Sitting on a Cash Surplus? Here's What You Can Do.
Having enough cash in reserve is crucial for businesses of all sizes.
Most financial experts say that a small business should keep enough cash on hand to cover three to six months of overhead. But sometimes you may find that you have more than that sitting in your account.
A cash surplus is surely a sign of success – but what can you do to make sure you’re protecting those extra earnings, spending smart, and investing in the right things?
1. Get Rid of Debt
About 49% of small business owners are in major debt. Holding onto debt and its accompanying interest can weigh down a small business and hamper its profitability. If you have excess cash, now is the time to pay down outstanding balances, which can improve your business’s cash flow, profits, and overall financial health.
2. Reinvest in Your Business and Your TeamLook for opportunities that won’t add long-term costs. Machinery and technology are good places to start. One-time software and hardware upgrades can help employee efficiency. Also, consider investing more in your business’s most valuable asset: its team. Reward hardworking employees with well-deserved bonuses or other perks, like 401(k) matching. These small investments can promote a big boost in morale and productivity.
3. Make Savvy Investment DecisionsChoose wisely when it comes to investing your company’s excess cash. Don’t be overly risk-averse, or you’ll likely fail to see much return on your investment, but also avoid being overly optimistic in your investment choices. If you haven’t already, earmark savings that are equivalent to three to six months of operating expenses and keep them in a competitive money market account. This will help the funds earn steady dividends while giving you easy access to cash for emergencies. For funds in excess of your emergency savings needs, consider a low-risk investment opportunity that you can expect to last three to 12 months, such as a CD or certificate.
If you’re still sitting on a sizeable surplus after making these smart moves, you might consider longer-term changes. Expansion through purchasing a building or adding staff is an option. Sit down with your accountant and review cash flow projections to determine your next move. Remember, there is no set formula as to what to do with your cash surplus – and there is always some business risk involved.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
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Nu Direction Lending is a digital-first business lender that was formed and is funded by credit unions. We combine the speed and convenience of online lenders with the personalized touch of the local credit unions who help fuel our local economies.