If you are doing well right now, you should be congratulated. One of the best things you can do for your business is prepare for the unexpected by storing away surplus funds.
Week 4 – Invest Extra Cash
Consider the short-term investment
Short term Investments become important when a company has a great deal of cash assets. A company typically plans to sell this type of investment shortly to provide future cash. An example of a short-term investment is a bond that matures in a year or less. This allows the business to earn a slightly higher interest rate than if the cash were deposited in a corporate savings account. These investments aren’t as liquid as money in a checking account, but they provide flexibility if the need for these funds appears in the near future.
Pay Off Debt
One of the most popular questions I receive is, “Should I invest extra money or should I use it to pay off debts?” To answer this question, I explain that you must decide how your money could work best for you and your business. Would the return on your investment be greater than you would pay on your debts? If you would earn less on investments than you would pay on debts, you should pay off debt.
Let’s assume that you have $10,000 in a savings account that earns an annual rate of return of 2 percent. Meanwhile, your credit card balance of $10,000 incurs annual interest at a rate of 22 percent. In a year, your savings account will earn $200, while your credit card costs you $2,200. You’ve essentially lost $2,000 over the course of a year (the difference between what you earned on the savings account and what you paid in interest on the credit card balance). Also, consider how this affects your taxes – the interest on the savings account is taxable, and you have to use after-tax dollars to pay your credit card bill.
Prepare for Your Tax Bill
While we are on the subject of taxes, don’t forget your corporate tax or estimated tax payments each year. Tax season will be here before we know it, so prepare now to avoid late payments and hefty fees.
Create Collateral for Future Loans
If you plan on adding a new initiative to your business, you may as well begin saving for it now. When you add up marketing and promotion costs, it can cost more than you originally expected. Therefore, it is wise to create a separate savings fund for this project to prevent dipping into reserves earmarked for other goals of your company.
Here are some additional suggestions (for some of you) to help reduce overhead and other expenses in your company:
- Acquire one of your suppliers to eliminate a link in your supply chain
- Acquire a distributor to better connect with your valued customers
- Establish a new location to tap into additional markets
If you had an extra $50,000 at the end of this month, how would you invest it for the short term?