Cash reserves are funds set aside to cover operating expenses in case of a crisis or cash-flow problem. Whether your problem is late-paying customers, seasonal revenue fluctuations, or temporary business closures, cash reserves give you time to reset and recover.
How much money should you keep in your cash reserve? This will depend on your business, but a good rule is to have the equivalent of three to six months’ worth of operating costs in your cash reserves to keep your business going.
Start building up your cash reserves with these five tips.
1. Trim expenses
Saving money is often the quickest way to free up extra cash to build your cash reserve. List all of your fixed and variable costs to see what can be reduced or eliminated. For example, consider:
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Moving to smaller or less expensive premises
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Shifting to online sales
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Trimming employee hours
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Renegotiating with key suppliers
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Using lower-interest borrowing options, like a secured line of credit to pay off higher-interest items (like credit cards)
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Getting creative with marketing and promotions
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Collaborating with other business owners to share resources
2. Convert assets to cash
If you have machinery or vehicles you no longer need you could sell them and turn it into a cash reserve.
Other ways to raise extra cash include:
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Leasing equipment instead of buying it
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Selling parts of the business
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Liquidating excess inventory or raw materials
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Re-investing your own capital
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Refinancing against your existing assets
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Finding external investors
Look closely at the business assets on your balance sheet to see what you don’t need and consider what you can convert into cash without impacting your core business.
3. Improve business efficiency
Next, take a close look at how your business could be more cost effective while maintaining or improving efficiency. Document every step of your business process to see where you can improve your capacity to do more with less, or opportunities to generate extra cash quickly. Examples include:
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Raising prices to bring in more cash
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Having more than a few customer segments to rely on
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Diversifying into new growth markets
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Widening your product or service mix
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Negotiating new terms with suppliers
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Amending customer credit terms to collect money faster
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Selling off, closing, or outsourcing any part of your business that doesn’t make a profit
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Focusing on core business activities
Need a hand? Meridian can help you optimize your cash flow with our Cash Management Services. Our team will work with you to understand your business, identify efficiencies and share investment advice.
4. Tighten credit control
Build your cash reserves with an efficient credit control system that will speed up your cash collection and avoid bad debts by limiting how much credit you provide to customers. Consider:
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Requesting customer deposits or progress payments
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Switching from offering credit to immediate payment
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Running credit checks on new and current customers to help assess credit risk
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Monitoring invoices approaching maturity
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Accepting multiple forms of payment to make customer payments easier
5. Secure outside financing
Tap into outside sources of funds to build up your cash reserves. You have several options, including a loan or line of credit, angel investors, funds from friends or family, government loans or subsidies, or crowdfunding. As some of these options will take longer than others, be sure to first explore financing solutions that are flexible and give you quick access to cash.
One last tip - and some next steps
Having enough money set aside in cash reserves available to cover unforeseen business emergencies is sound business practice. Go the extra mile by putting your cash reserve to work by investing it in an accessible savings vehicle such as an interest-bearing business savings account or Guaranteed Investment Certificate (GIC).
So, ready to start building your cash reserves? Here are some ideas about what to do next:
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Determine how much money you should keep in your cash reserves
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Instead of spending cash reserves on equipment, use equipment financing or leasing to get the gear you need.
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To free up extra cash, consider re-financing long-term assets.
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Explore financing options and get answers to any questions you have by connecting with a Meridian Business Advisor.
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