Competing Needs for Business Cash at End of Year
As the end of the year approaches, you might need to decide among competing uses for your company’s finite cash resources. Below you’ll find some guidelines for this annual asset allocation process.
Survival is first and foremost. Take home enough money to live on, avoid wracking up burdensome debt, and give the business sufficient working capital for routine bills like rent, payroll, loan payments, and inventory.
Next comes income tax. If you and your company made a lot of money, you might owe a lot of tax. In March/April of next year you’ll need to square up with the IRS not only for this year, but you’ll also need to make your first payment against next year’s tax liability.
Saving on income taxes takes cash, too. Staff bonuses are one way to reduce taxable income. In general, don’t spend money on things you wouldn’t otherwise buy, but if you’re going to buy something in the first quarter of next year anyway, accelerate its purchase into this year to take the deduction. A common example: buying and putting into use a new vehicle, machinery, or computer hardware and software then taking the Section 179 deduction this year. On the other hand, you might be better off saving that tax deduction for next year, when it might be more valuable.
Confused? That’s natural, because there is no “right” or “wrong” answer - just a series of legitimate, competing uses for free cash. For instance, maybe one of your suppliers wants to move a lot of product by year-end so you have a chance to bulk up inventory at a deep discount. The trade-off here is that when you sell the product your gross margin will be higher, but the inventory you buy this year isn’t a tax deductible expense — not until you sell it.
Or think ahead three to five years. Maybe you should invest in the future of your business: bigger office or factory, new computers, heavy equipment, maybe a long-term workforce investment. Here you’re taking today’s dollars and betting that they’ll generate future profits. Less glamorous but no less important is accelerated debt service. With rising interest rates, variable rate debt might be slowly squeezing profits.
Perhaps least glamorous of all is to simply keep profits in the business to build your balance sheet, usually measured by such statistics as the current ratio or debt:equity. This might seem arcane, but bankers rely on such statistics when deciding how much to lend and at what interest rate.
Finally, you can transfer assets from the business to your personal domain, most commonly through retirement plans and various owner compensation strategies. Then the tricky issue is figuring out what to do with the cash in your personal account. But as they say, that’s a good problem to have.
