As long as you have enough cash on-hand to cover at least a couple of months overhead in an emergency, here's what you can do with the rest of it.
Holy smokes. You've got cash! Sure, the past few years have been tough. You worked hard. You had to cut expenses and payroll. You managed your projects with skill. You paid attention to details. And now you look at your bank statement and see the results: more money sitting in your account than you need. But for God's sakes don't tell anyone! Don't you know that U.S. companies are hoarding close to $2 trillion in cash and that this is likely the cause of our slow economy, high unemployment, and global warming? You don't want to be accused of contributing to these problems, do you?
In all seriousness, though, what's the right amount of money to keep in your business? Like anything else, there are different opinions. But a safe number is enough cash on hand to cover at least two months overhead. As an extra safety net, be sure (if you're able) to have a line of credit available from your bank. Yes, you'll have to pay an annual fee but it's pretty nominal. The line can be your added cushion if you miscalculate your cash reserves. And current interest rates on business lines are historically low--around 5 percent.
What do you with the rest? You can't put it under a mattress and you can't just leave it all there. Or can you? Here's a few real-life examples from clients of mine, with their names changed to protect me from getting yelled at.
Patty looks at it. Yes, that's right. She looks at it. She leaves it in her design business. She has a checking account and she transfers extra cash into her business money market account. She doesn't care that it's earning next to nothing (less than 1 percent annual interest). She just likes to know that it's there. It gives her comfort and confidence. And the fact that it's earning something is better than earning nothing. This is conservative. Safe. Boring. Like her husband. But understandable--she's accumulated this wealth over the years and she's not a huge risk taker. For some, this is a completely reasonable option. Patty sleeps soundly at night.
Alan pulls it out. He leaves only the cash he needs in his landscaping business and takes the rest out for himself. Other business owners I know loan the money to themselves or issue dividends. It depends on your organization, so run this decision by your accountant. Why does Alan take the cash out of his business? For starters, he's uncomfortable leaving too much money that would be included as part of his corporate assets if any incident turns into a company liability. (I'm talking about lawn mowers, get it?) Secondly, Alan likes to feel lean and mean. To him, if the cash is out of sight, then it's out of mind. Because it's been removed from the business (and invested in a personal account) he can believe it's no longer there. That keeps him in the mindset of a hungry entrepreneur. Silly? It works for him.
Jeffrey buys inventory. He has a decent-sized warehouse for the automotive parts that his company sells and is always looking for deals. He's not afraid to do a little travelling too, if that's what it takes. And cash puts him in a strong buying position. He can approach his vendors and make aggressive offers for larger amounts of inventory while dangling a wad of dough in front of their noses. He looks for used parts and distressed businesses, and swoops in for the kill. He can negotiate bigger discounts this way. His attitude is that he can achieve a much greater return on his money by relying on his own buying and selling instincts, rather than sticking it in a low paying interest bearing account.
Laura spreads the wealth. Her car service employs more than 20 people. And for her, like most business owners, they are the most important part of her business. She doesn't plan to give anyone equity in her company. But she still wants them to benefit from her company's success. If the cash is there, she gives bonuses twice a year. They're based on what she can afford, the level and experience of the individual, and the value to the company. One of the bonuses is straight cash; the other is a contribution to the employee's 401(K) retirement plan. Her employees love Laura for this. It keeps them from leaving and it ties them closer to her company's performance. Laura has to be careful, though: oftentimes employees come to expect these amounts as part of their annual compensation. So she has to remind them every year that the amount and frequency of her bonuses are strictly dependent on the company's financial success.
Jennifer buys other businesses. She's an accountant and took over her dad's firm a decade ago. Since then, she acquired the practices of three other accountants, and she's always on the hunt for more. The population is getting older, and more and more people are looking to sell out. Jennifer doesn't like to take gambles on direct mails or mass email campaigns to try and drum up new business. She'd rather buy existing clients from an established firm where she can get an immediate foothold. To her, that's the best way to grow her business. The more cash she accumulates, the stronger her buying position can be because she requires less debt. The way she looks at it, she could buy shares in a publicly-held company like Apple or General Electric, but that's like giving her money away for other people to use to grow their businesses. She'd rather use it to grow her own.
So do you have excess cash? It's OK, you can tell me. I won't tell anyone. You don't want this kind of information getting around, particularly in challenging political times. People don't like to admit success nowadays and I completely understand. Hopefully if you've managed to accumulate a few extra bucks in recent years, you'll find a good use for it. The most important thing I've learned: You have a better chance of growing your own money faster by relying on yourself than any financial planner.
GENE MARKS is a columnist, author, and small-business owner. He oversees the Marks Group, a 10-person technology consultancy to small and medium-size businesses. A certified public accountant, Marks has also worked in the entrepreneurial services arm of KPMG. He writes for The New York Times, Forbes, and The Huffington Post. @genemarks