Investing vs. holding cash: Trends and perspectives
A look at how investing and holding cash impacts businesses’ ability to grow.
July 22, 2021 5 min read
Amid the uncertainty and recovery from the COVID-19 pandemic, many businesses are taking this time to reassess their capital growth strategies.
More traditional businesses are focusing on paying down their debts and are actively growing their savings by holding on to cash. More risk-tolerant companies are using the disruption as a chance to grow and invest in new technologies and opportunities.
Deciding which capital model or cash strategy is right for your business requires the managerial team and owners to consider the unique circumstances the company is facing. So how can you ensure you’re making the right choices for your company’s financial position? Here are a few things to keep in mind that can help you balance your capital expenditures and savings strategy to keep your business growing and stable.
Maintain a healthy source of emergency cash
Emergencies happen all the time. Make sure your company is ready for them by having a strong supply of emergency cash on hand. If you don’t have the capital on hand, consider opening a line of credit that will help you cover emergency expenses when they come up.
In addition, keep an eye on your company’s cash flow rather than focusing on revenue alone. Ultimately, a company with $1 million in revenue that maintains enough cash to cover expenses for two months is more viable than a company making $10 million that can’t cover its expenses for a couple of weeks.
You can work with your banker to find ways to leverage your current cash supply. Consider additional ways to boost cash flow, like digital payment programs. These programs may help make it easier for your customers to pay you, which then makes it faster for you to receive funds and easier for you to generate savings by reducing the cost of payment processing.
Prioritize capital expenditure needs
Capital expenditure is part of business. But during times of economic recovery, it’s important to carefully assess capital expenditure needs. While capital expenditures like purchasing new equipment or technology or investing in building improvements can help you take advantage of growth opportunities, they can also impact your balance sheet. Look at the long-term costs associated with the investment. This means doing a deep dive into your company’s operations and considering these key factors:
- Labor - Before investing in new equipment or products, consider the impact of those investments on your labor costs. For example, a $1 million system won’t benefit your company if you can’t find the right person to run the system. Make sure the investment will work for you rather than create a burden on your balance sheet.
- Supply - Consider the macro environment of your industry and any shortages that could drive up costs in the short term. These could include materials like microchips, paper products, lumber or other raw materials needed for your product. Shortages can increase the prices you’ll pay for your regular expenses. Make sure you’re able to justify the added cost and that the cost won’t negatively impact profitability and sustainability.
Rethinking the business strategy
If you’re weighing the benefits of holding cash versus investing, it’s a good idea to rethink your business’s strategy. For example, if your revenue remained constant throughout the pandemic, but your margins shrank, you’ll need to assess whether your sources of revenue are truly working for you. You might need to rebalance your clients or book of business to free up cash flow.
If shutdowns impacted your business, you’ll need to do things differently to remain competitive. Tightening your belt and ignoring the potential benefits of investing idle cash may not benefit your business enough. You may need to consider using a different operating model to restore your company to its normal level of profitability.
Making smart changes to remain competitive
It’s natural for businesses to make some changes based on supply and demand trends and business priorities. Be willing to look at your company’s operations and weigh the costs and benefits of holding cash versus investing it. If you understand your company’s position, you’ll be able to make adjustments quickly. This can help you create a resilient and sustainable plan for the future.