For small business owners – cash is usually tight. There are expenses that have to be met quickly and customers that pay slowly. This combination makes it hard for business owners to build a reserve – even if it’s a small one. However, having a cash reserve is critical if your business is going to survive and grow. Without a cash reserve, your business runs the risk of becoming a casualty if there is an unexpected bump in your cash flow.
Many business owners pride themselves of running a tight ship by carefully managing their income and their expenses. The problem is that sometimes things are run so tight that a small unpredictable ripple – say a few late payments by customers – can send the whole business into a tail spin. This can quickly spiral out of control – especially if you miss payroll or key supplier payments. One way to address this problem is to have a cash reserve that can be used for emergencies.
How big a reserve?
The size of the cash reserve is a matter of much debate by experts. Some recommend a few months worth of business expenses – while others suggest you should have 6 months or more. In reality – you and your advisers will need to pick the number that is right for your company. Additionally, you have to take into consideration that cash that is sitting in the emergency fund is not producing returns for your company since you are not investing it in the business. Regardless, it’s usually a good idea to build a reserve, even if it’s done slowly and have to build it little by little. Many companies often divert a portion of their profits on a regular basis to start building their reserves.
Improve your cash flow. Strengthen your reserve
One approach to managing this problem is to combine a smaller cash reserve with a business financing product – such as a business loan or invoice factoring. This enables you to free some funds from the reserve and use them to grow the company. The added financing increases your ability to weather financial problems. This strategy of using business financing as part of your reserves can be useful if your cash flow problems are caused by slow paying customers. It will not be very useful if your cash flow problems are caused by slowing sales. This last point is very important.
Get predictable revenues
Factoring is one tool that enables you to handle cash flow problems that are created by slow paying customers. It accelerates your revenues, providing predictable cash flow and minimizing problems from slow paying customers. When used in combination with a proper cash reserve, it can be a great tool to help you weather cash flow shortages.
Disclaimer: This article does not provide financial advice. If you need advice, please consult an expert.