Savings Options for Small Businesses, Part 2

Part 2: Making Smart Decisions With Surplus Cash

When business owners talk about savings, many think first about not having enough. But an equally common—and often overlooked—challenge is knowing what to do when you do have extra cash on hand.

This moment often shows up during periods of strong business. A few large projects closing, steady revenue, or disciplined budgeting can leave owners with more cash than expected. And that’s when the temptation begins—to spend it before the IRS takes a bite.

But according to Financial Planner Dan Stich, that instinct—while completely understandable—can sometimes cost small businesses more than it helps.

In Part 2 of our series, we explore how to think through surplus cash, why “panic spending” happens, and what smarter alternatives exist.

Why Surplus Cash Often Leads to Reactive Spending

By Financial Advisor Dan Stich, CPFA

Many owners believe they have only two choices:

1. Spend the money on business expenses
2. Lose part of it to taxes

Because of that belief, business owners often make purchases that aren’t necessary or strategically helpful, but that reduce the tax bill. Here’s an example: A client had cash on hand and didn’t want it to go to the government. The decision was made to buy signage for the company vehicles—despite the fact that signage wasn’t essential for that type of business.

It wasn’t a bad purchase, but it wasn’t the best use of those funds. The owner simply didn’t know what alternatives existed. This is where planning becomes powerful.

Before Spending: Understand What the Money Is For

I recommend asking a few simple questions before making any significant purchase:

Do I genuinely need this equipment or upgrade right now?
Will it meaningfully improve operations or revenue?
Is this purchase solving a problem—or just solving a tax concern?
Could these dollars be used in a way that supports future financial stability?

Because here’s the truth: Buying something unnecessary to save on taxes often costs more than the taxes would have. A tax deduction gives you a discount, not free money. Spending $20,000 on something you don’t need in order to “save taxes” still means you’re spending far more than the tax you’re avoiding.

Most business owners don’t make these decisions because they’re careless. They make them because they’ve never been shown the other paths.

Smarter Uses for Surplus Cash

Here are the options I regularly discuss with small business clients:

1. Strengthen Your Short-Term Safety Net

If you don’t yet have 3–6 months of operating expenses set aside (Part 1 of this series), a surplus is a perfect opportunity to build it. This gives you more resilience through seasonal slowdowns, sudden equipment failure, health issues, delayed client payments, and economic downturns.

A strong cash cushion is often more valuable than a new piece of equipment with a questionable ROI.

2. Move Excess Cash Into Higher-Earning, Short-Term Accounts

Once short-term needs are secure, evaluate where your cash lives. Many business owners keep all surplus in checking, where it earns nothing. Better options include:

• Business money market accounts (flexible with better interest)
• High-yield savings accounts (for cash you don’t need immediately)
• Short-term CDs (only if you won’t need the money for a few months)

These tools let your cash work for you instead of sitting idle.

3. Consider Retirement Contributions—Your Most Underused Tool

This is where many small business owners have untapped potential. If your business had a profitable year, contributing to a retirement plan may:

• reduce your taxable income
• keep more money working for you instead of going to taxes
• build long-term financial security
• reduce the pressure to sell your business as your only retirement strategy

In my experience, few small business owners realize just how flexible retirement accounts can be. Even solo business owners can establish:

• Solo 401(k)
• SEP IRA
• Traditional IRA
• Cash balance plans (for high-earning businesses wanting to save significantly more)

We’ll dive deeper into these options in Part 3, but for now, the key takeaway is: A retirement contribution often produces a better long-term benefit than end-of-year purchases made just to lower taxes.

4. Avoid “House Poor” and “Business Poor” Thinking

I see an interesting pattern in both personal and business finances: People assume that if they have money, they should use it immediately. The result? Here are some examples:

• Individuals become house poor—owning a home but having nothing left for life.
• Businesses become equipment poor—owning tools, tech, or vehicles they didn’t truly need, while lacking liquidity.

The goal is a healthy balance of short-term stability, strategic mid-term growth, and long-term retirement planning. Surplus cash should strengthen all three—not weaken one to benefit another.

A Better Question to Ask

Instead of asking, “What should I buy to reduce my taxes?” I recommend a different question: “What choices today will make me stronger next year?”

Sometimes the right answer will be a purchase—if it truly supports growth, operations, or revenue. But many times, the best decision is redirecting surplus toward stability, savings, and long-term planning—not another expense you don’t really need.

Coming Up in Part 3: Retirement Strategies for Small Business Owners

Most small business owners hope the future sale of their business will be their retirement plan. But that assumption comes with real risks.

In Part 3, we’ll explore:

• Solo 401(k)s, SEP IRAs, SIMPLE plans, and more
• Why Wisconsin may soon mandate employer retirement plans
• How tax credits can reduce the cost of starting a plan
• How to use good years to build long-term security
• Why retirement planning shouldn’t wait until you’re close to selling the business

And, most importantly:

• Why your business should fund your retirement—not the other way around.

Daniel Stich, CPFA — And Small Business Milwaukee Advisor
Stich Financial Partners
Independent financial & insurance planning. Multiple carriers. Client-first approach.
262.853.4541
[email protected]
N27 W23957 Paul Road  |  Suite 105  |  Pewaukee, WI 53072