Given that most businesses have been in hunker-and-save mode for the past few years, "find ways to spend excess cash" probably ranked last on the average entrepreneur's to-do list. But with things looking up, business owners may find themselves surprised by a surplus in their company's coffers. It may not be millions, but it could be a sizable enough wad to burn a hole in the company's pocket.
The key to smart spending and investing is to be neither overly cautious by leaving it all in a low-interest-bearing money market account, nor overly optimistic by rushing to staff up or buy a new facility before you know how far you can stretch the money you're left with.
First, sit down with your CFO and accountant to do some serious projections. Look at the operating cycle of your business and how much cash you're expected to turn under normal circumstances, advises Ira Rosenbloom, CPA and managing director of Mintz Rosenfeld & Co., a Fairfield, New Jersey, accounting firm specializing in small-business finance. Make sure the extra money really is excess and not a one-time bump from an unusual sale or savings from a one-time cost cut.
Then sock away enough money in an interest-bearing account or low-risk investment vehicle to last several months-anywhere from three to 12 months, depending on your industry-should the economy contract and customers be unable to pay. "You can control your expenditures somewhat," says Rosenbloom, "but I know of nobody who can accurately predict their collections."
Not too many people can accurately forecast an economic downturn, either. That's something Jaye Donaldson, president and CEO of strategic branding and image communications firm Donaldson Makoski, learned the hard way in the early 1990s, when she and her partner, Chester Makoski, 57, first bought the Avon, Connecticut-based business. "We were doing extremely well; then the bottom started to fall out in the early to mid-90s, and we weren't ready for it," says 44-year-old Donaldson. "No one told us to anticipate how much further out we needed to look-so we got nailed." Since then, when the business has a good year, like it did in 2003, Donaldson and Makoski make sure they have enough to operate (sans sales) for three to six months out, if not longer. They base their forecasts on an analysis of not only their own industry, but also the industries of their clients-primarily Fortune 500 companies such as The Gillette Co. and IBM.
When they do have extra savings, the first thing they do is pay down debt. It may not be the most exciting spending spree, but it's a solid strategy, according to Lydia Jones, director of the Kennesaw State University Small Business Development Center in Georgia. "The interest and debt service can be tough on a small business that's trying to grow and operate in other areas," says Jones. "Removing that as an expense item will help both cash flow and profits."
Once that's done, look at improvements that won't add a fixed future cost, such as employee bonuses and one-time improvements to technology or other essential machinery. Donaldson's firm does both. First, it offers a number of what she calls "conditional benefits" to employees when the business is doing well. These include quarterly and annual performance bonuses, profit sharing, upwards of 50 percent 401(k) matching, and weekend trips to reward exceptional work. Improving technology is typically next in line at Donaldson's company.
If your business still has a surplus after putting away cash and making improvements without fixed costs, then consider making more significant changes, such as adding staff, expanding to another location, or purchasing a building for the business if you're currently leasing. According to Jones, buying a building can offer sizable tax benefits as well as a potential added revenue stream if the building is large enough to support other tenants.
Just remember that working up reliable cash projections with an accountant or CFO is critical to the success of any larger project. Beyond that, says Jones, it's just going with your gut instinct. "There is no formula for this," she says. "It's called business risk."
C.J. Prince is executive editor of CEO Magazine. She can be reached at .