We have discussed the importance of liquid assets, or cash reserves to cover operating expenses, in a cash flow crunch. However, what can you do when your business has excess cash reserves?
Cash reserves should, at the very least, cover that occasional slow month, which can be particularly relevant for those companies selling seasonal goods or services. Then there is the option of a contingency fund. This amount can ideally be used for those unexpected expenses, or to tide you over for a period of time, dependent upon your business needs. Preparing a cash flow forecast can help determine the amount your business may need to help your company balance finances.
But what if there is more cash left over? Have you considered growing your business? What could you do with the excess cash?
- Hire additional sales staff
- Share the wealth with your employees in the form of bonuses to encourage loyalty
- Invest in new production equipment
- Buy inventory
- Pay down debt
- Invest in a high yield savings account, or stocks and bonds
- Acquire a new company to complement your present business model
Some companies are keeping cash reserves as a result of being affected by the economic downturn. With the economy beginning to thrive again, they are being more conservative with their reserves. In an article entitled ‘Too Much Cash?’ CFO Magazine examines why it is that companies may choose to hold large amounts of liquid assets. There is a fear that should they have to face an economic downturn, they will be unable to borrow money. As the economy keeps improving, companies will have more confidence, and will begin to spend once more.
It requires a tremendous amount of hard work to get to the point where your business has more cash on hand than it needs. If you are not a big risk taker, it may work for you to simply save the cash. Don’t let excess amounts of cash create bad habits, such as allowing expenses get out of control, or even worse, have a negative effect on performance. Large amounts of cash can mean that managers within your company do not feel the need to perform as well as they do when cash is in short supply.
Of course, many businesses find that they are not in this enviable position, and need to find ways to increase cash flow. They may find that their accounts receivable is high, while their cash flow is weak, and may want to consider an alternative financing option such as invoice factoring.