Is it even possible to have too much cash in your business? It is! With all the Paycheck Protection Program (PPP) money being given to small businesses, some people are finding themselves in a position of too much cash. The question to ask yourself is, “How much are you earning on that cash?”
If you have excess cash that you’re not putting to work in your business, you might be earning only as little as .2% or .5%. On the other hand, if you’re proactive and putting it in a six-month CD, you might be getting as much as a .6% or .7% return.
You have to think about what you’re doing with your excess cash because if it’s $1,000,000, even if you just put it in that CD you’re making an additional $6,000 a year.
You can do this by looking at your current ratio and building a graph. When your current ratio goes above your acceptable limits, that means you’re not using your current assets as effectively as you could. One option is taking a distribution and investing it in real estate, the stock market or something else.
Another option is looking at other capital investments you could make in your business to drive growth forward and produce additional profits. Either way, you really want to track your cash and current ratio so if you have too much cash, you’re putting to work and earning some interest on it.
Right now, inflation is growing around 4% year-over-year. You must consider that you don’t want to lose purchasing power with that cash, but that you’re putting that cash to work to earn more money. That way, you’re gaining freedom and opportunity by not losing ground to inflation.