Cash is the most liquid type of asset and having access to it sometimes is a good thing as it helps cater for emergency spending. However, it could also be a problem if you are holding too much simply because cash loses its value over time.
When is it okay to keep cash reserves?
It’s fine to keep cash reserves anytime if they cover up for emergencies. Reserves are great but only if they are kept at a minimum, not all of the cash. This allows you to handle minor problems that arise in your business.
This way, you’re not borrowing money and piling up debts. A common rule for businesses is to have enough cash reserves to last between three to six months.
Why is it not advisable for businesses to hold too much cash?
Having too much idle cash means lowering the return on assets because the money is stagnant and not used for anything profitable. Therefore, it won’t generate additional returns.
Another reason it’s not advisable to have surplus cash while running a business is to increase the cost of capital. The cost of capital is the minimum return that a company must generate to justify value for its shareholders.
It isn’t a good sign for investors to invest in your business if you have so much lying around.
What Should You Do With Excess Cash In Your Business?
One thing to do with excess money at hand is to invest it, usually in mutual funds or the stock market. Although investments fluctuate, you’ll get better value from your money in investments in the long run than choosing to just save it in the bank.
Secondly, be prudent with your spending. You might decide to give out bonuses or spend the money on some luxury in the company but be careful not to spend money in a hurry. Return to the drawing board and see, for example, if a department is lacking some resources which you can provide to make their work easier.
Another way of dealing with excess cash is to talk to a financial advisor to guide you on the next steps regarding the surplus cash and where to move them. Financial advisors study the business and the market so they can best predict the best place to move your money.
Put Your Idle Business Cash To Work
A company holding too much money may not always be wrong, but it’s essential to decide how much is needed in reserve and what to do with the rest. Making sure the money gives you a return on profit is better than leaving it in the bank.
With Sprout by Cowrywise, you can invest your surplus business cash and create an additional income stream for your business. We’ve got you covered with a range of low-risk investment options with attractive yields.
Got questions? Reach out to us or leave a comment below.
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