4 Profit-Savvy Ways to Use Your Excess Cash

by Ina Masten, Founder of Masten Solutions

Young man in a suit looking up while sitting on a pile of excess cash.

“My business has excess cash … What do I do with it?”

Are your sales booming? Is your cash flow positive?

If so, you may be sitting on a pile of profits and wondering what to do with the excess cash. This, of course, is a great problem to have. First off, congratulations! Running a profitable business is no easy feat.

But just because the coffers are overflowing does not mean that you should make any rash decisions. Rather, this is an opportunity to seek out professional advice. Assembling a team of professionals is essential to having a strategy, seek out Tax Strategists, Financial Planners, Real Estate Professionals and your Accountant.

Conduct a Self-Analysis

Before you allocate your extra funds, confirm that you do, in fact, have access to them. Given how quickly cash flow can damage a business, it is paramount to identify the exact dollar amount you have “extra.”

Once you have confirmed that the books are correct, ask yourself why you have that windfall. By performing a rigorous cash flow analysis, you can identify what income streams are thriving and pinpoint their origin. Armed with that knowledge, you can take further actions to continue to optimize those channels.

Establish Cash Reserves

After you have reviewed where the excess cash funds are coming from, your next action should be to set aside some of those profits in order to create a cash buffer. By creating a savings pool, you can ensure that you have the funds to cover payroll and bills should the revenues decline or market shocks occur.

According to Quick Books:

To estimate how much cash you should set aside, imagine revenues falling by 25% and expenses increasing by 50%. Then, calculate the amount of extra cash you need to get through that type of scenario for a few months.

Nearly one in three (30%) businesses fail because they eventually run out of money. If you do not have an emergency fund in place, your business is vulnerable. Without a safeguard, all it takes is a single unexpected tax bill or business setback to jeopardize everything you have built.

Creating a cash buffer works as a lifeline should the unexpected occur. Many companies are resilient and can weather a maelstrom, but without the cash to pay the overhead, this endeavor becomes infinitely more difficult.

Consider Eliminating Your Debts

Having a stack of debt is bad for businesses and individuals alike. The longer you take to pay it off, the more interest you will inevitably owe. By paying down your debt, you can lower your company’s debt-to-equity ratio.

For some companies, however, holding a certain level of debt is smart business. In fact, as Harvard Business Review notes, there are two reasons why companies often use debt to finance operations:

  1. The government incentivizes companies to use debt by allowing them to deduct interest on the debt from corporate income taxes.
  2. Debt is typically a cheaper form of financing than equity.

That said, the type of debt you accrue is dependent on your business model and overall strategy. However, you want to ensure that you retain agency over money owed.

Invest the Excess Cash

If your money is simply sitting in a business bank account, it is likely accruing little to no interest. As a result, you may actually be losing money due to inflation.

Because of this, it may be wiser to invest your company’s excess cash. There are several avenues you can consider after developing a clear short and long term strategy with your new wealth strategy team of professionals.

Here are a few areas, but not limited to:

  • 401K program
  • Business property to you can run your business in and also rent out
  • Comprehensive and diverse investments

Keeping an eye on your cash will allow you to make the best business decisions and in order to make those decisions wisely you need to assemble your team of professionals who working together with you can advise you on the best strategy for building your business and personal financial wealth

Ina Masten, Founder of Masten Solutions

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