Putting Your Company’s Surplus Funds to Work

If your company is in the enviable position of having more funds on hand than are needed for current operations, you can make the most of these surplus funds by investing them. When examining possible investment options, there are several main points to consider: safety; after-tax yield; and liquidity. In addition, you should also examine the possibility of personally receiving some surplus funds from your business. Let’s take a further look:

o Safety. Treasury securities—bills, notes, and bonds—and FDIC-insured (Federal Deposit Insurance Corporation) bank deposits are relatively low risk, since they are backed by the U.S. government. Other investment vehicles may offer higher interest rates, although they are likely to be riskier.

o After-Tax Yield. Regardless of whether you invest in taxable, tax-exempt, or tax-favored investments, the critical point is how much you will yield after taxes. Taxable investments produce higher yields than those that are tax exempt or tax favored. But how a particular investment works out for you will depend on your company’s tax bracket. If your company is in a low tax bracket, you may net more from a high-yield taxable investment than from one that’s tax exempt or tax favored.

Short-term taxable investments include money market mutual funds; commercial paper; bankers’ acceptances; and large, negotiable certificates of deposit (CDs). If you won’t need the funds for an extended period, you might also consider long-term taxable investments. These include debt and equity securities; plus any of the numerous varieties of mutual funds.

Tax-exempt investments include Treasury securities, which are exempt from state and local taxes, and municipal securities, which are exempt from federal taxes, and state taxes where issued, subject to certain provisions.

o Liquidity. Virtually all the investments mentioned above may be sold or transferred easily, although not all may be sold without a loss of principal. Whenever you invest in any security whose value is determined by the market, such as stocks and bonds, there is no guarantee you’ll be able to recover the amount you originally invested. There are tax considerations that also must be taken into account when liquidating investments.

What About Removing Surplus Cash?
If your company has substantial amounts of surplus cash, there may be some additional options worthy of consideration. Be sure to explore the possibility of taking some of the funds as additional taxable income (dividend or wages, depending on your situation). You can then personally invest the funds, or use them to help meet specific financial goals and objectives. Surplus funds can also be used to repay any personal loans you’ve made to the business over the years. If you’ve maintained accurate records, loan repayment should incur little or no tax liability. Keep in mind, before you remove any surplus funds from your business, be sure to carefully analyze the tax consequences of this action.

Making the Most It
You work hard to achieve a good return on your business and you probably don’t get to enjoy a break very often. If you feel the need to maintain a significant cash surplus, be sure to adhere to the principles of safety, after-tax yield, and liquidity. That way, your investment decisions will help you get the most out of your surplus funds while keeping them readily available for your working capital needs.


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