Cash reserves: not just for big businesses
Have you ever thought about how the song lyric “Cash rules everything around me” (C.R.E.A.M.) is relevant to the liquidity in your business? You’re probably wondering why I’m referring to a Wu-Tang Clan song in regards to a common business issue, but I believe it has some merit.
In a business’s daily operations, unexpected expenses and opportunities arise that require a quick response. And if you don’t have enough tangible funding on hand to meet these costs, your operations could come to a halt because you can’t afford to fix an emergency mishap, or you may lose out on an additional source of capital because you don’t have enough to travel to meet a new investor. Saying that cash rules everything may be a little extreme, but it does heavily factor into your viability as a business.
How much should you have in your cash reserves?
As a business owner, you should always have a contingency fund. It’s hard to speculate what could happen in the future, but it’s best to have money on hand for when the impossible happens, like if you have to hire a new person should one of your executives decide to leave or if you have a PR mishap that requires damage control. You can handle these things in a better manner if you have an emergency fund already set in place rather than scrambling for money at the last minute. You should try to save 5-10 percent of what these issues would cost and set it aside as an emergency contingency in addition to your regular cash reserve.
View your company’s cash reserve as you would your personal savings. Aim to have at least three to six months of your company’s expenses liquid, and perhaps more if you’re foreseeing heavy future costs. This coupled with your emergency 5-10 percent contingency fund for unexpected costs should suffice should a serious issue arise. It’s best to try to have this amount on hand as quickly as possible, but be realistic in how much you can put away each month after expenses are paid.
How to get started with cash reserves
You can begin with setting a goal of six months to a year, but it’s okay if it takes a while longer, and if you experience a period of lean months, then you may have to cut back a bit, but begin to sock away cash more aggressively once things stabilize. Having this liquidity in your business will help during times of hardship, for example, if you can’t make payroll one month or need to repair a water leak at the office.
And by getting into the habit of having a sufficient amount of resources on hand, YOU determine what projects your company can take on or how quickly you can fix a repair rather than having it solely dictated by the amount of cash you have.
