As a business owner, managing your finances effectively is crucial for sustaining and growing your business. The question of whether to save or invest is a common dilemma, and the answer depends heavily on where you are in your business cycle—a concept we refer to as the “entrepreneurial journey.”
Understanding Your Business Runway
Before diving into the specifics of saving or investing, it’s essential to understand the concept of a “business runway.” In simple terms, your runway is the amount of cash you have on hand to cover your business overheads if your income drops to zero. For example, if your business has direct costs and overheads of £51,000 per month, you need to ensure you have enough cash in the bank to cover these expenses for a comfortable period, say three months.
Having a three-month runway is often considered a safe buffer. However, this can vary depending on your business cycle and how your revenue fluctuates. If your low point stretches to three or four months, having a 12-month runway might mean you are tying up cash that could be better invested elsewhere.
Saving Opportunities in the Current Market
With interest rates rising, there’s a unique opportunity for cash-rich businesses. Previously, savings accounts offered minimal returns—often around 0.01%. Now, it’s possible to earn 4.33% or more with instant-access savings accounts. This is a great way for businesses to earn a decent return on their surplus cash without locking it away for years.
Another interesting strategy is paying your taxes early. While nobody enjoys paying taxes, HMRC offers attractive returns for early payments. Not only does this boost your financial standing with HMRC, but it can also reduce your corporation tax bill for the following year. It’s a win-win situation that savvy business owners should consider.
Investing for Business Growth
Once you’ve secured your runway and maximised your savings opportunities, it’s time to think about growth. Investing in your business might involve expanding your team, acquiring another business, purchasing assets, or launching a significant marketing campaign. You can fund these initiatives either by securing external finance or using your retained earnings.
Bootstrapping, or using your own funds for growth, is a popular and safe method. However, there are scenarios where external finance could provide a higher return on investment (ROI). For instance, if a business acquisition costs £50,000 in finance but is projected to generate £300,000 over three years, resulting in a net profit of £250,000, this could be a smart move.
However, acquisitions and other forms of growth investment come with risks. They require careful planning, due diligence, and effective management to succeed. The integration of new assets or businesses can be complex and emotionally taxing, but with a solid implementation plan, the rewards can be substantial.
Diversifying Your Investments
Beyond investing directly in your business, consider diversifying your investment strategy. This could involve contributing to a pension fund and investing that in the stock market or exploring other investment opportunities that align with your business goals.
Key Takeaways
Know Your Runway: Ensure you have enough cash reserves to cover your operational costs in the event of income disruption.
Maximise Savings: Take advantage of the current interest rate environment and explore early tax payment benefits.
Strategic Growth Investments: Evaluate whether bootstrapping or external finance is best for your growth ambitions.
Diversify Wisely: Beyond business investments, consider broader financial strategies that support long-term stability.
If you’d like to discuss these strategies further or need help calculating your overheads and planning your runway, feel free to reach out to us at MDH Accountancy. We also offer a free download of our book, “75 Ways to Pay Less Tax,” which could provide some immediate savings tips for your business.
