What Should Your Business Do With Extra Cash?

As a private business owner, you may find yourself in the fortunate position of having excess cash. This can be an exciting opportunity to strategically allocate your profits and optimize your business for long-term success. However, it’s important to approach this situation with careful consideration and planning. In this article, we will explore various strategies to help you make informed decisions about what to do with your extra cash.

1. Conduct a Thorough Self-Analysis

Before making any decisions regarding your excess cash, it’s crucial first to understand the source of these funds. Conduct a rigorous cash flow analysis to identify which income streams are thriving and why they succeed. This analysis will provide valuable insights into the areas of your business that are performing well and can guide you in optimizing those channels further. If the excess cash results from seasonal fluctuations or random market demand shocks, it may be wise to hold onto those funds for now.

2. Establish Cash Reserves

Once you clearly understand your excess cash, it’s prudent to set aside a portion of those profits as a cash buffer. Creating a savings pool will ensure that you have the necessary funds to cover payroll and bills in case of a revenue decline or unexpected market shocks. According to QuickBooks, estimating how much cash you should set aside is recommended by imagining a scenario where revenues fall by 25% and expenses increase by 50%. This exercise will help you determine the amount of extra cash you need to weather such situations for a few months.

Having a cash reserve acts as a lifeline for your business, protecting it from unforeseen circumstances. Without a safeguard, a single unexpected tax bill or business setback could jeopardize everything you have worked hard to build. Having a cash buffer in place enhances your business’s resilience and ensures its continuity even in challenging times.

3. Consider Eliminating Your Debts

If your business has accumulated debts, it might be a good time to prioritize paying them off. Holding a stack of debt can be detrimental to both businesses and individuals, as the longer you take to pay it off, the more interest you will incur. You can improve your company’s financial health and flexibility by reducing its debt-to-equity ratio.

However, it’s important to note that not all debts are equal. Some types of debt can benefit businesses, especially if they come with tax advantages or lower interest rates. Harvard Business Review explains that companies often use debt to finance operations because the government incentivizes them with tax deductions on interest payments, and debt is generally a cheaper form of financing than equity. Consider your business model and overall strategy when deciding whether to eliminate or retain certain debts.

4. Go Bargain Hunting

Just as your revenue can fluctuate, so can your expenses. Market shocks, changes in demand, or supply chain disruptions can cause certain inputs to become more expensive, which can eat into your profit margins. If you have excess cash available, it may be wise to consider purchasing more inventory, especially if prices are currently low. Buying in bulk can help you secure cheaper prices and create larger profit margins.

Additionally, this may be an opportune time to maximize your capital expenditures. Investing excess cash in buildings, properties, or equipment not only sets the stage for future growth but also allows you to increase your business deductions during tax time. By strategically allocating your funds towards necessary assets, you can enhance your business’s operational capabilities and position it for long-term success.

5. Invest the Money Wisely

If your extra cash is simply sitting in a business bank account, it may lose value due to inflation. Instead of letting your money idle, consider investing it to generate potential returns. There are several avenues to explore, each with its own risk and return profile:

  • Money Markets: Money Market investments offer high liquidity and low risk by investing in short-term debts. While the returns are typically low, they provide stability and security for your excess cash.
  • Bonds: Bonds are considered one of the safest long-term investments. They offer a fixed rate of return over a specified period, and the risk varies depending on the issuer. Bonds can be a reliable option if you’re looking for stable returns.
  • Stock Market: Investing in a diversified stock portfolio can provide higher returns over the long term. While the stock market carries inherent risks, it has historically demonstrated consistent growth and can be a lucrative investment option.

It’s essential to conduct thorough research, seek professional advice if needed, and carefully consider your risk tolerance and investment goals before entering any investment venture.

6. Pay Out Employees

If your business is experiencing a surplus of cash, it clearly indicates that your staff is performing exceptionally well. Recognizing their hard work and dedication can go a long way in boosting morale and retaining talent. Consider rewarding your employees for their outstanding performance by providing cash bonuses or contributing to their RRSP plan. By tying bonuses to company performance, you incentivize employees to continue working hard and show them their efforts are valued and appreciated.

When employees feel valued and rewarded, they are less likely to seek opportunities elsewhere, reducing turnover rates and ensuring stability within your workforce. A small bonus or acknowledgment of their hard work can significantly impact employee satisfaction and loyalty.

7. Seek Expert Financial Guidance

If you’re unsure about the best course of action for your excess cash, it’s wise to seek the advice of financial experts who can review your books and provide tailored recommendations. CFO Hub, for example, offers financial planning, analysis, and back-office support to assist businesses in making informed financial decisions. Their team of experts can help you navigate complex financial landscapes and develop strategies that align with your specific business requirements. Consulting with professionals can provide valuable insights and help you make confident decisions regarding your excess cash.

8. Explore Growth Opportunities

Having excess cash can be an excellent opportunity to explore growth prospects for your business. Consider investing in research and development (R&D) initiatives to innovate and stay ahead of the competition. Investing in new technologies, product development, or expanding into new markets can help diversify your revenue streams and position your business for long-term success.

Furthermore, you can use your surplus funds to expand your marketing efforts, improve your branding, or enhance your customer experience. Investing in these areas can attract new customers, increase sales, and strengthen your market presence.

9. Give Back to the Community

Another way to utilize your excess cash is by giving back to the community. Consider supporting charitable organizations or sponsoring community initiatives aligned with your business values. Not only does this create a positive social impact, but it also enhances your brand reputation and fosters goodwill among your customers and stakeholders. Giving back can be a rewarding way to utilize your excess cash and contribute to the betterment of society.

10. Plan for Future Expansion

Lastly, if you have ambitions for expansion or acquisition in the future, your excess cash can play a crucial role in realizing those goals. By setting aside a portion of your profits, you can build a strong financial foundation that supports future growth initiatives. Whether it’s acquiring new businesses, entering new markets, or launching new product lines, having excess cash provides you with the necessary resources to seize strategic opportunities as they arise.

In conclusion, having excess cash as a private business owner opens up a world of possibilities. By conducting a thorough self-analysis, establishing cash reserves, eliminating debts, going bargain hunting, investing wisely, rewarding employees, seeking expert financial guidance, exploring growth opportunities, giving back to the community, and planning for future expansion, you can strategically allocate your excess cash and optimize your business for long-term success. Remember to consider your unique business needs, consult with professionals when necessary, and make informed decisions that align with your goals and values.

Note: The information provided in this article is for informational purposes only. It is not intended as financial or investment advice. Please consult with a qualified professional for specific guidance regarding your business’s financial decisions.