Like many of your peers, I hope you’ve had a strong business year in 2021. If so, hopefully that leaves you with the enviable situation of having to decide what to do with the surplus cash in your business.
While I’m certainly no accountant and the views of your own accountant should certainly be sought, here are a few thoughts to consider yourself.
Live for today
There are many factors to consider, if you are thinking of taking the surplus cash out of the business for your own personal use. Of course, central to this is the high level of tax that will inevitably be due.
But at the same time, maybe a bit of surplus personal cash is needed. Some advisers take quite small salaries and don’t have a lot of personal wealth outside of their business. Maybe you’ve been working extremely hard through the pandemic and extra cash for a well-earned high quality family holiday, or some other big purchase is exactly what’s needed! This could be a catalyst to re-energise you to drive forwards with renewed enthusiasm.
Of course, your own personal circumstances will dictate here. How badly do you need extra cash? It often doesn’t make sense to take cash out, unless you have a definite need for it, as this may simply rule out better options at a later stage. If cash is needed and is available – well great! If not needed, maybe look at other options.
Live for tomorrow
I certainly am not going to attempt to advise you about the value of structured retirement planning and the tax advantage of pensions! Enough said…
Leave it as part of tax planning
Alongside your pension planning, there are other ways of extracting wealth from your business, mainly through Retirement Relief or Entrepreneur Relief. These are routes that need careful planning, well in advance of your desired exit date. Leaving cash in the business may give you more options to maximise your opportunities available under these tax reliefs.
You also have the added benefit of a cash buffer within the business, should you experience an unexpected shock to your revenue. This could be very important in the event of a sudden economic downturn, a sharp fall in investment markets impacting your trail income, an illness to you or another key revenue generator in the business or some other cause.
Re-invest to increase the value of your business
Of course the other route to consider is to use the surplus resources to increase the long-term value of your business. There are several different areas that warrant careful examination, to determine if they’ll help you grow.
Spend money to grow your revenue: Money spent on refining and improving your client proposition that will enable you to charge more or meet the needs of a wider range of clients will be money well spent. Alongside this, money spent on improving and raising awareness of your brand in key target markets through social media activity, advertising, PR and sponsorships warrants consideration. This can be further augmented with a structured approach to marketing your business, with the objectives of attracting new, profitable clients and deepening relationships with your existing clients.
Grow your advice team: If you have surplus money in the business, it’s worth considering the benefits of adding another adviser to your team. Of course there are many factors to consider here such as the balance of your team, how an additional person will affect the culture of your business (they hopefully will improve it!), the ability to service increased numbers of clients, reward structures and whether the marginal profit increase is actually worth it.
Spend on capital improvements: Does money need to be spent to improve the working environment of the team, that will lead to higher productivity? Or is it worth considering spending money on the public areas of your office to improve the client experience when they visit? With the explosion of remote working and client meetings, money may be well spent on your technology solutions to improve both the productivity of your people and also the experience of clients for online meetings. There is nothing more off-putting for a client than talking to an adviser with a poor camera, microphone or surroundings.
Grow through acquisition: While at the moment there appears to be more buyers than sellers, opportunities arise to purchase other advice businesses or indeed books of business. Having a war chest ready to go could just give you the edge in terms of ability to go a quick deal. Of course, being above to make an acquisition with no / less debt or external investment keeps the ownership in your hands too.
With extra cash in your business, it comes down to the desire for instant gratification (take cash out), extract it for your own future wealth (through pensions) or retain it in the business for tax planning or business growth. Each have their merits and deserve careful consideration.