Cash Reserves: The Root of Your Business Success
“New research from the JP Morgan Chase Institute finds that many small businesses are living month to month, and the median small business has only enough cash in the bank to last 27 days without additional funds…Cash reserves provide a readily available means to pay employees and suppliers in normal times and are an important buffer to draw upon during adverse times,” the study’s authors wrote. “In other words, cash reserves are a key measure of the vitality and security of a small business.The study was based on data from more than 470 million anonymized and aggregated transactions conducted by 597,000 U.S. small businesses between February and October 2015.” This Chase study was reported by Chad Brooks.
This is something very few new business owners think about. It’s easy to see why. Most barely have enough money to keep their businesses afloat anyway. Building a cash reserve is the furthest thing from their minds. There is so much to think about! Some people are fortunate enough to have large sums of money to begin with. They have operating capital to last for a good amount of time. It would be a great move for their businesses if building a cash reserve was one of the initial goals, but it’s hard to think like that when things are moving fast and you’re just trying to keep up.
A few traps that might keep you from thinking about cash reserves could be:
Not having a real knowledge of your business development requirements. This can happen if you’re not aware of the general management skills required to build a successful business. Sometimes, we believe that our special talents will automatically lead us to success. The fact is that new owners must work on building the business as well as working in the business. You must do both. This is where management skills are important. Mission/Purpose design, strategic planning, systems design and employee management are just a few of the skills a growing business will require. A little time acquiring these skills will help you build a successful business with control and assurance.
Not taking time to design a plan for your growing business.You need to have some idea about the service or product targets, financial targets and growth targets. You can’t allow things to just happen without using any controls to guide you as you work. Planning is essential to business development. The shape the business will take is up to you, the owner. Otherwise, it will go in any direction and could end up in failure.
Assuming because you have a large amount of money all of your expenses will be covered. No. Don’t assume the money will always be there when you need it. I know, this seems to be sensible conclusion, but this erroneous assumption occurs more times than you might think. In your head, it might seem that you’ve got it all covered.You may even have written financial projections but the reality doesn’t automatically match the plan, or you don’t actually control the money according to the plan. You make decisions based on positive or desired assumptions rather than actual results.
Not analyzing the need or research requirements for adding employees. You may not be aware of the additional finances or additional supplies needed when adding employees. Doing the appropriate homework can prevent a lot of trouble. Expenses required by the IRS Federal and State guidelines must be taken into account. There may be transportation, equipment and other costs as well.
The sad truth is, sometimes, new owners will run out of money even if they are able to secure additional funds. They run out of money because they didn’t have the skills needed to manage the business and consequently, balance the money!
This isn’t necessary, particularly in this Information Age. Basic management skills can be learned easily. Be prepared to manage well. There’s lots of help out there to guide you when managing your financials and overall business.
Financial dashboards are available for small business that makes complex financial management manageable. Sabrina Parsons in ”How to Avoid Drowning in Your Financials.” points to the advantages of a financial dashboard. The basic advantages are: Efficiency, Complete visibility, Reduced stress, Forecasting and Budgeting. With a dashboard, you have good data for planning, fortifying and sustaining your growing business. Parsons states, “The more simple your business information appears, the less intimidating it will be. When your financial information is easy to understand, you will be more likely to see problems before they happen, make smarter decisions about what to sell, what price to sell it at, and how much money you can spend to help sell. Knowledge is power, so embrace your financials, don’t fear them.”
See also: The Best Business Dashboard Apps For Small Businesses (This report may be a little outdated, but it’s a good place to start)
Once you are managing your business accurately, you can see how to build cash reserves.“For many small businesses, three to six months’ worth of operating capital is a reasonable target. While there is no set ratio or number for small-business cash reserves, you can use a number of benchmarks to determine how much money you should keep in your bank account to get you through tough times.”
“If you have no sales for a time, you won’t have production costs, but you will have overhead costs, such as rent, utilities, insurance, administrative staff, leases and other expenses to run the business. Calculate your overhead cost per month so you can add this to your production costs to determine your cash reserve needs for both slow sales and slow receivables scenarios.” Sam Ashe-Edmunds
A simple example would be to notice your overhead capital allotment. If you didn’t spend the projected amount for a certain month, put the excess in a money market or any account you can quickly withdraw from if you need to. The key thing here is to understand the importance of building cash reserves and make doing that a strategic intention. For help on how to cut costs and build excess see “5 Design Principles for Financial Success in Your Startup”. Intentionally, focus on building a cash reserve and it will happen.
Basic Management Skills simply described: “20 Small Business Directives for Success: Do or Die” also The GeniusCore Business Building Podcast