How to maximise your cash reserve
7 strategies to build and maintain your cash reserve
Whilst there is no guaranteed formula for getting your business to survive any situation, it’s clear that having a healthy cash reserve buys you time and peace of mind when disaster strikes.
So, to help ensure that your business has enough cash to survive a crisis, here we look at what a cash reserve is and why you need one. Plus, we offer 7 strategies to help you build it.
What is a cash reserve?
A cash reserve is money that a business sets aside for use in emergencies. This money is then used to cover costs or expenses that are unplanned or unexpected.
Why do you need a cash reserve?
Ultimately, a cash reserve helps a business to avoid falling into financial difficulty.
When disaster strikes, businesses who don’t have an adequate cash reserve can face the risk of bankruptcy. In contrast, those with a healthy cash reserve will be able to focus on their next steps.
Cash reserves also help in the following situations:
1. Slow sales months
Whether it’s due to deteriorating economic conditions, an increase in competition or a slowdown in your industry, even a small drop in sales can cause significant cash flow problems.
During slow sales months, you can use your cash reserve to cover your regular expenses and avoid falling into negative cash flow.
2. Seasonal imbalances
Likewise, if you run a seasonal business you may need to dip into your cash reserve to help cover slow periods.
The majority of businesses experience seasonal highs and lows throughout the year and plan their cash flow accordingly.
However, not all seasonal imbalances can be planned for. A surprising change in weather, for instance, can cause an unexpected cash flow gap.
3. Unexpected expenses
Most expenses can be planned for but others are completely out of your control.
Whether it’s a natural disaster, breakdown of machinery or any other unexpected expense, a cash reserve offers protection.
This money allows you to carry on with operations as usual without worrying about how you’ll cover the unexpected costs.
4. Growth opportunities
Businesses often find opportunities to boost revenue and grow. But these opportunities often require money upfront.
Whether it is taking on a large order, expanding your business or acquiring a new one, a cash reserve will allow you to take advantage of growth opportunities.
5. New purchases
Whether you need to buy new plant and machinery or upgrade your existing kit, having access to a cash reserve will allow you to make purchases without borrowing more.
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How much should you have in a cash reserve?
There is no right or wrong answer to this question. It largely depends on your business and its needs.
Many financial experts agree that a solid cash reserve would cover anywhere from three to six months of expenses.
The key thing here is to find the right balance.
Failing to build enough of a cash reserve can make a company financially vulnerable. But holding on to too much cash could mean that the business misses out on opportunities.
How to maximise your cash reserve
1. Plan ahead
Effective financial planning can help you understand where you stand financially and identify where changes are necessary.
Take the time to formally put together your plans, forecasts and budgets. Whilst doing this be specific about the details. Being thorough is key to improving your cash reserves going forward.
Always make sure that you have a plan for every scenario, even the worst possible outcomes, so that you’re prepared for anything.
2. Reduce your spending
The more money you spend the less you’ll have to put into your cash reserve. It’s that simple.
The first step to overcoming this issue is to analyse your expenditure so that you have a clear picture of your incomings and outgoings.
This will highlight where your money is going and where you can make cutbacks.
Look at each outgoing and ask yourself: do I need this to be successful? And do the ends justify the means?
It’s also important to regularly benchmark your suppliers to ensure that you are getting the best deals.
When doing this remember that, whilst saving money is important, you don’t want to sacrifice on quality.
Here are 5 key areas to look at to save your business money. Could you make any savings?
3. Improve your credit management
Late payment and bad debt can be a massive strain on your cash flow. This makes it challenging to build a cash reserve.
Therefore, you need to have an effective credit management strategy in place to reduce the chances of late payment.
There are various credit management techniques you can try to achieve this. For example, improving your invoicing, credit checking your customers and using solid terms and conditions.
If you need help with this, you might find it beneficial to outsource all or part of your credit management to a specialist debt collection agency.
These companies excel at encouraging customers to pay and will remove the burden from your business.
4. Optimise your funding
One challenge with building a cash reserve is successfully finding the balance between building a safety net and investing in your growth.
Fortunately, some financing solutions exist which can be used to support cash flow and keep cash available to use.
Invoice finance, for example, allows you to release funding against the value of your invoices to close the cash flow gap between paying your suppliers and receiving payment from customers.
Having money tied up in unpaid invoices can restrict businesses of all sizes.
By using invoice finance, it’s possible to access this cash to reinvest into the business, fulfil new orders or meet general running costs.
It is also an extremely flexible source of finance as facilities grow in line with the business. The more you invoice, the more cash that’s available.
Certain facilities can also help to protect your business against late payment and bad debt.
The key thing to remember is that when it comes to any form of business finance, there is not a one-size-fits-all solution.
So you should regularly benchmark the funding options available to see if there is a better fit for your business.
This could allow you to capitalise on new business opportunities and manage cash flow more effectively.
5. Invest in software
There are various tools available that can automate your processes and help make it easier to manage your cash flow.
An automated invoicing system, for example, can enable faster payment, while being able to take electronic payments easily can also improve payment times.
Whilst investing in this software can require some money upfront, it’s worth it if it helps to improve your financial standing in the long term.
6. Release money from your assets
Whilst buying in bulk can have advantages, if you purchase too much stock you risk tying up your cash in unsold stock.
You can avoid this by implementing a good stock management system, monitoring inventory levels carefully, disciplining your spending habits and always clearing discontinued or obsolete stock.
If your business has a large amount of cash tied up in the value of excess stock, it is possible to release this working capital through stock finance.
Commonly provided as part of a wider asset based lending facility, stock finance enables businesses to release capital against raw materials, work in progress or finished goods.
Likewise, if you own the commercial property your business occupies, a large amount of potential capital is tied up in the building.
Sale and leaseback allows a business to release this capital by selling the building and then leasing it back.
Businesses can also release funding that’s tied up in existing assets.
Asset refinance enables businesses to do this by selling a piece of equipment or machinery to an asset finance provider, before leasing it back in return for regular rental payments.
The fixed payments assist with cash flow management and help to meet day-to-day commitments or invest in growth.
7. Make cash flow a companywide priority
When you’re focusing on building a cash reserve it’s important that the whole business pulls in the same direction and keeps cash flow in mind.
There are various ways you can achieve this.
For example, you could budget by department so that each section of your business has responsibility for their spending.
Also, it could be beneficial to incentivise your employees for meeting budget goals so they are motivated to stay on track.
Similarly, setting spending limits for employees who incur expenses ensures that they don’t overspend on unnecessary things.
Can we help?
Cash is king in business. If you need help improving your cash flow we could help identify the most appropriate solution. Contact us on 0800 9774833 or request a call back to see how we could help.