What to do with excess cash in a small business

Even if you’ve been very careful about tracking the cash going in and out of your business, you might find that you’ve got some excess cash at the end of the month. As a small business, excess cash presents a great opportunity, so you need to make sure you spend it wisely.

This article will provide you with a few examples of how you can use your excess cash, as well as how to make sure the money you’ve got is definitely in excess of what you need. Here are the topics we’ll be covering:

• What is excess cash?
• Look for cheap resources
• Consider buying property
• Diversify your products and services
• Save it for later

First, you need to figure out if the cash you’ve got is actually excess. It might be that you’ve got a bill somewhere you’ve forgotten to pay, so don’t spend any supposedly surplus money before you’ve investigated it a little. When conducting this investigation, the main thing you need to understand is the difference between cash flow and profit. 

Your cash flow refers to both the money your business makes and the money you spend on the company itself. The money your business makes overall is known as your gross profit, and the money left after you’ve paid any expenses (such as rent and your own wages) is your net profit.

At the start of each month, it’s a good idea to create a rough forecast of your expected earnings and expenditures. If you’ve got a larger net profit than you expected to have, the extra money can be safely referred to as excess cash, and then spent.

It’s essential that you have money set aside to buy the bits and pieces necessary to keep your business going. For instance, if you run a bakery, you should budget for the purchase of ingredients. However, when you have excess cash, you have the opportunity to buy more than you normally would. This means you’ll need to buy fewer resources next month, which would lead to more excess cash.

You need to think carefully about these sorts of purchases. Firstly, think about what resources you already have — your current inventory. This includes the things you need to make your products, as well as the finished products themselves. If you already have a fairly full inventory, it might be smarter to spend the excess cash on other sorts of resources, like equipment such as better ovens. 

Property is a valuable asset for any business. Even an online business or a business run from a private home may need its own property. For example, ecommerce stores might need extra space for spare inventory. If you find yourself with some extra cash, purchasing a property for your business is a good use of it.

Keep in mind that property can be expensive, so one good month’s worth of excess cash might not be enough to actually make the purchase. However, it’s still sensible to divert any excess money that will eventually be spent on a physical property to a specific savings account.

The primary benefit of owning a property outright is that it can eliminate rent from the list of bills you need to pay each month. There might be some startup costs associated with adapting your new property to your business, but in the long run owning a building, room, or office space will usually save you money. 

You might have a great idea for a new product or service your business could offer, but it’s always been too much of a risk to try it out. Excess cash provides an opportunity to finally try that idea, as you’ll now have a financial ‘safety net’ in case things don’t go to plan. 

Diversification (to use the business definition) means that you’re making a new product as well as entering a new market or industry. If you’ve only recently started a business, you don’t necessarily need to enter a new market — although with enough excess cash and a good enough idea, you might find that it’s a worthwhile use of time and money. 

If you’d prefer to start small, spend your excess cash on a small amount of the new product, so you can test it out over the following months or weeks. If it doesn’t sell very well, you’ve only spent surplus money, so there’s no loss to your other profits. If it does perform well, budget for more of the new product next month and offer it on a regular basis now you know the customer demand is there. 

You may have asked yourself if you need a business bank account — excess cash is a good reason to say yes. Setting aside your excess cash in a bank account means you can withdraw from it whenever you find yourself short of money.

It’s smart to have easily accessible spare cash, as a small business’s financial circumstances can quickly change. For example, it might be that you have a month with very few sales, and the following month your suppliers increase their prices unexpectedly. If you’ve saved any excess cash that you made during better months, you’ll still be able to purchase enough supplies to carry on running your business despite any price increases.

Although it’s not fun to think about having hard times, it’s better to plan for the worst than to be caught out with no preparations when issues arise. Having excess cash squirrelled away might end up saving your business if you find yourself struggling.

Even if it’s unexpected, you should still record the appearance of any excess cash and track how you spend it. The easiest way to do this is with financial management software like Countingup.

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.