How Startups Should Invest Their Excess Cash
Startups often do not have much cash left to invest for expansion. The initial days of any startup are often without surplus money which can be spent or used somewhere else.
If you are a startup and have surplus cash available to you, you can have many choices.
Are you, as a startup, confused about where to invest the excess cash you have made? Having a sufficient reserve of money is a great tool in times of uncertainty. The positive thing about money is the fact that it works as a powerful backup plan.
On the flipside, however, cash is often thought to be such an asset that has a chance of underperforming with regards to expectations.
Excess cash in any business means that it is underemployed which is why you have to ensure that the money works for you. You need to make sure it is invested in a manner that it makes the most for the startup and can allow it to achieve growth objectives.
However, before a company makes any decision regarding what it should do with the extra cash, it is imperative that you first determine the amount of surplus funds available.
Understanding excess cash
Excess cash is defined as money that is not required for a medium term or even short term operations once you take into account numerous factors like tax installments. To ensure that you don’t miscalculate excess cash, you should conduct a cash flow projection for 12 months.
Depending on how your startup blooms, sometimes you require a greater amount of money while other times you don’t need too much. Also, remember that a company needs at least a two-year plan to figure out what to do with the extra cash that has been accumulated.
Where can you invest the excess money?
Before you take any action regarding your cash, make sure that you consult your business advisor or your accountant. Professional help can easily allow you to cover legal risks and also make a wise decision before taking any action.
Regardless, here are a few ways in which you can utilize your money.
#1. Set up a holding company
If your cash is not being used, then you should think about saving it from additional taxes. If money is not required to run daily operations and you plan on investing it for long term projects, then you should think about a holding company.
One advantage of this would be that the tax repercussions would be minimized. If there is extra cash around, then business creditors can access the money.
Therefore, if done smartly, the funds can flow to a holding company tax-free so that it is safe from creditors. This will allow to have some legal protection as well as to provide a startup a bigger name in terms of its corporate structure and standing in the market.
#2. Invest in your startup
Find out if the time is right to purchase something that can benefit the business like some property or new equipment. You should mainly think about investing the money back into the business particularly if the product you are purchasing is offered at a reasonable price.
As a result, you can utilize such investments as tax write-offs too. You may also need a regulated broker to make sure everything is invested correctly and without actually incurring new legal risks.
Startups often can grow further through acquisitions therefore if there is sufficient cash left, it is always better to either invest in your own startup or acquire other companies so that growth objectives can be achieved.
#3. Invest in yourself
For startup owners, it is critical to continue to learn and improve. The overall owner productivity can only increase provided new skill sets are learned over the period.
One of the primary uses of extra cash, therefore, can be to invest in learning and development of new skills.
If there is extra cash, then you can treat yourself. Spend the money in a retirement vehicle, a retirement saving plan, increase your salary, or pay it as a dividend to the shareholder.
However, in the end, you might have a greater amount of after-tax money by funding all your personal living with dividends and then leaving the excess cash for the company.
So, if you feel that there is no immediate need for money in the corporation, then you can think about purchasing a car, a house or even funding education.
#4. Make more money
Depending on the need of time, you should consider putting the money in a locked in investment. For example, if you think that you don’t require the extra cash for at least half a year, then you can put the money in GIC – Guaranteed Investment Certificate.
Similarly, for daily use, there are also business savings accounts that have higher interest rates than the ones that regular accounts have.
Though the overall interest rates are on the lower side profitable investments can be found to make sure that the excess cash is utilized to make more money instead of letting it sit idly in the bank account.
#5. Pay debt
If you need to pay off loans you took for your startup and other liabilities, then the excess cash you have earned is perfect for such a task.
Though the chances of having debt initially for a startup are quite small in case you were not able to find sufficient equity financing, debt is a viable alternative. What is critical to note, however, is the fact that debt carries the cost and longer you hold it, the more cost you have to pay.
The excess cash, therefore, may be utilized to pay off the old debts so that costs can be saved and excess cash is used in most productive manner.
There are numerous ways for startups to invest extra cash. All you need to do is be smart about your decision. It is always great to make sure that a startup’s resources are utilized efficiently and with the intention of improving the overall health of the startup.
[Featured image by http://brandgenetics.com/speed-dating-with-start-ups/]
I am professional blogger writing since 2013 for blogs like lifehack.org . I am MBA and have professional finance related experience. I have significant experience in understanding the needs of small businesses and what solutions they need to improve their business.Read Full Bio