How should I invest a large profit?
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How do you put surplus business cash to good use? Instead of simply holding it in a regular savings account, you could invest it – e.g. into your team, or back into your business to help generate further revenue. Given the range of options, deciding how to commit a large profit is not always easy. In this guide, we offer five ideas for business owners and directors on this subject. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
#1 Invest in your team
It is often said that your people are your best asset. By offering them a great employee benefits package, you can incentivise staff retention, productivity and morale. It can also help to attract strong new candidates to join a growing team. Could some of your recent profits be committed to raising some salaries, providing a bonus or adding a new/expanded benefit to your workers (e.g. a death-in-service scheme)?
However, make sure that any team investment can be kept up in future. If your business suffers from low/no profitability in future seasons, then you may be forced to scale back some of these benefits or let people go. Therefore, this idea may be more suitable for businesses with a more established track record of profitability and growth (rather than startups).
#2 Deal with debt
Just like personal debt (e.g. high-interest credit cards), business debts can jeapordise stability, deter investors and lead to cash flow problems. It is often necessary to use debt to get a new business off the ground, and sometimes it can be “cheaper” to pay the interest on a loan rather than corporation tax you would otherwise pay on the profit.
However, a recent profit can be a great opportunity to reduce liabilities like these and present a healthier balance sheet to your investors. For newer businesses, it could help you refinance your debt so that interest payments are lower.
#3 Improve the business
In many sectors and industries, older equipment can be expensive to maintain. Yet the cost to upgrade or replace them can be prohibitive. Naturally, some of your profits could be used to bring your technology, machinery and operations more up-to-date. Doing so could help lower your production and distribution costs, potentially improving your margins.
However, you need assurance that any such purchases will, in fact, save money over the long term. If the new equipment breaks often (e.g. due to unforeseen wear-and-tear factors), then you could end up costing the business more money.
#4 Build a business portfolio
It is not just individuals who can invest in stocks, bonds and similar assets, a company can do this too. Although it will not be able to use certain tax-efficient tools (like an ISA), it will benefit from certain tax advantages, such as receiving dividends. This can offer much better returns than simply holding profits in cash.
However, just like with a personal investment plan, there are many factors to consider when building a business portfolio. How long until the company needs the money? How involved (“hands on”) do you want to be with the investments, and what level of return are you hoping for? Do you simply want to stick to mainstream asset classes, or are you interested in looking at alternative investment options?
A financial planner can be very helpful to advise on the best way to construct – and maintain – a corporate investment portfolio in a tax-efficient, sensible manner.
#5 Strengthen your protection
The COVID-19 pandemic was a sharp reminder that business is not always as usual. In 2022, moreover, there are hints that the UK could be entering recession – which could negatively impact many businesses (e.g. due to lower consumer spending).
If you recently generated a healthy profit, it is worth checking how it might be used to buttress your business against weaknesses and threats outlined in your SWOT analysis. An important (but often neglected) area is key person protection and shareholder protection. These policies provide a much-needed lump sum to help tide the business over if you suddenly lose a director, shareholder or other crucial staff member due to death, injury or ill health.
Buy To Let investors who are holding their properties in a company structure may also wish to check policies such as Rent Guarantee Insurance and Landlord Cover. The former will provide an ongoing income if your tenants do not keep up their rent, whilst the latter protects you from tenant claims (e.g. should they injure themselves in your property).
Of course, whilst you should not hold too much in cash (since it will be eroded by high inflation), it is also wise to have a good emergency buffer ready – in case you encounter a season of dry customer activity, or hard economic times.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
