Growth Risk as Small Businesses Hoard Cash
Almost two-thirds of small businesses are hoarding cash rather than investing in growth because of fears over future financial difficulties, new research from Venture Finance has suggested.
In the poll of 500 business owners, 61 per cent admitted to holding on to cash, rather than ploughing funds back into the business.
Nearly half (47 per cent) also revealed they were saving money not required for day-to-day operations, with those holding on to investable cash keeping an average of £190,000 in the bank.
Managing director of Venture Finance Peter Ewen said business owners were “building up their war chests” while waiting for economic conditions to improve. But he warned that it could become a vicious circle, sending trading back into the doldrums.
“Prudence is obviously important in uncertain times, but small firms could be taking this too far. Businesses have to ensure they aren’t [letting] prime business opportunities to expand pass them by.”
Alan Smith, CEO of financial advisers Capital Asset Management, said it was understandable that small firms were looking to manage their risk in the current financial climate by keeping funds in the bank.
However, business owners with savings “could earn greater rewards with just a small step up the risk spectrum,” he said.
“If you’re looking to invest in equipment for instance, then obviously hold on to some cash for the short-term, but otherwise, there is a broad range of investments available, such as shares, bonds or gilts. These can be put together in a careful way and will earn a much better return than if you are just sitting on cash.”
Small and medium-sized businesses also needed to look at their tax structures to make sure they were maximising efficiency, according to Smith.
“There are perfectly legitimate, HMRC-approved ways to minimise corporation tax, for instance, by using onshore or offshore investment. Not many companies know about these types of tax wrappers, but by holding assets in a separate entity, they can reduce your exposure to tax.”
For further information see our range of free business advice articles relating to the subject of cashflow.