In the current uncertain small business climate, a cash reserve can be the difference between weathering the storm or facing a crisis.
5 ways to build a cash reserve
A cash reserve is your rainy day fund set aside to cover essential expenses like payroll, insurance and utilities during tough times.
Ideally, your business should have cash reserves equal to three to six months worth of expenses. However recent research has shown that one in five small businesses have no cash reserves at all.
Do you have enough of a cash reserve? Or if you hit a tough time, will you have to dip into personal funds?
Here are our top five ways to build your business cash reserve, so you can get that peace of mind to focus on growing your business.
1. Figure out how much you need
About six months of expenses is the gold standard. But it is important to have a grasp on exactly how much your business needs.
To get started look at:
your monthly cash flow reports
add up recurring costs like payroll, rent, supplies and marketing
look at several months of data
2. Set up a separate account
You can keep the funds in your general business account, but this can be hard to track. Instead, consider putting the money in a separate on demand interest bearing account.
This means your reserve can grow, while remaining accessible.
Make sure this account is visible in your accounting software.
3. Keep an eye on excess cash
Check your operations monthly to find excess cash that doesn't affect your immediate finances. Where you can, allocate or transfer this to your cash reserve account.
4. Put a little bit aside regularly
A little bit can go a long way. It is better to set a small but consistent amount of your profit aside, and get it going into your cash reserve account.
This should be over and above your tax savings - you should already be saving for tax!
5. Replace it if you use it
Don't be afraid to use it if you need to, that is what it is for after all! But after you have weather the storm, look again at your monthly cash reports and other business info and try and replace the funds you used as quickly as possible.
How to maintain your cash reserve once you have it
Monitor cash flow: Use Xero to track cash flow against your budget, finding trends and issues before they become problems
Maintain lean spending: Think about the essential and the nice to have. Maybe put a few of the 'nice to have's' on the back burner for a bit
Build up in peak seasons: If you have a peak season, plan to build up more during this time to get you through the quiet times
Get professional advice: Have a chat with your accountant to make a tailored plan. A good advisory accountant can also set you up with a budget, cashflow forecasting, and monthly reports to make it super easy to stay on top of this stuff.
Financial management can be overwhelming, especially if you’re new to running a business. But don't be afraid to seek help from a qualified accounting professional.
If you need help, at Clear Mind we can:
Create a cashflow forecast for you, so you know exactly where you money is coming from, and how much you can put aside
Create a budget so you have a full strategy to follow
Help you get 'there' faster
Set up ongoing planning and financial management - no ambulance at the bottom of the cliff here!
Make an enquiry now to see what we can do together.
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