Some days you may find you’re more than satisfied with the results of a hard day’s work – your business has earned significant cash surpluses.
A cash surplus happens when your cash inflows exceed the amount you need to run the business within the time period you’ve budgeted for or even beyond. Aside from letting you breathe easier about your business finances, having a surplus allows you to either pay off debts or invest.
Option 1: Driving your debt down
Feeling pressure from your bank or suppliers? With more cash on hand, your first priority might be to minimise money you owe, starting with the most expensive source (e.g. loans or credit cards). This will benefit you in a number of ways:
- Being able to save on interest payments
- Lessening your long-term financial commitments, and
- Allowing the business to focus on future growth.
Take note that once you’ve spent your cash surplus on debt, you’re effectively saying goodbye to the funds. Consider whether this is the most strategic for your business especially if:
- You see your business needing to re-borrow that money in the future, or
- If the extra cash came from selling an asset, and you still need to buy a replacement.
Option 2: Getting returns on your investments
Of course, money always works the hardest when you’re able to generate more cash with it. Business owners may consider investing their extra cash when they want to:
- Earn larger amounts of money after a period of time
- Earn passively by investing in assets outside the business, or
- Re-invest money into the business to increase sales, etc.
However, there are also many risks (on your business’s end) that come with deciding to invest. Some reasons for you not to invest include:
- Having many outstanding debts to pay off
- Not having access to your funds within short, mid, or long-term investments
- Having only questionable or high risk investment options
- Having options that will take too long to grow
It’s always best to find out which option is better for your business before you start dipping into your cash surplus for mundane expenses. Consult your accountant for more options, and whether it may be time to spend your surplus or reserve it for future needs.
To learn more about business and cash flow management, you can contact Omnis Group at 9380-3555 or 1800 99 66 90. Our friendly team of professional business advisers and accountants are more than willing to help.