How to grow your company's excess cash

If your hard work results in surplus cash for your company, that's usually a good thing. If that surplus cash works hard for your company, that can be a great thing. But that money will only work if you make it. Leave it sitting idly in your current account and that excess cash probably won't earn a penny. What's worse, inflation will even nibble away at its value.

Put that cash to work by investing it and the gift of surplus cash can keep on giving.

Of course, there are reasons why people decline to invest: 'too risky'; 'sounds complicated'; 'not worth the trouble'. But you don't have to be the Wolf of Wall Street to make your money grow. You don't need super trading powers. You just need to define your objective and your conditions and the cash should do the rest all by itself. So what could those objectives and conditions be?

Let's examine how you can set your own parameters for a safe and profitable investment of your company's cash surplus.

It's often said that a company with a cash surplus is a company in good financial health. Why? Because an excess of available funds suggests both profitability as well as an ability to manage finances and anticipate risk efficiently.

So what exactly do we mean by cash surplus?

A cash surplus occurs when cash coming into your company exceeds the cash going out. As an equation, it's the Gross Operating Surplus (GOS) minus the Working Capital Requirement (WCR), or more simply:

Cash surplus = Operating revenues - Operating costs

If the result of that equation is more than zero, you have a cash surplus. Your company is making more money than it spends. That's good news. If you can put that excess cash to good use, well, that's even better news. Whether you invest that cash to generate more, or use it to mitigate future financial risk, the choice is yours.

🔔 Surplus cash (and cash flow in general) is not something to be taken lightly as it's directly linked to your company's ability to remain robust in the long run. That's why it's essential for business owners and Chief Financial Officers (CFOs) to keep a tight grip on cash management.

As we said above, a cash surplus is a good sign that a company is financially healthy. However, there is such a thing as a useless surplus cash: if the money is allowed to lie idly in a current account, it represents a missed opportunity, also known as an 'opportunity cost'. The money is effectively doing nothing when it could have been used to generate more money.

In fact, it's worse than money just 'doing nothing'; because of inflation, that dormant money actually loses value. According to the Banque de France, inflation has been bubbling away at an average of 1.8% in 2021. In other words, if you had €100 in a current account at the start of the year, it's only worth €98.20 in real terms at the end of the year.

If your business has generated a cash surplus, it makes financial sense for you to invest at least part of it so that it can yield returns, rather than leave it in a current account where it will likely get eroded by inflation.

• The cash surplus should be recurrent, and not just a one-off.
• It is only the surplus that should be invested. You'll still need enough instantly available cash to cover the day-to-day operating costs of being in business.

Not all companies have the same needs and expectations when it comes to investing. But if you define your investment criteria carefully, you'll be able to ensure you end up with the solution that's best adapted to your situation.

The most common criteria to take into account are risk, return and liquidity.

Risk equates to the fluctuation (or volatility) of value. Everyone interprets risk differently, often according to their own experience. Some people are more sensitive to risk than others and prefer to place their money in the safest investments possible.

What tends to remain constant is the relationship between risk and reward. Usually, the riskier an investment, the higher the potential return. It's a truth as old as Time itself.

While the return is proportional to the risk, it also depends on the length of time you want your money tucked away in the investment, a period of time known as the 'investment horizon'.

Short-term investments usually have a relatively lower risk and lower return. Longer-term investments are more profitable and, you've guessed it, riskier.

Your liquidity is your ability to access cash at any given moment. To protect it, you may need to be able to pull your funds out of the investment without that impacting their value. Some investments stipulate that the funds may not be withdrawn until the maturity date, when the pre-defined period is over. If you withdraw the funds before this maturity date, you will have to pay a fee.

This makes it important to forecast and take into account your future cash needs carefully before investing, to avoid having to withdraw your invested funds early. This will determine both your liquidity and the duration of the investment horizon.

Essentially, this entails that the more surplus cash a company has, the longer it will be able to invest part of it, meaning bigger returns.

