appropriate approach will depend on the company’s circumstances, objectives and timescales.
- Review your business savings arrangements
Sometimes the simplest solution is to make better use of cash deposits. Business current accounts don’t always offer competitive interest rates, and many business owners have neither the time nor inclination to regularly review the available alternatives.
Depending on your requirements, options might include instant-access savings accounts, notice accounts or fixed-term deposits. Each offers a different balance between accessibility, certainty and potential interest.
At Blue Sky, we can help businesses explore cash deposit solutions across a range of providers and platforms, including options that may not be available through their existing banking relationship.
For businesses that want to retain capital in cash, but make more effective use of it, reviewing these arrangements can be a sensible first step. - Consider investing surplus company cash
For funds that may be needed within a relatively short period, a more defensive investment strategy can offer a balance between accessibility and return. These investments typically provide higher returns than traditional cash deposits, although they are not risk-free.
For capital with a longer investment horizon, a diversified portfolio that includes higher exposure to equities may provide greater growth opportunities. While this approach involves a higher level of investment risk, it can help businesses preserve and grow the value of surplus funds over the long term.
The key is to understand not simply what returns might be possible, but what risks the business can reasonably afford to take. - Consider whether the money could serve a wider purpose
Surplus cash doesn’t necessarily have to remain within the business indefinitely. By allowing the capital to work harder for the business and generating a greater return, this opens further opportunities to deploy the capital in other areas, such as:
- Making employer pension contributions for directors, subject to the relevant tax rules and individual circumstances
- Providing an opportunity to increase staff remuneration or pay bonuses
- Investing in equipment, more people or business development
- Funding expansion or potential acquisitions
- Supporting longer-term succession or exit plans
- Exploring how business wealth could contribute towards personal and family financial goals
These are not interchangeable options, and each has different financial and tax implications.
For many business owners, however, the most valuable discussion isn’t simply about where the cash should be held. It’s about what they ultimately want that money to help them achieve.
Your business wealth and your personal future
There’s another dimension to this conversation that I think is particularly important. For many of our business owner clients, the company represents far more than a source of income. It’s the result of years of commitment, sacrifice and hard work. It may also represent a significant proportion of their personal wealth and future financial security.
Yet, it’s surprisingly easy to become so focused on building a successful business that you spend relatively little time considering what you ultimately want that success to provide for you personally.
Perhaps you’d like to retire earlier, reduce your working hours, support your family, invest in another venture or simply have greater freedom to make choices about the future. Understanding how your business finances connect with those personal ambitions can change the way you think about the capital you’ve accumulated.
The question becomes less about achieving the highest possible return and more about making sure your money is supporting the future you want to create. That’s what we do at Blue Sky.
Keeping it simple
There is no universal answer to what a business should do with surplus cash.
For some companies, retaining substantial reserves will remain entirely appropriate. For others, reviewing savings arrangements, investing for the longer term or using capital towards wider business and personal objectives could present worthwhile opportunities.
At Blue Sky, we help business owners understand their choices. We relish the opportunity of working alongside accountants and other professional advisers where appropriate too.
Our role isn’t to suggest that every pound of surplus cash should be invested or committed elsewhere. Instead, it is to highlight that holding larger cash balances presents opportunities which may be worth exploring.
We’re here to help you understand your financial position, explore the options and make informed decisions with confidence.
If you’d like to explore whether your company’s cash reserves are being used effectively, please call us on 01202 756560 or email me directly.
Risk warnings: The value of investments can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The information in this article is for general information only and should not be regarded as personal financial advice.
Tax treatment depends on individual circumstances and may be subject to change in the future.
Investment returns are not guaranteed. Even lower-risk investments can lose value and may not be suitable for money needed at short notice.
Access to funds depends on the account terms. Notice periods, fixed terms and withdrawal restrictions may apply.