Carnac, France
Taking the stress out of financial planning
What does financial freedom mean for your business?
It’s an exciting time. Your Employee Owned business has successfully paid off the exiting owners, and you are now ‘financially free’.
In order to make those payments to the exiting owners, your business has been profitable and cash generative, and that state of affairs is likely to carry on.
But here’s the rub: unless you do something with it, that cash will be building up in the company accounts, earning very little interest and losing its value over time, thanks to inflation. Through our experience in the field of supporting EO businesses, we know that most businesses simply aren’t making the most of that surplus cash. You might well be surprised by what’s possible.
Does my business need to reinvest profits? Why bother?
The answer to this question lies partly in the various responsibilities and duties that all company directors and trustees are bound by. A company has a duty to its shareholders; namely to:
1. Ensure the business can continue running in the future, and provide the necessary capital and assets to do so.
2. Reinvest profits to provide investment growth for its shareholders OR distribute those profits to its shareholders (in the case of EO companies, this is the Trust).
The Trustees have a duty to manage the Trust’s assets (its shares in the business) for the beneficiaries (the employees), both current and future.
However, this is only one part of the picture. Through reinvestment, you’re not just fulfilling your responsibilities. You’re potentially unlocking a wealth of benefits for staff and business alike…
How might your surplus cash be used?
Investing in your business
– Ensure there is enough money in the business for it to continue operating
– Use surplus cash to grow the business over the years, by reinvesting profits. For example: having repaid the owners, we often see businesses relocating or renovating their premises to help scale-up and/or get a fresh start
Investing in your people
– If there is still surplus cash after step 1, firms will often then look at improving the soft and hard benefits available to all employees. Hard benefits include things like bigger performance-related bonuses, higher company pension contribution, death in service life cover, income protection insurance and so on. Soft benefits are things like discounted gym membership, wellness programmes, and cycle to work schemes. This helps to retain and attract the best people and shows the level of commitment and loyalty a business has to its people.
Investing in the future of your people and business
– If you have covered bases 1 and 2, and still have cash to spend, you may wonder if you are missing a trick. This is where investing can be transformative – and it’s where we can help turbocharge your business.
What investment options are available to EO businesses?
There are a variety of opportunities that can potentially be leveraged, depending on the nature of your company and what’s most appropriate for you. Examples include:
Corporate investment plans
These plans aim to grow your retained profits over the years and build up a ‘war chest’ to allow the company to negotiate any tough periods or fulfil its growth plans without taking on debt.
Employee-owned wealth funds
This is a bit like a university trust fund, which uses returns to cover the maintenance of buildings, new resources and improved facilities, with the aim of helping keep fees down. In a company setting, investing your profits in this way could lead to bigger payouts for employee owners in the future – or investment growth could be used to cover the costs of the employee benefits packages.
Case study
Let’s look at a simple example that illustrates how modest investment gains can be transformational.
A company makes £1m surplus profit a year, with 15 employee owners.
If it invested that £1m and achieved a 5.5% return per year net of tax, in the first year, the company has made £55,000 – without lifting a finger.
The company could then distribute this money to cover the £3,600 a year tax-free allowance for every employee, without touching the original £1m of profits.
Next year, the company makes another £1m of profit, which goes into the pot, making £2m in total. If it made 5.5% on that £2m, it would make £110,000 in year 2 – half of which could cover the £3,600 a year tax-free allowance, and the other half invested in a flexible benefit provision.
And so on, year after year…With the profit ‘war chest’ remaining untouched.
Please note the above numbers are indicative. All investments carry a degree of risk and you should consult a financial adviser before proceeding.
Your next step: Talk to us about EO
Start planning for the future you want today: book an exploratory consultation with one of our specialists.
This is a chance for us to find out a little more about your business, and for you to ask any questions you need to. It is complimentary and there is no commitment required on the back of it.
If you are already an EOA member, you should have been provided with a private link to book a complimentary consultation with us. If not, don’t worry. Just book via the link below and state in the booking questions that you are an EOA member.
We look forward to speaking to you.
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