Building a cash reserve for your business
even a business can benefit from a “Rainy Day Fund”
Cash reserves are vital to a business’s success. It allows you to ride out a dip in sales with a buffer for a rainy day. It can also allow you to take advantage of opportunities that requires cash to set up, like buying another business or researching and developing new products and services.
Traditional methods like business loans, overdrafts, and adding in more of your own capital can work for some time, but it’s sensible to have contingencies in place to access capital when you need it. Here are five ways to increase your cash reserves. They can be effective independently, or when implemented together can combine to complement each other.
1. Sell more
Existing customers are your best prospects. You’ve already spent money on acquiring these customers, and they already know and trust your business—they are the most likely to reorder or order more from you. Regardless of how long the buying cycle is, the effort spent on returning customers will always the best use of your time and money.
2. Find new customers
The best new customers are likely to match the profile of your current best customers. For this reason, your current customers can be a great networking tool. Additionally, figure out what traits your best customers might have in common and use those to determine how you spend your marketing dollars or networking energy. Where would this kind of customer be found? What is important to them, and how can you establish your expertise in that area?
3. Set up a savings plan
If you wait for a perfect time to save it will never happen; automate savings as much as you can. Develop a detailed budget that outlines all income and expenses so that you understand where your money is going and identify when you can afford to save. This budget can help you identify expenses that could be eliminated or reduced, which can increase the amount you put into savings regularly. Talk to a financial partner about what percentage might be appropriate to move to savings regularly, and any resources that might use automation to ensure you stick to your savings plan.
4. Ladder your investments
Investing in certificates is appealing due to higher interest rates, but businesses can be reluctant to tie up large sums of cash for a set time. Laddering involves strategically staggering maturity dates. This ensures regular access to funds while benefiting from long-term interest rates. This process will be easiest to achieve after developing your detailed budget, because then you will be confident in what amount is available to split into investments. Make sure you understand the terms of the certificates—some high promotional rates expire at the maturity rate and revert to a default lower rate, so tracking maturity dates will make sure your money is where you want it to be.
5. Find more cash
The previous four methods are ideal for proactively building a reserve before you need it. Sometimes, though, unexpected situations arise, and you may need a bit more. That’s when you might need to get creative. You can consider taking out loans against assets, borrowing from family, short-term loans and more. Be sure to consult with your personal financial advisor and accountant to find which method is right for your situation.
Next steps
- Determine how much you want to save based on your monthly cash flow. A common goal is to have a cash reserve that covers 3-6 months of operating expenses.
- Establish a realistic timeline to reach your reserve goal amount. Consider your current cash flow and financial obligations.
- Treat your cash reserve as an emergency fund, only to be used for unexpected expenses, a downturn in business, or a time-sensitive opportunity that will fund your growth.
- Find a reliable financial partner you can talk to about a savings plan.
