How to grow your money by investing

If your business’s money is sitting on deposit, it’s unlikely to be working for you. Here’s how to make the most of it.

Most business owners would agree that it takes a combination of time, tremendous effort and significant success to accumulate large cash balances.

Having worked so hard to get the cash, the all-important question is whether it’s working for you?

If your company’s money is sitting on deposit, it’s just not working as hard as it should be.

“Irish firms held €50.6 billion on deposit at the end of April 2018.”

Huge cash piles

According to the Central Bank of Ireland, Irish companies held €50.6 billion on deposit at the end of April 2018 (excluding financial corporations).

Today, interest rates are at record low levels; in fact, some more substantial deposits are on negative interest rates. This situation is unlikely to change for some time.

The end of 2019 is widely believed to be the earliest for interest rates to rise again. While the official rate of inflation is pretty benign, many firms are experiencing elevated cost levels. Smart business owners realise the importance of continuing to grow the real value of their assets, in other words, the level of growth after inflation. This growth involves the company doing some financial planning and to do this; they need to take a holistic view of their business. So how do you about it?

Start with a holistic view

The first step is to take a snapshot of your business’s assets and liabilities; to capture any loan facilities and what levels are drawn and undrawn. You should take a look at typical cash flow patterns and identify what role seasonality plays. What does your debtor book look like – have you substantial receipts coming shortly?

“How much of an emergency fund do you need?”

The next stage is about looking forward. This is where you set out planned capital expenditure and any acquisition plans. This is an excellent exercise for company management.

  • You may have a business plan in place for the years ahead. If so, good, it should form a key input here. If not, you need to discuss and agree on what direction the business is going in?
  • You do not want to reach a stage where half the management team are working towards putting the business in a place where they are ready to sell, while the rest are thinking about acquisitions.
  • You also need to identify what level of an emergency fund the company needs. Insurance can cover many 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.

“If you can make a gain of 4% or 5% per annum from your investments, you will be delivering growth.”

Cover the bases – short; medium-term needs first

Business owners should be able to see what level of funds remain after sufficient resources have been allocated to cover short and medium-term needs.

The funds earmarked for short to medium term needs should be held on deposit. The priorities for this money are typically access and security.

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

“Is it reasonable for your company to spend cash?”

Before you invest

Before proceeding further, you need to check if you’re allowed to invest. Your memorandum and articles of association will tell you this. What you also need to consider is it reasonable for your company to spend. In other words, given the nature and size of your business, is it appropriate for your firm to take this step.

“History has shown that over time shares delivers a better return than bonds, property and in particular cash.”

What is your firm’s attitude to risk?

The next stage is to assess your company’s attitude to risk. This might be very different from your approach to risk. Firms 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.

“Never put all your eggs in one basket.”

Lessons from history

History has shown that over time investing in shares delivers a better return than that derived from bonds, property and in particular cash. However, we know that shares can have their moments.

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 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 suggest the best solution for a company’s financial goals.

“The fastest-growing part of the market is multi-asset funds.”

Be diverse

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 just to 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 under the bonnet including those that can benefit from a falling market.

The fastest-growing part of the market is multi-asset funds. These solutions aim to deliver a massive 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.

“If this money is invested in a fund, the surcharge tax will not apply.”

Tax back

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. If this money is invested in a fund, this surcharge tax will not apply.

“There may be some tax advantages when extracting money to contribute to a pension.”

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

If the business has cash that’s 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.

For advice click here.


This guide is by Bernard Walsh, head of pensions and investments, Bank of Ireland Investment Markets. June 2018.