When it comes to business, understanding financial terminology is a must. One such term you may have come across is “spend down”, and it could have a significant impact on the financial plan of your business. In this article, we’ll explain what the term really means, and how it works.
What Does ‘Spend Down’ Mean?
It’s fairly simple: spend down is the process of drawing on existing assets to cover costs until they’re none left or the target expenditure is reached. This is known as “using up” or “liquidating” resources. For example, if you were planning on expanding and needed to purchase software licenses, you could sell stocks or annuitize assets to spend down to cover the cost.
What Are the Benefits of Spend Down?
The primary benefit of spend down is that it allows you to quickly access funds to cover expenses without having to take out an additional loan or sell assets at a discount. This is especially beneficial if you’re instituting a plan with a stringent budget, or if it’s a one-time expenditure that you don’t anticipate having to make in the future. Additionally, having a plan to spend down can help you preserve capital, as it allows you to quickly liquidate assets.
How Is Spend Down Different From Investing?
Spend down and investing are two different processes. With spend down, you’re using resources to cover a specific expense, usually in the short-term. Investing, on the other hand, is used to grow or protect your resources over a longer period of time. Investing can have immediate benefits, such as gaining returns, but spend down’s primary focus is to spend rather than to accumulate.
Final Thoughts
If you’re seeking to quickly cover the cost of short-term expenses, spend down may be the right choice for your business. While the process doesn’t always yield immediate returns, it can be an effective means of preserving capital while cutting costs.