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Cash Reserves – Set Your Goal!

For assistance projecting your cash flow and requirements, give ZümiFi a call!

Cash Reserves – how much is enough? This is a question we address with our clients quite frequently actually. It is wonderful to beyond those day to day cash crisis needs, but the next level of success often means that while your cash position may be stronger, your need for cash may also be growing.

So if you are fortunate enough to be building cash reserves (and we should all be targeting that goal!), then the question becomes – how much is enough? There are a number of different philosophies about how to handle this, and the truth is that the answer will depend greatly on your own individual business circumstances. One general rule of thumb is to have three months worth of operating expenses on hand.

Cash Reserves - Set Your Goal!

A more sophisticated approach would be to craft a detailed cash flow projection, and then identify your vulnerabilities … the reality is that it is not likely that all of your clients would stop paying you at the same time, but your cash requirements will be dramatically different if you have one large contract that comprises most of your revenue versus numerous smaller accounts that add up to the same amount. Your cash requirements will also need to be higher if you have more “fixed” expenses, meaning expenses you cannot cut in the event that cash gets tight.

So businesses with long term leases, or significant loan repayments, etc may be more vulnerable than a home-based business with little fixed overhead. So the best approach is to map out how cash actually flows through your business, and then step back and determine what the impacts would be if cash stops flowing in certain ways. From there, you can set your individual goals about exactly how much cash to set aside in reserves.

And keep in mind – liquidity requirements also include your lines of credit! We’ll talk more about lines of credit, but these are also a critical tool to be used strategically along with maintaining actual cash reserves in your business.

To learn more, or for assistance projecting your cash flow and requirements, give ZümiFi a call!

Cash Reserves – Set Your Goal!

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