What should I do with excess business cash?
If your business has accumulated more cash than it needs to operate comfortably, the first question isn’t where to invest it. It’s what that money needs to do.
Fight the urge to simply say, “Let’s grow this cash.”
If that’s the right answer, we will absolutely do that. But first, let’s ask a few other questions.
What does the business actually need? When might you need the money? What opportunities could be coming? And should all of this cash still be in the business?
Start with the cash your business actually needs
We start with operating expenses, payroll, taxes, debt obligations, planned purchases, seasonality and an appropriate emergency reserve. Money you may need soon should generally be treated differently from money you probably won’t need for several years.
Then ask a different question
Instead of asking only, “Where should I invest my business cash?” I want to ask, “When might I need this money back?” Cash needed next month has a different job from capital earmarked for an acquisition next year or money the business is unlikely to need for years.
Give the money a job
Some cash may be operating cash. Some may be reserves. Some may be planned capital for hiring, equipment, expansion or acquisitions. Some may be longer term capital. And some may be wealth that no longer needs to remain inside the business.
The goal isn’t to force every dollar into an investment. The goal is to understand why every dollar is where it is.
What might this look like?
Consider a business owner with $1 million of excess cash. The easy answer is, “Let’s invest the $1 million.”
But what if the company expects to spend $400,000 on expansion next year? What if another $200,000 provides the operating cushion the owner needs to feel comfortable?
Suddenly, we’re not deciding how to invest $1 million. We’re deciding what the remaining $400,000 should do. And even then, investing it isn’t automatically the answer. We still need to ask whether that capital has a better opportunity inside the business or outside of it.
The bigger question may not be about cash
Many successful business owners have a sophisticated strategy for allocating capital inside their business and almost no strategy for allocating the wealth their business has created outside of it.
At some point, “What should my business do with this cash?” can become a bigger question: “Should all of this money still be in my business?”
My approach
I don’t start with an investment. I start by figuring out what you have, what the business actually needs, when you might need the money and what you want the remaining capital to accomplish. Then we can look at the options.
Because every dollar should have a reason for being where it is.
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