One of the most important things that long-standing, successful businesses have in common is a cash reserve.

By on 24-11-2018

HOW MUCH MONEY SHOULD YOUR BUSINESS KEEP IN RESERVE?

One of the most important things that long-standing, successful businesses have in common is a cash reserve.

A cash reserve can help you pay employees and suppliers during hard times. It can help keep things moving if clients start paying slowly. It can help your business take on new growth opportunities. And it helps your business during a downturn.

• PRODUCTION COSTS

If you make a product, you’ll need to keep enough money on hand to continue ordering materials and supplies, hiring workers and keeping your plant running. If you’re a consultant or other service provider, such as a graphic designer or accountant, you might be able to continue operating without having to fund any work you do for clients who pay you later. If your service relies on contractors, you’ll need to cover those costs. Calculate your production costs for 30, 60 and 90 days to calculate how much money you’ll need to keep making product or providing your service at your normal sales levels.

• OVERHEAD COSTS

If you have no sales for a time, you won’t have production costs, but you will have overhead costs, such as rent, utilities, insurance, administrative staff, leases and other expenses to run the business. Calculate your overhead cost per month so you can add this to your production costs to determine your cash reserve needs for both slow sales and slow receivables scenarios.

• TOTAL COSTS

Calculate your total operating costs per month to determine how long you can continue to run your business while producing your product or service without pay. This scenario might include having business, but with slow receivables and/or sales made on credit. Estimate your total costs based on two or three different production or sales levels to determine how much business work you can do at different amounts of cash reserves.

• MAKE YOUR DECISION

Determine how long an interruption in cash flow is likely to occur, calculate your costs to keep doing business during that time, subtract any credit or other assets you are willing to use and determine your cash reserve needs