91% of SMEs have cash reserves. While having these reserves is essential, it’s also crucial to make them work to maximise results across your business. Having them sitting there might mean you are missing out on potential opportunities.
We list the common ways you may choose to utilise your cash reserves to benefit your business in the long run.
- Reinvest in the business
- Pay off debts
- Pay your wages
- Funding deposits
- Rainy day funds
- Cover large expenses
- Invest elsewhere
Reinvest in the business
According to a report by Nucleus Commercial Finance, 39% of SMEs with cash reserves stated they plan to invest at least a third back into their business this year.
Reinvesting in your business will be essential at specific points along your journey. It enables you to cease opportunities, optimise operations and improve efficiency.
Examples of areas that you should consider reinvesting your cash reserves into include:
- Launch new products or services
- Staff recruitment and training
- Improving processes
- Upgrading machinery
Alternatively, your cash reserves can be used to fund your growth goals, such as mergers and acquisitions, hiring new employees, scaling operations with increased equipment or infrastructure, acquiring new premises, etc.
Few companies will have substantial cash reserves to cover all their expansion targets. You’ll likely need growth finance to progress further – but your funds will be an important contributing factor to this process.
Pay off debts
If your business has debts or loans of any kind, it is a sensible idea to use your cash reserves to clear them. Having debts can undermine your financial stability and negatively impact your credit score, making it harder to apply for external funding in the future.
If you choose to clear these debts, make sure it’s wise to do so – if you are clearing debt early, there are sometimes charges associated which makes it less financially viable.
By reducing your debt levels, you will make it easier to seek funding in the future and put yourself in a better position, especially if it leads to an increase in your credit score or boosts cash flow.
Pay your wages
Often small business owners will neglect to pay their own wages, instead prioritising the other financial needs of the company. However, it’s essential you are paid for your hard work and that your personal life is not negatively affected.
If you find yourself with reserves to spare and have been neglecting your own remuneration, it’s a good time to pay it. You may also consider boosting your staff’s wages, such as through a bonus scheme, to improve staff morale and motivation.
Funding deposits
Utilising external funding is crucial to the longevity of your business. In some instances, you will be required to put down a deposit for financing that enables you to access larger sums. Examples include mortgages, asset finance, acquisition funding or some larger loans.
While these deposits are typically a smaller percentage of the total value, you still need to pay them to secure the loan. Your cash reserves will be key here, enabling you to cover such deposits and improve your eligibility for external finance.
Rainy day funds
In business, at some juncture you will run into financial obstacles. During these stages, you may experience cost increases and falls in revenue which restrict cash flow and causes temporary difficulties.
One of the primary purposes of cash reserves is to provide rainy day funds for these instances. They may fill any funding gaps you experience, enabling you to keep on top of your financial commitments while you work to correct the issue.
It’s important that you have cash flow projections to determine if you have sufficient cash flow for the coming period.
While you shouldn’t necessarily hold back all your funds for a rainy day, it’s wise to build up reserves for unexpected scenarios.
Cover large expenses
There will be times in any business when you need to cover unexpected or significant costs. For example, if a piece of equipment breaks and disrupts productivity, you will need to pay to fix or replace it promptly.
When such instances occur, you usually need cash and fast. This is where cash reserves come in, enabling you to cover significant expenses.
It’s also important if you prefer to own equipment outright rather than lease it, enabling you to cover the expense.
Invest elsewhere
Another sound option for a business looking to make the most of their cash reserves is to invest it elsewhere, such as in bonds, gilts, stocks and shares. Your aim is to increase the value of your reserves by making strong investment choices.
If you are investing, understand the market and make sensible choices. This can be done through a specific stocks and shares account or off your own back. If you aren’t familiar with investing, it’s also worth speaking with a financial advisor to find out the best options.
Conclusion
Having cash reserves is a real positive for any business, especially given the safety net they provide. However, if you want optimal results, it’s crucial to make your cash reserves work harder.
By finding the best way to use your reserves, you will move closer to your goals, protect yourself from future situations and cover any necessary expenses.
For advice on building and utilising your cash reserves for maximum effects, speak to one of our expert advisors.