Don’t wait until you’re successful to decide what you’ll do with excess cash you generate in your business. In addition to planning to avoid failure, it’s important to plot out what you’ll do when you hit your goals. Knowing how to allocate a budget surplus can help you maintain and expand upon your success in thoughtful, proactive ways, rather than spending your new-found money reactively.
Before you decide what to do with a budget surplus, determine how it came about. You might have extra cash because of a temporary decrease in expenses or spike in sales that won’t last. Your surplus might have occurred from inaccurate budget projections or temporary discounts that won’t last, or current expenses that will soon rise. On the other hand, your surplus might be a sign of good revenues for the foreseeable future, based on a competitor going out of business, paying off your start-up costs or operational changes you’ve made that will continue to keep your profits growing.
The first step you should take with a budget surplus is to build a cash reserve. This will help you during slow sales periods, uneven periods of cash flow, a temporary emergency or a long-term problem. Depending on the size of your business, set aside a minimum of three months’ worth of operating capital, which will allow you to keep your doors open with little or no revenue. If possible, save cash to keep you operating for at least six months, especially if you have limited credit options.
Instead of leaving your cash reserve in a non-interest bearing checking account, put your money into investments that earn you money. Meet with a financial planner to find investment options that offer low risk and easy access to your money, meaning you won’t need to wait weeks or months to use it or pay hefty penalties for early withdrawal.
The less debt you have, the more the net worth of your business and the less interest you’ll pay each year. Consider reducing debt in conjunction with your cash reserve buildup strategy. If you can use credit to pay many of your operating expenses and those credit lines are secure, pay off part or all of your debt, leaving you enough cash and credit to meet your three- to six-month operating needs. Paying off $10,000 on a credit card with a 20 annual percent interest rate will save you $2,000 annually.
Talk with your tax accountant about taking profits out of your business as a reward for your hard work and success. Look at what this will do to your income tax rate, deductions and quarterly payments if you’re an independent contractor. Compare this to the business taxes you’ll pay if you leave the money in your business as profits. If you want to retain key staff members, share some of your profits, especially if those staff members had a hand in creating them. Look at increasing benefits as an alternative to a cash bonus. Offering a 401(k) or health savings account match, which lower payroll taxes, might be more attractive for everyone.
If you feel your surplus is a sign of continuing profits and you have settled your financial stability and employee recognition issues, reinvest some of your surplus into your business. This will help increase your productivity, reduce your operating expenses and lower your taxes. Look at new machinery, computers and software, adding worker training, opening another location, building inventory levels, expanding your production capacity or increasing your marketing. Lowering your prices can boost your sales, create more gross profits and make it more difficult for your competitors to operate.