Surplus cash is the excess a company has which is not required for day-to-day operations or for future expenditure.
If a company is profitable, over time it may find that surplus cash reserves have built up.
Assessing how much surplus cash the business has will often be difficult and ultimately subjective.
Many business owners will know their business, being able to instinctively assess the cash requirements of the business. For others, detailed cash flow forecasts will be used so they can consider the company’s future cash requirements.
In considering the cash requirements, the company will need to consider its working capital requirements including its taxation liabilities, the payment of dividends and predicted changes to the company’s cash generation.
How to utilise the surplus cash:
There can be taxation implications if a company holds excess surplus cash or investments and these need to be considered when utilising the funds and deciding if the cash should be retained or extracted.
Surplus cash could be used as follows:
- Reinvesting the cash to grow the business. This could be organically, such as obtaining new assets or employing new staff or by acquiring another business.
- Investing in R&D, either relating to current products or to diversify.
- Extracting the cash, by increasing remuneration to the Directors or the payment of dividends to shareholders.
- Making pension contributions for the Directors, on which the company gets tax relief but on which do not pay taxation (subject to meeting the conditions).
- Gifting to charity, if the Directors have social or charitable objectives.
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The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.