Credit Matters Blog

What Is The Best Use Of Your Business's Surplus Cash?

Kim Radok 04 February 2018


Business investors mostly call for a return of cash when a business is deemed to have too much cash which cannot be profitably used for the takeover of a competitor or expansion. Rarely do you hear these same investors stop and ask, "What is our capability to enhance profitability by other means or can we survive any sort of major problem?"

Of course, there are no issues if (i) creditor payments are up to date, (ii) there is cash to take up unexpected offers of settlement discount, and (iii) the accounts payable and receivable departments are resourced properly to ensure there are "... no hidden negative cashflow surprises."

Unfortunately, my experience suggests many businesses are not in these situations and a better use of any spare cash should first be directed to these objectives.

Accounts Payable

1 Ensure all creditors are paid up to date.

2 If your business is recognised as being a poor or slow payer, occasionally pay a few invoices early.

3 Remove all blockages which prevent creditor invoices from being paid in a timely manner.

4 Review for unexpected offers of settlement discounts.

5 Create the best accounts payable team possible by treating them as professionals with rewards for extra good results such as identifying a potential fraud.

Accounts Receivable and Credit Management

1 Make sure your employees are adequately resourced so they can contact all customers in a timely and professional manner.

2 Treat all employees as professionals and reward them properly for any extra good results such as identifying a potentail bad debt risk before goods and services are supplied.

3 Install a customer service ethos throughout the whole business to try and stop the issues which lead to slow payments and credit claims.

4 Respect the information provided by your accounts receivable employees because it is not anti-sales, rather it is for sales and profit enhancement.

Bank overdrafts and finance facilities

If possible, pay off all bank debt and reduce other finance facilities. The facts are finance, (i) is a debt which must be paid, (ii) has never been as cheap and so costs can only increase, and (iii) not all banks or financiers will be supportive if problems arise.

The use of what is deemed to be excess cash for aforementioned purposes helps to:

(i) ensure the business can pay its accounts in a timely manner so that in bad times, suppliers are more willing to be lenient if cashflow becomes a problem;

(ii) take up unexpected offers of settlement discount to increase profitability;

(iii) ensure all debtors pay as quickly as possible or within terms of trade;

(iv) reduce the opportunity of fraudulent activities against the business from both internal and external sources;

(v) avoid the discovery of hidden and unexpected negative cash surprises;

(vi) assist the directors avoid trading insolvently; and

(vii) attract the right type of investors for the long term rather than those only interested in the short term grab of any extra cash.

There is no doubt, investors deserve an extra dividend when there is an excess of cash and it is deemed that it cannot be used profitably elsewhere. The proviso of course, the business is performing well and geared for survival and growth.

Those businesses which are considered to be bad payers, or lack solid business operating processes and the best quality employees, are always a risky proposition. Paying investors of these businesses before ensuring the business is in good shape, is therefore rarely the best long term option for any excess cash.