surplus cash
Post on 04-Apr-2018
216 Views
Preview:
TRANSCRIPT
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 1/9
Managing yoursurplus cash —Savings and investments
• Establishing a plan• Putting your plan
to work
• Thinking long term
B S E S S C O C S E E S
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 2/9
Y myld wk
d y d
B u s n e s s C o a C h s e r e s
The situation
Thanks to seasonal actors, increased
sales or your continued hard work, your
business has begun to generate surplus
cash. Although you recognize that it’s
inefcient to keep this extra money
sitting idle, you are unsure about how
to eectively manage your surplus cash
assets or make unding decisions that
will both beneft your business in the
short term and increase your personal
advantage over time.
The solution
At BMO Bank o Montreal ®, we are
committed to helping Canadian
business owners succeed. The purpose
o this Business Coach booklet is to help
you ensure that your cash assets work
as hard as you do. By reviewing your
various options, including the potential
or investing your surplus cash, you may
be better positioned to achieve both your
business and personal fnancial goals.
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 3/9
There are many reasons why your business may
be accumulating surplus unds. You may receive
large cash infows at certain times o the year.
Perhaps you’ve been setting aside unds or a
large purchase you plan to make in the uture.
Or maybe your business just simply generates a
lot o cash that accumulates in your account.
Regularly reviewing your cash fow allows you
to assess the extent to which your cash infows
exceed your disbursements. This will give you
an idea o how much surplus cash you’ve been
generating over time. Whatever the reason, i
you are cash fow positive, you owe it to your
business and yoursel to review the options
available to you or maximizing the value o your
surplus cash. This Business Coach booklet can
help by prompting you to think about whether or
not it makes sense or you to invest your surplus
cash, and by outlining various investment
strategies you may want to consider based on
your business goals.
1. Cid t c
f t pl
Companies need cash to remain operational andmeet ongoing expenses. However, cash can also
have an “opportunity cost”. I your business has
too much cash in its deposit account, your money
may not be working as hard as it could.
To determine whether your cash is truly a
surplus or not, it helps to consider its source.
•Ifyourcashisfromincreased sales, it is
likely a surplus. Beore investing all o that
money, consider whether the surplus is due toincreased seasonal sales or a result o longer-
term business growth.
•Ifyourcashisfromthesale of an asset or
equipment, it may be surplus. Consider i you
need the money to purchase a replacement asset
or whether it truly represents “extra” cash.
•Ifyouhaverecentlyinjectedyour own money
into your business as capital, you may want to
explore ways to earn a maximum return on thatcash, depending on your business priorities.
2. slct ttgyI you determine that your business does
have a surplus, here are three strategies or
maximizing the value o your cash assets:
•Weightherelativemeritsofpayingdowndebt:
– I you decide to pay down long-term debt,
keep in mind that you may have to repeat
the loan application process and potentially
incur additional costs i you ever need to re-
borrow that money.
– Paying down a revolving line o credit may
make sense i your borrowing costs exceed
your potential investment returns.
•Purchasingxedassetswithcashonlymakes
sense i you are certain you will not need
access to your surplus cash in the uture.
•Consideryourvariousinvestmentoptions:
– Short-term investments provide you with
ongoing liquidity.
– Medium-term investments can help
enhance your returns while retaining
access to your unds.
– Long-term investments let you maximize
the yield on your surplus cash over time.
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 4/9
3. f y dcid t ivtThe principal goal o a successul owner/
manager is to manage assets eectively, not to
own them. That’s why it makes sense to consider
selling unused or under-utilized assets.
Surplus cash is a lot like an under-utilized asset.
Tomaximizeitsefciency,youmaywantto
consider investing it. The question is: How much
should you invest?
•Considerhowmuchcashyouneedinreserveor daily operations and as an emergency und.
•Ensureyouretainsufcientcashtoservice
your debt obligations.
•Lookatyourbankstatementstogureouthow
much your balances fuctuate. Don’t look only
at your end-o-month balances; review your
minimum balances as well.
•Determineifyou’rerequiredtokeepa
certain amount o money in the bank to meet
government regulations or other legislative
guidelines.
•Reviewyourworkingcapitalandequityratios
to assess the extent o your surplus (see the
companion Business Coach booklet Managing
Your Cash on this topic).
•Reviewyourbusiness’operatingcycleto
determine how much cash you’re going to need
in the coming months and quarters.
•Spendsometimeforecastingyourfuture
expenses. Keep in mind that certain market
conditions beyond your control, such as
Investment vehicles with longer
terms-to-maturity tend to yield
higher returns
Tips
!
exchange rate fuctuations or changing
customer demands, may increase your need
or ready access to your cash.
