Growing companies have a significant challenge on their hands today. What to do with spare cash?
While many will seek out acquisition opportunities or indeed may invest in their business for further organic growth, we are often approached by companies that simply want to build up their financial firepower for the future and want this money working hard for them.
So where do we start?
We’re aware of all of the potential economic risks out there and the worries about the possible impact of Brexit, market fluctuations and geopolitical risks.
But we can also take all emotions such as fear or greed out of the decision-making process and look at your issue objectively.
And where we always start is with a few simple principles that we always uphold, to help you get the result you are looking for.
1 – KNOW YOUR TIMEFRAMES
This is an important starting point for us. We will help you tease out how long you are likely to hold these reserves for.
Your money might be earning nothing in the bank, but if you are going to look to access it within a very short timeframe, this is probably the best place for it.
However if you are looking for a strategy to invest your company reserves for a medium to long term period, there are more than likely better alternatives out there for your company.
Of course you might have both requirements – some short term liquidity requirements, while also happy to take a longer term view with some of your reserves.
Once we know your timeframes, we can build the plan.
2 – DIVERSIFICATION IS KEY
There is always the temptation for investors to simply follow the latest and supposedly safest investment approach.
This might be investing only in a narrow asset category – remember all those companies in the early to mid-noughties who had a lot wealth tied up in Irish bank shares?
Putting all of your money into one area is an extremely risky strategy; if it goes wrong, your company could lose the lot.
Always spread your risk and build your wealth through funds or pools of assets.
This diversification gives you some protection against one of the companies your funds are invested in, or even one of the asset classes going south.
3 – Know the value of Life Assurance Investments
Life Assurance products offer excellent opportunities to companies to increase the value of their reserves.
They offer excellent diversification options as well as some significant tax benefits.
As these funds operate under the Gross Roll up regime, any earnings under these products are subject to Exit Tax as opposed to Corporation Tax and/or Capital Gains Tax.
This can benefit companies both in terms of the amount and timing of tax liabilities.
However this is an area where advice is strongly recommended, so please talk to us!
4 – Volatility is a feature of long-term investing
We come back to our timeframes here.
Fund volatility is very unwelcome when you have short-term needs for your company’s investments as you may require the funds after a dip in the markets, without having the luxury of time to recover.
If your company has short-term needs, avoid volatility.
However volatility is simply a feature of long-term investing. Markets will go up and down, the critical tactic is to stay invested and not react to short-term factors.
Time and again it has been proven that you are better off riding out the peaks and troughs, rather than trying to call them yourself.
5 – Get compound interest working for you
Compound interest has a huge impact on investment portfolios.
To help see the effect of compound interest, it’s worth remembering the ” Rule of 72″.
This is a simple way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.
For example, the rule of 72 states that €100,000 invested at a 6%p.a. target return would take 12 years ((72/6) = 12) to turn into €200,000.
Knowing this rule will help manage your expectations in relation to the performance of your portfolio. Time and compound interest are great friends of investors!
6 – Cash costs your company money
Yes cashflow is the lifeblood of your business, it is a safe haven and by staying true to the diversified portfolio principle, it makes sense to have an allocation of your reserves in cash.
But many companies today have too much of their money sitting in the bank, being eroded by inflation and zero interest rates.
If your company has longer-term financial goals, you will most likely need a level of investment growth to achieve them. Leaving your money sitting in cash won’t deliver that growth.
Investing by companies is not straightforward. Where there is money to be invested, the emotions, doubts and behaviours of decision makers often get in the way.
But that’s where we come in. As your financial adviser we will be completely objective, and using these principles we will help your company manage its spare money wisely.
We welcome the opportunity to talk to you about how you can get your company’s money working as hard as possible.
About The Author…
Michael Geoghegan QFA CFP, previously of Canada Life and The Irish Government Foreign Affairs Dept., is the Managing Director of Agathos Financial Planning. At the top of his field for nearly 20 years, he is a renowned expert in taxation and trusted adviser to some of Ireland’s wealthiest individuals and businesses.
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