Four strategies to manage excess cash in your business

It is rare to hear of an SME with excess cash considering most SMEs fall out of business due to liquidity problems. However, on the rare occasions when your business happens to have excess cash, the situation can be as depressing as the time when you are cash-strapped. This is due to lack of exposure to different strategies available to utilise your excess cash and still keep your business running.
Four strategies to manage excess cash in your business
Your options could vary depending on your risk appetite and the amount of excess cash you have. For the risk-averse they might decide to save the cash in a fixed deposit account; while for the risk-takers they might decide to venture into risky investment channels such as forex trading. Others may venture into online trading by devising optimum binary options trading strategies that optimise their return while keeping their risk exposure in check. On the other hand, some business owners may decide to redistribute the wealth among their employees and shareholders in a number of varied strategies.

The list of potential ways in which you can utilise your excess cash is long, depending also on your personal preferences, and includes the following:

Savings

For the risk-averse, having the money safe in the bank account gives you peace of mind and the sense of financial security. The fact that you can go back to the bank the following day and find your money intact helps to budget for your operations with a high level of assurance that the funds needed to fund those planned operations will be availed as and when needed. The flipside of saving your money in the bank account is that you earn a very small interest income which in some cases might be lower than the prevailing inflation rate; hence your money will be losing its value when left in the savings bank account during a rising inflation period.

Invest in low-risk investment vehicles

Four strategies to manage excess cash in your business
With the time value of money put into perspective, other business owners decide to invest their excess cash in low-risk investment avenues in order to earn an interest rate that is equal to or slightly higher than the prevailing inflation rate. If you are this type of business owner you will find treasury bills issued by the South African Reserve Bank suitable for you due to their risk-free nature since their repayment is guaranteed by the government. You will also find mutual funds and unit trusts being safe investment vehicles with higher returns than the treasury bills and interest returns earned from fixed deposit savings accounts.

Invest in high-risk investment vehicles

For risk-takers, the motivation to earn higher returns pushes them to venture into more risky investment instruments such as trading on stocks and bonds in the capital markets. Others get into forex trading, while those with a wider experience in financial markets dive into derivatives trading. Online trading is also becoming a common alternative investment strategy for the high-risk-takers who want to get into the market and move out fast while making huge returns in the process. As business owner you need to be very cautious though before venturing into the high-risk investment instruments since you might end up losing huge amounts of cash if you do not design and execute winning strategies. Advice from market brokers is highly recommended before venturing into trading of any of the complex financial instruments in the markets globally.

Distribute the wealth to employees and shareholders

Some business owners prefer to distribute the excess cash to employees and shareholders as a way to motivate them to continue creating more value and growing the business further. To the employees, you can choose to distribute the cash to them as a bonus at the end of the year or distribute it in form of increased salaries and wages. Bonus is the most common strategy used since it is usually a one-off payment that does not have much financial implication to the business cash flows. An increase in salaries and wages would result in bulging your business expenses going forward and reversing the process in gloomy economic times might be a challenge.

Four strategies to manage excess cash in your business
For shareholders, you distribute the excess cash through dividends at the end of the year. This can be paid out in cash or through a bonus issue whereby the existing shareholders are issued with additional shares on a pro rata basis with the share purchase being paid for from the excess cash available to the business. The bonus issue is a preferred method since the cash is retained within the business for other investments and expansion purposes in the long run, while at the same time incentivising the shareholders for injecting capital into the business.

None of the above four strategies is better than the other. As a founder and business owner you will need to determine which one is best suited for you based on your short-term and long-term financial obligations, as well as in consideration of other business and stakeholder priorities.