Building the Right Cash Reserve

Knowledge and preparation are as constant to the life of an entrepreneur as daily sunrise. Paramount to this ongoing focus is cash liquidity. Unbounded upward trajectory in business is obviously founded on incoming cash over time exceeding money outflow. Keeping the bills paid when cash collections are low is an exercise is perseverance toward the ultimate objective of positive cash flow.

When cash flow is negative, you have to dip into a reserve that’s been built as a safety net. The appropriate size of your cash reserve is related to the volatility of your sales. For a business with steady collection of revenue, reserving cash that covers a couple of months of overhead expenses is probably sufficient. If any uncommon cash crunch arises, you can still meet your obligations while making adjustments for a return to cash flow stability. To determine this figure, you merely need to know the amount of your recurring monthly costs.

Conversely, a business engaged in extended projects over many weeks may require enough cash reserve to pay for several months of expenses. The key measure is the average period that elapses between project start and customer payment. In case of delays in starting or getting paid, you can weather through the time.

Business owners with a lot of cash in their companies are frequently tempted to overspend. But the reverse is also true. Holding more cash than is needed as a reserve is inefficient. Once you identify a sound amount of emergency cash to hold in reserve, any excess may be deployed for growth. Among these considerations are replacing outdated equipment, marketing endeavors, and initiating new lines of business.

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