Having cash on hand, or money that is reserved in case of an unexpected event, can keep a business running when funds are tight or allow them to take advantage of unforeseen opportunities such as a large expansion or investment opportunity. Without enough cash on hand, a business likely won’t be able to survive a financial crisis or will be forced to sell assets to compensate for its losses.
Here's how to ensure your business has enough cash on hand to endure a tough financial period.
How much cash do you need on hand?
Cash on hand refers to any accessible money, funds in bank accounts, or liquid assets that could be accessed within less than 90 days. As a general rule of thumb, it’s recommended that businesses have at least three to six months' worth of cash on hand to cover operating expenses if possible, though you should make sure your business can afford whatever amount you set aside.
Determining how much money your business needs to keep on hand will be dependent on the stage it’s currently in (be it a startup company or an established enterprise), along with its future goals and expansion plans, historical spending, accessibility of cash (whether your cash is available in bank accounts or assets), your industry, and various other factors.
Why you need to monitor your cash flow
Monitoring your cash flow is crucial to making sure you have enough cash on hand to protect your business. Cash flow is the amount of money your business takes in and pays out — in other words, it’s the net amount of money flowing through your business. By monitoring your cash flow, a business can ensure it has enough money to stay afloat and continue paying employee salaries, rent, bills, and other operating expenses.
Businesses that don’t carefully monitor their cash flow may find themselves in big trouble in the event of a financial crisis. Without an understanding of one’s cash flow, it’s hard for a business to plan and budget for forecasted expenses or make predictions about its anticipated income.
[Read more: How to Create a Cash Flow Statement to Keep Track of Your Business Finances]
As a general rule of thumb, it’s recommended that businesses have at least three to six months' worth of cash on hand to cover operating expenses if possible.
How to ensure you have enough cash on hand
Set aside money in a separate savings account
By setting aside funds in a savings account, businesses can avoid the temptation to spend that money. Instead, the money that is set aside can earn interest over time and be looked at as solely an emergency fund, rather than considered to be cash that is available to spend right away.
Have extra sources of funding available before you need them
The best time for a business to ask for a loan or credit line is before it needs the money. By securing additional funding in advance, businesses can better prepare and budget for an emergency, rather than rushing and struggling to find funding.
Keep track of client invoices and set payment terms accordingly
Having a record of client invoices and setting firm expectations and payment terms with clients as to when money is due helps businesses better forecast their cash flow. Doing so also provides businesses with insight into when they can expect payment from any given client, which helps with budgeting and ensures there’s always enough funding to pay for operational expenses.
Stay on top of any business debts you have
When a business is behind on its debts, it can incur a large amount of interest and owe its lender even more. A firm understanding of a business's debts allows for planning and budgeting accordingly to ensure there’s always enough money to pay off outstanding debts without impacting operations.
Eliminate extra expenses where possible
To keep costs down, review all of your expenses and determine where you may be able to reduce spending. By eliminating waste, extra expenses, or anything else that isn’t generating revenue, you’ll be able to reallocate and save money that was previously earmarked for unnecessary expenses.
[Read more: Small Business Funding: A Breakdown of Business Loan Types]
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