4. Dvlp plWhen developing an investment plan, consider:
•youroverallinvestmentgoalsforboththe
short and long terms
•thetimehorizonbeforeyou’llneedyourfunds
•whetheryouneedquickaccesstoyourfunds
or can aord to lock them in
•whetheryou’repreparedtoacceptsome
investment risk or potentially higher returns
With a little oresight and knowledge, you
can also develop a plan that can guide yourinvestment decisions through the various
liecycles o your business.
•Considerallocatingshort-termsurplusesto
more liquid investments.
•Whensavingforalargecapitalpurchase,the
intended date o purchase can dictate your
investment strategy.
•Determinewhichportionofyourcapital
purchases can be paid or in cash and which
portionshouldbenanced.
•Whendevelopinganinvestmentplan,consider
not only your business goals but your personal
goals as well. With advance planning, your
business surplus can help you prepare or the
day you may wish to sell your business or retire.
Investing your surplus cash can
make sense i saety and liquidity
are assured.
Tips
!
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 5/9
5. Dtmi y tim izMany business owners believe that surplus cash
investments should automatically be allocated
to short-term investment vehicles. However, as
with any other investment decisions, your time
horizon is a key consideration when determining
your investment approach.
•Considershort-term investments i:
– you are interested in maximizing your
returns on your business’s surplus cash,
while maintaining ready access to unds
– your business is required to hold deposits
and/orreservesforaspecic,shorterperiod
o time
•Considermedium-term investments i:– you are working to set aside money or an
upcoming event, such as a down payment
or a large capital purchase or a business
expansion
– your business is required to hold and invest
deposits and/or reserves or a longer period
o time
• Considerlong-term investments i:
– you are interested in building up long-term
cash reserves to enhance the value o your
business
– you would like to prepare or the uture
by taking steps now to set aside money or
your retirement or the eventual sale o your
business
It’s inefcient to continually
reinvest your surplus cash in
short-term investments.
Tips
!
•Ifyouneedtodrawuponyoursurplusfundson
a regular basis, long-term investing may not be
right or you.
•Considerusingadifferentinvestmentstrategy
or dierent percentages o your surplus cash.
For instance, keep money you require to und
operating expenses in shorter-term investmentswhile setting aside a certain amount o money
or longer-term investments where you can
earn a potentially higher return.
6. Miti liqidityWhen making investment decisions, businesses
must consider how much cash they need in
reserve or daily expenses, working capital, debtservice and capital expenditures. However, with
the right investment products and strategies, you
can maximize your investment returns without
sacricingliquidity.
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 6/9
•Don’tsacriceinvestmentefciencyfor
liquidity. Research your investment options
rst.Therearemanyinvestmentsthat
deliver solid perormance without locking in
your money.
•Businesssavingsaccountswithpremiumrates
o interest allow you the fexibility o a depositaccount.
•Lookforinvestmentswithexibleoptions
such as cashable eatures, automatic
renewalfeatures,andxedorvariablerate
features.Thesecangiveyouthebenetand
convenience o longer-term investing without
losing access to your cash when you need it.
•MoneyMarketandT-Billmutualfundsprovide
a high degree o liquidity, allowing you towithdraw your unds without penalty.
•TherearemanyGuaranteedInvestment
Certicates(GICs)thatoffercompetitiverates
while eaturing attractive levels o fexibility
and cashability.
•Manymutualfundsareliquidinvestments,
although short-term fuctuations in their value
may make you hesitant to withdraw your unds
on a regular basis.
7. Mg ikWhen investing surplus cash, you need to decide
what types o returns you’d like to earn or your
business, bearing in mind your investment time
horizon and your risk tolerance. Here are some
strategies or managing risk:
•Beforechoosinganinvestment,assess
your comort with market fuctuations anddetermine how well your business can handle
those fuctuations.
•Reviewyourpreviousinvestmentexperience
to gain a better understanding o your comort
level when dealing with volatility.
•Considerwhatpercentageofyourportfolio
is held personally and by the business to
determine i you need to better balance risk
between the two.•Identifytheexternalrisksthatmayaffectyour
business.Externalriskscanincludeeconomic
downturns, new or emerging competitors,
changing or new technologies, changes in
consumer demand, or tightening government
regulations.
•Somebusinessesaremoresusceptibleto
external risk than others. Assess how well
your business can withstand unexpected
external changes and how they would aect
your investment strategies.
•Saveyourmoneyforunexpectedexpenses
by putting aside enough surplus cash in a
low risk investment vehicle to last several
months — anywhere rom three to 12 months,
depending on your industry — in case the
economy contracts.
•Beforetyingupexcessfundsinlong-term
investments, make sure you’ve put aside
enough operating income or the next three
to six months.
By orecasting your operating
expenses, you can make moreinormed investment decisions.
Tips!
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 7/9
8. DivifyRegardless o the economic climate, it’s always
wise to ensure that your investments are
properlydiversied.Whenconsideringyour
business investments, here are a ew things to
keep in mind:
•Knowyourbusiness.Evaluateyour
investments based on your business goals,
tolerance towards risk and time horizons.
