When you first started your business, having extra cash on hand may have seemed like a pipe dream. But if you find yourself in that position now, it’s important to make the most of your money so you can turn your short-term success into sustainable, long-term growth.
In this article, we’ll explore how you can use your excess cash to strengthen your business and keep it running smoothly.
What counts as extra cash?
For your business, extra cash is the money you have available after covering operational expenses and financial obligations. Because cash is the most liquid asset, organizations need to have enough on hand to cover daily business operations. While some companies struggle to pay their daily expenses, others may accumulate a budget surplus by earning revenue that covers and exceeds their expenses. A cash surplus is a great sign for businesses, indicating that your financial operations are well-managed and the company is generating more money than it’s spending.
However, just because you have excess cash doesn’t mean that you need to spend it. Your business should strategically spend in places that make sense, while finding ways to save or invest the rest so you have money available for emergencies. For example, you can use extra cash to fund growth projects like office or store renovations, new equipment purchases, and hiring new staff. You can also pay off any debt you have on business loans.
Before you decide how to manage your excess business cash, you should consider analyzing your cash flow and revenue streams. This will help identify the best ways to use your surplus and ensure that your decisions align with your short- and long-term goals.
Can a business have too much extra cash?
While having extra cash on hand is typically a sign of strong business performance, it can also vary by industry. For example, businesses in the manufacturing industry may burn through cash faster than, say, an ecommerce company that outsources its shipping and fulfillment. Ongoing operational costs and seasonal fluctuations—as well as unexpected expenses—can combine to make cash flow different for every business.
So, although a cash reserve is a good thing to have, there’s an opportunity cost to not putting it to use. Manufacturers might upgrade their equipment frequently, so they may not find themselves in a situation where they have more cash than they know what to do with. It’s important to understand your goals and needs, so you have a plan if your cash flow is stronger than anticipated.
7 ways your business can put its extra cash to work
While it can be tempting to spend and reinvest the extra cash immediately, you should consider different factors and scenarios that may impact your business. It’s a good idea to have a safety net that can cover a minimum of three months of all fixed costs. If there is an unexpected business disruption, your company should be able to cover its bills, loans, and recurring payments without making drastic cutbacks.
Once you’ve established that emergency fund, you can use the extra cash to further strengthen the company.
1. Pay off company debts
Consider paying off or lowering company debts to save money on interest payments. While holding a certain amount of debt helps build creditworthiness and improve your business credit score, you can avoid paying unnecessary interest if you make a few extra payments. Just make sure you won’t be charged any prepayment fees on business loans you decide to pay off.
2. Reinvest in your business
Depending on your business model or industry, you can allocate additional funds toward research and development, marketing, or new employee training programs. If your current team can’t keep up with the workload, it might be time to hire additional staff or third-party specialists. For bigger businesses, you can make the most of the money by investing in property. Manufacturers and retail businesses can purchase inventory in bulk to take advantage of discounts.
3. Improve company benefits
As your organization begins to grow and accumulate extra cash, it might be a great opportunity to shop around for better retirement plans, healthcare, and educational resources.
If you’re concerned about your company’s environmental footprint, you can invest in sustainability efforts that make your business more carbon neutral. Examples could include renewable energy, providing home office funds so employees can work virtually, or encouraging commuters to use public transportation by subsidizing their costs.
4. Reward your employees
There wouldn’t be any extra cash if it wasn’t for your hard-working employees. Use the surplus to reward your staff with wage or salary increases, bonuses, or 401(k) contributions. Not only does this help them feel appreciated, but also improves company morale.
5. Reward your shareholders
Some companies can use surplus income to distribute dividends to the shareholders who initially made the business investment to earn an ROI (return on investment).
6. Invest in markets
Not every business checking account earns high-yield APY. In fact, your business checking balances may even lose value over time due to inflation. Consider investing this money strategically to outpace inflation. You can explore investment options like money market accounts, treasury accounts, bonds, or stocks with a comfortable risk level.
7. Donate
Make a donation to charities or nonprofits that align with your company’s values and mission. Many organizations are implementing social responsibility policies, partnering with organizations that work to enhance society and protect the environment.
Having extra cash provides businesses with many benefits, flexibility, and peace of mind. Whether you decide to put some funds aside, focus on growth, pay off debt, or invest in your team, it’s important to find a way to make your extra money work hard for your organization. By conducting an in-depth evaluation of your company’s financial picture, you can align your cash management with your business goals, setting you up to thrive.
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