We Have More Cash Than Expected – Now What?

Many companies find themselves with unexpected amounts of cash on hand as a result of PPP funds, stronger financial results and reduced spending over the last 12-18 months. While on the surface, that is an enviable position, many CEOs are struggling with the best decisions related to that cash, especially as there is still so much uncertainty in the global economy. It is highly likely there is no one right answer, but a combination that will strength the overall health of the business and its owners.

Here are a number of options to consider.

1. First and most importantly, understand any large pending uses of cash, the most obvious of which is taxes. Businesses that performed better than expected are likely to have higher tax liability as a result. What is the cash balance after that tax liability is paid? That number becomes the starting point.

2. Maintain reserves. Every business should have a minimum amount of cash on hand at all times as an internal insurance policy. This amount will vary by business based on the volatility of income, the amount of monthly expenses and how capital intensive the business is, but this should be a well thought out baseline.

3. While interest rates are historically low, there are still options to earn yield on cash balances. Talk to your bank about different programs that may increase returns without taking on unnecessary risk. More so in instances where future uses of the cash are expected, finding ways to earn even a minimal return for a period of time is better than a simple savings account.

4. Invest in the business. Are there options to invest in the business that will generate near term and/or long term returns. Perhaps an investment in new equipment, people, marketing initiatives or expansion opportunities. Key to this is an evaluation of the return, but this may be a time to reinvest in areas to propel further growth.

5. Stock up on inventory. Especially given a strained supply chain, purchasing larger quantities and/or carrying larger inventory balances could be critical to generating the revenue desired in the future. You can’t sell what you don’t have, and some suppliers are lowering per unit pricing for larger orders.

6. Pay down debt. Particularly in the case that reserves are sufficient and there are not areas of good ROI investment in the business, accelerating the payment of debt can make a lot of sense. Interest is a cost to the business even when rates are low. And companies with lower leverage are most often better positioned to take advantage of opportunities down the road because they have a greater margin for error.

7. Reward your people. Success is a team effort and this could be a great opportunity to share the benefits of the success, especially given the tight labor market. Profit sharing and bonuses are great, but there may also be meaningful rewards that cash can buy – experiences, thoughtful gifts or extra benefits and perks throughout the year.

Regardless of the amount of cash in a business, having a plan on where it goes is key, and for every business that plan is unique. Don’t just let cash sit there, take action on where it goes to best support the business and its growth.

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