Small business owners know that cash is a vital thing. The survival and eventual achievement of your business depend on keeping the cash flowing. But you need to check whether you are having too much cash. You might have no idea about how much cash your business has.
If you are unsure about your company’s cash requirements, make a cash forecast depending on projected and historical business activities. Then go for cash flow management for deciding how much cash you should keep in a business.
Cash speeds up business functions and development. It funds sales and marketing programs for obtaining and retaining consumers, pays salaries to your workers, and purchases devices and facilities and other daily utilities. Proper cash flow handling makes sure you have the precise cash amount on hand for operating your business.
The basic cash flow management recommendation is to keep up with cash equal to three to six months of operating costs. However, using this for all businesses in any situation is confusing. To decide whether you have the proper amount of cash flow, take a look at these basic areas:
Things to Do When You Have Too Much Cash Flow
Image Credit: Pgscanfly from Getty Images
1. Evaluate Why You Have Extra Capital with a Cash Flow Assessment
At first, you will need to validate your accounts and check why you have extra cash-flow. Ensure your figures are accurate because in case you spend money you do not have, you could find yourself in trouble. After authenticating your accounts through a cash flow assessment, knowing why you have excess cash can help you optimize all income flows and then enhance your cash flow.
2. Check the Stage of Your Business
Will you launch a new business or run an existing business consistently? Do you have strategies for increasing or making large buys? Each of these will affect the cash prediction you made. A successful business has good benchmarks, whereas start-ups have few benchmarks, and thereby must be more cautious while deciding cash flow requirements.
In developing businesses, accounts receivables and perhaps inventory maximize to support the enhanced sales. However, sometimes it is ignored that you require cash for accelerating this development – you should invest money for producing sales before the consumer transfers cash.
3. Set up a Cash Buffer
Almost 30% of businesses fail due to cash crunch. Not paying heed to your cash flow can make you exposed to this risk. And this is where you need a cash buffer. This is a significant financial security that safeguards you as well as your business during an emergency. You can keep this money for urgent times.
If you have an excess of cash flow, just take a look at your cash buffer. This emergency business fund is required for dealing with sudden business costs, bridging gaps in cash flow when your business is not fast, and being capable of using funds for maximizing the business.
4. Figure out the Time You Need to Get More Cash
You need to consider the time you will need to get more cash if required. In case you will fund the business from your personal resources, it may take three to five days for writing a check or selling a security. Nevertheless, in case you require loans from banks, it might take two or more months for finding a bank interested in making the loan and doing the documentation.
Fundraising from angel investors can increase the timeline significantly. In case you go this way, it will take six to nine months for making the business strategy and investor pitch deck ready, creating presentations to different angel groups for finding the good fit and interested one, and waiting while they conduct their due activity and make an informed decision.
Other funding sources that might have shorter time periods are:
a. Increasing the balances of credit cards
b. Enquiring vendors for credit terms
c. Borrowing funds from friends and family members
d. Incenting consumers for paying sooner
e. Leasing instead of purchasing devices
f. Furthermore, it’s a great practice to have a line of credit to use fast when required as a security net.
Image Credit: Lisay /Getty Images
5. Reduce Debts
In case your business has any monetary obligation, it’s a great time for repaying it. Debts basically accumulate extra expenses in the form of interests. In case you repay them earlier, that’s less interest you will need to pay off. Having less debt is always good. If there is cash for paying down high-interest debt, you must prioritize that. Moreover, having money has the possibility to provide creditors your assets’ control.
6. Decide How Much You Will Use
Your financial or budget plan will display cash flow projections that cover the next twelve to fifteen months. In case you don’t have a budget or any type of detail, you will require building a prediction. Be alert with your predictions as a part of your cash flow handling. Sometimes, original results differ from the projections. Remember that costs are generally more anticipatable than revenues because many are comparatively pre-decided, like rent and payroll. Get professional help from your accountant or financial advisor.
7. Take a Much-Needed Break
Although investing your excess cash on a flashy trip does not sound like a financial suggestion, there could be an advantage of giving you some rest and relief from the regular hassles. For a business owner, this could help avoid exhaustion, providing you scope for becoming recharged and refreshed – prepared for going with new ideas and inspiration.
8. Change What You Do with Your Cash Flow
Changing your income flows is possibly the best lesson an entrepreneur can learn. This protects your cash flow more. For instance, in case a business has a bad quarter, you still have other businesses for falling back on. Moreover, this implies altering your investments.
Image Credit: Relif /Getty Images
In case your organization has extra cash beyond the predicted requirements, just distribute it to the shareholders or owners, or put it into another individual account, instead of making suboptimal determinations only for using up the extra cash. This is called smart cash flow management.