You Have a Cash Surplus... Now What?
May 11, 2022
Since you launched your startup, you've had one overarching goal: to stop burning cash. In fact, you've probably worked so hard to improve your cash flow, you haven't thought much about what you'd do with a cash surplus. Well, congratulations, it's time to have that discussion.
As a small business owner, a cash surplus counts as one of those "good problems." Even so, it still poses challenges. To continue to push your startup forward, you need to judiciously apply your cash resources.
What are your options? What's the best way to deal with your cash surplus? In this article, we'll address some of your alternatives and give you the background you'll need to make a good decision for your small business.
What is a cash surplus?
Taking a broad definition, the term "cash surplus" has an obvious meaning. You have a pile of cash available to spend.
However, it's important to think about how you ended up with this excess cash. Did it come about because of a one-time windfall? Did you raise the money through selling equity or taking on debt? Or did you build it up by having an operation that you can reliably expect to continue to generate cash on an ongoing basis?
Answering these questions will help you determine the best way to apply your excess resources.
Having cash vs. generating cash
In technical terms, when you bring in more cash than you send out, you've reached a condition known as "cash flow positive." This is slightly different from running a profit, since non-cash items (like depreciation and amortization) can impact your bottom-line figure.
But from a business standpoint, consistently generating cash represents a crucial milestone. It stops the ticking clock that accompanies a cash burn and gives you more resources (and peace of mind) as you consider options to support your growth efforts.
Consistently generating cash represents a crucial milestone. It stops the ticking clock that accompanies a cash burn and gives you more resources (and peace of mind) as you consider options to support your growth efforts.
Achieving a positive cash flow has much larger implications than just having a large amount of cash on hand. You can acquire cash through various means, like taking on investors or borrowing money.
However, if you spend more on your operations than you generate in revenue, you will still burn cash. No matter how much you have in the bank, when you're cash-flow negative, those resources are constantly dwindling. Meanwhile, having a positive cash flow implies a different set of options compared to just having access to a sizable pool of cash.
If you have cash but remain cash-flow negative, your main goal should still center around becoming cash-flow positive. However, once you have reached a point when you can reasonably predict ongoing cash generation, your range of potential decisions becomes both more complicated and more appealing.
What to do when you get a cash surplus
Experts take different views on how long a startup should operate before becoming cash-flow positive. Some take a view that two to three years is a fair assumption. Others feel a longer timeline is needed, with a three- to four-year window (or even more in some cases) providing the best estimate.
How long it takes to reach cash-flow positive will depend on the industry and the particulars of your startup. But, whatever the specifics, the event likely comes after years of struggle. Once you start generating cash, it's time to reassess your growth plans and determine the best way to utilize your new surplus.
Here are a few things to consider:
Enjoy the moment
Operating a startup represents a stressful process. Typically, from the moment you launch, you are burning cash. Your endeavor becomes a race between your dwindling cash resources and how long it takes you to reach cash-flow positive.
As such, don't gloss over this moment. If you've hit the point when you're now generating cash, you should celebrate. As a founder and business owner, you still have plenty of stress ahead of you. But your challenges have a less-dire character when you are accumulating cash in your bank account.
Invest in your business
The added resources that come with a cash surplus can help you accentuate your growth. You can reinvest in the most promising parts of your business. With the money, you can:
- Hire more people
- Buy new equipment
- Create a fresh marketing campaign
- Launch new products
Don't rush into any new spending, however. Research your options carefully. You don't want to squander your added cash. Or, worse yet, add expenses to the point where you start burning cash again.
Instead, use data to choose your investments carefully. From there, create models for your potential options and pick the ones that will bring you the best return on your investment.
Use data to choose your investments carefully. From there, create models for your potential options and pick the ones that will bring you the best return on your investment.
Pay down debt
You can also use your additional cash to reduce your debt load. Retiring high-interest rate borrowing can ultimately boost your cash flow and save you money.
However, you have to weigh this decision against the potential upside you get from another investment. If you can boost revenue and profits by using cash to improve your operations, that might offer higher value. To make the decision, look at the cost of carrying the debt versus the potential ROI from other uses of the cash.
Return cash to shareholders
You can also use your added cash to reward shareholders (including, presumably, yourself). You can do this through dividends. You might opt for a one-time payment to shareholders, giving them a reward for believing in the vision of your startup. Or you can consider enacting regular dividend payments to attract a longer-term commitment.
For high-growth businesses, however, a dividend payment often comes with a substantial opportunity cost. Usually, startups can leverage their long-term potential better by pouring excess funds into the business, accelerating expansion and rewarding shareholders by increasing the value of their equity holdings.
Build a war chest
Of course, you don't actually have to spend your cash. You can let it accumulate for a time, storing up funds for a future date. You wouldn't be alone in this strategy. Apple, for instance, has about $200 billion in cash on hand.
Presumably, you won't end up with an Apple-sized war chest. And accumulating a large cash reserve has its drawbacks. But this strategy will give you a store of resources when you need it.
You'll have an emergency fund that will let you respond to unexpected setbacks. At the same time, you'll be positioned to jump on potential opportunities if they arise.
Getting the most from your cash surplus
Having a cash surplus is a good problem to have. It represents the end result of years of hard work and signals a new stage in your startup's development. However, reaching this milestone comes with problems of its own.
Use the information here to help you decide what you'll do with that extra cash. With the right approach, you can thoughtfully apply the additional funds to fuel further growth. You'll create a stronger, more stable operation, with the prospects of even more surplus cash to come.