How to Calculate a Cash Surplus in Finance

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Calculating a cash surplus doesn't take high-powered accounting mojo. It's a routine part of making your cash flow statement. The result shows whether you have a cash surplus for the accounting period or a cash deficit. If it is a surplus, consider options for investing surplus funds.

TL;DR (Too Long; Didn't Read)

To calculate a cash surplus, make out a cash flow statement. The statement tracks all the cash you spent and received for the accounting period. If your inflow is greater than your outflow, you have a surplus.

Cash Flow Statement

The cash flow statement is one of the fundamental financial statements, along with the income statement and balance sheet. The income statement tracks the money you earned or owe, even if the bills haven't been paid. The cash flow statement records the movement of the money into and out of your company.

On the cash flow statement, you report the money you received in the current accounting period, not only from sales but also from investments and financing. You also report cash you spent to pay bills, buy assets or issue dividends. Compare the two categories, and you can see whether you ran a cash surplus or a cash deficit for the period.

The preferred method of making out cash flow statements is to start with the income statement and then eliminate non-cash items, such as depreciation or accounts payable and accounts receivable. There's no shortage of software and spreadsheets that can handle the number crunching for you.

Calculating a Cash Surplus

Suppose you had sales revenue last month of $60,000 and expenses of $40,000. Your accounts receivable are $20,000, and accounts payable are $7,500. Your expenses include $3,000 in depreciation.

  • On your cash flow statement, you enter the $60,000 revenue and subtract the unpaid accounts receivable. The cash flow into your company is $40,000.

  • Enter the $40,000 in expenses and subtract $7,500 in accounts payable. Subtract depreciation, too, because there's no cash involved. That leaves you with $29,500.

  • Subtract cash expenses from cash income. You finish the statement with a cash surplus of $10,500.

Significance of a Cash Deficit

Even if your income statement shows money rolling in, cash flow is important. A business that runs a recurring cash deficit may run short of money to pay employees or bills. Customers who take too long to pay their bills, for example, can leave a business with great income but little cash.

Even an occasional, temporary deficit can pose problems. Giving utility companies or employees an IOU isn't going to fly. If the deficit poses a problem, you need to take at least short-term steps to fix it. Steps to address a short-term deficit include:

  • Cut staffing temporarily
  • Buy less inventory than usual, as long as your stocks are adequate
  • Delay paying bills wherever possible
  • Use sales or special offers to increase sales
  • Nudge customers with outstanding bills to settle
  • Find short-term capital to tide you over

Investing a Cash Surplus

If your cash flows are usually pretty tight, you might prefer not to do anything with a surplus. Just keep it handy as emergency funds for when cash flow goes negative. If it's an exceptionally large surplus or a recurring one, consider options for investing surplus funds.

One option is a sweep account. At the end of every day, the bank transfers everything in your checking account above a specified balance into an interest-bearing account. If the checking account balance dips, the sweep account money transfers back.

It's simple, but it's also a low-interest option. You might be better off paying off loans or lines of credit. If you're confident you won't need the surplus, you could invest it in a certificate of deposit.