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Generating a cash surplus is an ideal scenario when you're running a business. It's a sign of good financial management. It does, however, raise the question of how best to manage it. What is a cash surplus? How do you manage it, and how do you create it? We answer these questions in this article.

What is a cash surplus?

In simple terms, a cash surplus exists when income exceeds expenditure. In other words, after liquidating its operating and operating expenses and charges, the company still has cash on hand.

Surplus cash can be short-, medium- or long-term . A short-term cash surplus exists when funds remain in the company's coffers after it has met its needs during the fiscal year.

On the other hand, a long-term surplus exists when the company has surplus funds to save or invest.

We also distinguish gross operating cash surplus (GOC) and net cash surplus. Net cash surplus is the amount of excess income after taxes due by the company have been taken into account.

The existence of a cash surplus is a positive sign for a company, since it testifies to the following its financial health . In other words, in the event of unexpected expenses, it can do without borrowing or selling assets to meet them.

How do you calculate it?

To calculate operating cash flow (OCF), simply subtract operating expenses paid from operating income received by the company. This is a simplistic formula.

Cash surplus = Operating income received - Operating expenses paid

Causes of a cash surplus

Several situations can lead to a cash surplus in a company:

Rapid company growth

Rapid growth can come from market opportunities (new products, partnerships, etc.), a new context (as in the Covid-19 period) or acquisitions . It can be sudden or planned. In all cases, it's characterized by a rapid rise in sales, leading to a cash surplus.

Reducing operating costs

Cutting costs is an obsession for any company worthy of the name. Reducing costs maximizes profits. And when profits increase, this can lead to operating surpluses.

Increased sales and margins

Following a price rise or a sudden influx of orders, the company can generate more sales or increase margins This situation may be short-term and linked to a given season. Whatever the case, these are situations that generate a cash surplus.

Strategies for managing surplus cash

There are several ways to manage surplus cash in a company. You can choose between go to the réinvestir in the company or use it to repay debts or build up reserves liquidity.

Investing in investments

If you decide to invest your surplus cash, you can choose between short-, medium- or long-term investments. Your choice will depend on your financial situation and available resources.

Also, before making your decision, you need to consider the amount of your investment, its growth potential and tax treatment as well as the duration of the investment.

A court terme

If you are looking for short-term profitability, you can invest your surplus cash in the following investment vehicles:

Interest-bearing current accounts . What are the advantages of this type of investment? The account earns interest every day, so capital can grow rapidly.

What's more, you can set an investment horizon of your choice.

UCITS or Undertakings for Collective Investment in Transferable Securities . Also known as cash funds, these are portfolios of securities and other financial instruments. They also pay a daily interest rate of 1-2%. They also offer the advantage of flexibility, as there is no minimum investment threshold.
Early payment discounts . A company with surplus cash can take advantage of this to pay its suppliers ahead of schedule, in order to obtain early payment discounts. This is an attractive option for using surplus cash, as the rate for early payment can be as high as 3%.

In the medium term

Here are some investment solutions for the medium-term investment of your cash surpluses:

Negotiable certificates of deposit

These are short-term debt securities issued by the bank. The return on this type of investment is attractive, since it is higher than the money market rate and exceeds that of a term account.

This is a short- to medium-term investment, as you are free to choose the investment horizon from 1 day to over a year. What's more, unlike term accounts, you can sell a certificate of deposit at any time.

On the other hand, you should be aware that there are a minimum deposit of 150,000 euros.

Term deposit

This involves investing your surplus cash in a term account for a pre-agreed period at a pre-agreed interest rate. You need to be careful when choosing the term. In particular, make sure you don't need the funds in the meantime, because breakage costs can be substantial. However, the term deposit remains an interesting investment for its profitability and flexibility. You can choose between a revolving term account, progressive rates and short- or long-term terms to suit you.

The savings account

It's also a risk-free way to invest surplus cash .

The benefits? It is less costly and better remunerated than an account current . What's more, you can access the funds at any time. On the other hand, profitability is less attractive than with a term deposit or certificate of deposit.

A long terme

If your company's financial health allows, you can also invest in a long-term product. For example, you could invest in a capitalization contract with an insurance company . Returns can be more attractive than with bank products.

Reinvesting in the development of your business is also a way of investing your surplus balance over the long term.

Pay off debts

When the company has cash on hand, it can be a good idea to take advantage of it to pay off debts . To achieve this, it is necessary to prefer high-interest loans It's a good way of putting the company's finances on a sounder footing. What's more, it sends a strong signal to banks and investors that the company is managing its finances well.

Reinvesting in the company

When you have a cash surplus, it's the best time to implement strategies to develop the business.

You can invest this money in various ways:

Financing the purchase of equipment to increase the company's production capacity
Buying out or acquiring a stake in a company that is a competitor or whose activities are of interest to your own activities
Launch a new business
Buying new premises
Etc.

However, these options are only available if the amount of surplus is sufficiently large.

Build up a cash reserve

It is also possible not to invest the amount of the cash surplus and only use it to build up a reserve This enables the company to protect itself against unforeseen events. If unforeseen expenses arise, the company is in a position to deal with them and not systematically resort to borrowing.

How to generate surplus cash with Heropay?

We have seen that having a cash surplus is a real advantage for a company. It helps to project an image of good financial health, particularly to the bank and its financial partners.

You can generate surplus cash using Heropay. Here's how:

Cash in faster

Heropay practices what is known as de electronic factoring . In other words, the platform takes the place of its customers to pay their invoices or settle their debts more quickly, so that they can be reimbursed at a later date.

In concrete terms, when you issue invoices, Heropay lets you pay directly . This is an advantage for both sides, as you can collect your payments more quickly. In turn, your business partner benefits from easier payment terms to reimburse the platform.

So you can say goodbye to late payments and unpaid bills .

Request a customized quote

Pay your suppliers later

The process works with your supplier payments. Heropay replaces your company for pay your invoices immediately with your suppliers. It then offers you two types of payment facility to pay it back:

Deferred payment or after 60 to 90 days
Payment in instalments or 3 or 4 times.

This system offers a number of advantages, including

Pay your suppliers later while preserving your business relationships
Benefit from early payment discounts, if any