On the face of it, having too much cash doesn't really seem like a problem. Businesses are supposed to make money, and having a bunch of excess cash means you've made a lot of it.
Still, too much cash just sitting on your books can be a problem. Capital is a value resource, and ideally you want it to be doing something productive. If your business has more money than it needs to cover your operating expenses (two months of overhead is a good rule of thumb), here are some ways to put that cash to good use.
Look For Bargains
Most businesses will have some fluctuations in their expenses. An apparel retailer might be subject to the variable prices of cotton or an electronics company on changing costs for various components. These fluctuations can be frustrating, especially if you're in the position of having to buy these inputs at high prices just to keep your inventory up.
With excess cash, you have the option of buying up more than you currently need. Are cotton prices at a historic low? An apparel retailer can stock up, eliminating the need to buy later at a higher price. As long as you have ample storage space, this practice can significantly expand your margins.
Of course, buying in bulk can be risky. Prices are never fully predictable, and you might find yourself stocking up only for the price to continue dropping. Be very picky when looking for deals, and take advantage of the fact that your stability and cash hoard give you the upper hand in the transaction.
Pay Out Bonuses
Excess cash is a sign of a successful business, which means that your employees are probably doing a great job. The best way to hold on to these employees is to make sure they're rewarded for their excellent work. Cash bonuses are great, and contributions to 401(k) plans can also be a good way to build loyalty.
Make sure that your employees understand that the bonuses are tied to the strong performance of the company. Ideally, you should have a concrete formula for how those bonuses are determined, so that employees can get a sense of what to expect. Otherwise, they might expect a big bonus after a banner year to be the standard, only to end up disappointed when the next year is not as strong.
Invest In Growth
You might earn reliable interest on your cash, or even a higher return if you put it in stocks and bonds. Holding onto that cash still carries an opportunity cost, as you're sacrificing the potential cash flows from investing it into your business.
There are many ways you can utilize excess cash to fuel growth. You can acquire other businesses: either a competitor to consolidate your market position, or a company in a related but distinct business to diversify your earnings.
Beyond acquisitions, you have many other options. Buying new equipment can increase your efficiency and decrease expenses. Technology and software upgrades can improve your data analytics and make your whole business run smoother. Expansion into new markets can expand your revenue potential and increase economies of scale.
Give Yourself A Raise
Hey, you've earned it. You built this highly successful business, so why not reap some of the rewards. As an entrepreneur, you should pay yourself what you are worth. If your business has so much excess cash, you might just be worth more than you originally thought.
Talk to your accountant to determine the best way to take the cash out of the company and into your own bank account. Maybe you pay yourself a higher salary, or issue dividends. Some business owners will even loan the money to themselves. Depending on the business structure and your own personal finances, each option will have different advantages in terms of legal and tax implications.
Hold Onto It
It's easy for business owners to feel as though they have to spend cash right away. This can be a dangerous mindset, as it can lead to value-destroying acquisitions or careless spending. If the timing is not right to spend that cash, hold onto it. Don't buy high on a needless acquisition or build up a ton of inventory just for the heck of it.
If you think you might have a use for that cash in a reasonably short time frame, it's probably best just to hold onto it. If you have a longer horizon, you can invest in stocks and bonds to earn a higher expected return. You run the risk of losing money, but you could also build up even more cash for your company.