How to Manage a Business Cash Flow Windfall

3d rendering of an exclamation sign made of many dollar bills hovering over a wooden desk.

It’s true—businesses can sometimes find themselves with a temporary cash surplus.

If you do experience a sudden incursion of cash, you’ll want to make sure it is well-managed or else it could soon evaporate. And, in some cases, an incursion of cash can leave you worse off than you were before the windfall. So, here are some tips to help you manage cash flow windfall.

What Can Cause a Cash Flow Surplus?

The type of windfall that this article focuses on is the one-off influx of cash. And there are several scenarios in which this situation may arise. Here are some examples of the causes of a temporary cash surplus.

Seasonal Sales

If you sell seasonal products, you will, of course, experience seasonal fluctuations in sales. These fluctuations are likely to create a cash surplus in the peak season. And then, you may have a negative cash flow for the remainder of the year.

One-Off Significant Sale

Almost any business could receive a one-off windfall sales order. An office equipment supplier, for example, could receive an order to kit out an entire office. A manufacturing company could close a deal to supply a major corporation for a one-time purchase. One-off significant sales could open new markets. However, it is generally best to treat such windfalls as one-offs until further orders of the same size can be predicted with certainty.

Unexplained Increase in Sales

Sometimes, a business can get lucky! Sales might increase significantly for no apparent reason. One month of increased sales volume could leave you with a cash surplus. But, like the one-off orders, it is best not to jump the gun in assuming that an unexplained one-off sales volume increase will continue.

Sale of An Asset

There will also be an influx of cash if you sell a high-value asset. You might, for example, sell your business premises in preparation for moving to an alternative location. Or you might be downsizing your business. Alternatively, an asset may have increased so much in value that it makes sense to sell the item for a profit. Your office might be on land earmarked for a major redevelopment, for example, and so has increased significantly in value.

Related: Ten Cash Flow Management Tips for Business Owners

New Investor Buy-In

Suppose new equity holders are coming on board. In that case, you might receive cash for those investors’ initial investment in the business. For example, a new business partner might have bought a share of the business, or you may have sold stock in the company. Or you may have received financing from a venture capitalist.

Cash From Loans or Other Finance

You will have a surplus of cash when the funds are first received from a new credit line. An overdraft facility, for example, will immediately provide the business with additional spending power. A loan granted to fund business expansion will provide a pot of cash. And, if you decide to factor sales invoices, most of the value of your current accounts receivable will be advanced on the signing of the contract.

How to Manage an Influx of Cash

The above are some of the scenarios in which a business might find itself with a cash surplus. But, as mentioned in the introduction, an unexpected windfall needs to be well-managed. So, here are some points to consider when your business has an excess of cash

Be Patient

It might be tempting to go on a spending spree. But it would be best to bide your time and consider all the possible uses for the extra cash. And, as discussed below, there may be costs incurred as a result of the windfall. So, it would be wise to give yourself time to plan before you begin spending the cash surplus.

Calculate Tax Implications

There may be tax implications in some of the scenarios mentioned above. A significant increase in sales, for example, may mean a higher tax bill to the end of the year. And there may be tax to pay on the sale of assets. So, it would be best to calculate the tax due and confirm the date on which that tax will need to be paid. It would be advisable to talk to your accountant about the potential tax liability on a windfall if you are unsure about the tax implications.

Consider Other Potential Indirect Costs

A windfall might result in other additional costs, too. A bumper month of product sales, for example, might lead to a need for a significant restocking of raw materials or goods for resale. Likewise, if you manufacture products, production may need to be increased to replenish inventories. And, if you have sold an asset, that asset may need replacing.

Related: 8 Strategies to Avoid a Cash Flow Crisis

Ringfence Surplus Funds

Ringfencing excess funds will help you manage a windfall of cash. So, consider opening a new bank account to separate the surplus cash from the day-to-day working capital. Holding the money in a separate bank account will enable you to track how much of the surplus you have used and how much is left. Ringfencing the cash will also prevent the excess from being slowly eroded by excessive everyday expenditure.

Ringfence Funds Acquired for Specific Purposes

You may have received financing for a specific purpose. A bank loan, for example, might have been obtained to buy new equipment or build new premises. In that case, it would be best to ringfence these funds in a separate bank account and only spend the money on that specific item. Indeed, the use of funds from a bank loan may have been stipulated in the loan agreement terms. Likewise, money received from investors or grants may also be earmarked for a specific purpose and need ringfencing and reporting on separately.

Reduce Debts

If the surplus cash is not earmarked for a specific purpose, you can plan how to use that money. And, generally, it would be best to think long-term when considering how to spend a cash surplus. So, look first at the debts the business is currently servicing. And calculate how much could be saved by repaying some or all that debt. Even if the excess funds came from another credit line, you might save on interest by repaying a high-interest debt, such as a company credit card balance.

Invest Rather Than Spend

The alternative to reducing debt is investing in the future. You might, for example, use a cash flow surplus to purchase new equipment. You could use some of the money to fund a high-profile marketing campaign. Or you could invest in product development.

The crucial thing is to spend a cash flow surplus on something that will bring a return. Indeed, when you weigh up the various options, it would be advisable to calculate the return on investment on each of those options before arriving at a decision.

Keep Some Cash as a Reserve

Finally, it would be advisable to keep some of a cash surplus in reserve. And it would be best to transfer this cash to a separate bank account. Then you will have some money to fall back on should any unexpected expenses be incurred, or sales take a turn for the worse.

The Bottom Line

The crucial takeaway for business owners is to take your time planning how you will spend a windfall of cash. First, ringfence any funds obtained for specific purposes. Then, look for the best return on investment you can get on your cash surplus. And don’t forget to keep some of the money back for a rainy day.

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