Is your business sitting on a cash surplus?

A cash surplus occurs when you have an excess of net receipts relative to cash disbursements in a given financial period. Put more simply, it means you’ve made more money than you’ve spent.

Having enough cash in reserve is crucial for businesses of all sizes. Many financial experts say that a small business should keep enough cash on hand to cover three to six months of overhead. But what if you’ve amassed more than that? You might think that an abundance of available funds is a sign of success – but it can actually be a financial risk.

For an easy way to put your money to work, consider a sweep account.

First, consider inflation. Between 1960 and 2021, inflation rates in the U.S. averaged about 3.8%. Using that figure, if you had a cash surplus of $50,000 and let it lie idle in a payment account or lockbox for three years, you’d have lost $5,000 in purchasing power.

Then, consider opportunity cost. What if you had a chance to invest that $50,000 in a security or business venture that yielded a 7% annualized return on investment (ROI) and didn’t? After three years, you’d have forgone over $11,000 in nominal gross earnings.

So, if you have a cash surplus, what can you do to make sure you’re protecting those extra earnings, spending smart, and investing in the right things? Here are four tips to consider.

1 Pay Down Debt

About half of all business owners are in major debt. Holding onto debt and its accompanying interest can weigh down a small business and hamper its profitability. If you have excess cash, now is the time to pay down outstanding balances, which can improve your business’s cash flow, profits, and overall financial health.

2 Empower Your Enterprise and Team

Look for opportunities that won’t add long-term costs. Machinery and technology are good places to start. One-time software and hardware upgrades can help employee efficiency. Also, consider investing more in your business’s most valuable asset: its team. Reward hardworking employees with well-deserved bonuses or other perks, like 401(k) matching. These small investments can promote a big boost in morale and productivity.

3 Take Business Banking to the Next Level

Choose wisely when it comes to investing your company’s excess cash. Don’t be overly risk-averse, or you’ll likely fail to see much return on your investment, but also avoid being overly optimistic in your investment choices.

If you haven’t already, earmark savings that are equivalent to three to six months of operating expenses and keep them in a competitive money market account (MMA). This will help the funds earn steady dividends while giving you easy access to cash for emergencies. For funds in excess of your emergency savings needs, consider a low-risk investment opportunity that you can expect to last three to 12 months, such as a certificate of deposit.

For an easy way to put your money to work, consider a sweep account. This is a handy business banking tool that “sweeps” excess funds from your checking account into an MMA or other interest-bearing account. You set the target balance and the transfers happen automatically. Sweep accounts can also help you manage unexpected expenses and avoid overdraft fees – if your checking account dips below a predetermined minimum, funds can be swept back in.

4 Build Equity With Commercial Real Estate

If your business has been cash-positive over a sustained period and you’ve amassed a sizeable chunk of change, investing in real estate could be a wise strategy. If you’re currently renting your space, buying your own property can enable you to convert a major recurring expense into a long-term asset and even a secondary revenue stream.

While investments are never guaranteed, commercial real estate has generally delivered strong returns. Over a recent 20-year span, it’s yielded an average annualized ROI of 9.5%, which is better than many major equity indices. It’s all the better if you can use your cash surplus to put down a substantial down payment and/or make improvements that could leverage future growth.

Investing for the Long-Term

If you’re still sitting on a surplus after making these smart moves, you might consider longer-term changes. Sit down with your accountant and review cash flow projections to determine your next growth goal. Remember, there is no set formula as to what to do with your cash surplus – and there is always some business risk involved.

Invest Wisely

For personalized guidance on making the most of your hard-earned funds, consult your financial institution.