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Feeling flush: What to do with excess cash

Small businesses may consider themselves lucky if they find themselves in a position of having excess cash.

But how they manage it can have serious consequences, even if they do nothing.

Before doing anything, however, you need to have an accurate understanding of whether you really do have extra cash to play with.

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Running an above-average bank balance doesn't mean the cash is free to redirect.

Maybe you have a big payment owing that you'll soon have to make good on, or maybe you've been paid in advance for a job whose expenses are still to be covered. Maybe you are at the tail end of a busy season and will be facing leaner months ahead that will use up this float.

If you really do have cash that won't be needed by your business, the fun can begin.

What to do with it? Here are some options to get that money to work for you and your shareholders.

Pay yourself

Take the money out. Enjoy it. You've earned it.

You can increase your salary, pay yourself a one-time bonus or pay it out as a dividend to yourself and/or other shareholders.

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But check with your accountant. All of these moves have serious tax consequences for both you and your business.

If you add to your salary or take a bonus, your business can write it off but you will pay personal taxes on the money.

If you pay a dividend, you will be personally taxed at a lower rate, but your business won't be able to write it off.

This can be tricky, though, as the combined corporate tax and dividend tax is meant to roughly equal your personal tax level. So that may be a zero sum game.

There are also RRSP implications, so you really do need professional advice.

Buy back stock

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This sounds like a strategy for big public companies but it can also apply to a small business.

Maybe you have partners or minority shareholders who have been itching to get out or cut back but were too shy to ask? Their holdings are fairly illiquid, so they might jump at the chance to sell some or all of their holdings back to you.

You'll have to make sure to put the right value on your company so that everyone gets a fair deal. Professionals can also help with that.


This might be an opportunity to invest in new equipment, facilities or training that will create a short-term tax writeoff and improve your business's performance in the long term.

Or maybe you have a competitor, customer or vendor that would make a good acquisition?

This is a big move, though, so tread lightly, and always get outside advice.

Pay down debt

Interest on debt may be tax-deductible but that doesn't make it free. Pay it off and watch the interest expense move straight to the bottom line.

Leave it in and make it work

Some owners choose to leave the cash in the business by investing it in short -or long-term investments like you would in a TFSA or RRSP. How you do this is up to you and depends on your risk tolerance.

Why pay it out to yourself, pay the tax on it and then turn around and reinvest it in an RRSP for the tax break? The business may be able to write it off but RRSPs have their limitations and restrictions.

Investing inside your own business has much more flexibility. Keeping it in the business means it is an asset that can be accessed by creditors or in a legal dispute.

A family trust is a great way to balance all of these priorities and opportunities (a topic for a future column, no doubt).

Take prompt-pay discounts from vendors

If you have extra cash, then you have the resources to take prompt-pay discounts from vendors. Hey, you've got good cash flow, so you're already doing this. Right?

Be mindful of exit implications

Whatever you do, be mindful of the implications to your projected exit from the business.

If you plan to wind it down some day, as opposed to selling it, you can withdraw from the business's investments at your own pace, paying taxes only when you sell those investments at a gain and take them out.

If, however, you plan to sell your business, too much cash may put you offside for a capital gains exemption, which is almost never worth it. In this case, 90 per cent of the total assets in your business must be required for operations.

Excess cash is the ultimate sign of your business's success, so make sure it is working for you.

Special to The Globe and Mail

Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.

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