surplus cash

7/29/2019 Surplus Cash

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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



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.



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.



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

!



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.



•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!



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:



•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

!



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

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