Although this seems like a far cry from real life, income from large projects could lead to a buildup of cash in a business.
This storage of cash inside a company can be great for hedging against future periods of slow income, as it can provide a steady personal income during weaker periods, also known as a war chest.
You may want to extract some of this cash or put it to better use whilst it is stuck in the business. There are a number of options that can be used to help extract cash from your architectural company, with one of the most commonly stated solutions being to use a mixture of salary and dividend payments. Further to this, it could be tax efficient to contribute some of the money to a pension.
However, there are options to ensure that any money retained in a company is still working hard for the business. 4 potential options to help deal with excess business cash are outlined below:
Leaving it alone
Leaving money in the business and doing nothing has the advantage of being particularly safe as the money is unlikely to be lost and it stays in an easily accessible state for times when it is needed. Although this sounds like a great option, inflation could erode the relative value of this surplus cash over longer periods – that is to say, as the cost of goods increases over time, you would need to use more of your stationary cash to purchase them if it is only earning little to no interest.
As with your personal cash, you could portion some of the extra money into a specific business savings account. This could help ease the strain caused by rising prices and help reduce the loss of purchasing power of your cash. This option is still quite safe and easy to implement, whilst allowing your cash to be accessible in case it is needed (although you may lose your interest payments if you take the money out before an allotted period). However, the success of this method depends on the interest rate on offer as ultra-low interest rates mean that very little interest may accrue on the account balance, and therefore the cash may be better served elsewhere.
An alternative saving method could be to use the cash to purchase bonds that generally have higher interest rates than standard business savings accounts. The tradeoff here is that the money will usually need to be tied up for a specific time period, which reduces your ability to access the money at short notice.
A further option that could really put your money to good use is to invest in some stocks or shares. This would mean purchasing public company shares or funds of shares as investments, in the hopes of seeing a return on investment (ROI). Therefore, this could be inherently riskier than using a savings account or investing in bonds, and it would likely require specialist advice and knowledge to implement successfully.
It is also important for investing not to become the main business activity as this could change the nature of the business. The tax implications of investing through a limited company are different to personal investing so it would be crucial to speak to a specialist advisory firm to ensure you invest in the most tax-efficient way.
If you do have excess business cash and want to further your understanding of what to do with this, then don’t hesitate to contact us to learn more about our services for architects and their businesses. It is important for any business to seek expert advice on how to efficiently utilise your cash.
As a client of Gorilla Accounting, we can forward you on to a specialist provider. Get in touch in with your accountant or call 0330 024 0406. For more information, download our free Top Tax Savings Tips guide.