What Should My Business Do With Excess Cash?

What Should My Business Do With Excess Cash?

Are your sales booming? Is your cash flow positive?
If so, you may be sitting on a pile of profits and wondering what to do with the excess cash. This, of course, is a great problem to have. First off, congratulations! Running a profitable business is no easy feat.
But just because the coffers are overflowing does not mean that you should make any rash decisions. Rather, this is an opportunity to drive optimizations and build systems within your business. By being sagacious with your cash reserves, you can bolster your operational fortitude and prepare for potential market shocks down the road.
To that end, if you’re wondering what to do with excess cash, here are some areas where you should consider allocating your profit.

Conduct a Self-Analysis

Before you allocate your extra funds, confirm that you do, in fact, have access to them. Given how quickly cash flow can damage a business, it is paramount to identify the exact dollar amount you have “extra.” And by extra, we point at funds that would not interfere with your business’ holistic well-being if they were omitted from the account.
Once you have confirmed that the books are correct, ask yourself why you have that windfall. By performing a rigorous cash flow analysis, you can identify what income streams are thriving and pinpoint their origin. Armed with that knowledge, you can take further actions to continue to optimize those channels.
For instance, if the excess cash is due to seasonality or random market demand shocks, it may be best to simply sit on those funds for the time being.

Establish Cash Reserves

After you have reviewed where the extra funds are coming from, your next action should be to set aside some of those profits in order to create a cash buffer. By creating a savings pool, you can ensure that you have the funds to cover payroll and bills should the revenues decline or market shocks occur. According to Quick Books:
To estimate how much cash you should set aside, imagine revenues falling by 25% and expenses increasing by 50%. Then, calculate the amount of extra cash you need to get through that type of scenario for a few months.
Nearly one in three (30%) businesses fail because they eventually run out of money. If you do not have an emergency fund in place, your business is vulnerable. Without a safeguard, all it takes is a single unexpected tax bill or business setback to jeopardize everything you have built.
Creating a cash buffer works as a lifeline should the unexpected occur. Many companies are resilient and can weather a maelstrom, but without the cash to pay the overhead, this endeavor becomes infinitely more difficult.

Consider Eliminating Your Debts

Having a stack of debt is bad for businesses and individuals alike. The longer you take to pay it off, the more interest you will inevitably owe. By paying down your debt, you can lower your company’s debt-to-equity ratio.
For some companies, however, holding a certain level of debt is smart business. In fact, as Harvard Business Review notes, there are two reasons why companies often use debt to finance operations:
The government incentivizes companies to use debt by allowing them to deduct interest on the debt from corporate income taxes.
Debt is typically a cheaper form of financing than equity.
That said, the type of debt you accrue is dependent on your business model and overall strategy. However, you want to ensure that you retain agency over money owed.

Go Bargain Hunting

Just like your revenue, your expenses are subject to fluctuation and seasonality. Demand, market shocks, or supply chain interference may cause certain inputs to increase in cost, which can shrink your margins.
If you have excess cash and space, you may want to consider purchasing more inventory, especially if prices are low. Buying in bulk allows you to enjoy cheaper prices and create larger margins.
Along these lines, now may be the perfect time to maximize your capital expenditures. Spending excess cash on buildings, property, or equipment not only sets the stage for future growth, it also allows you to increase your business deductions when tax time comes.

Invest the Money

If your money is simply sitting in a business bank account, it is likely accruing little to no interest. As a result, you may actually be losing money due to inflation.
Because of this, it may be wiser to invest your company’s excess cash. There are several avenues you can consider, including:

  • Money Markets – Money Markets are investments in short-term debt that provide high liquidity and low risks. Returns are typically low in exchange for a reduced risk profile.

  • Bonds – Bonds are often considered one of the safest investments possible, especially over the long term. However, you can enjoy higher return rates in exchange for increased risk.

  • Stock market – Investing in a diversified stock portfolio is likely the safest way to derive 5%–10% annual return on investment. Naturally, there are risks involved, but the stock market is one of the most consistent long-term bets available.


Pay Out Employees

Is your business swimming in excess cash? Then that likely means that your staff is blowing their performance metrics out of the water. If so, you may consider rewarding them for a job well done—whether by paying out cash bonuses or 401(k) contributions.
By tying bonuses to company performance, you further incentivize employees to keep working hard. And you let them know that they are appreciated.
Even if it is just a small bonus, the simple act of acknowledging their hard work can do wonders for morale. When employees feel like their work is valued and rewarded, they are less likely to seek a job elsewhere. This lets you retain talent and reduce employee turnover.

Lean on the Financial Experts at CFO Hub

Are you unsure where to direct your excess cash?
If so, you may need financial experts to review your books and advise you on the best course of action. And this is where CFO Hub can assist. Whether you need financial planning and analysis or back-office support, we can pair you with a financial team that is built for your business’ unique requirements.
Curious to see how that could benefit your venture? Contact us today to discover more.

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