Cash 'Rich' SME - Where to Stash It?

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MissRibena

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350
Hi all

After years of muddling through, our SME seems to have turned a corner and is relatively cash rich. We are continuing to invest and grow but in a modest and cautious way. We know that cash is king at the moment and are looking for safe options for the short-medium term for our cash which make the most amount of sense.

We have access to some sterling funds and already have a bit on short term deposit (with rubbish interest rate). The majority is in euro though so we were thinking of a move to (say) a German bank account rather than expose ourselves to extra currency risk.

We still have access to quite a lot of short term funds via invoice discounting. Although we don't really need it at the moment, we're happy to pay the price to keep it in place in case of any changes in circumstances.

This is not the kind of connundrum we're used to managing so are interested to hear what approaches others are taking or might suggest?

Thanks in advance.
 
I'd be very careful about any investment advice (that is what you are looking for) from a forum like this, as it would tend to be a one size fits all approach, which is never the case.

Talk to your own accountant, they would have better knowledge of what you want and the level of risk you are happy with.

I'd also look at paying down any debt, leases loans etc., you might (in the current market) get a good discount for clearing them.
 
Hi Miss Ribena

As a general principle, you should take it out of the company as salary and take the hit up front of income tax on it. If the company needs the cash again, you can lend it back to the company.

Accumulating cash in a company is not efficient for tax and business purposes. And you will have a much bigger nightmare trying to take it out after a few years.

Do take tax advice on it, but the general rules are something like the following.

Assume a 31 Dec 2012 year end.
You can accrue Directors' salaries in the accounts at 31 Dec without actually paying the salaries.
But you must pay them by 30 June 2013, or pay interest for late payment of taxes.

If you made profits in 2011 subject to Corporation Tax and kept the cash in the company, then you should review whether this was the best strategy. It's tempting to keep cash, but it's not tax efficient. If you have not finalised the accounts for 2011, you can accrue directors' salaries but you will pay interest on late payment of tax.

Alternatively, you could pay salaries in 2012 which would create a loss in 2012 which could be set back against the profits of 2011.

But you need to get your tax advisor to figure this out for you. They should do a plan for directors' salaries and profits in writing and make sure you understand what they recommend. Get a second opinion if you are not sure.

Brendan
 
You need a tax efficient cash extraction strategy combined with an appropriate investment strategy for the retained cash.

As noted a one size fits all approach is rarely the best. You need a plan that takes account of where you are, where you are trying to get to and deals with the gaps.

Marc
Chartered and Certified Financial Planner
 
Thanks everyone.

With heavy R&D investment, the RDTC helps mitigate our tax position so we're not too bad that way.

We would prefer to hold the cash for now to be in a position to take advantage of opportunities that come our way (hopefully) to invest further in our core business. We really believe that this is the best route for us in times when not everyone is in the same boat. That's why we are looking for short-medium term solution rather than extracting it.

I know there are short term things we could do like early payment discounts with suppliers etc. We will probably do some of this but are reluctant not to take advantage of hard-earned good credit terms we have with suppliers (even temporarily).

So if we did want to just hold onto it and with the deposit guarantee limited and the euro faltering, we wondered what the best/safest way would be?

We have good tax advice (we believe!) but no investment advisor.
 
Questions for yourself (not requiring an answer here). I’m sure you’ve thought of these, I’m just posting them as examples.
How much of your own cash do you need to burn for R&D over the coming year(s)?
You are an SME with a heavy R&D cost, how much of this is funded through Enterprise Ireland/ other sources and is there a potential that loans/investments will have to be repaid at short notice?
Are you reliant on one or two customers for a large proportion of your business?
Etc?

There are far too many variables specific to your sector and your business for any detailed advice to be worth much here.
Talk to an advisor and don’t be afraid to keep looking ‘till you find one that you are confident in. If one comes highly recommended but you don’t get a good feeling about them then move on. Trust your gut.
 
We would prefer to hold the cash for now to be in a position to take advantage of opportunities that come our way (hopefully) to invest further in our core business.
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Miss

This is not inconsistent with taking it out now as salaries. The directors can always lend the money to the company again when the company needs it.

Brendan
 
We are looking for safe options for the short-medium term for our cash which make the most amount of sense.
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The most important things here are security and flexibility.

From a security point of view, I think you have to consider protecting your cash against a euro breakup.

The best way to do this is to pay down any borrowings, as J. Ryan has pointed out. Have you paid off all your borrowings especially the invoice discounting?

Paying customers promptly will get you great prices and great service and probably help the economy generally.

I would think that a demand deposit account is the best thing after that. There may well be opportunities for someone who can pay cash promtly for liquidation stock or a new building or equipment or even to acquire a competitor out of administration.

As I hate seeing cash and deposit interest in a company, I don't even know how DIRT interacts with Corporation Tax and Investment Income surcharges and the like. So there might be an advantage in having government bonds over deposits. But then there are security issues with these.

Ask your tax advisor to explain the taxation of different income - deposit, bonds, etc.

Brendan
 
Thanks again everyone.

We don't owe anything much at all really. Invoice Discounting is completely clear but we still maintain it as a facility 'in case'. If we do get an opportunity to invest, then the WC funding through invoice discounting is very flexible for dealing with growth spurts. We have a couple of small-soon-to-expire leases for machinery we invested in in the past but really these are not significant in the grand scheme. We do have some longterm EI funding but this is not huge and has a couple of years before review.

There is more scope to improve business spread through customer and product mix but this is ongoing and we've made good progress on it over the last few years.

