If you are not managing your money, then you are not deriving value from it, writes Bernard Walsh, Head of Pensions and Investments, Bank of Ireland Investment Markets

Most business owners would agree that it takes a combination of time, huge effort and significant success in order to accumulate sizeable cash balances. After you have worked so hard to accumulate this money, the all-important question is whether this asset is now working for you? The likelihood is that if you are not managing your money, then you are not deriving value from it.

According to the Central Bank of Ireland, Irish companies held €50.6 billion on deposit at the end of April 2018 (excluding financial corporations). Interest rates are at record low levels - in fact some larger deposits are on negative interest rates. This situation is unlikely to change for some time, and Bank of Ireland Investment Markets expects the end of 2019 to be the earliest for interest rates to rise again. 

While the official rate of inflation may be pretty benign, many companies are experiencing increased costs. Smart business owners realise the importance of continuing to grow the real value of their assets i.e. the level of growth after inflation. This involves the company doing some financial planning and to do this they need to take a holistic view of their business. So how do they go about it?

Make A Holistic Financial Plan

The first step is to take a snapshot of the business’s assets and liabilities, to capture any loan facilities and what levels are drawn and undrawn. Business owners will need to take a look at typical cashflow patterns and identify what role seasonality plays. What does your debtor book look like – have you substantial receipts coming shortly?

In Association with

The next stage is about looking ahead. This is where you set out planned capital expenditure and any strategic moves such as making an acquisition. You may have a business plan in place for the years ahead. If so, great, it should form a key input here. If not, you need to discuss and agree what direction the business is going in. You do not want to reach a stage where some of the management team are working towards putting the business in a place where they are ready to sell, while the rest are thinking about expansion. 

You also need to identify what level of emergency funding the company needs. Insurance can cover a lot of things that go wrong but having the safety net of some surplus cash is also important. It is a good idea to keep this money in a standalone account to avoid it being consumed with day-to-day spending.

Short And Medium Term Needs First

The priorities for this money are typically access and security. Cash management is an important exercise. If you can segregate cash that you believe you expect that your business will not use in the short to medium term, you typically will find much better value in term deposits and notice accounts than simply putting it in a demand deposit.

With the remaining funds, now may be the time to consider investing, with a view to achieving a better return than deposit rates. If you can achieve a return of 4% or 5% per annum from your investments, you could be delivering real growth on the overall sum.

Before You Invest

Before proceeding further, you need to check are you allowed to invest. Your memorandum and articles of association should tell you this. You also need to consider is it reasonable for your company to invest. In other words, given the nature and size of your business, is it appropriate for your organisation to take this step.

Your Company’s Attitude To Risk

The next stage is to assess your company’s attitude to risk. This might be very different to your personal attitude to risk. Companies tend to be conservative when it comes to their money.

Interestingly, although establishing and running a business inherently involves taking risks, some business owners are apprehensive about the risk involved in investing in a fund that holds shares.

History has shown that over time investing in shares delivers a better return that that derived from bonds, property and especially cash. However, we know that shares can suffer periods of volatility. The most recent crash is still vivid in the memory from 2008 and 2009. Every time we saw a fall, it was followed by a sharp rebound. 

We also know that there are times when bonds might do well while shares are struggling. This is why the old adage of not putting your eggs in one basket is as relevant as ever. 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 recommend the best solution to meet your company’s financial goals.

Solutions For Every Investor

Today, there are many solutions to help you get a better return on your money. The question is what kind of journey you want? Some will be happy to just beat deposit rates plus inflation. A common strategy used to achieve this is to use an absolute return fund. Typically they aim to deliver a return of 3% or 4% above cash, irrespective of whether stock markets go up or down. 

They employ a range of strategies, including those that can actually benefit from a falling market. The fastest growing part of the market is multi-asset funds. These solutions aim to deliver a huge 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. 

Most investment funds have a recommended term of five to seven years or more. While many allow you access to your money within that period, exit penalties may apply and you will get back the value of the fund at that point. 

Regular saving is something that we see more and more today. Rather than putting aside a single lump sum, some companies are placing cash in investment funds on a monthly basis. The term ‘Euro Cost Averaging’ refers to investors buying into a portfolio at a range of price points. Rather than buying at the top or the bottom of the market, you are averaging in a range of price points in an economic cycle. 

Tax Advantages

It is also important to note that there is a small 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. But if this money is invested in a fund, the surcharge tax will not apply.

Making The Most Of All Assets

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 that accrue when extracting money via a contribution to retirement plans as opposed to direct cash. A financial advisor will be able to explain this in further detail. 

But the overall conclusion is that  if the business has cash that is 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.