What to Do with My Spare Cash? An SME Perspective

As an SME owner, you understand the importance of managing cash effectively to ensure your business thrives. Having spare cash in your company can provide flexibility and growth opportunities. However, the question of what to do with that cash often leaves many entrepreneurs uncertain. Should you reinvest in your business, hold onto it for emergencies, or explore other financial opportunities? Before you read on, you may wish to first understand the importance of cashflow here. Do plan ahead and be clear that this cash is indeed in excess of what is required from your operations. In this article, we'll explore the options for managing your spare cash and helping you make informed decisions that align with your business goals.

1. Reinvesting in Your Business

One of the most common uses of spare cash is reinvestment into your business. Whether you want to expand operations, enhance your product offering, or improve customer service, reinvesting can accelerate your growth. Below are key areas where your business could benefit from reinvestment:

• Purchasing More Inventory: If your business experiences high demand or plans to expand your product lines, investing in additional inventory can help ensure you're well-stocked and ready to meet customer needs. A common sign of high demand is that your business frequently runs into an "out-of-stock" situation. However, be very careful when purchasing more inventory. Some inventory will be perishable or quickly obsolete (such as fruits, perishable food, and technological products). So, strike a balance between shelf-life/shelf value and inventory turnover.

• Upgrading Equipment & Machinery: If your equipment is outdated or inefficient, investing in new machinery can improve productivity, reduce maintenance costs, and enhance quality. It's essential to weigh the cost against the long-term benefits to ensure it's a profitable investment. This equipment may also inevitably increase your inventory capacity if you are a company in the engineering sector, light manufacturing, or production industry. Therefore, performing a cost-benefit analysis and understanding the market demand is advisable. Use historical data such as accounting records, past year financial statements, and your sales team performance records.

• Enhancing Infrastructure: Improving your office space, upgrading IT systems, or expanding your facilities can all contribute to smoother operations and better service delivery. While these may involve significant initial costs, the right improvements can lead to higher efficiency and cost savings over time. Such investment will usually be aligned with the company's longer strategic goal.

2. Short-Term Investment in Financial Products

If you don't need the cash immediately, placing it in short-term investments can offer growth opportunities. There are various low-risk financial products that SMEs can consider, including:

• High-Interest Savings Accounts: A simple option for preserving cash while earning interest. While the returns may not be substantial, it ensures liquidity while gaining some growth.

• Fixed Deposits: These investments offer better interest rates than traditional savings accounts but have limited liquidity. Depending on your cash flow needs, this might be an ideal option for your spare funds, especially when you can be sure of your cashflow needs. Fixed deposit rates can be substantial, especially during times of high interest, such as the 2023-2024 period.

• Money Market Funds: These funds offer relatively low risk with higher returns than savings accounts. They can be a suitable option for SMEs looking for short-term, low-risk investments with higher returns.

• Foreign exchange: Some companies take calculated risks when purchasing foreign currencies, especially when they can predict their future needs. After buying these foreign currencies, they will be placed in a time deposit. Hopefully, interest coupled with foreign exchange gain is the most desired outcome. (Do note that holding foreign currencies may result in Foreign exchange risk. You may refer to this article for elaborations)

3. Exploring Mergers & Acquisitions (M&A)

For SMEs looking to scale up, investing in mergers and acquisitions (M&A) could be an excellent option for deploying spare cash. M&A provides an opportunity to expand market share, gain new customers, access new technologies, or enter new geographic regions. While this strategy has more risk and complexity, a well-executed M&A deal can bring significant long-term benefits. These M&As can occur up or downstream along the supply chain or between complimenting products.

Before pursuing M&A, conducting thorough due diligence is crucial, as ensuring that the acquisition target aligns with your company's long-term goals and operational capabilities.

4. Paying Down Debt

If your SME has outstanding loans or lines of credit, using spare cash to pay down debt is a strategic move. Reducing debt can decrease your financial liabilities, lower interest costs, and improve your credit rating. This can give your business a stronger financial position and greater flexibility for future investments. Of course, you may be faced with the question of the optimal debt-equity ratio. Do read this article for more information. 

5. Building a Cash Reserve

While reinvesting in the business is essential, maintaining a cash reserve for emergencies or unexpected expenses is equally crucial. A healthy cash reserve can help ensure that your business can weather any storms, whether covering operational costs during slow periods or managing unexpected repairs or legal fees.

While considering this, you may also factor in the strength of raising new funds. This figure will be much larger for businesses that are unlikely to secure fresh funds or have difficulty drawing down any loans.

6. Consult with Experts

The options for managing spare cash are vast, and every decision should be based on your business's specific circumstances. Different companies will have different needs and there is no one-size fits all strategy when it comes to managing your cash. Historical data, short and long-term goals, risk appetite and financial strength are critical factors influencing the most suitable strategy for your SME. Speaking with an accountant or a business consultant can provide valuable insights and potential solutions. These professionals can help you evaluate your financial position, understand tax implications, and identify the best ways to leverage your spare cash for goals you wish to achieve.

Conclusion

Having spare cash is an excellent position for any SME to be in, but making the right decisions on how to use that cash can be challenging. Whether it's reinvesting in your business, investing in financial products, or considering mergers and acquisitions, there are multiple avenues to explore. Each option comes with its own set of benefits and risks, and it's essential to carefully evaluate what will best support your business goals.

By developing a sound cash management strategy and seeking expert advice when needed, you can ensure that your spare cash is put to work in a way that drives long-term success for your business.

This article provides SME owners with practical advice on managing spare cash effectively while considering the most suitable investment options. From inventory purchases to M&A, it covers various options supporting business growth and sustainability. However, we recognise that every SME's position and situation are uniquely different. It would be best to seek professional advice and experts who can assist your business in making the best decision.

At OakTree Accounting and Corporate Solutions, we offer accounting services and can assist you in generating meaningful reports. Our experts will be able to advise your business in having a healthy cashflow and optimise the usage of spare cash.

References

https://www.forbes.com/sites/billconerly/2022/11/29/what-should-a-business-do-with-extra-cash/

https://www.hwca.com/accountants-wirral/opinion/managing-surplus-cash-in-your-company/

https://alltopstartups.com/2023/07/04/6-things-your-company-can-do-with-surplus-cash/

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DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.

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