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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. Of course, it is wonderful to go 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 cash need may also grow.

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 several different philosophies about handling, and the truth is that the answer will depend greatly on your kind circumstances. One general rule of thumb is to have three months of operating expenses.

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 simultaneously. Still, 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 if cash gets tight.

So businesses with long-term leases, 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 flows through your business and then step back and determine the impacts of cash stops flowing in certain ways. From there, you can set your individual goals about 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 critical tools to use strategically and maintain substantial 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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