Local suppliers get paid first of the month by EMTS but the big bulk of our suppliers are continental and we've fought long and hard to secure 60 days EOM from many so reluctant to change tack on that (will probably target a couple of key ones for early payment but this will only go so far).

Will read more on the Euro break-up link - thanks for that as it is our major external threat (not just the cash side but the general problems this would cause our type of business with EU customers and suppliers).

Just in case anyone reading this is thinking it sounds overly miraculous, we have been through our fair share of the horrors too!

Will put out some feelers for an advisor too - thanks again.
 
MissRibena said:
Thanks again everyone.

We don't owe anything much at all really. Invoice Discounting is completely clear but we still maintain it as a facility 'in case'. If we do get an opportunity to invest, then the WC funding through invoice discounting is very flexible for dealing with growth spurts. We have a couple of small-soon-to-expire leases for machinery we invested in in the past but really these are not significant in the grand scheme. We do have some longterm EI funding but this is not huge and has a couple of years before review.

There is more scope to improve business spread through customer and product mix but this is ongoing and we've made good progress on it over the last few years.

Local suppliers get paid first of the month by EMTS but the big bulk of our suppliers are continental and we've fought long and hard to secure 60 days EOM from many so reluctant to change tack on that (will probably target a couple of key ones for early payment but this will only go so far).

Will read more on the Euro break-up link - thanks for that as it is our major external threat (not just the cash side but the general problems this would cause our type of business with EU customers and suppliers).

Just in case anyone reading this is thinking it sounds overly miraculous, we have been through our fair share of the horrors too!

Will put out some feelers for an advisor too - thanks again.
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Great to hear about a business doing well.
Do you export much?

Our business is over 60% direct export (the rest goes to multinational in Ireland but we have no Irish customers) and we maintain dollar and GB£ accounts. This protects us from currency fluctuations as we also buy raw materials etc in Dollar and GB£ so we try in as much as we can to match the two.
We trade in many other currencies but we convert those as they are not large or regular revenue or expenditure streams.
 
Sounds pretty similar structure to us Purple. Direct export is only about 25% but many of our Irish customers are exporters too so it's still an export driven business. One of our aims is to further increase direct exports.

We have some dollar dealings but a good bit of GBPs and try our best to match as much purchases from UK as possible (but they just don't make what we need a lot of the time). We maintain GBP accounts (current and deposit). At the moment we're experiencing some currency gains but we've seen the other side of the currency coin and have no intention of becoming speculators.
 
Use a holding company structure to transfer the cash out to another company for reinvestment.

Need a tax adviser but well worth it.
 
Complainer said:
Are accountants generally authorised to give investment advice?
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Yes, (as mentioned above) many/most are so authorised.

That said, a more relevant question might be:
Are many/most accountants generally competent to give investment advice?

I'm not so sure of the answer.

If we have learned anything from the past 5/6 years (or even the past 5/6 days :eek: ), it should be that many apparently sophisticated/attractive/smart investment strategies are fraught with extreme danger, especially within a corporate context.

For example, blowing a windfall on heavily-taxed and otherwise-unwanted directors salaries is especially risky as the tax expenditure may not be recouped if the company needs to recover the funds. It's a long road that has no turn.
 
MissRibena said:
Will read more on the Euro break-up link - thanks for that as it is our major external threat (not just the cash side but the general problems this would cause our type of business with EU customers and suppliers).
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If a potential breakup of the euro could threaten the future existence of your business, it would increase the arguments for taking the cash out of the business now.

Assuming it will just damage your prospects, but not be fatal, then you should factor this into the strategy.

If Ireland leaves the euro, will you owe your German suppliers euro or punt nuas? I suspect you will owe them euro. You could minimise this risk by paying them in advance of the due date, so that you have a lower exposure if Ireland leaves. Alternatively, you could transfer your cash into a German bank account.

It's a very interesting question.

Brendan
 
Brendan Burgess said:
Miss

This is not inconsistent with taking it out now as salaries. The directors can always lend the money to the company again when the company needs it.

Brendan
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If she does that she'll lose half of it in income tax leaving less to reinvest when the time comes.
 
smeharg said:
If she does that she'll lose half of it in income tax leaving less to reinvest when the time comes.
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That was exactly my thought also. Yet I note that it has been mentioned that it is not good to retain cash from a tax point of view
Brendan Burgess said:
Accumulating cash in a company is not efficient for tax and business purposes. And you will have a much bigger nightmare trying to take it out after a few years.
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- I'm not fully understanding that phrase Brendan; what issues should we be addressing?

We are in a similar position, worried for the future of euro but want to invest when more certain about growth potential in coming years, but in a relatively good place now DG. Slightly different to OP as almost totally export based.
 
smeharg said:
If she does that she'll lose half of it in income tax leaving less to reinvest when the time comes.
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She loses half of it to income tax, but the company would be losing 12.5% of it to Corporation Tax anyway.

If she leaves it in the company she will pay CT on it now and income tax on it later. It's just very inefficient.

If the company has paid off its borrowings, she will be able to provide any increase in working capital through lending her cash to the company and invoice discounting.

If she takes a high salary now and the company needs cash next year, she can cut her salary next year to retain cash in the company.
 
Brendan

You may be missing the point that the company will gain a Corporation Tax deduction for salaries when/if salary extraction takes place in the future. So the 'tax inefficiency' argument against retaining funds in the company is weak enough. Incurring a tax cost of 50%+ on extracted salaries is hardly tax efficient either.

Otherwise, I can only repeat my earlier point that blowing windfall profits on salary extraction may prove a false economy if the company needs a reinjection of those funds at a later stage. By then, half of the entire pot will be gone in tax.
 
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