When your company goes beyond “breaking even,” and starts to generate excess cash, it’s easy to start fantasizing about what you’ll do with your sudden windfall. Maybe you’ll pay yourself a big bonus or go on that dream vacation you’ve been imagining for so long.
Not so fast, though.
What you do with your money now will make a big impact on the future of your company. With that in mind, this is the perfect time to plan for the future and make some moves to protect your business.
In this post, we’ll discuss the benefits of investing your company’s excess cash (AKA profits), and how to get started with the process. Let’s dive in.
4 Critical Questions to Ask Before Spending Excess Cash
Your balance sheets look great lately, and you’re excited about the profits you’re suddenly pulling. Before you go on a spending spree, though, be sure to ask yourself these four questions:
- Will you need the money? Is there any circumstance you can imagine that would cause your business to need any of that money in the next 6-12 months?
- What are your company’s goals? Are you looking to grow or diversify? What direction do you ultimately want to take your company in?
- Do your personal finances need some attention? Is there a way you could use the money to tick off some goals and put yourself in a better financial position?
- Do you want to make more money? If so, the way you spend this money matters.
Once you’ve asked yourself these questions, it’s time to get down to business. Take some time to create a document that accurately portrays your daily and emergency cash needs for the next 12 months. Once you have a clear picture of your finances, you’ll be in a better position to understand what’s truly excess cash and make a plan for what to do with it.
7 Ways to Start Investing Your Company’s Profits
You’ve set aside some cash for an emergency fund, and now you’re excited to put the rest of the money to work. Here are a few smart ideas we suggest:
1. Grow Your Cash Reserves
Small business owners are particularly vulnerable to unexpected circumstances. Even a relatively small financial event, like the need for new computers or office equipment, can set you back hugely – unless you’re prepared for it.
With that in mind, consider using some of your excess cash to build up your cash reserves. As a general rule, you should have enough money in the bank to cover your monthly expenses even if your revenue decreased significantly.
To figure out how much cash you should keep on hand, imagine your sales decreasing by 25% and expenses increasing by 50%. From there, figure out how much cash you would need to survive for about six months. Work toward banking that amount.
2. Pay Down Debt with Excess Cash
If you took out loans or ran up credit card balances to open your business, now is a good time to consider paying it off. Most debt is very expensive to maintain, meaning it accrues additional expenses in the form of sky-high interest.
The sooner you pay the debt off, the more money you’ll save in added fees. Plus, paying off debt alters your debt-to-equity ratios, making you a more attractive borrower and (possibly) even increasing your credit score. If you have debt, prioritize paying off the loans or cards with the highest interest rates, first.
3. Consider Capital Expenditures
Some business owners want to invest excess cash in capital expenditures. If you realize you’ve made some healthy profits recently consider purchasing land, buildings, or tools and equipment related to your business. At the end of the year, these things will count toward your tax deductions.
4. Improve a Key Product or Develop a New One
Have you been postponing investing in your business due to a lack of cash? Now could be a great time to consider making improvements to your business.
One great way to invest profits is to focus on R&D to improve your current products or develop something new that will help expand your offerings. If you’re like most business owners, you’ve likely got many ideas for products your customers will snap up.
Now is the time to use excess cash to make those ideas a reality and get them out into the market.
5. Purchase a Second Business with Excess Cash
Instead of investing in your current business, you may consider buying another one. If you’re interested in diversifying, it could be wise to buy an existing business in a different market.
Here are a few pointers we recommend:
- Look for a business with a strong customer base and established name recognition.
- Know how much you can afford to spend on the business – this is not the time to overextend yourself financially.
- If you want to boost your market share, consider buying a competitor and rebranding that business.
- Consider buying shares of a small business you like. This smart approach is a great way to invest your profits without taking on the operation of another company. Plus, since small business shares usually qualify for a capital gains deduction, this could be a tax-savvy decision that may help you save money.
6. Invest in Marketing
If your marketing could use a boost, consider investing some of your profits into it. Great small-business marketing helps you secure more clients, increase sales, and promote brand awareness.
To ensure great results (and a healthy ROI), consider hiring an expert, like a marketing manager or ad agency. When it comes time to actually revamp your marketing, here are a few tips to consider:
- Break into channels you haven’t explored yet. Live videos, podcast sponsorships, and personalized content are all great places to start.
- Keep your customers in mind – everything you do should be tailored to appeal to them.
- Revisit your current marketing efforts to identify what’s working, what’s not, and what could use a refresh.
7. Invest in Your Staff
Last, but not least, consider investing in your team. After all, a small business is only as good as the people working within it. Take a good look at your workplace to make sure it’s a welcoming, inclusive place to be, and consider polling your employees to learn more about the improvements they’d like to see.
Pay performance-related bonuses to longtime employees and up your training program for new team members. If you have room in your budget, consider hosting a retreat or other fun event that will keep everyone engaged.
Ready to Invest Excess Cash? We can Help!
It’s a great moment when your business starts to realize a profit. Here at Cunningham & Associates, our team of business growth and tax experts can help you figure out how to wisely invest your profits and make your business more sustainable, both now and in the future. Contact us today to learn more about our services or to schedule your initial consultation.