What is a cash surplus? Quite simply, it's when a company is doing well, generating more capital than it consumes. Having a cash surplus is therefore a good thing. Now it's a question of putting it to good legal use. Let's see how.
How is surplus cash calculated?
Cash surplus is the difference between operating revenues and expenses. It is obtained by subtracting working capital requirements (WCR) from EBITDA.
Gross operating surplus or gross operating profit takes into account operating income and expenses, i.e. everything generated by the company's day-to-day operations. It is calculated by subtracting from sales, purchases of goods and raw materials, miscellaneous expenses (rent, water, electricity, telephone, insurance, fees, etc.), personnel costs, taxes and duties.
In general, a company buys inventory or raw materials before it collects anything. It therefore needs cash. This is where WCR comes in. It assesses the company's permanent cash requirements to cover its operating cycle.
If WCR is negative, this means that cash flow from income is more than sufficient to pay expenses. Low inventory levels, cash-paying customers and no supplier debts result in a negative WCR. On the other hand, if the company pays its suppliers before being paid by its customers, and stocks a lot of goods, it runs the risk of ending up with a positive WCR. This is not a serious situation in itself, but there are a number of steps you can take to avoid it: eliminating superfluous expenses, asking customers for more advance payments, chasing up debtors, negotiating bank overdrafts. The importance of lead times also comes into play here: debt collection lead times, supplier lead times, production lead times, sales lead times.
A cash surplus exists when the net cash balance is positive. It is calculated as follows: receipts on sales minus disbursements on purchases. In this way, we can estimate the company's self-financing capacity.
How to use surplus cash?
A positive cash balance does not reflect the company's entire financial situation, but it is nonetheless an indicator of its good health. Managers can therefore consider certain investments to develop their business or create wealth.
Acquiring new fixed assets
Surplus cash can be used to purchase machinery, tools or other equipment that will boost production or sales. Expanding premises, modernizing furniture, investing in digital technology or automation will also enable the company to evolve favorably.
Expand your business
Why not take advantage of the opportunity to launch a related activity or conquer a new market? This can also be an opportunity to buy out a competitor or acquire shares in another company.
Settling debts
Sometimes it's better to get rid of a loan or rearrange certain debts. Suppliers grant a discount for early payment, which represents a significant financial discount on purchases.
Earn interest
The main thing is not to keep excess cash in your current account, unless you're sure you'll need it almost immediately. Available sums can always be invested and capitalized, even on a very short-term basis.
The company can grow its liquid assets through judicious financial investments: mutual funds (FCP, SICAV), for example, provide a daily return. Certificates of deposit are bank-issued debt instruments with subscription terms ranging from one day to one year. Term accounts are an attractive solution for short- to medium-term investments (minimum 1 year). It's a low-risk product that offers a good return. Finally, the savings account, also risk-free, allows you to keep your money always available.
Managing surplus cash is one of the most important functions. It involves seeking out suitable investments based on cash balance forecasts. Surplus income must be optimized to the maximum benefit of the company.