Where to allocate financial surpluses?
For many years, the company can generate only losses or provide profits that allow you to finance only the current activity - pay tax liabilities, contractors, employees, buy the necessary goods and materials. After a period of hard struggle, the desired moment may finally come when the company starts to generate the so-called financial surplus.
Financial surplus - what is it?
The financial surplus is simply defined as the company's free financial resources. How can it be established in a sole proprietorship? It is very simple - just subtract the costs from the income. If the difference is positive, then the money is free money that can be used in many different ways.
What to do with the surplus?
Depending on the needs and conditions of the enterprise, the financial surplus achieved may be distributed to:
- financing the company's development,
- payments for company owners and employees,
- debt repayment,
If it is sufficiently high, it may be allocated in part to each of the above-mentioned areas. However, it is worth taking into account effective ways of using the financial surplus, especially in the initial stages of the company's existence. The additional impact on the portfolio of the business owner will certainly please him very much, but it may turn out to be unprofitable in the long run. For free funds, you can buy modern equipment that will improve production, renovate office rooms, send employees to specialist training so that they can perform their duties better. Thanks to this, there is a chance to multiply the current surplus, which at the same time will contribute to increasing the owners' income (all in good time).
Another way to use the surplus is to use it to pay off debt - be it to the bank or contractors. If the company has a lot of debts, it is worth resisting the temptation to spend free funds on various types of pleasure, in order to allocate it to pay off overdue liabilities. Nothing spoils the company's reputation as much as the common opinion that it is unreliable and untimely. It is also not known whether the surplus achieved in a given period will also appear in the next one, so it is worth being safe than sorry and until the company achieves a stable situation on the market, all surpluses should be used for more "noble" purposes.
Another possibility is to multiply your profit by various types of investments. This option may prove to be the best solution for companies that are in a good period of development and do not have arrears with various institutions and contractors. There are many options at your disposal - for example, you can deposit money into a company savings account or set up a deposit. A wide range of banks will help you find an option ideally suited to the company's needs - there are deposit products that differ not only in the interest rate, duration, capitalization method, but also in a number of features that are tailored to the specific requirements of a specific client and allow you to generate even greater profits .
Deposits are divided into renewable (automatically extended after a specified period) and non-renewable (one-off - after the deadline, the funds are returned to the entrepreneur's account). Another criterion divides deposit products into short-term (maturity not exceeding one year) and long-term (maturity over one year but generally shorter than 6 years).
Banks' offers also include investment funds designed specifically for entrepreneurs. In this case, money market and bond funds are very popular. The first of them are related to profits similar to those that can be obtained from bank deposits, but they are characterized by greater flexibility. The funds in the fund are invested in treasury bills, bonds and bank deposits. If an entrepreneur decides to use a bond fund, then his company's money will be spent on the purchase of bills, treasury bonds and debt securities.
As you can see, an entrepreneur can allocate his company's financial surpluses in many different ways - withdraw them, leave them in the enterprise or invest. The choice should depend primarily on their amount, the time for which they will be available and the needs of the business.