When you finally get ahead on cash, it can seem like unfamiliar and even dangerous territory. And the possibility of a misstep is real.
Spending it too fast and unproductively can strangle cash flow. Stashing it in your mattress amounts to underutilizing a potential valuable resource. Lock it up in an illiquid investment and you could find yourself short yet again before you know it.
But there are ways to use excess cash in ways that will help you stay ahead — and get even further. Here are a few tips and ideas:
Make sure your cash is really excess… and determine how much of it you have. While the exact answer will vary by industry, at a minimum, you should have enough cash on hand to meet short-term expenses, such as wages and rent, for a couple of months. The amount over and above your short- and intermediate-term needs could be excess cash.
Purchase inventory. Paying cash opens the door to discounts. And buying products or supplies that can be expected to increase in price soon can generate still more savings, both enhancing cash flow and overall financial health.
Invest in equipment. Updated technology, improved machinery and new or expanded production lines all add capacity to your business, increasing the top-line sales potential, ideally while also reducing costs. Higher profits and cash flow are two positive potential results from a carefully studied purchase of more efficient equipment.
Test new marketing. Using excess cash to reach out to a new market, try a different channel or simply spruce up a tired ad campaign can increase sales significantly.
Put cash to work in appropriate investments. While bank accounts provide ready access to cash, current low interest rates mean savvy business owners must balance liquidity needs with opportunities to earn higher interest. Real estate lacks liquidity, while alternatives like angel investing, options and hedge funds may involve excess risk. Money market funds, bond funds, stock funds and other investments can, if carefully chosen, give adequate liquidity with much-improved returns.
Spread the wealth. Paying employee bonuses improves retention and motivates key workers. Employers can distribute cash, pad contributions to retirement accounts, reduce what employees have to pay for benefits or any mixture of these.
Plan for your personal future. Retirement isn't just for employees. While taking care of your business's needs, make sure you're funding your own goals for the future. Placing a portion of a cash surplus in a tax-advantaged retirement account can reduce your current tax burden while also helping to assure a comfortable retirement.
Acquire another business. Buying another business can quickly bulk up a company's products, markets, capabilities, scale and other valuable assets, without requiring the investment of the time, trouble and risk it would take to build a bigger business organically.
While planning how to invest your current cash trove, cast an inquiring eye to the future. Now that you've gotten some appreciation for the challenges of investing excess cash, attempt to forecast your cash flow so you'll see the next excess cash situation coming ahead of time. If you know in advance that next month you'll be able to pay cash for inventory or distribute employee bonuses, it can help you make better decisions this month.