Do you have extra cash hiding somewhere in your business? It turns out more and more small business owners do. Last week’s blog looked at a Citibank survey on sacrifices owners make to keep their small businesses alive. This week, we look at a recent Globe and Mail article discussing what to do with excess cash for small business owners. Many are holding on to cash because of economic fears– but it really isn’t all doom and gloom. It’s always been true and still is: there are smarter ways of dealing with funds then stuffing them in a mattress.
The first step according to this article is to figure out if you have excess cash – and how to calculate it. You need a 12 month cash flow projection that reflects your business cycle. Most small businesses have more cash during certain parts of the year and less in others, depending on their busy season. It’s always wise to review those cash flow calculations with your Chartered Accountant or financial adviser to make sure you’re making reasonable assumptions in line with your small business plan.
If you figured out you do have more cash than you need to operate your business effectively, you need to look at possible strategies. The Globe offers the following five:
- Pay down debt (loans, lines of credit)
- Set up a holding company to protect the cash from creditors
- Invest in your business (new equipment, property)
- Invest in yourself (Registered Retirement Savings Plans, larger salaries and dividends to improve your personal lifestyle)
- Use your money to make money. Invest in locked-in options such as guaranteed investment certificates.
There can be consequences to having your extra cash flow lying around. The article points out people can be misled by having extra cash available. It can lead to inappropriate business decisions and failing to properly monitor the effectiveness and profitability of operations.
At Silver & Goren we have some more ideas for using excess cash:
- Make sure all your corporate income tax and HST installments are paid on time. The CRA’s rate of interest is significantly higher than what you earn on investments or pay on your line of credit.
- Take advantage of all supplier discounts. There’s often a 2% discount offered if the count is paid in 10 days rather than the usual 30 day credit term.
- Make your RRSP contribution at the beginning of the calendar year rather than waiting until February 28 of the year following.
- Consider buying property and stop paying rent. Given that interest rates are at historic lows and additional funding is available through the Canada Small Business Financing Program, it’s very possible to buy real estate and not pay much more than you’re currently paying in rent.
Like most things in running a successful small business, managing your cash effectively requires an appropriate business plan. And that doesn’t involve a mattress, shoe box, or any other place you can store cash.