How to ensure you have a surplus not just this year, but every year.
You often read about how to manage your cash flow and what to do in times of cash shortages but what about when you have a surplus?
You’ve had a great year; you scored a big contract, everything went to plan, you stuck to your timeline and the customer has just paid their bill on time. Sounds like a fantasy but it can happen!
When there is excess cash in the bank, it’s easy to think you have two options. Option 1 – pay yourself a big dividend and escape to Bermuda for a fortnight – wooh! Or option 2- leave the cash sitting safely in the bank.
While we definitely don’t recommend option 1, it might surprise you to know that we don’t always recommend option 2 either.
Money sitting in the bank isn’t earning you anything. Most everyday transaction accounts accrue an insurmountably low amount of interest which rarely offsets the value you’re losing thanks to inflation.
The difference between spending and investing
Your surplus can be a tool in growing your business but only if you invest it wisely. It’s important to understand the difference between spending and investing. To invest is to allocate funds towards opportunities that will hopefully create profitable returns. This is very different to blowing cash on a flash new ute because you like the way the V8 engine sounds…
The phrase ‘to invest’ may make you think of buying and selling shares, and playing on the stock exchange. While this may be a viable and profitable option for you, there are many other avenues to consider.
When you’re pondering your options, remember to think broadly. Investing a year’s salary into a new staff member may just allow you to take on those two, three, four extra jobs, which will, in turn, earn you back that salary and then some.
What about upskilling your employees, gaining a particular qualification or upgrading your machinery and tools so that you can take on bigger, higher-quality and more valuable jobs?
Have you considered your marketing? How much value would a new customer contribute to your business and how might effective marketing help you attract that new customer?
Streamline your business practises
Often pesky business administration tasks can eat up your valuable time. Outsourcing to an expert can be a real money saver for small businesses. The ATO highlighted tax professionals as vital for small business success. Don’t worry, we know a great accountant.
Even the latest tech can be considered an investment if it makes the day-to-day management of your business less time-consuming and therefore more cost-effective. Simple options like receipt management apps (you can check out our recommendations here) can streamline tax time, getting you off the books and back to the tools faster.
Pay off your debts
Depending on your financial situation and the intricacies of your loan agreement, using a surplus to boost your loan repayments could save you hundreds or thousands in interest down the line. Be warned, this solution is not always as simple as it seems. Many loan agreements have fine print and stipulations which make this option unsuitable, so best to consult your financial advisor.
More traditional options
If the near-future looks relatively financially comfortable, you could consider locking the funds away into a higher-interest savings account or term deposit. Before committing to a term deposit, consider how likely you are to need the funds before the end of the term, otherwise high withdrawal fees may apply.
Playing in the stock market is more suitable as a long-term investment strategy. Funds tied up in shares are not easily accessible should you urgently need cash and shares may take several years to return a notable profit. The stock market is a confusing world so we always recommend reaching out to a financial professional before diving in.
Playing it safe
Depending on the individual financial status of your business, leaving the funds in the bank may be the most suitable option. While these funds may not be growing in value, they are easily accessible should an unexpected expense arise.
Whether you invest your surplus or leave it for a rainy day, paying yourself a dividend should always be a last option. Taking care of your business first may be the difference between having a surplus next year or not.
Got surplus? Don’t miss the opportunity to invest it wisely. The team at Tradies Accountant offer consultation services to help ensure you have surplus not just this year, but every year. Contact us today!