What to do with your excess business cash?

As entrepreneurs your focus during the initial stages of launching your business is to keep it up and running. Once you have established your business, you need to have a strategy in mind about how you intend to use up your excess cash. The goal is to develop your business so that it achieves long term success, so you have to avoid withdrawing most of the excess fund for yourself at least during the initial stages of your business.

This article explores some options that business owners should consider when deciding how to use the excess cash.

1. Create a cash reserve

Set some money aside so that your business would be protected when there are unanticipated circumstances such as an increase in expenses or a drop in sales. This way you won’t have to rely on debt financing when you are faced with a cash shortage. Also keep in mind that this reserve doesn’t have to only be in cash, it can be short term investments such as government/ corporate bonds and money market funds.

Look at your monthly cash flows to identify how much money is spend on average for expenses multiply that amount by the number of months that you want the reserves to cover. You can adjust this figure for inflation if you anticipate the costs to rise in the future. This would give you a rough indication on the amount of cash reserves that you should maintain.

2. Re invest

Once you have set aside a portion of your excess funds, you can invest part of the remaining cash back into your business. This could be in the form of a new marketing campaign to grow the customer base, launching a new product or service, upgrading your equipments or investing in training your employees. All these are bound to yield returns in the medium to long term so your company would benefit from that.

3. Repay debt

If you borrowed money to finance your business at its inception, you can consider paying part of it off with the excess cash. This will help bring down the interest costs and reduce your debt burden. Alternatively you could refinance your loans, whereby obtain a new loan at a favorable rate by showing your cash reserves. This loan can be used to settle your previous debt which you may have obtained at a higher rate.

4. Pay out bonuses

You can reward your employees by paying out bonuses as a way of recognising their contribution to the business. This would help you to retain the employees. Have a mechanism in place for deciding how much bonus needs to be paid and keep the employees updated on how the bonuses will be paid out. They should be made aware that it is tied to company performance so that there are no disappointments in the years where the company has not achieved its financial goals.

Written by Zara, ACMA,CGMA, BBA(Accountancy & Finance). Zara is a Finance and Commercial Executive at SandS Australia. She has 4+ years’ experience in Auditing, Finance and Accounting which helps her drive business growth.

Edited by Sam Mansoor. Chartered Management Accountant, CPA, Chartered Global Management Accountant, Dip. Equity Trading. He has over 30 years’ experience helping businesses achieve immediate and long-term success.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *