Why even a business can be a savvy investor
For all the economic doom and gloom of the past year or so, it’s not all been bad news. In December, Bloomberg told us that US corporations generated more in profits than in any other quarter in recorded history. George Wylesol’s accompanying cartoon depicting elevator doors unable to shut due to the piles of banknotes spilling out raises a serious question: What’s a responsible business supposed to do with all that money?
The answer, some might say, is the same as for an individual – invest it wisely and with a close eye on risk.
Why corporate investing makes sense
Like the rest of us, a business has choices on what to do with its money. It can spend it, leave it sitting in the bank or invest it. 10 years ago, when corporation tax was at 28 percent, conventional investments were unattractive and it made more sense to sink any excess profits into pension funds and similar tax efficient vehicles. Now, with corporation tax down to 19 percent, it’s a different story.
It suddenly makes sense for businesses to invest in other ways, too. In doing so, they are diversifying their investment profile, thereby reducing risk and improving the chances of making extra profits. It certainly makes more sense than leaving large sums in the bank generating practically nothing.
What sort of investments?
The same types of investments are open to businesses as are available to individuals. So we are talking about stocks, bonds, CTFs and so on. Businesses can also invest in physical commodities. It comes as little surprise that with the current unrest in the world, many have decided to buy pure gold, a commodity that’s always seen as a safe harbor in turbulent times.
Of course, businesses can still invest money in pension funds, too. It remains a highly tax efficient strategy, although it does mean the money is tied up, so is less attractive from a liquidity perspective.
Managing risk
Naturally, it’s important to take risk into account when corporate investing, and to have checks, balances and oversights in place. Keep in mind that some investments can tie cash up for longer than others, so if you are likely to need it back in the bank at short notice, that should certainly inform your thinking.
Also, it’s advisable to get professional advice, especially on the tax implications of your investment strategies.
