How Much Cash is Too Much? A Look at What the Experts Say
Cash is king. The old proverb doesn’t necessarily mean it’s the one and only currency that matters; in business, it very much does.
Cash is essential for any company to keep on running. From employees to suppliers, almost all businesses have expenses that are regularly paid in cash. And when you have more cash than you need, it means you can reinvest it into your business in other areas that can help expand your company.
However, there is such a thing as having too much cash, and this article explores what the experts say about how much cash is too much and what you should do with your surplus cash if you find yourself in that situation.
What is too much cash?
Cash sitting in your bank account is a good thing, but there comes a point when it’s no longer contributing positively to your business or your bottom line. Exactly how much cash is too much? The short answer is that it varies from business to business, and it’s up to you to decide when you have too much cash.
There are some indicators, however, that you may have too much cash and should start looking at ways you can put it to use. If your revenue is increasing and your cash balance isn’t, that’s a good sign that you have a surplus. Ideally, you want your cash to be growing at a rate equal to or slightly faster than your revenue.
Reinvest in your business
The first, and most obvious, thing to do with a surplus of cash is to reinvest it back into your company. Cash is important for any company, but it becomes crucial if you need to make a big purchase like buying new equipment or real estate. For example, if you want to open a new branch, you need capital for the lease and renovations, utility connections, and furniture.
There are other areas where you can use your excess cash as well, such as by providing incentives for your employees. It’s often difficult to ask your employees to work harder or longer when you’re not offering any additional compensation for it.
The best ways to reinvest your excess cash are by increasing your marketing efforts, buying new equipment, or making strategic improvements to your business. Doing so will help improve your bottom line and make your company more profitable in the long run.
Pay off debt
Another option for what to do with your excess cash is to pay off any debt you may have. Debt like mortgages, car loans, and credit card bills all take away from your ability to reinvest in your company.
For example, let’s say you own a small landscaping company. You purchase new equipment every year, but you are also paying down a mortgage on your office and a car loan for your truck. This means that you are constantly having to find ways to keep your business afloat and pay your bills.
If you were to pay off your car loan and mortgage, you would be able to divert money from those payments into your business. It may seem like you’re just giving your money away, but doing so can give you a huge boost of cash that you can put to good use.
Employee bonuses and/or raises
One way to use your cash is to give your employees bonuses or raises to show them that you appreciate their hard work. This can be a great way to boost morale and show your employees that you are grateful for their contributions. It’s also a great way to show your employees that you have extra cash to put towards their salaries and working conditions.
It’s important to keep in mind, however, that you can only do this in moderation. If you start giving out bonuses and raises left and right, your company may end up with a reputation for being generous but not financially sustainable. Some companies even offer stock options to employees to give them a sense of ownership and show them that their hard work is appreciated.
Company events or celebrations
Another great use for your excess cash is to throw company events or celebrations. It may be a year-end party or a summer barbecue. These events are a great way to bring your employees together, while also giving them an opportunity to relax and celebrate their hard work.
However, you don’t want to go overboard with these events. A few celebrations here and there is a great way to keep your employees happy, but too many will make them feel unappreciated.
You also want to make sure that they aren’t too lavish. Throwing a lavish, over-the-top party is great, but it’s something that only happens once every few years. It’s better to have a few smaller events throughout the year that employees can look forward to than one big event that becomes expected.
Cash is king, and any surplus that you have can be put to good use. However, there comes a point when you have too much cash sitting in the bank, and it no longer serves a purpose. If you have too much cash, one of the best ways to use it is to reinvest it in your company.
This can be done by growing your business, paying off debt, giving bonuses to employees, or throwing company events. These are all great ways to use your excess cash, and they can be a boost to your company’s success.
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