All the answers to your unique business lifestage questions
What to do with extra money? Here’s how to go about making returns on surplus cash.
What is cash?
Cash is ready money in the bank or in the business. It’s not inventory, it’s not what the business is owed, and it’s not property. Profit growth – the amount of money you expect to make over a period of time – does not necessarily mean more cash on hand. Cash is what you must have on hand to keep your business running.
Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most critical management tasks for any business. The outflow of cash includes payments of salaries, suppliers and creditors. The inflow includes the cash you receive from customers, financiers and investors.
Good cash management is simple. It involves the following:
- Knowing when, where, and how your cash needs will occur
- Knowing the best sources for meeting additional cash needs
- Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors
Investing surplus funds
It’s imperative for small business owners to build a cash cushion for any short-term liquidity needs that may arrive unexpectedly. But what happens when you have taken care of all these possibilities, you are clear on your cash flow needs for around three years into the future, and you find that you have spare cash on hand? It may sound too good to be true, but it can happen, but when it does, you need to find ways to make that cash work for you.
It obviously makes sense to invest any cash you have where it will give you maximum returns. If you are not risk averse, you may choose to invest in stocks and shares. Retail deposits are another option, as are property and commodities. If your appetite for risk is low, government bonds yield fairly high returns and are a safer alternative.
When it comes to appetite for risk, no two business owners are the same. The experts will tell you to take into account the amount of risk you are able to tolerate, both emotionally and psychologically and in terms of individual and business needs. It is therefore vital to understand the different levels of risk inherent in various types of investment.
Diversify where possible
Bear in mind that concentrating too much on a single asset class will increase the risk to your portfolio unnecessarily. The balance of assets in your portfolio will depend on factors such as age, attitude to risk, financial objectives and the length of time over which you intend to invest.
Equities, for example, should be viewed as long-term investments that are held for at least five years. If you are looking at less than three years, you should probably limit yourself to cash-based investments. It makes sense to spread investments so they are not reliant on one asset class. This will help address market volatility.
In addition to asset mix, you also need to consider the tax implications and costs of any investments you make and to ensure that the return is greater.
Building and maintaining an investment portfolio is not easy and only people who are really knowledgeable should attempt it themselves. Financial advisers are there to help you achieve your financial goals and protect you from having to pay unnecessary tax. They should also be able to review your investments as circumstances change. They will be able to advise you about which type of investment best suits your needs.