Investment or dividend: how should you use a tax cut?

13th June, 2017

Every so often (not nearly often enough) business is given a tax cut.

What each business does with this piece of good fortune could shape their future.

Back in April, the Australian government introduced a tax cut which has the potential to give small- to medium-sized companies a bonus next year.

Companies with an annual turnover of less than $50 million will have their company tax rate cut down to 27.5 percent.

This is an opportunity.

More cash is great, of course, but with it comes pressure on CEOs to make the most of the extra money.

Individual businesses have to work out how to best use their tax cuts.

There are many different options – from new locations, to more staff, to investing in technology or simply returning a dividend to shareholders.

Although every option has benefits, the goal should be creating sustainable business growth – not just short-term dividends.

New locations, new opportunities

Expanding your business by opening a new store or office is a great way to grow revenue, but if you expand too quickly your back-office functions may not be able to keep pace.

So often, businesses enter new markets enthusiastically, attracting customers and increasing sales.

With that comes the need for more supply chain capacity, the ability to manage greater volumes of data, and efficiencies in pricing and stock management – just to name a few.

If you’re not also investing in your back end, you may end up just seeing a brief spike in sales, followed by stagnation.

People power

Growing your business through headcount and new people can rejuvenate and revitalise a team, but this often has a limited impact and may not directly grow your business – particularly if you are adding staff to perform manual processes.

It doesn’t make business sense to pay people to do work which could be done by automation.

In the long run, a more sophisticated software system that helps your team work more efficiently will be more cost-effective, giving you more time to focus on strategic projects that can make a tangible impact on your bottom line.

Think of all the time you used to spend putting files in a filing cabinet and then trying to find the relevant files at the right time. Now it’s as simple as clicking a mouse.

In much the same way, automation of processes can take a manual process and make it much easier to accomplish in a shorter time frame.

This frees your employees up to focus on what really matters.

Giving back to shareholders

Ultimately, shareholders are looking for a return on their investment – whether you are listed on the ASX or are part of a family-run business.

However, using the tax cut purely on dividends doesn’t drive long-term business growth.

Paying a one-off dividend can actually cause ongoing problems – with no long-term cash flow visibility, shareholders may expect continued dividends which are not financially viable.

To create sustainable business returns, your business needs reinvestment so that it can continue to evolve to meet changing consumer demands.

In the long run, business growth leads to an improved bottom line, which will increase dividends anyway.

Efficiency through technology

For the same cost as a new staff member, you could implement an ERP system to run your business more effectively.

ERP can automate time-consuming tasks, freeing up resources and people. More than that, it provides meaningful insights about your customers – you can use those insights to identify opportunities for sustainable business growth.

The right ERP system will affect your entire business.

READ: The what, when, and how of ERP software

These impacts may not be as feel-good or exciting as investing in new people, locations, or dividends, but they will make a difference in the long term – making your business more efficient and productive as it grows.

There are many ways to reinvest the extra funds from your tax cut.

Investing in a long-term ERP solution to drive business growth, reduce costs and improve your customer experience should be high on the list for ROI.