Smart business owners realise the importance of continuing to grow the real value of their assets
If your business has money sitting on deposit then it is likely to face negative interest rates in the near future. Having worked hard to build up a cash store, the all-important question is whether it’s working for you?
Although many businesses have suffered badly during this pandemic, there are also many that have seen their business do very well. Today, interest rates are at record lows with substantial deposits now attracting negative interest rates. This situation is unlikely to change for some time.
Smart business owners realise the importance of continuing to grow the real value of their assets. This growth involves the company doing some financial planning and taking a holistic view of the business.
Start by taking a look at your current situation. Is there debt where it might make sense to pay down early, do you have short to medium term capital expenditure plans?
The next stage is to look forward. This is where you set out your planned capital expenditure and any acquisition plans for the medium to longer term. This is always a worthwhile exercise for a company to complete.
You will then be able to see what level of funds remain after sufficient resources have been allocated to cover short and medium-term needs. The funds earmarked for short to medium term needs should be held on deposit. The priorities for this money are typically access and security.
For any funds remaining it could be the appropriate time to consider investing. However before proceeding further, you need to check that you are allowed to invest. Your memorandum and articles of association will tell you this.
The next stage is to assess your company’s attitude to risk. This might be very different from your approach to risk as firms tend to be conservative when it comes to their money. History has shown that over time investing in shares delivers a better return than that derived from bonds, property and in particular cash. However, shares do suffer from volatility and therefore the best advice is to have diversity in your investments.
Diversification and allowing time to smooth out the ups and downs are essential ingredients in the investment mix. Meeting with a financial advisor to discuss the options available and what may suit your business needs is always a recommended step. A financial advisor can help explain what the options are and suggest the best solution for a company’s financial goals.
Today, there are many solutions to help you get a better return on your money. Some will be just to beat deposit rates plus inflation. The most common solutions are multi-asset funds. These solutions aim to deliver a great level of diversification. The percentage held in shares will typically depend on the level of risk that you are comfortable with. In the case of some providers, they will also diversify your money across a range of fund managers.
It is also important to note that there are tax advantage for companies that invest. Most Irish businesses are treated as “close companies” on the basis that they have five or less owner directors. If they do not distribute interest income, then an additional Close Company Surcharge tax may apply. If this money is invested in a fund, this surcharge tax will not apply.
Lump sum investments and savings plans issued after the 1st of January 2001 benefit from the Gross Roll Up regime. This means that all income and gains in the life fund accumulate gross with a “deemed” tax charge on any growth taken only on the 8th anniversary of the plan if it remains in force. This means that any growth in the fund compounds over the period without being reduced by tax. Where the funds are taken from the fund they are subject to an exit tax rate of 25%.
In contrast when a company invests directly in a deposit account, shares or property, any income arising from the investment like Interest, Dividends or Rental Income is subject to tax on an annual basis.
Many businesses in Ireland have accumulated sizeable cash deposits. In a substantial number of cases, the company is family owned. The cash is effectively their own, but they do not want to be taxed when taking it out. There may be some tax advantages when extracting money via a contribution to a pension as opposed to direct cash. A financial advisor will be able to explain this in further detail.
If the business has cash that’s not needed for the short and medium term and the owners want a better return on a portion of their money than deposits offer, it is well worth getting some quality advice on investment opportunities.
Conor Harte is a Financial Planner with Wealthwise Financial Planning who are based in Block C, Hartley Business Park , Carrick on Shannon, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141