💡 Another factor that's worth considering is taxation: different tax rates apply to different types of investment.

Once you've assessed the above criteria, you're ready to choose your preferred investment option. You can be prudent and go for 'short, safe and flexible', you can be more aggressive and plump for 'higher risk/higher reward' or you can settle anywhere you like on the spectrum that exists between the two.

A Term Deposit (TD) - also known as a Certificate of Deposit or Time Deposit (in French, 'un compte à terme' or CAT) - is an investment with a pre-defined maturity date deposited at a financial institution.

When you open a Term Deposit account, you choose the duration of the investment, which in turn determines the interest rate you'll get and therefore your return. The longer the duration, the higher the rate. For example, a one-year investment may offer interest at 0.25%, a two-year investment 0.35% and so on. The funds are deposited in one single payment when the Term Deposit account is opened and, generally speaking, cannot be withdrawn until the end of the term without incurring a penalty fee.

💡 Term Deposit summary:

• Duration: short-term, from 1 month to 10 years.
• Expected return: interest rates might vary from 0.10% to 0.45% (according to the duration).
• Risk: none, as the return is contractually binding. The funds are guaranteed (in France by the Fonds de Garantie des Dépôts et de Résolution; each investor is covered up to €100,000 if the financial institution goes bankrupt).
• Liquidity: weak, as the funds are usually blocked until they reach full maturity. Some financial institutions allow for early withdrawals with one month's notice.

Securities accounts:

A securities account, also called 'brokerage account' (in French, 'un compte-titres ordinaire' or CTO) is more suited to those who are prepared to take on a higher element of risk and invest over a longer term in exchange for a higher return.

It's an account that allows you to deposit money with a broker or bank, and these funds will be used to buy and sell securities like stocks, bonds and mutual funds on international markets. Put your money into a securities account and any profit they generate will be yours.

💡 Securities account summary:

• Duration: medium- to long-term. It is prudent to opt for an investment over several years as the international markets are volatile and exposed to risk.
• Expected return: market volatility makes it difficult to forecast for sure but annual averages generally gravitate around 7%.
• Risk: moderate to medium, as the funds are subject to the fluctuating financial markets. Your investment is not guaranteed and you may make losses.
• Liquidity: strong, as you can transfer money in and out whenever you like, much like a bank account. Real Estate investments:

In France, there exists a system of real estate investment known as 'pierre papier' (let's call it 'Brick&Mortar/Paper'). This allows you to buy shares (the 'paper' part) in financial products that own real estate (the 'Brick&Mortar' part). Think of it as an indirect way of investing in property. Two types of 'pierre papier' products are SCPIs and OPCIs:

• SCPIs buy and rent out real estate (usually commercial property) that are run by a certified management company.
• OPCIs work in much the same way as SCPIs, except that a minority part of the invested funds must be funnelled towards non-real estate investment, such as the international markets.

The 'pierre papier' system is a good solution for diversifying your investments and enjoying the relative stability of real-estate without having to buy entire properties or collect rents. Instead, you become a partner in a property portfolio and share in rent incomes as well as any appreciation in the value of the property (and thus your shares).

💡 Real Estate investment summary:

• Duration: long term; OPCIs are suitable for investments of at least 4 years, SCPIs for those of at least 8 years.
• Expected return: this varies according to the fluctuations of the property market (and financial markets in the case of OPCIs). Typically a SCPI may bring yields of around 5%.
• Risk: your investment is not guaranteed, meaning you do risk losing money if the property market collapses.
• Liquidity: strong, as you can sell your shares within a few days.

With all the above options, we see that there's no investment option that's perfect for every individual case. Each business owner needs to think carefully about the most suitable solution for investing their company's cash surplus.

There are, however, general rules that should be obeyed in most cases. Like 'don't put all your eggs in one basket' for example. Diversifying your investments can limit the overall risks. Money to be invested in the short term is suited to Term Deposits, whereas surplus cash that can be spared for longer periods can be put to work in Securities accounts or in real estate.