Situation: A company has excess cash at the end of the year. Options are to distribute the excess in bonuses following a challenging year, or to invest in the company. Two questions: how should the company structure a bonus distribution, and how would the company best invest the excess cash? What is the best way to utilize excess year-end cash?
Advice from the CEOs:
- Evaluating bonus options.
- One company uses a published step-function bonus program, with the steps tied to company profitability, and performance against individual objectives.
- Include evaluation and scoring on company core values as part of the overall performance evaluation scheme.
- What’s the best way to utilize the current cash surplus?
- Use the current surplus to reduce debt or invest it in the future of the company. Build value. Retained earnings are fine even if the company’s accountant is concerned about tax consequences.
- Consider purchasing life insurance, or other tax-favored deferred-compensation for partners and key employees. Cash bonuses get spent by recipients, whereas tax-advantaged deferred compensation programs build future value for the team.
- Consider using the excess cash to buy the building.
- The company can afford a sizeable down-payment.
- Negotiate a favorable purchase price at a reasonable interest rate.
- Doing this, monthly lease payments become monthly payments toward ownership of the building and additional value for the firm.
- Consider purchasing the building under a separate corporate entity, even if ownership of this second entity is identical to current ownership. This may create tax advantages.
- What do company owners keep in pay versus investing in the future?
- Keep the cash needed to run the company, plus a bit. Focus on securing the long-term value of the company.
- “If you take care of the company, the company will take care of you.”
- If excess cash is invested in the firm, assure to retain long-term access to the value invested. There will be times when the company will need the cash.
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