What to Do with Your Cash Surplus

Grow­ing com­pa­nies face all sorts of prob­lems and chal­lenges. One of the biggest chal­lenges (and my favourite) is what to do with cash sur­plus. 

There is no right answer as every com­pa­ny has its own phi­los­o­phy and strat­e­gy about how they want to man­age cash. The first thing is to get clear on your cap­i­tal strat­e­gy, which also extends into your bor­row­ing strat­e­gy and how much lever­age or debt you want to have on the bal­ance sheet. The key is to have clear para­me­ters on which every­one agrees. 

We often think that grow­ing com­pa­nies con­sume a lot of cash. This can be the case for those aggres­sive­ly want­i­ng to expand their cus­tomer base and build mar­ket share. How­ev­er, many oth­ers do build up a mas­sive cash sur­plus. While not pos­si­ble in every busi­ness mod­el, with many of our clients in growth mode we opti­mize and use all the levers and strate­gies we’ve learned to build cash — and that posi­tion can change quite dramatically.

Then the prob­lem goes from not enough cash to excess work­ing cap­i­tal burn­ing a hole in their pock­ets — and peo­ple sug­gest­ing all kinds of wacky and amaz­ing ideas of what to do with it.

Here are four basic strate­gies you can use for your war chest now (or when you build one):

1. Hold it — to be pre­pared for a rainy day or a big opportunity
2. Use it — as div­i­dends for share­hold­ers, pay­ing down debt or buy­ing back shares
3. Rein­vest it — what the remain­der of this arti­cle is about
4. Invest it — acqui­si­tions or invest­ments in future part­ners or start-ups.

The first impor­tant thing to assess is ow much of your cash sur­plus to save for a rainy day ver­sus how much to use in oth­er ways. In an abun­dant state, options 3 and 4 offer the most inter­est­ing oppor­tu­ni­ties because of the unlim­it­ed pos­si­bil­i­ties. Then the ques­tion becomes how to decide which work­ing cap­i­tal strat­e­gy brings the best return.

The ulti­mate mea­sure of a CEO is an abil­i­ty to cre­ate a return on the cap­i­tal invest­ed in the busi­ness (ROCI or sim­i­lar mea­sure), which is a reflec­tion of how well they make the deci­sions about where to put cash and how to make the busi­ness bet­ter, as a result.

Eval­u­at­ing cash Sur­plus Ideas

Many com­pa­nies have a process for busi­ness cas­es, to ratio­nal­ize, jus­ti­fy and back up with data whether or not to invest. Here’s the best approach I’ve observed:

Choose the best investment

Ide­al­ly have mul­ti­ple ideas com­pete for the avail­able cap­i­tal, so that you aren’t in a ​“should we/shouldn’t we?” posi­tion. It’s more about which, of five or six or sev­en oppor­tu­ni­ties, is the best for our busi­ness mod­el and to eval­u­ate them by asking:

• How well does the idea fit with our strat­e­gy and can make the orga­ni­za­tion stronger?
• How large is the expect­ed return?
• When and how like­ly are we to succeed?
• Who, on the team, has the capa­bil­i­ty and band­width to ensure our success?

Think of this com­pet­i­tive exer­cise like pitch­ing a busi­ness idea on an episode of Shark Tank or Drag­ons Den.

In my new book The 4 Forces of Growth, we share a mod­el called Step­ping Over Nick­els to Pick Up Dol­lars and you have to be care­ful not to do the inverse. This Pen­nies, Nick­els & Dol­lars Mod­el helps you to eval­u­ate an idea by look­ing at the like­li­hood of suc­cess, and the size of the dol­lar impact:

Test your hypotheses

After debate and analy­sis, con­vert the idea to what Jim Collins calls a ​‘bul­let’. This small and repeat­able low-risk test helps you prove the idea out with­out dam­ag­ing the com­pa­ny. Iden­ti­fy­ing an oppor­tu­ni­ty doesn’t mean it will work, unless you’ve done some­thing sim­i­lar, that fits the fact pat­tern, many times before. This is a way to test and cal­i­brate if your bril­liant think­ing pays out in real life.

Aggres­sive­ly invest in the proven ones

When you’ve test­ed enough to prove your idea works then it’s time to imple­ment the Jim Collins’ ​‘can­non­ball’ strat­e­gy. This involves mov­ing aggres­sive­ly ahead know­ing with close cer­tain­ty that you’ll get the return on your investment.

Con­tin­ue to eval­u­ate and adjust

The part that many com­pa­nies miss, or don’t have a process for, is ongo­ing eval­u­a­tion. Just because you have shot the ​“can­non­ball” doesn’t mean that those invest­ments should con­tin­ue in per­pe­tu­ity. Things change — and that can result in your returns not being ful­ly realized.

This review, ide­al­ly done quar­ter­ly, looks up to five years back and eval­u­ates the returns on every invest­ment. The review also mea­sures per­for­mance relat­ed to your ini­tial invest­ment, help­ing assess future opportunities.

The Chal­lenge

• What is your cap­i­tal strat­e­gy both in terms of addi­tion­al cash gen­er­at­ed and use of debt in the company?
• What is your process and eval­u­a­tion for invest­ment or re-investment?