Generally people only think about cashflow when there is a shortage of cash in the bank to pay the bills. But what happens if you find your business with surplus cash in the bank? For some businesses at present that is a very real possibility, either because the disruption from Covid has played to their advantage, or because they have made plans for a worse impact than they actually suffered.

So what can you do when your business seems to be cash rich?

Obviously the first thing to do is to make/ check your cashflow forecast. It is easy to feel cash rich now, but have substantial bills due for payment in the not to distant future (check out my advice on cashflow forecasting specifically for 2020 here.

As I have talked about before, cashflow pressure usually stems from changes in sales, and so recovery after lockdown (or successive lockdowns) will always present challenges.

The good news in the Chancellor’s “Winter Economy Plan” was that repayments on both the Coronavirus CBILS and Bounce Back loans can now by extended (with the lenders permission) to up to 10 years, and any VAT deferred from spring 2020 can be repaid over the fiscal year starting in April 2021 rather than being due in a one off payment. This should help ease some of the cashflow pressure on businesses who are battling with fluctuating sales.

How much cash do you need to have?
My first reaction to seeing a lot of cash in the bank is that cash is like fuel to power your business’ engine – without it amazing opportunities can’t get off the ground. So it’s worth having a reserve in case of emergencies. To carry on the fuel analogy, this is like having a spare petrol can in the back of your car – it may get you out of trouble in the future.

How much reserve you need depends on your attitude and your business – usually one or two months’ worth of fixed (unavoidable) costs is a good place to start.

Using that fuel
If you have surplus cash on hand at the moment it’s likely that it is earning a pitifully small sum of interest while its in the bank. So what can you do with it to make it work harder for you?

Whether your business has been positively or negatively affected by Covid, having cash in the bank allows you an opportunity to invest in making your business stronger. The disruption has challenged a lot of our old ideas about what needs to be done and how it should be done.

Whether that is adding a new sales channel, launching additional services or adopting new technology in your business there are chances to “future proof” yourself and this surplus cash may be the fuel that you need to kick start the effort.

Make sure that you reflect these plans in your cashflow forecast though, because growing sales usually sucks in more cash than you expect, and the worst outcome is to invest in a new opportunity and then find that you can’t fulfill all the promise because of cash shortages.

Restructure
If you don’t see a particular business development opportunity on the cards at present how about using the cash to restructure existing (older) loans? It is likely that the interest rate will be lower, and the terms (length of the loan) will probably be better so this presents a clear saving as well as help with the ongoing cash repayments.

There is an advantage from replacing a personally guaranteed business loan with a government guaranteed loan. Effectively it gets you off the hook if your business go bust in the future. However insolvency practitioners are already wise to this fact and are likely to investigate the timing and reasons for replacing one loan with another. But if you have a healthy bank balance at present this is unlikely to effect you…

Other ideas
Depending on your business plans and your attitude to risk, if you feel you really don’t need the loan money you can repay it at any time within the first 12 months and incur no fees or interest.

Action!
Above all else it is important to do something. It is easy to let the cash sit in the bank with no particular plans and see it slowly whittle away being used for nothing in particular. This is the worst of all cases: if you use a loan to fund it’s own repayments you still have to find cash to pay the interest at the end, so there is a significant cost to the business with no matching benefit.

So you need a plan. Look at your options; maybe there is more than one, maybe there is a whole wish list. Work out what you need to do, make a cashflow forecast, keep it updated and steer your business to success.

If you have a plan but you need some help working out what the financial implications are then message me here to talk it through.