And on the contrary, a significant cash surplus that builds up over an extended period of time may not necessarily be desirable, depending on the goals and objectives of the operation. Therefore when a cash surplus occurs, there should be plans as to how to make the most advantageous use of it.
One intended use of cash surpluses generated at certain times during the period may be to fund cash disbursements that are made at other points in the period, or even in subsequent periods. Cash disbursement are not spread evenly over an operating period. Some examples of disbursements that need to be taken into consideration for funding purposes and that should be planned for in advance include:
Insurance premiums that are prepaid for several months
Deposits for a lease agreement
Advance payments on contracts
Estimated income tax payments
Increased installment payments that can occur with variable rate or interest only mortgage loans
Scheduled replacement of plant, equipment, vehicles and other assets
Unexpected disbursements for major repairs
Debt reductions
Acquisitions
In some cases, it may be necessary to set aside reserves to cover major expenditures, either expected or unexpected, when they occur.
It may be possible to even out the projected cash flow by borrowing against revolving lines of credit during periods of cash deficits, and repaying the credit during periods of cash surpluses. Or cash surpluses could be used to purchase short-term investments in marketable securities, which could then be redeemed or sold to provide the necessary funds during periods of cash deficits.
Once there is a reasonable level of assurance that cash requirements are appropriately provided for, surplus cash balances could be destined for investments, and for growth and expansion of the business.