A cash surplus is the cash that exceeds cash required for daily business operations. How you handle your cash surplus is just as important as the management of money into and out of your cash flow cycle. Two of the most common uses of extra cash are:
Posted on Feb 19, 2014
Paying down your debt
Investing the cash surplus
Paying down debt is generally the first option considered when deciding what to do with a cash surplus. Rightfully so because a short-term investment of your cash surplus is not likely to yield a return equal to or greater than the rate of interest you're paying on any of your debt. One of the key advantages of managing your cash flow is the ability to predict the future cash requirements for your business. That is, it should help you determine when your business may need to rely on external financing as a source of cash. The need for external financing may be the result of expanding your business, purchasing new property or equipment or just getting you through a normal seasonal down period. Whatever the reason, preparing a cash flow budget is the best way of predicting these future needs for cash. With at least some indication of your future cash needs, you can then make some decisions regarding the best way to finance those needs.
When investing a cash surplus, it's only natural to seek the highest rate of return for your investment. Four factors must be considered when making your investment decisions:
Each factor plays an important role in determining the rate of return you receive on your invested cash surplus. These factors can also help you determine how much to invest and when to invest your surplus.
There are many investment opportunities available for your cash surplus. You must consider the advantages and disadvantages as well as the levels of risk, maturity, liquidity and the yields of each of your investment opportunities. Just be mindful of tax implications when deciding to invest.