Stepping up: investing business profits

If your business is generating profits beyond its day-to-day needs, you’re probably wondering how best to get this money working for you.

Investing surplus cash can strengthen your financial future and help you step up to the next level, both for your business and by shoring up your personal finances.

But there are things to consider when looking to invest business profits, not least the risks and the tax implications. Speaking to a financial adviser can help owners navigate the options.

At a glance

• Businesses should aim to have a cash buffer saved to act as a safety net, before investing surplus funds.
• Consider when the money may be needed, the risks involved and the tax position.
• Choose a strategy that supports both the business and your personal financial plan and goals.

Cash first

Managing the profits of a successful business requires careful planning and a clear strategy. Business owners need to look at the bigger picture. This is because profits may not always necessarily mean spare cash.

For most businesses cashflow is paramount. A business can report strong earnings yet struggle to meet wages, pay supplier bills, loan repayments or a tax bill.

A good rule of thumb is to have at least three months’ worth of cashflow in an instant or easy access business savings account, to at least cover staff wages and other priority bills, for example.

Check your business savings are within the eligible limit under the Financial Services Compensation Scheme (FSCS). This is to ensure their money is protected in the event of a bank failure. The limit for business bank and savings accounts is up to £120,000 per person or per limited company, per financial institution. Where necessary, consider spreading deposits across separate banking groups.

Where could the money go?

There will usually be a broad range of options for saving or investing business profits, depending on your needs, attitude to risk, business and personal tax situation, and your overall financial plan.

Chris Everard, business growth adviser at Elephant’s Child, says: “Gather the facts before making decisions. What works for a growing business may be very different from what works for an owner planning an exit. Look at the options with your financial adviser and build a plan around your goals.”

The value of cash held in deposit accounts, such as current and savings accounts, can be eroded over time due to inflation, particularly if the interest rate offered isn’t competitive. This can often act as a driver to consider alternatives.

But you’ll need to weigh up the varying risks and access of the different options.

Tax-efficient options are likely to include pension contributions. Your business could make pension contributions directly into your pension. Plus, where family members work in the business, employer pension contributions can form part of their overall remuneration package, potentially offering a tax-efficient way to share profits and support your family’s long-term wealth planning.

Spending money on the business can help fuel its growth, and in some cases can also be tax efficient. This may include reinvesting in business development or expansion, such as investing in staff training or recruitment. Upgrading technology, investing in cybersecurity, or replacing old equipment or machinery may also be worth considering.

Alternatively, money could be spent on developing a new product, expanding into a new market, or creating a digital marketing campaign.

It is always worth carrying out analysis on the potential return on an investment before deciding how much you’ll spend, and how you’ll spend it.

Advice builds confidence

Working through your plans with a financial adviser can ensure your personal goals are aligned with the plans for your business.

How you choose to invest profits will be down to your personal financial situation and your goals, as well as your attitude to risk.

Four questions to ask:

• Tax: What are the consequences for the business and for you? Some options for your business profits will be more tax-efficient than others. Bear in mind that tax rules, rates and reliefs are subject to frequent change and will depend on your personal circumstances.
• Access: When might the business need the money back? The access you need to the money will influence the decisions you make.
• Risk: Could you tolerate a fall in the value of an investment? Carefully consider your attitude to risk. Capital values can fall as well as rise when you invest. With investments, returns aren't guaranteed and you may get back less than you put in.
• Timing: Are you building, growing or preparing to exit the business?

There is no single right answer to how best to invest business profits. By working through these and other important questions with us, you can assess the benefits and trade-offs of different options. This can help you narrow down your investment choices to build a joined-up strategy, helping you move forward with confidence.