FOUR CONSIDERATIONS AS YOU GET YOUR BUSINESS RESERVES IN SHAPE
One constant for any business is the need for cash. It’s the fuel that makes a business run, whether it’s to fund marketing programs, make office lease payments or pay your employees.
First, it’s important to have a healthy cash flow to cover your bills. But it’s also critical that you have a reserve fund in place for your company if your business suffers a reversal or some other major challenge.
So how much in reserves do you really need? A general rule of thumb is to have three to six months’ worth of expenses available in a liquid account such as a business checking or money market account.
As you determine what’s best for your business, here are four key considerations to determine whether your reserves are in shape for the coming year.
HOW MUCH CASH HAVE YOU BEEN USING AND PLAN TO USE IN THE FUTURE?
Businesses should review their financial accounts to see where they’re spending money. Since expenses such as rent, subscriptions and payroll are usually more predictable than revenue, they should be relatively consistent month to month. So even if you don’t have an established monthly budget, a financial forecast can help predict future expenditures.
WHAT STAGE OF BUSINESS ARE YOU IN?
Are you in start-up mode, in the first year of operation or maintaining a steady ongoing business? More established businesses will have more predictability for planning for the future, while younger companies may need more flexibility to get more cash quickly.
HOW LONG WILL IT TAKE TO GET NEEDED CASH?
Once you know how much cash you’ll need for the next year, consider how long it will take to get more if it’s needed. For example, with some investments, it may take three to five days or longer to receive the funds after a withdrawal, while business checking or money market account funds could be available immediately.
WHAT OTHER CASH SOURCES ARE THERE?
It’s good to be aware of ways to help your cash flow. For purchases, you can ask the vendor for credit terms or a longer period in which to pay. For sales, you can incentivize customers with a discount to pay in a shorter timeframe. It’s also a good practice to have a bank line of credit or a business credit card as a safety net. Also, keep in mind that the best time to apply for a loan or credit card is when you don’t need it, so that you can compare lenders for the best term and rate. Your banker can help provide all kinds of customized advice as you work towards your business goals.
MEET THE EXPERT
Brian Blanks is Vice President, Market Manager at Valley Bank in Wetumpka. He has nearly two decades of experience in retail banking. You can contact him at 334-748-8607.
Valley National Bank is a Member of the FDIC and Equal Opportunity Lender.