This will help you decide how to diversiy your
investmentsaccordingtoyourspecicneeds.
•Diversifyyourinvestmentsbyterm,by
dividing up your money into short-term,
medium-term and long-term holdings.
•Youcandiversifybytermevenifyou’re
only investing or the short term. Consider
dividing up your money into investments with
maturities that range rom 30 days to 150 days.
•Ifyourbusinessconductstransactionsin
U.S. dollars, consider making U.S. dollar
investments. In addition to protecting your
unds rom currency fuctuations, this can help
youmaintaincurrencydiversicationwhile
saving money on conversion costs.
•Ifyouhavecashavailableforlongterm
investing, and your risk tolerance is higher,
mix it up. You could hold a variety o cash,
xedincomeandequitiesbecauseamixof
holdingsoffersinherentdiversication.
•Haveasolidbase.Havingexposuretodifferent
markets — Canadian and international — is a
prudent investment strategy that can help you
mitigate your risk i one market declines.
9. add y lg-tm pl
d bi wAs a business owner, chances are you’re
ocused on ensuring the success o your
business. However, it is equally important that
you take some time to consider your personal
nancialpicturetoensureyoucontinueto
make business decisions capable o supporting
your long-term goals.
Consider a range of strategies
•Youmayplantosellyourbusinesswhenyou
retire. I so, you need to assess how much
money you can earn in a sale and i it will be
sufcienttosupportyourlifestyle.
•Keepinmindthatthevalueofyourbusinesscan fuctuate due to market circumstances or
other events beyond your control, potentially
leaving you with less money than expected.
•Ifyouplantoworkintoretirement,preparein
advance or unoreseen circumstances such as
anillnessthatmaymakeitdifculttocontinue
working.
•Considerarangeofretirementstrategiesto
ensure you meet your goals. For instance,youcanbuildupadditionalnancialassets
by taking ull advantage o your RRSP
contribution room.
•OutsideyourRRSP,amassadditionalfunds
through tax-preerred investment income,
such as capital gains and dividends rom
Canadian corporations.
Plan in advance
Planning now or retirement lets you start
considering long-term strategies or your
business and yoursel, such as:
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 8/9
•protectingthefullvalueoftheinvestment
you’ve made in your business
•buildingtowardscreatinganincomestream
or your retirement
•makingsurethedirectionyoutakewithyour
business is in line with your own long-term
personal goals
•ensuringyourbusinessremainsontrackto
provide you with the money you need to und
your retirement
Remember that retirement planning has less to
do with your age than it has to do with making
sure you’re making good decisions throughout
the lie o your business.
Diversify outside your business
•Asignicantpercentageofbusinessowners
have over hal their net worth tied up in their
business. However, it is important to consider
thebenetsofsavingsomemoneyoutsidethe
business or retirement.
•Offsetsomeofthebusinessrisksassociatedwith
economic downturns, competition or even the
possibility o potential business losses.
•Takeadvantageofpersonalincometaxdeerral by saving and investing in an RRSP.
•Considertherangeofincomestrategies
available to business owners, such as income
splitting.
•Establishasourceofretirementincomethatis
independent o your business operations.
In addition to aecting your
business investment decisions,
business risks can also aect your
personal investment decisions.
Tips
!
10. Tx cidtiWhen deciding which investments are right
or you, it’s important to consider the tax
implications o various types o investments:
•Investmentsthat
accrue interest
income tend to
be subject to the
highest rates o tax.
•Considerholding
investments with
interest income
inside a registered
investment plan.
•Toreducetaxes
payable, consider
investing in longer-term holdings such as
equities. Capital gains earned on the sale o
equities are taxed at the most avourable rates.
•DividendsearnedfromCanadiancorporations
tend to be subject to a reduced rate o tax.
•Toensureyourinvestmentdecisionsaretax
efcient,consultwithyouraccountantortax
advisor.
Minimize investment tax by
understanding how income is taxed.Tips
!
7/29/2019 Surplus Cash
http://slidepdf.com/reader/full/surplus-cash 9/9
This document is designed or inormation purposes and should notbe considered advice. For specifc inormation on your business needsplease consult with the appropriate business proessional.
® Registered trade-marks o Bank o Montreal. 5125088 (10/11)
1 0 / 1 1 - 9 6 2
At BMO Bank o Montreal, we are committed to
helping Canadian businesses develop and succeed.
To this end, we’ve created a Business Coach Series that
provides inormation and knowledge that can optimize
the value o your company’s fnancial resources. The
booklets that make up the Series ocus on essential
areas o fnancial management allowing you to ocus
on operating your business more eectively.
For more information on howBMO Bank of Montreal can helpyour business:
• talk to your Commercial Account Manager
• call us directly at 1-877-262-5907 or
• log on to bmo.com/business-resources
top related