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How can you build a cash reserve for your business?

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Having a cash reserve for your business can help you survive unexpected challenges, take advantage of opportunities, and plan for the future. But how can you build a cash reserve without compromising your cash flow or profitability? Here are some tips to help you create and maintain a buffer of liquid funds for your business.

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1 Assess your cash needs

The first step to building a cash reserve is to determine how much cash you need to cover your essential expenses, such as payroll, rent, utilities, taxes, and debt payments. You can use a cash flow statement or a cash flow forecast to calculate your average monthly cash inflows and outflows. Then, you can estimate how many months of cash you need to have on hand in case of an emergency or a downturn. A common rule of thumb is to have at least three to six months of cash reserve, but this may vary depending on your industry, business cycle, and risk tolerance.

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Dr.Bindhu A

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1. estimate your current and future cash needs accurately. 2. Determine the size of an emergency fund to cover unexpected expenses.

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2 Reduce your cash outflows

The next step to building a cash reserve is to reduce your cash outflows as much as possible. This means cutting down on unnecessary or discretionary spending, such as travel, entertainment, advertising, or equipment. You can also negotiate better terms with your suppliers, vendors, and creditors, such as longer payment periods, lower interest rates, or discounts for early or bulk payments. Additionally, you can streamline your operations, improve your efficiency, and eliminate any waste or inefficiency in your processes.

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3 Increase your cash inflows

The third step to building a cash reserve is to increase your cash inflows as much as possible. This means boosting your sales, expanding your customer base, or diversifying your revenue streams. You can also improve your cash collection, invoicing, and billing practices, such as offering incentives for prompt or advance payments, enforcing penalties for late or default payments, or using electronic or online payment methods. Furthermore, you can leverage your assets, inventory, or receivables, such as selling or leasing unused equipment, liquidating excess or obsolete stock, or factoring or discounting your invoices.

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4 Allocate your cash wisely

The fourth step to building a cash reserve is to allocate your cash wisely among your various needs and goals. This means prioritizing your cash outflows according to their urgency, importance, and return on investment. You should also balance your cash reserve with your other investments, such as debt repayment, capital expenditure, or growth opportunities. You should not keep too much cash idle, as it may lose value over time due to inflation or opportunity cost. You should also not keep too little cash, as it may expose you to liquidity or solvency risks.

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Dr.Bindhu A

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1. Ensure part of your cash reserve is easily accessible for immediate needs. 2 Reinvest in growth initiatives that align with your business goals and market opportunities.

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5 Monitor your cash position

The fifth step to building a cash reserve is to monitor your cash position regularly and adjust it accordingly. This means tracking your cash flow statement and cash flow forecast, and comparing them with your budget and projections. You should also review your cash reserve level and ratio, and benchmark them with your industry standards and best practices. You should also evaluate your cash performance and identify any gaps, issues, or opportunities for improvement. You should also update your cash reserve plan and strategy based on your changing needs and goals.

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6 Choose your cash reserve location

The sixth step to building a cash reserve is to choose your cash reserve location carefully and securely. This means finding a suitable place to store your cash reserve, such as a bank account, a money market fund, a certificate of deposit, or a treasury bill. You should consider the factors such as accessibility, liquidity, safety, interest, and fees when selecting your cash reserve location. You should also diversify your cash reserve among different locations, institutions, or instruments, to reduce your exposure to any single risk or loss.

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Haytham M. Azmy - MBA, CTP

Strategic Finance lI Finance Business Partner lI Finance Director lI Financial Analysis lI Financial Managment lI Treasury
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Cash is King! But this doesn't mean any amount of cash. You need to agree with managment on a minimum level of cash required for day to day operation, along with any CAPEX requirements, then you can arrange accordingly for the acceptable level of cash funds, other than that for any extra cash, this is the treasury roll to use it effectively and start generating inflows covering at least your banking charges. Cash flow projection is a keyword here.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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Note that carrying a cash reserve has an opportunity cost regarding foregone investment opportunities. In my experience, many firms carry a bank revolver or line of credit, wholly or partially, instead of a cash reserve. Generally, the absolute return on cash is low, so keeping such secondary liquidity from a lender is more capital efficient.

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How can you build a cash reserve for your business?

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1 Assess your cash needs

2 Reduce your cash outflows

3 Increase your cash inflows

4 Allocate your cash wisely

5 Monitor your cash position

6 Choose your cash reserve location

7 Here’s what else to consider

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