Most business owners will tell you that if there’s one certainty that comes with running a business it’s this: the unexpected can and does happen. In other words, things don’t always go according to plan. Whether it’s an unexpected tax bill, equipment breakdown, or late invoice payment, many unforeseen things in business can spell disaster if you’re unprepared.
Business owners who have been at this game for a while know how important it is to build up a cash reserve. In the beginning, it is easy to overlook such a necessity especially when you’re in the process of building up your income. However, building up a cash reserve is one of the best ways to future-proof your business and ensure things can continue running smoothly, despite slow-paying clients or unforeseen costs. In this article, we will be sharing the importance of having a cash reserve in business and how you can get one.
What Is A Business Cash Reserve?
A business cash reserve is sort of like a savings account. It’s basically a reserve of cash that a business has set aside for emergency use. Many business owners will place the money in a separate, designated account so that their cash reserve is kept separate from their daily business earnings.
A business cash reserve is important because they provide the financial support you need when the unexpected happens. Having a cash reserve in place ensures you can still pay yourself, your employees, and your suppliers even when your income is tight or cash flow is affected due to unforeseen circumstances or a quiet work season. An emergency cash reserve ensures that you make it through difficult times in your business without having to stack up credit card debt.
How Much Money Should Be In A Cash Reserve?
The amount of money you put into your business cash reserve is up to you. However, typically financial experts suggest that a healthy cash reserve is one that can cover a company’s expenses for anywhere from three to six months.
Deciding how much money you set aside for your business cash reserve is an important decision and one that should be taken seriously. After all, if you fail to set aside enough money you could put your business in a financially vulnerable position.
To set aside the correct amount of money for your business cash reserve, we recommend reviewing your expenses for the year and dividing the total by 12 to give you an idea of how much your expenses cost you monthly. Then, you multiply that number by the number of months you want to set aside money for. This will give you the total amount to set aside in your cash reserve fund and should provide the financial support you need if things become difficult.
How To Create A Business Cash Reserve
When you are just starting out, it can be extremely difficult to set money aside – particularly if you are barely earning enough to cover your expenses. Thankfully, there are numerous ways you can create a business cash reserve over time. Let’s take a look at some of the most popular strategies:
1. Set An Achievable Savings Goal
In the beginning, we know it can be tricky to set aside savings. Often, business owners set unrealistic monthly savings goals they’re never going to meet. Sadly, you won’t meet your dream savings figure in one attempt.
That’s why we recommend you set small monthly goals that help you build your cash reserve incrementally over time. Breaking down your savings goals in this way is a great way to manage your money, stay motivated, and avoid feeling intimidated by your long-term financial goals.
2. Set Boundaries
One of the most challenging parts about building your cash reserve is managing the temptation to take cash out whenever you feel like it. Building a cash reserve isn’t where the hard work ends; you also need to learn how to set boundaries and manage your money sensibly. Your cash reserve must be used for emergencies or unforeseen circumstances only.
Setting boundaries and creating guidelines outlining when you can and cannot extract funds from your cash reserve is an important first step in good financial management. It will help ensure that you have access to the funds you need when you need them.
3. Tighten Your Invoice Procedures
Too often, financial challenges in businesses occur as a result of delayed or missed invoice payments. In fact, 79% of accounts payable departments admit to paying invoices late, so it’s a pretty common problem to face.
Invoices that are not paid on time (or perhaps not paid at all) can cause problems with company cash flow, causing all sorts of issues with your outgoing payments, from paying contractors through to meeting business expenses.
Tightening your invoice procedures is a great way to build up your cash reserve steadily over time. It helps ensure your invoices are paid on time and to the correct amount so that you have a steady, reliable cash flow and are less likely to experience problems.
4. Free Up Cash Elsewhere
If you are looking to grow your business quickly, you may need a bigger cash reserve sooner. As such, it may not be possible to grow your cash reserve steadily over time. Instead, you may need a financial boost to help you reach your goals sooner.
According to Loanonyourcar, “Savings are ideal for paying for unforeseen expenses that otherwise would have had to be paid for by taking on more debt […] If you do find yourself in an unexpected emergency and don’t have enough savings, then a short term loan might be a suitable option.”
You can take out a loan against your car or your home (to name a few options) and free up some spare cash to create a much-needed cash reserve for your business. This will ensure you are prepared for financial emergencies and will provide the backing you need to grow your business quickly.
When you run your own business, it’s fair to say that you wear a lot of hats. You have many responsibilities and it’s up to you to ensure everything runs smoothly. Planning ahead and saving up a cash reserve gives your business the best chance at success, no matter what challenges you face.
About the author: Daniel Groves is a Business Development Specialist at Consultant Inc.