Why a business with cash to spare shouldn't just park it in the bank

Sure, it’s a good problem for firms to have.

By Cormac Kelleher Partner, Mazars

THERE IS A new problem being experienced by some companies. It is one of their own creation.

As they rode the economic rollercoaster, organisations instituted layoffs and reduced dividends during the recession, all with the intention of improving operating statements and ultimately liquidity positions.

While these strategies proved successful for many, an economic resurgence means many companies now face a good ‘problem’ – they have excess cash.

But nominal interest rates, coupled with banks beginning to charge for holding deposits, make deposits unattractive. So what is an organisation to do?

Given the lack of viable short-term investment opportunities, organisations need to start making decisions about cash usage. A focus on existing work practices and what customers value could identify areas where excess cash may be employed.

This could range from upgrading production processes and machinery to acquiring additional floor space to facilitate increased production capabilities. These initially capital-intensive projects could help to decrease overheads and increase capacity and speed in the longer term.

To aid organisational longevity and the relevance of its offering, consideration could also be given to R&D. This could help to ‘future proof’ the organisation, while also potentially qualifying for tax credits and government grants and thereby unearthing an alternative source of finance.

Consideration could also be given to buying out ‘friends and family’ – investors who may have provided funding in the start-up phase of a company.

The buy-back could be used to clean up the share register or to facilitate the removal of dissenting shareholders. A shared organisational vision and agreed direction could help the organisation to act upon opportunities and drive future value.

The buy-back of shares may also be beneficial from an individual shareholder perspective as they may be able to avail of the reduced 10% capital-gains tax rate.

Think of staff

Another feature of the economic rollercoaster was the widespread cutback on employee costs. This ranged from remuneration to benefits.

There are now stories on a daily basis in the media relating to salary negotiations and increases. Various opinion polls for differing industry sectors consistently concur – employees are expecting salary increases in 2017.

Companies sitting on excess cash need to consider employee expectations. This should be factored in as part of any of the above alternative options.

Increasing production capabilities is fruitless if there is a steady stream of staff departures. While retention of key personnel is important in any organisation, it is particularly so where proprietary knowledge is involved.

In the wake of Brexit, consideration could be given to acquiring a competitor. Strategically, this could be particularly beneficial if the competitor has access to alternative markets and customer bases or indeed is located in the UK.

Closeness to existing UK customers may aid in speed to market and overcome the anticipated hard border which Brexit may bring.

Excess cash is not a problem all organisations will encounter. For those who do, it should be perceived as an opportunity as opposed to a challenge. The trick is not to waste the opportunity. In lean times, cold, hard analytical thinking was employed; why should there be any difference in an upturn?

Cormac Kelleher is a partner in Mazars.

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