Cash Surplus

A Cash Surplus in accounting refers to the volume of inflow of cash exceeding its outflow during a given period, showcasing positive liquidity and allowing businesses to meet their obligations or expansion requirements. It reduces debt, improves financial position, helps reinvest in growth avenues, and offers excess funds for reserves and business expansion.

It excludes the actual amount deposited in the bank and only considers retained profits. This surplus plays a key role in strategic planning, ascertaining financial decision making and upgrading the ability of a company to respond to market dynamics successfully. It also helps businesses manage and use their finances for new services or products.

Cash surplus is the excess cash with an individual or business after they have met all their business or personal obligations, operational costs, loans and expenditures within a specified time. It depicts positive cash flow for a business, presenting it as a well-managed and well-funded business to regulators, stakeholders and investors.

The cash surplus situation arises when a business's effective planning makes its income surpass all compulsory expenditures. The situation could be structural, temporary or consistent, representing cash flow fluctuations. Companies can achieve it through proper cash management and cost control. If one carries out savings and budgeting with discipline, one can achieve it. 

It has various implications, including:

• Financing uncertain emergencies or expenses ensuring smooth operation, 
• Upgrading the company's ability to fulfill its obligations and improving its credit ratings.
• Offering enough funds for growth opportunities by providing money for reinvestment in assets or new ventures.

Cash surplus can be used to pay loans and buy stocks, securities, or bonds. Businesses utilize it to build cash reserves for targeted financial goals and uncertainties. It can also be used to reduce debt having a high interest rate. A positive cash surplus highlights the strong financial status and management, promoting stability. It also fosters opportunities for growth and individuals. It also plays an important role in maintaining resilience and operational efficiency. 

In terms of the financial realm, a cash surplus adds to stability by allowing businesses to withstand recessions and make growth investments. In a way, it signals sound and healthy financial practices to investors. Hence, investors are attracted to investment, which improves their credit ratings, forming a positive business cycle and fostering the economy.

The cash surplus consists of elements like cash inflow and outflow during a given timeframe, usually in a financial year. One has to consider all streams of cash and subtract all cash expenses. Hence, the formula for surplus of cash can be written as follows:

Cash Surplus = Cash Inflows – Cash Outflows

Where, 

Cash Inflow = Operating revenues + Investment income + Financing inflows

Cash outflow= Operating costs + Capital expenditures + Interest and debt payments + Taxes

If the surplus formula has a positive outcome, it has a surplus of cash; if the results are negative, it is recorded as a cash deficit. The above expression forms the basis of the online cash surplus calculators.

Let us use a few instances to understand the cash surplus definition well:

Example #1

Let us assume a cloth manufacturing company in Old York City, Maara, has the following cash-related data-

Cash inflows:

Operating revenues: $600,000

Investment income: $60,000

Financing inflows: $160,000

Total cash inflows = $600,000 + $60,000 + $160,000 = $820,000

Cash outflows:

Operating costs: $400,000

Capital expenditures: $200,000

Interest and debt payments: $80,000

Taxes: $50,000

Total cash outflows = $400,000 + $200,000 + $80,000 + $50,000 = $730,000

Surplus of Cash = Cash Inflows – Cash Outflows 

= $820,000 – $730,000 = $90,000.

Hence, Maara achieves a surplus of cash of $90,000, which acts as an element to attract more investors for their upcoming project.

Example #2

An online article published on December 6, 2024, discusses the treasury investment worth MAD 2.2 billion by the Moroccan Treasury and External Finance Department (DTFE). The report indicated how it divided the planned investment into two categories - one was a repo investment amounting to MAD 2 billion for six days at a rate of a weighted value of 2.39%, while the other one was an unsecured investment of MAD 200 million for about three days at a rate of 2.75%.

This example states how the cash surplus can help businesses and individuals diversify portfolios for future returns, helping them build their wealth over time.

It has numerous benefits, which include the following: 

• Creates opportunities for investment in the expansion and growth of business
• Provides buffer funds to keep a company operational during economic disasters and unexpected costs
• Facilitates dividend payouts as surplus cash could be distributed to all shares and stakeholders, increasing investor confidence
• Opens window for funding marketing campaigns, preparing competitive pricing plans and solidifying market presence

Both deal with cash management, but yet share multiple differences. Let us have a look at these differences below: