Do you know what a ‘lazy’ balance sheet is? It means you may have excess cash sitting around that isn’t working for you – or your business – as hard as it could be. The truth is that you could be creating wealth from any excess you have sitting on your balance sheets.
Essentially, when your incoming cash flow regularly exceeds your outgoing expenditure, you might be tempted to put that excess aside into an interest bearing account for a rainy day. Sure, you might be earning 4% or 5% interest on that cash, and it might be sitting there in reserve for when you want it, but could it be doing other things to grow your wealth?
Many business owners like the idea of holding cash in reserve to help cover those tough times or slower months. This is fine if you want to hold a buffer to protect against slow cash flow months. You may even prefer to reinvest that excess cash back into the business to fund expansion plans or to increase operations. You might even opt to reduce business debts and decrease those liabilities.
But there are times when having too much excess cash could actually reduce your business’s overall profitability.
How Can Too Much Cash Be Bad?
In truth, having too much cash isn’t bad. However, you’re running a business that you hope becomes a profitable concern and that may be worth something when you eventually sell it.
Your return on equity can influence your business’s profitability, which can directly affect your business’s value. If your eventual end goal is to sell your business for a profit, you obviously want the business value to increase as much as you can.
Your business equity is the amount remaining once you deduct the liabilities your business has from the asset totals. Obviously, the cash you have sitting around forms part of that asset total, so you have an inflated figure to begin with.
When you remove that cash, your figures suddenly don’t look quite so attractive, unless you’re replacing that value for an equivalent value in other types of assets. Ideally, these should be assets that can offer returns higher than those offered by earning bank interest.
When you have equity available in your business budget, you also have the capacity to borrow money. This can allow you to purchase other assets to increase the business’s value overall. In other words, you’re taking advantage of the opportunity to leverage that excess cash to increase your returns.
Alternatively, you might want to diversify your asset classes and consider purchasing shares or even property. Both of these options have the capacity to increase your return on equity far higher than the lazy 4% or 5% you might earn in interest from your bank. They also help to create wealth in other asset classes that might offer a form of hedge in future in case your business takes a turn for the worse.
Of course, you could decide to pay yourself a fat bonus and give yourself a large pay rise, but that’s not quite the same thing as creating real wealth that has the potential to earn you far more over the longer term.
Take a more careful look at your own balance sheets and see if you can work out whether yours could be considered ‘lazy’ or not. Then see if you can pinpoint ways to put that excess to good use.