How much cash should a business have on hand?

Small business owners often struggle to have enough cash to cover day-to-day expenses. But there is also a problem with too much cash in your bank account.

So what is the balance? How much money should your business have?

What does it mean to have cash on hand?

Having cash on hand refers to reserves of cash that you can easily access. This could be cash in a box in your office that you use for petty cash, or money from your checking account that you can easily withdraw.

This money can come from your cash flow, which is any money coming into your business, whether it’s customers paying bills, a loan, or money you’ve earned. provided to fund your business.

Why every small business should have cash on hand

It’s important to have cash flow and liquidity on hand to keep your business running smoothly. In addition to cash inflows, you also have cash outflows, which are all the things you spend money on in your business, including paying suppliers, rent, utilities, and inventory. You need cash to cover these expenses.

If yours is a seasonal business, cash flow may be unstable. You can operate mainly in the summer, and the rest of the year you may have little or no money. These months, it is especially important to have access to money to operate.

And then there’s the ever-changing economy. If your sales drop, do you have enough money to cover expenses until things improve?

Determine how much money your business needs

So how much should you have on hand? It depends on the cash flow needs of your business. Start by looking at your normal operating expenses. These include what I mentioned above: rent, utilities, inventory, supplies, software subscriptions, etc.

Startups can have higher expenses, especially in the beginning.

Some of these expenses can be paid for in ways other than cash, so consider those you could pay with a credit card.

Now consider the future. Will your expenses stay the same or increase? Forecasting future costs by calculating your cash flow projection will help you understand how much money you will need in the future.

While there’s no hard and fast rule on how much cash you should have, the general rule is to keep three to six months worth of cash on hand.

How to increase cash

If your expenses exceed your income, it’s time to consider how your business can cope with the growing financial demands. Here are some strategies for finding some extra cash.

Spend less money

It’s simple. If you want more cash, reduce your expenses. Find ways to cut corners. Review all of your expenses and determine which ones are unnecessary (especially recurring subscriptions to software you may no longer use).

Increase income

You can do this in several ways. You can increase your prices, sell additional products to your existing customers, or offer additional products or services. The more income you generate, the higher your cash balances.

Reduce your expenses

If you’re buying inventory or materials from a supplier, do some research to see if you can find a better price. This will reduce your costs and increase your cash flow.

How much money is too much?

It may sound strange to say, but excess cash can be a bad thing. First, if it’s in your checking account, it doesn’t earn interest. If you don’t need it, consider transferring it to a savings account.

Second, having access to a large amount of money can be tempting to spend. Suddenly you’re eyeing that $500 office chair you don’t really need!

If your cash flow statement shows a high amount of cash on hand, that is money that is not being reinvested in your business.

So how much is too much? Anything beyond those three to six months. If you have more, consider how best to reinvest the funds in your business.

Other Options for a Financial Safety Net

Having too much cash may not be your problem. Maybe you don’t even have enough money to pay your expenses. In this case, you have options that can provide a safety net.

You can take out small business loans, which can include bank loans, SBA loans, and short-term loans, depending on what you qualify for. Here are some options to consider:

SBA loans by SmartBiz

Medium-term loan by Credibility Capital

Short term loan by LendSpark

There are also business credit cards that can help you buy what your business needs. Look for one with rewards so you can get perks when you spend.

Capital on Tap Corporate Credit Card

Divvy chip credit card for business

CitiBusiness® / AAdvantage® Platinum Select® Mastercard®

Your business runs on the power of money. Staying on top of what you have and making sure you have enough to pay your bills should be a top priority.

This article was originally written on February 11, 2022.

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