Money to Burn? Before you go on a spending spree with your surplus cash, get your priorities straight.

Given that most businesses have been in hunker-and-save mode forthe 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 themselvessurprised by a surplus in their company's coffers. It may notbe millions, but it could be a sizable enough wad to burn a hole inthe company's pocket.

The key to smart spending and investing is to be neither overlycautious by leaving it all in a low-interest-bearing money marketaccount, nor overly optimistic by rushing to staff up or buy a newfacility before you know how far you can stretch the moneyyou're left with.

First, sit down with your CFO and accountant to do some seriousprojections. Look at the operating cycle of your business and howmuch 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 firmspecializing in small-business finance. Make sure the extra moneyreally is excess and not a one-time bump from an unusual sale orsavings from a one-time cost cut.

Then sock away enough money in an interest-bearing account orlow-risk investment vehicle to last several months-anywhere fromthree to 12 months, depending on your industry-should the economycontract and customers be unable to pay. "You can control yourexpenditures somewhat," says Rosenbloom, "but I know ofnobody who can accurately predict their collections."

Not too many people can accurately forecast an economicdownturn, either. That's something Jaye Donaldson, presidentand CEO of strategic branding and image communications firmDonaldsonMakoski, learned the hard way in the early 1990s, when she andher 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 weweren't ready for it," says 44-year-old Donaldson."No one told us to anticipate how much further out we neededto look-so we got nailed." Since then, when the business has agood year, like it did in 2003, Donaldson and Makoski make surethey have enough to operate (sans sales) for three to six monthsout, if not longer. They base their forecasts on an analysis of notonly their own industry, but also the industries of theirclients-primarily Fortune 500 companies such as The Gillette Co.and IBM.

When they do have extra savings, the first thing they do is paydown debt. It may not be the most exciting spending spree, butit's a solid strategy, according to Lydia Jones, director ofthe Kennesaw State University Small Business DevelopmentCenter in Georgia. "The interest and debt service can betough on a small business that's trying to grow and operate inother areas," says Jones. "Removing that as an expenseitem will help both cash flow and profits."

Once that's done, look at improvements that won't add afixed future cost, such as employee bonuses and one-timeimprovements to technology or other essential machinery.Donaldson's firm does both. First, it offers a number of whatshe calls "conditional benefits" to employees when thebusiness is doing well. These include quarterly and annualperformance bonuses, profit sharing, upwards of 50 percent 401(k)matching, and weekend trips to reward exceptional work. Improvingtechnology is typically next in line at Donaldson'scompany.

If your business still has a surplus after putting away cash andmaking improvements without fixed costs, then consider making moresignificant changes, such as adding staff, expanding to anotherlocation, or purchasing a building for the business if you'recurrently leasing. According to Jones, buying a building can offersizable tax benefits as well as a potential added revenue stream ifthe building is large enough to support other tenants.

Just remember that working up reliable cash projections with anaccountant or CFO is critical to the success of any larger project.Beyond that, says Jones, it's just going with your gutinstinct. "There is no formula for this," she says."It's called business risk."

C.J. Prince is executive editor of CEO Magazine. Shecan be reached at .