You can earn extra income from your excess cash

You can earn extra income from your excess cash

It is normal for all business organisations to experience seasonal variation in their volume of business which result in either positive or negative impact on the available cash   resources at any given time.  There is a tendency among some organisations to rush to the bank for an overdraft when the organisation start showing signs of shortage of   cash and of feeling good when an organisation has a good cash surplus in the bank. Some organisations hold the cash balances for rainy days which sometimes take long to come. This article explains  how an organisation can determine the excess cash and possible ways or opportunities of investing the surplus in order to earn return on it.

Cash flow planning

The financial budget for the year should include the monthly cash flow statements showing the expected cash inflow and outflow and   cash balance at the end of each month. The cash inflow comes from operations and other sources and the cash outflow relates to the planned expenditure for each month or period.  The cash outflow includes the payment of expenditure relating to operations and other non operations payment like loans. The establishment of the excess cash or shortage guides the organisation on deciding on what needs to be done with the cash position. The excess cash as disclosed by the cash flow should be invested for the period it is available.

 Why do organisations hold cash in the bank?

The organisation hold cash in the bank for a number reasons including the following;

  1. In some situations it may be cheaper to hold cash because of the challenges of raising cash from the market.
  2. Cash balances are part of working capital as cash must be available to clear obligations as they fall due
  3. A few members of management may fear to lose the  cash in case it is invested outside the organisation
  4. Some members of management often want to build a power base because of having a lot of surplus cash
  5. To prepare for a day when cash will be required.
  6. Some organisation hold cash in preparation for a major payment or investment

What can happen with keeping cash surplus on the bank account?

With cash balances available on the bank account may cause some temptations on the side of those staff that have access to it.    It is possible some managers may come up with projects which are not very viable because excess cash is available in the bank. Holding excess cash in the bank for a long time can also be tempting to some employees with weak morals.  It is also possible for some staff that are not morally upright either on their own or in collaboration with outsiders to plan schemes for stealing the cash. This is important to note as fraudsters only steal cash they can easily have access to. The investment of the excess cash reduces the risk.

Investment periods

The periods for investment of excess cash   resources can vary from business to business but may include shorter periods of less than a month. Many banks are willing to offer short term investment opportunities to their clients.  These opportunities are only available to those organisations which seek for them.  For reasonably longer investment periods, the investing organisation   should consider the net effect of terminating the investment in case urgent cash requirements arise during the period of investment.

Investment opportunities

The organisation can use the excess cash in a number of ways including the following;

  • Paying  off long term debts
  • Pay dividends using  the available  cash  as the shareholders may invest it better
  • Investing in Treasury bills and corporate bonds
  • Investing in short term products offered by banks.
  • Placing the cash on fixed deposits with commercial banks

Long term investments  in business expansion programmes ,  buying shares or investment in long term bonds  among others can be considered if excess cash is available for long-term.

Conclusion

Excess cash has a cost associated to it in the form forgone interest return on it. It is therefore important for organisations to safely invest the excess cash at all times.  The return on the internal investment should be compared to the return to be earned if cash is eternally invested. It important to consider that the long term goals of the organisation should not be sacrificed because of high short term returns on the cash resources.

Author

John Muhaise Bikalemesa

Director: Big Drum Advisory Services Limited

johnmuhaisebikalemesa@yahoo.com

About The Author

John Muhaise-Bikalemesa (JMB), is the founder of Muhaise.com blog and bigdrumassociates.com company. Learn more about him here and connect with him on his social medias below

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