What you should know about having a business cash reserve
Every business owner should consider having a cash reserve. This is true for the smallest to the largest businesses. Business owners who work to develop a cash reserve won't have to worry about a downturn for their business. When you can keep your cash flow healthy you can much more likely to have a business that is successful for the long term. This makes having a cash reserve crucial for the success of your business. However, having a cash reserve is much more then just stashing away some money. Here is what you should know about having a business cash reserve-
- Know what a cash reserve is-The first step toward building a business cash reserve is to know exactly what one is. A cash reserve for your business functions just like a personal savings account does. You will be setting aside money that you can use when your business runs into an unexpected need. Keep in mind that you will use only use this money should you need to beyond your regular cash flow. Most businesses strive to have an at least a 90-day cash reserve.
- Know why you should have a cash reserve-It is also important to know why you should have a regular cash reserve. Successful businesses are built on preparation. Business owners who take the time to build up a cash reserve are far more likely to be successful since they have prepared for unexpected expenses. This means that when a cash need comes up they will not have to have apply for additional financing, use invoice factoring, or even sell assets in order to get the cash that they need. This can give the business owner additional peace of mind that their business can continue to operate even through difficult challenges.
- Know how to build a cash reserve-There are many different ways that a cash reserve can be built up. Each business owner will need to determine what the best and most effective way is to build up a cash reserve for his or her business. Keep in mind that the best way for your business may not be the same as the business down the street. Most business owners focus on saving money wherever they can and then putting the extra cash into the cash reserve. This seems to be the best way to build a cash reserve since it requires no borrowing. There are also grants and many different options for borrowing that the business owner can use to build a cash reserve. However, the cost of borrowing to build a cash reserve should be factored into the overall need for the money.
- Know when to use the cash reserve-Business owners need to be very strict in how they use their cash reserve. Most businesses should only resort to using their cash reserve as a last resort. Do not allow your cash reserve to be used for anything then adding to the profitability of their company or even keeping it operating. Cash reserves should only be used when the business has an immediate cash need that must be taken care of in order to keep the business up and running.
- Know when to not use the cash reserve-Business owners should also make sure that they never use the cash reserve for anything that does not make the business more profitable. Speculating with the cash reserve is also never recommended since this is money that the business cannot afford to lose. In addition, the cash reserve should never be used for short term gains that can be financed in another manner.