💰 Cash Reserves – how much is enough? This is a question we address with our clients quite frequently. While it’s wonderful to have cash reserves beyond day-to-day cash crisis needs, your cash needs may also grow as you reach the next level of success.
📈 So, if you’re fortunate enough to be building cash reserves (and we should all be targeting that goal!), the question becomes – how much is enough? There are various philosophies, and the answer greatly depends on your circumstances. A general rule of thumb is to set aside three months of operating expenses.
🔍 However, a more sophisticated approach involves crafting a detailed cash flow projection and identifying vulnerabilities. It’s highly unlikely that all your clients would stop paying you simultaneously. Therefore, your cash requirements will differ significantly based on factors such as having one large contract that accounts for most of your revenue versus numerous smaller accounts that add up to the same amount. Additionally, businesses with more “fixed” expenses, which cannot be easily reduced during tight cash flow, may have higher cash requirements. For instance, if you have long-term leases or significant loan repayments, you may be more vulnerable than a home-based business with minimal fixed overhead.
📊 The best approach is to map out how cash flows through your business and assess the impact of different scenarios where cash stops flowing in certain ways. Doing so lets you set individual goals for how much cash to set aside in reserves.
💳 Also, remember that liquidity requirements include your lines of credit! Lines of credit are critical tools that should be used strategically to maintain substantial cash reserves in your business.
💼 To learn more or for assistance in projecting your cash flow and determining your cash requirements, give Zumifi a call! We are here to help you set your cash reserve goals and develop financial stability and growth strategies.