Using Cash Flow Surpluses for Investment or to Pay Down Debt

Once you’ve improved your cash flow, you’ll likely encounter a lovely problem: a cash surplus for your business. Before paying down debt or investing with your extra capital, learn the pros and cons of each.

A cash surplus is the cash that exceeds the cash required for day-to-day operations. How you handle your cash surplus is just as important as the management of money into and out of your cash flow cycle.

  • Paying down your debt
  • Investing the cash surplus

Like so many other things you do for your business, deciding where to use your cash surplus requires some planning and your better judgment.

Paying Down Debt

Paying down any debt you may have is generally the first option considered when deciding what to do with a cash surplus. Rightfully so because a short-term investment of your cash surplus is not likely to yield a return equal to or greater than the rate of interest you’re paying on any of your debt.

It doesn’t, for example, make any sense to invest a cash surplus at 5 percent when you can pay down a bank loan that is charging interest at 12 percent. However, the decision to automatically pay down debt may not be correct in all cases.

One of the key advantages of managing your cash flow is the ability to predict the future cash requirements for your business. That is, it should help you determine when your business may need to rely on external financing as a source of cash. The need for external financing may be the result of expanding your business, purchasing new property or equipment or just getting you through a normal seasonal down period.

Whatever the reason, preparing a cash flow budget is the best way of predicting these future needs for cash. With at least some indication of your future cash payday loans Waterville Ohio needs, you can then make some decisions regarding the best way to finance those needs.

For example, you may feel that interest rates are relatively low at this time and that you look for them to rise in the near future. Therefore, instead of using your cash surplus to pay off a two-year loan at 10.5 percent, it may be beneficial to invest the surplus temporarily, and avoid a much higher interest rate on a bank loan one year from now.

Investing the Cash Surplus

When investing a cash surplus, it’s only natural to seek the highest rate of return for your investment. Four factors must be considered when making your investment decisions:

  1. Risk
  2. Liquidity
  3. Maturity
  4. Yield

Each factor plays an important role in determining the rate of return you receive on your invested cash surplus. These factors can also help you determine how much to invest and when to invest your surplus.

There are many investment opportunities available for your cash surplus. You must consider the advantages and disadvantages as well as the levels of risk, maturity, liquidity and the yields of each of your investment opportunities. The following are just a few of the investment opportunities you may have:

  • Checking accounts with interest
  • Sweep accounts
  • Treasury bills and notes
  • Certificates of deposit (CDs) and money market funds


We suggest you consult with a professional before making any investments. Professionals who specialize in helping their customers make wise investment decisions can help you determine the best possible investment opportunities for you and your business. Many banks offer cash management services to their customers as part of their banking services. Contact your bank for more information about their cash management services.