Cash can be an invaluable safety net for a small business. Having enough cash on hand during lean times or for an unexpected emergency is crucial to your business’ survival — and future growth. But too much cash can mean money not being put toward its best use.
It’s a general rule of business to keep just enough cash to cover interest, expenses and capital expenditures, plus a little extra for emergencies. Of course the amount will vary depending on business type and needs, and companies in cyclical industries may want to keep more reserves on hand in preparation for a downturn.
Companies with all of their cash allocated appropriately that find themselves with some left over have several options. They could invest in a new project, consider expanding, pay off a debt or make a new hire. It’s tempting to want to hold on to extra cash, but there may be a better use for that green. Investing in a growth opportunity or hiring for a new position could propel the company forward and potentially bring in even more cash.
Investopedia advises that “sitting on cash can be an expensive luxury because it has an opportunity cost.” Opportunity cost is defined as the difference between the expected return of two options, say investing or not investing. If a company can get a good return on an investment, then that may make more sense than leaving the cash sitting in a bank.
Keeping personal and business finances separate is another important rule when it comes to cash reserves. This is the only way to get a clear picture of your business’ finances. “The key to managing your business cash flow is understanding how things stand now, and where they’re likely to go,” notes Small Business Trends. The online publication recommends analyzing your monthly sales over a period of time to look for trends and then putting together a 12-month forecast to better anticipate high and low periods.
Other practices that can help improve cash flow include making sure invoices are paid on time and in full, closing out projects in a timely manner and leasing or taking out a loan to finance a project or equipment rather than paying cash.
Managing cash flow is a top challenge for 34 percent of small businesses in 2017, according to the State of Small Business Report presented by Wasp Barcode Technologies. If this is something that’s over your head as a business owner, it’s probably worth considering spending some of that extra cash on a professional to help out. A good accountant, bookkeeper, financial adviser or banker can offer advice and assistance on how much cash to keep and how much to send out.
MidSouth Bank offers a full line of business banking services that include checking and savings accounts, business loans, cash management tools and even equipment leasing and insurance premium financing. Visit us for more information.