Cash is king. Is it time to spend?

After a year of tightened purse strings, many businesses have been sitting on a cash surplus. Now, some are eyeing major purchases and projects.

"With all of the uncertainty in 2020, businesses trimmed budgets where they could, canceled projects and cut spending," said Bruce Guest, a regional commercial banking manager for BOK Financial^®. "As a result, many are sitting on more cash than usual and may or may not know how to use it most effectively."

With everything in flux, from consumer spending to supply chain issues to local and state mandates, many businesses opted to sideline planned projects, upgrades, expansion and marketing efforts during the pandemic. Looking ahead, business owners must navigate when to spend, when to save and when to finance.

But even with cash on hand, Guest said it may not always be best to purchase new equipment or fund a capital improvement project with cash alone.

"Cash is king," said Guest. "But sometimes the king isn't the right move."

Keep an eye on your borrowing capacity, he said. "It may make sense to finance equipment purchases matching a longer-term asset to a longer-term loan, and reserve your cash for more urgent purchases, such as raw materials."

As businesses build back their inventories, they may need extra cash, Guest said. "You don't want to overextend yourself. Cash will protect you in a downturn—so consider not spending it all."

With interest rates at historic lows, Guest said many clients are considering real estate to find a better fit for their operations. Building equity in a property is certainly preferable to just paying rent, he added.

Companies are also looking for greater efficiencies by purchasing new technology, machinery and new production lines, including packaging. All should contribute to higher margins down the road.

"Be mindful of future innovation, future markets and demographics to make sure you're thinking, buying and borrowing strategically."

- Bruce Guest, regional commercial banking manager for BOK Financial

When deciding between an all-cash purchase or a partially financed option—and the timing of it all— Guest offered this checklist:

• Compare your return on investment to the term of the loan. Will you make your money back before you've paid off the note?
• Be careful about expanding for one client. If you overly rely on one client and something happens to that business, or your relationship, what does that mean for you? Are you making this expansion specifically for a single account?
• Consider your labor needs. Does your capital expenditure require additional employees? And is that labor force available to you right now? Alternatively, does an equipment upgrade mean a staff reduction due to automation, and what effect will that have on your balance sheet?
• Check the supply chain. Who owns the tools or equipment you're considering? Is it the sole source? Do you foresee any supply chain, distribution or regulation issues with that supplier?
• Review your business plan. Does this purchase or expansion fit into your overall strategy?
• Investigate third parties. Do you need to make a purchase, or can you outsource to a third party and improve your efficiency and possibly bottom line?

"With all of these factors, consider how it will impact your gross profit margin," said Guest. "Be mindful of future innovation, future markets and demographics to make sure you're thinking, buying and borrowing strategically. "