Before you go on a spending spree with your surplus cash, get your priorities right.
The key to smart spending and investing is to be neither overly cautious by leaving it all in a low-interest-bearing money market account, nor overly optimistic by going all out to staff up or buy a new facility before you know how far you can stretch the money you're left with.
First and foremost, sit down with your CFO and accountant to do some serious projections. Look at the operating cycle of your business and how much cash you're expected to turn under normal circumstances.
Make sure the extra money really is in excess and not a one-time bump from an unusual sale or savings from a one-time cost cut. Invest a sizable proportion of this extra cash in an interest-bearing account or low-risk investment vehicle to last several months-anywhere from three to 12 months, depending on your industry in order to insulate should the economy contract and customers are unable to pay. Mr. Anand Lunia, CFO, Seed Fund says, “You can control your expenditures somewhat, but I know of nobody who can accurately predict their collections.”
Not too many people can accurately forecast an economic downturn, so smart thinkers when have extra savings, the first thing they do is pay down debt. It may not be the most exciting spending spree, but it's a solid strategy for the long-term. Mr. Bajalia, ED & SME Head, IDBI says, “The interest and debt service can be tough on a small business that's trying to grow and operate in other areas. Removing that as an expense item will help both cash flow and profits.”
Once that is done, look at improvements that won't add a fixed future cost, such as employee bonuses and one-time improvements to technology or other essential machinery. If your business still has a surplus money after putting away cash and making improvements without fixed costs, then consider making more significant changes, such as adding staff, expanding to another location, or purchasing a building for the business if you're currently leasing. According to experts, buying a building can offer sizable tax benefits as well as a potential added revenue stream if the building is large enough to support other tenants.
“Just remember that working up reliable cash projections with an accountant or CFO is critical to the success of any larger project. Beyond that it's just going with your gut instinct as there is no formula for all this, says Mr. Lunia.
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