A business's cash reserve is the amount of funds that the business has set aside to cover unexpected expenses, survive downslides, or to benefit of opportunities when they arise. The amount of a business's cash reserve will depend on the size and needs of the business, but most businesses should aim to have enough funds set aside to cover at least three to six months' worth of operating expenses. If you do not know how much cash on hand you have or how long your business could survive should your income dip, this is one task that needs to move to the priority of your to-do list.

Do you know how long your business could survive if your sales dropped today?

Nowadays, in this uncertain economy, it's more important than ever for businesses to have a reasonable cash reserve. But how much is enough? And how long could your business survive on its cash reserves if revenue suddenly stopped coming in?

There's no strict guidance to these questions, as the amount of cash you'll need to maintain depends on factors such as the type of business, your overhead costs, and your ideal "cushion" for tough times. However, there are some general recommendations you can follow to help ensure that your business has enough cash on hand to weather any storm.

Experts suggest that businesses have enough cash on hand to cover no less than three to six months' worth of operating expenses. This will help you to make sure that you have enough money to pay your employees and expenses even if revenue is low for a short period of time.

Of course, this is just a starting point - some businesses may need more or less, it depends on their specific situations. For example, businesses with high inventory levels or seasonal uncertainties in revenue may need to keep more cash on hand to make sure that they avoid troubles during slow periods.

The best way to determine how much cash you should keep in reserve is to work with a financial advisor or accountant who can help you create a customised plan based on your unique needs and goals.

How to calculate the cash reserve your business needs?

Working out how much cash you should have on hand to face a difficult period depends on a number of factors, including the type of business you're in and the nature of your revenue streams.

To make sure that your calculations are accurate you need to consider your business needs and to look at your cash flow statement. This will help you to identify the expenses that you have every month such as rent, loan payments, marketing, and fixed costs. Also, it will add revenue.

If you multiply your operating expenses by the number of months you want to have a cash reserve for 3 months or 6 months, you will know how much money you need to save to build that cash buffer.

The best way to then start building this buffer is to know how much you can save for future use each month. Subtracting your monthly expenses from your monthly revenue gives you your “cash on hand” or the amount of “extra cash” you have left over each month. Once you determine this, you can decide how many months you will take to build the cash reserves you want.

What are some strategies for building up cash reserves?

There are a number of strategies businesses can use to build up cash reserves, including:

1. Reducing expenses:

Analyse your business expenses and look for ways to reduce the costs.

2. Increasing sales:

Focus on improving sales and bringing in more revenue. This could include things like marketing campaigns, offering discounts or special deals, or expanding your product or service offerings.

3. Improving profitability:

Examine profitability and find ways to boost margins.

4. Securing additional funding:

Access to additional funding, through loans, investments, or other sources, can help you build that cash buffer faster.

5. Managing inventory levels:

Wisely managing inventory levels can help free up cash that would otherwise be invested in the stock.

This could include things like just-in-time ordering, reducing excess inventory, or selling off slow-moving items.

Advantages of cash reserves to your business

There are many benefits of holding cash reserves, specifically for small businesses. Some of them are:

1. Cash reserves help to cover unexpected expenses.

2. They can help you take advantage of opportunities when they arise.

3. They give you calmness in knowing that you have enough savings to meet your obligations.

4. They can help you handle the situation if the business has a temporary slowdown.

5. They can provide security in the event of a long-term loss of income.

Knowing how long your business can survive on cash reserves is important to financial planning. Why? Because you can better prepare for any potential declines in the market or modifications to your customer base.

Having appropriate cash reserves can provide a buffer against unexpected costs or delays related to operating expenses, and this really is the key to business flexibility.

Need help building a rainy-day fund?

If you are a new business owner, a fast-growing business, or an established business, Price Mann can help you build the cash reserves you need to bring you through financial difficulties and prepare for those unpredicted situations.

Talk to us about your business cash reserves plan.