What happens when your company starts generating more cash than is necessary to cover its operating expenses? This surplus is what we call excess cash flow. It’s a sign of financial strength and, when managed effectively, can significantly boost your business’s success and sustainability. If you aren’t quite there yet, keep reading. We’ll get you there in no time!
Excess cash flow refers to the extra cash a business generates after paying for its core operating expenses, taxes, interest payments, and capital expenditures. It’s money that isn’t required for day-to-day operations and can be strategically deployed for other initiatives. Essentially, it’s the financial breathing room that allows a company to be proactive rather than reactive. 💼💡
According to the U.S. Bureau of Labor Statistics, approximately 20% of new businesses fail during the first two years of being open, 45% fail in the first five years, and 65% fail during the first ten years. Read more here – Top 6 Reasons New Businesses Fail
Businesses that generate excess cash have multiple options on how to use this surplus. In this week’s edition of The Bottom Line, we’ll explore five key ways that excess cash flow can help propel a business forward. Each of these strategies can enhance growth, protect against risks, and deliver long-term value. Not an all-inclusive list by any means, but a few areas you should consider.
1. Fueling Growth Through Investments 📊💡
When a business has excess cash flow, it can invest in areas that drive long-term growth. Whether it’s expanding into new markets, developing innovative products, or upgrading technology, having surplus cash allows you to take bold actions that can lead to increased profitability. Without the pressure of immediate financial constraints, you can focus on high-return opportunities that enhance your competitive advantage.
For example, businesses in the tech industry often allocate excess cash toward research and development (R&D). This helps them stay ahead of the curve by innovating faster and more effectively than competitors. In sectors where agility and innovation are critical, the ability to reinvest excess cash into the business can result in significant growth and long-term success.
Investments in talent, technology, or even infrastructure improvements all become more feasible when you have extra liquidity. These forward-looking investments not only contribute to sustained growth but also create a positive feedback loop where the business becomes more efficient and competitive, generating even more cash flow in the process. 🚀
2. Reducing Debt and Interest Expenses 💳💥
One of the most straightforward uses of excess cash is to reduce debt. Carrying debt can be costly, especially if your business is locked into high-interest payments. By using excess cash to pay down debt, you free up resources that would otherwise be spent on interest, allowing more funds to be allocated to productive investments. This is where cash tracking comes into play heavily. If you aren’t managing this daily, you should be or at minimum 2-3 times a week looking at where things are at.
FREEBIE – first one to write me via email with the subject line “Free Cash Tracking” will get a free hour with me to discuss how you currently review cash daily or I’ll help you build this out to help you.
Debt reduction also strengthens your company’s financial position by lowering its overall liabilities. This can improve your credit rating, giving you access to better financing terms in the future. Reducing debt not only cuts your costs but also reduces the financial risk your business carries, which is particularly important during uncertain economic times. 🌧️
Imagine you have a business loan with a high-interest rate. Paying off a portion—or all—of that loan with excess cash can provide immediate benefits, such as lower monthly interest payments and improved cash flow. With less debt, your company becomes more resilient and better positioned to take advantage of future growth opportunities.
3. Enhancing Shareholder Value 📈💸
If your business is publicly traded or has private shareholders, excess cash flow can be used to enhance shareholder value. One popular method is through dividend payments, which reward shareholders by providing them with regular income from your company’s profits. Paying dividends can improve investor confidence and increase the overall value of your stock.
Alternatively, a company may choose to buy back shares. By reducing the number of shares outstanding, each remaining share becomes more valuable, boosting earnings per share (EPS). This can lead to a rise in the company’s stock price, making it more attractive to investors and improving overall market perception.
For businesses looking to attract and retain investors, showing that you can consistently generate and effectively use excess cash is a strong signal of financial health. Whether through dividends or share buybacks, returning value to shareholders is a key strategy for building long-term trust and improving the company’s financial performance.
4. Building a Safety Net for Tough Times 🌧️🛡️
Every business experiences ups and downs, and having a financial cushion can be the difference between surviving a downturn and going under. Excess cash flow allows you to build a reserve that can be used to navigate through tough times without taking on expensive, short-term debt or making drastic cuts.
During recessions, market downturns, or unexpected crises (like a global pandemic), businesses with cash reserves are in a much stronger position to weather the storm. They can continue operations without the need to lay off staff, cut corners, or compromise on quality, while also being ready to pounce on new opportunities that arise during difficult times.
Beyond immediate survival, companies with cash reserves are better able to seize opportunities during market turbulence. For example, they may be able to acquire struggling competitors or invest in assets at discounted prices, allowing them to emerge from tough times stronger than before. Always look for these opportunities. 🏢💪
5. Acquiring Competitors or Complementary Businesses 🏢🤝
One of the most powerful uses of excess cash flow is the ability to make strategic acquisitions. Whether it’s buying out a competitor or acquiring a complementary business that enhances your product or service offerings, acquisitions can lead to rapid growth and increased market share. There’s a local business here in the Louisville area that I watched do just this recently and it’s amazing to see them thriving and doing what they love. They also read our newsletter, so if you see this just know we are rooting for you to continue to succeed and GROW!
When you have excess cash, you can act quickly on acquisition opportunities without needing to secure external financing. This gives you a competitive advantage, allowing you to strike while the iron is hot. Strategic acquisitions can help expand your customer base, introduce new revenue streams, and strengthen your position in the market.
For example, a business that manufactures consumer goods might acquire a company that produces complementary products, enabling them to offer a wider range of solutions to their customers. Such a move not only boosts revenue but also allows the acquiring company to cross-sell products, resulting in greater market penetration.
Acquisitions also provide a way to diversify your business, reducing reliance on a single market or product line. This makes your company more resilient and better positioned for long-term success.
Whether you’re looking to reinvest in your business, reduce your financial liabilities, or grow through acquisitions, having excess cash flow gives you the flexibility to make strategic decisions that drive sustainable growth. 💡
Businesses that effectively manage their cash flow and leverage excess cash for growth are well-positioned to thrive in today’s competitive market. So, how are you planning to use your excess cash flow to maximize success? What are you doing today to track this more closely, reduce expenses, and make sure you are heading in the right direction daily?
Hopefully this helps get your mind thinking in the right direction to start putting money away for your business to foster growth, acquisitions, and more!
Here to help whenever you need it! brad@guernseyconsulting.com
BG
For those interested, I’d love to have you join our online community the Cash Flow Chronicles. We will be working closely on budgeting, planning, and alignment for the new year starting next month. Don’t miss out on this opportunity to have me in your corner at a super low rate.