Build a Cash Reserve
A cash reserve is an emergency fund for your business. This can be used to meet unplanned, short-term financial needs. Once you have a reserve, you don’t need to take out a loan to meet your business expenses. This makes it easy to plan and invest.
Cash on hand or cash in reserve refers to cash or financial assets that you can access immediately. This cash cushion typically includes assets like physical cash you have in your store, and the balance of your business account.
Saving up enough cash to cover expenses for a few months can improve liquidity and make your business more resilient. Your cash reserve account should be separate from your general business bank account and other specific accounts, like a payroll account.
Paying Bills on Time makes running your business easy.
Its easy to fall behind on your financial obligations. This often means you incur late fees. It also forces you to borrow money to cover expenses like payroll. You might also have a hard time with keeping inventory in stock or purchasing raw materials.
As a business owner, you need to be aware that sales can vary. Some industries see a seasonal peak, and a wide range of events can cause sales to slow down for a while.
Most of these factors are difficult to predict and are outside of your control. A natural disaster can disrupt operations, a new competitor can take market shares away from you, and something like an order cancellation or unpaid invoice can slow down your cash flow.
Keeping enough cash on hand to cover expenses over a few months makes it easy to overcome these situations. You should also know that cash on hand will increase your business valuation, which is an advantage if you’re in the process of applying for a loan or looking for investors.
How Much Cash on Hand Do You Need?
You need to determine how much cash on hand you need to stay afloat if demand slows down. Failing to save up enough cash could make it challenging to meet your financial obligations and increase your risk of bankruptcy.
However, saving more cash than you need would take away from the capital you could use for growth.
Growing your business requires investing in things like research and development, inventory, machinery, or marketing. A large cash cushion means that you will have less capital available for these different investments.
Your cash flow statements are an excellent place to start to assess your monthly expenses. You can use these statements to identify your different expenses, including recurring expenses like payroll, rent, utilities, loan payments, and production costs. It also includes variable expenses like inventory, taxes, and marketing.
If your industry is seasonal, go over your cash flow statements for the past year to identify the months with the most and least expenses.
Experts recommend saving up enough cash to cover between three and six months of expenses. If you operate a seasonal business, make sure you have enough cash to cover expenses during your busiest month.
You can adjust that amount based on your needs and the growth stage of your business.
Constantly review Your Financing Options
it’s wise to know what you want. Are you looking for long-term financing? Do you need cash within days? Do you need the money to refinance debt or buy real estate?
Remember, many types of financing not only have a range of turnaround times from application to payout, but they may also have rules on how the money is spent. Get familiar with each of these most common business funding choices before you start applying.
Obtaining more capital will help you address immediate financial obligations and give you a head start on saving for your cash cushion.
Financing your small business falls into two categories: debt and equity. Financing through debt is a business loan. It happens when a business gets money from a lender to be used as working capital or capital expenses. Loans are secured by assets, this means a lender can take assets away if you don’t repay the loan.
Equity financing is where a business offers a percentage of the company, known as shares, in exchange for money.