Excess cash: how to calculate it and put it to work
Your business account shows a healthy balance month after month. The good news is that your business generates more than it spends.
The not-so-good news is that this idle cash is costing you money every year. Here is how to measure your excess cash, understand what you are losing by letting it sit idle, and choose the right solutions for your timeline.
What is excess cash?
A simple definition
Excess cash refers to a situation where a company has more liquidity than it needs to fund its day-to-day operations and meet its immediate obligations. It is the surplus that remains after salaries have been paid, suppliers settled, loans repaid, and working capital requirements covered.
This surplus is perfectly normal. It usually reflects a profitable business with well-managed working capital. It can also result from a one-off event, such as the sale of an asset, the receipt of a grant, or the signing of a major contract.
One-off surplus or recurring surplus
This distinction is the foundation for the rest of our analysis.
- One-off surplus arises from an exceptional cash inflow or a deferred investment. It must remain accessible at all times.
- Recurring surplus is observed over several consecutive fiscal years. It represents structurally stable cash flow, the kind you can tie up without compromising operations.
Confusing the two leads either to locking up funds you will need in three months, or to leaving a sum sitting idle for years that could have been put to work.
How to calculate your surplus cash
The balance sheet approach
The most common method is to subtract the working capital requirement from the net working capital.
Net cash = net working capital minus working capital requirements
Working capital corresponds to stable resources, equity and medium- to long-term loans, minus fixed assets. Working capital requirements represent the capital tied up in the operating cycle, namely inventory and trade receivables, minus trade and social payables.
Take a company with working capital of 620,000 euros and working capital requirements of 380,000 euros. Its net cash stands at 240,000 euros. If it estimates its needs for the next twelve months at 90,000 euros, including planned investments, its actual surplus is around 150,000 euros.
The bottom-up calculation
The other approach starts directly from bank accounts.
Net cash = cash and cash equivalents minus short-term financial debt
Cash and cash equivalents include bank balances and marketable securities. Short-term financial debt includes overdrafts and shareholder current accounts repayable at any time. Both methods yield the same result, the second is simply faster to implement.
Operating Cash Flow vs. EBITDA: What sets them apart
These two indicators are often confused. EBITDA measures accounting performance, without taking into account when the money actually enters the account. Operating Cash Flow, or OCF, measures actual cash inflows and outflows.
The difference between the two stems from changes in working capital requirements. A company can report a very healthy EBITDA but a negative OCF if its customers pay late and its inventory levels are rising. When it comes to managing cash flow, OCF is what matters.
The real cost of idle cash
Leaving a surplus in a checking account might seem prudent. In reality, it is the only option that is guaranteed to lose money.
Every month, the Banque de France measures the average return on bank deposits for non-financial corporations. It hovers around 1.2%, across all types of accounts, including checking accounts and term deposits. Meanwhile, INSEE reported a 2.4% year-on-year increase in consumer prices as of August 2026.
The gap speaks for itself. Cash earning 1.2% interest in an environment where prices are rising by 2.4% loses about 1.2 percentage points of purchasing power every year. On 300,000 euros held in cash, that represents nearly 3,600 euros evaporated in twelve months, without a single accounting entry to flag it.
Beyond this mechanical cost, there is a signal. A large, unexplained surplus raises questions. An investor will see it as underinvestment, a bank as a lack of vision, and a potential buyer as an unnecessarily inflated acquisition price. Knowing how to justify your surplus is a key part of management.
What should you do with your excess cash?
Strengthen the business
This is the first option to consider. Upgrading production equipment, hiring staff, funding a product launch, or purchasing your business premises creates long-term value. Paying off an expensive loan early provides a guaranteed return equal to the interest rate of the debt avoided.
Early payment to suppliers is also worth exploring. A 1% discount for cash payment within thirty days is equivalent to an annualized return far higher than that of a risk-free investment.
Extracting cash
Repaying a shareholder current account is the most tax-neutral route, as it is simply the company settling a debt owed to you. Distributing dividends remains an option, provided there are distributable profits and the general meeting votes in favor of it. It is subject to a 30% flat-rate tax, which should be compared to the return on an investment held within the company.
Maintain a precautionary reserve
A portion of the surplus should remain untouched. It absorbs late client payments, unpaid invoices, or seasonal lulls, saving you from having to seek emergency financing at the worst possible time. In summary, there are six possible options.
- Invest in production tools and development
- Repay high-interest debt early
- Settle all or part of the shareholder current account
- Negotiate early payment discounts with suppliers
- Distribute dividends
- Invest the balance in interest-bearing accounts
One point of caution before making any investment decision. Verify that the proposed transaction falls within your company's corporate purpose; otherwise, you will need to amend your articles of association.
Where should you invest your excess cash based on your time horizon?
Four criteria guide your choice: your investment horizon, liquidity needs, risk tolerance for capital loss, and the amount to be invested. First, divide your surplus into three buckets, then assign each bucket to a specific type of asset.
Less than one year: liquidity over yield
- Short-term term deposit accounts with guaranteed capital and a pre-determined rate
- Money market funds, valued daily and quickly accessible
- Negotiable debt securities for larger amounts
One to five years: balance
- Twelve to thirty-six month term deposit accounts, often with a progressive rate
- Capitalization contracts, which allow for a secure euro fund and unit-linked investments
- High-quality corporate bonds held to maturity
Beyond five years: committed diversification
- Real estate investment trusts (REITs), SCPIs, and OPCIs for pooled rental income
- Structured products, where capital protection depends on specific conditions
- Private equity, reserved for the most stable portion of your surplus
These last three categories carry a risk of capital loss and reduced liquidity. They should only be used for the portion of your surplus that you are certain you will not need.
