The question of how much cash you need in your business is one all company directors need to seriously consider. Poor cash-flow management is one of the leading causes of company insolvency. Without a company rescue strategy in place, this lack of liquidity could lead to the closure of an otherwise viable and successful small business.
Maintaining a healthy level of cash-flow in your business is not always easy. There are employees and suppliers to pay, as well as other creditors like landlords and lease firm that fuel the growth of your business. There are also unexpected costs, such as repairs and maintenance bills that can come out of the blue and potentially derail your best laid plans for the future.
Keeping the right amount of cash in your business is a delicate balancing act. Spend too much and you risk having issues when it comes paying staff or creditors; spend too little and you could adversely affect your business’s ability to grow into something larger.
Assess your business’s cashflow needs
It’s impossible to provide a cookie cutter response to this question because every business uses cash in different ways. Businesses that sell a large quantity of goods at low margins will tend to need more cash in the bank than businesses that sell a small quantity of goods at higher margins.
To get a better idea of how much cash your business needs, think about how much it spends right now. If revenue has been steady for the last three months, look closely at your cash-flow during this period. How much of your revenue is spent on recurring costs? How much has been spent on irregular costs? How much cash has been left at the end of each month? Your gross burn rate is the amount you spend every month, while your net run rate is your income minus your costs.
If your business has a fairly consistent net burn rate of £5,000, you need to decide how much to reinvest in the business and how much to keep as cash.
Want vs. need
In business, as in life, it’s essential to take care of the ‘needs’ before the ‘wants’. Neglect the needs and you will soon struggle to operate properly as a business. However, once the needs are taken care of, like your rent, utility bills and rates etc., you can start to think about the wants.
Before spending on the wants, such as new staff, vehicles or an advertising campaign, make sure you put aside enough cash to cover your burn rate if your sales figures were to fall. The key is to spend intelligently, take small steps and fuel growth by investing in the priorities. Spending recklessly can bring the downfall of even the most viable business, so take care.
While the going’s good, you should also create a contingency fund that can cover three to six months of business expenses. This will allow you to continue trading if your revenues were decline and buy you time if a key customer goes bust.
Investing in growth
To gain a competitive advantage and capitalise on the good times, it’s essential businesses look to the future by investing in their development. If you have a generous contingency fund and some extra cash at the end of the month, it might be tempting to take money out of the business in the form of a salary or dividends. However, this will damage the business’s ability to grow.
Investing in the business can take a diverse range of forms, from hiring new staff and investing in better equipment, to renting bigger premises or launching a new marketing campaign. You should also consider how any subsequent increase in sales from these activities will increase your overheads, as this will have a knock-on effect on your cash-flow.
Are you struggling with cash-flow?
If your business is struggling to maintain a healthy level of cash-flow and you’re concerned about potential company insolvency, we can help. We have a number of potential solutions to help you out of a tricky cash-flow situation and put you back on the right track. For free, no-obligation debt advice, please get in touch with our team.