There’s no hard and fast amount or a set ratio on how much cash we should have available, but a rule of thumb is that most businesses will operate smoothly with enough cash reserves on hand to cover three to six months of average operating expenses. It depends on what your comfort level is.
Ask yourself “what if”:
- What if you lost your two or three largest customers in the same month?
- What if sales dropped 30% or more?
- What if a natural disaster occurred, a cybercrime wiped you out or …. a pandemic hit?
The Institute for Business & Home Safety says that 26% of small businesses that shut down due to an unforeseen catastrophe never reopen. Sadly, the numbers are exceeding that in some industries today.
You may be overwhelmed now, but consider: What can you do to help improve and maintain a financially healthy company?
- Become better organized financially. Generate regular reports so you can see at a glance how your cash flow is doing.
- Optimize your cash flow. Having regular reports will help you spot inefficiencies. Paying down inefficient debt, consolidating loans, or renegotiating rates are optimizations that can save a business hundreds or thousands of dollars.
- Start building up cash. Once you’ve organized and optimized, start building up cash in an automated way. Some companies sweep it into a separate, highly liquid account. Establish a goal of 6 months reserve so you have something to shoot for.
You need a plan and a system. Otherwise, Parkinson’s Law kicks in and your expenses will quickly rise to the level of any new income. Cash flow to a business is equivalent to blood circulating in our bodies – the business’ lifeline: once the flow stops, it’s tantamount to instant death.
The road is easier together,