Tuesday, September 13, 2011

CFO Services - Excess Cash

As a Part time CFO from time to time I get requests from clients as to what to do with excess cash flow. I know it sounds strange during these challenging economic times, but some companies do produce excess cash. This can occur if business is really good or just from a seasonal fluctuation in a seasonal business. When these situations occur we have a tendency to think only about putting the money in an interest bearing bank account. However, if you have seen money market and CD rates lately you know that if you can get an interest rate of 1% per year you are lucky and this does not seem to be changing anytime soon.

Here are some things that can be done with excess cash:

  1. Call all Trade Vendors to see if they will offer early pay discounts. Some offer them as a matter of policy but I would make a phone call to them anyway to see if they would accept a higher discount. After all you may be inquiring at a time where they need cash.
  2. Call the Landlord and see if he will give you a discount for prepaid rent.
  3. Call your expense vendors and see if you can get a discount if you pre-pay your expenses.
  4. Pay down your line of credit as long as you can dip back into it and the bank doesn’t freeze your line as you pay it down.

If you think about points 1 thru 3 these are operating expenses you have to pay any way in the near future. It is not like paying the credit line which is additional dollars outside of ordinary operating expenses. That is why with respect to the credit line I suggest you make sure you can borrow back into it.

I think it is very likely that the aforementioned four points will yield appreciably better results than an interest bearing bank account.