Building your Cash Reserves in the current economy

Small businesses constantly must juggle between cash coming and in and out to stay afloat. Building a cash reserve is a great way to guard against temporary issues such as reduced sales.?Additionally, when the cost of debt and equity increases business owners are forced to find other working capital options.

In the current economic climate, many businesses are actively trying to boost their working capital which may include shorter customer payment terms, aggressively collecting past-due accounts, and eliminating bulk purchases and excess inventory.

As CFO I assess how efficiently the accounts receivable process is and if the business is paying bills too fast or purchasing excess inventory which all tie up cash.

Why a Cash Buffer is IMPORTANT

Businesses generally fail because they run out of cash. Cash in the bank acts as a buffer and can help you better weather the ups and downs you may encounter when running your business. Having cash in reserve:

• Buys your business more time if things go wrong.
• Allows you to experiment and test new ideas without needing immediate revenues to cover your costs.

Managing Customer Credit

Inspecting the credit history of customers before you extend credit terms is an important step in minimizing the chances of having cash tied up in accounts receivable

Excellent accounts receivable management can be achieved by:

• Asking all your credit customers to fill out and sign a credit application form showing your terms and conditions.
• Adding your credit terms to quotes and invoices.
• Applying credit limits to each customer – and asking for deposits for larger orders or prepayments for work is initiated
• Checking for a history of bad debts – when new customers ask for credit terms.
• Keeping in touch with your accountant – and give them any debtor records recorded through your accounting software.

Available Cash from Your Inventory

Buying in bulk and having unsold inventory stock is cash you can’t use. To preserve your cash and avoid getting it tied up in inventory, try:

• Introducing lower minimum inventory stock levels.
• Putting a just-in-time (JIT) policy in place rather than ordering large, bulk orders.
• Holding a sale to reduce levels of older inventory stock and to free up some cash.

Assess your business borrowing

Is your business loan the right one for your needs? It can be easy to forget about your loan as you concentrate on the day-to-day running of your business.

However, with volatile markets and banks continuously competing for business, it would be wise to keep in close contact with your bank manager to take advantage of any loan restructuring opportunities.

Make sure you also discuss how much you should borrow with your CFO.

Lower costs

Look at ways you can cut costs to your overhead, obviously not to the detriment of your business, but do shop around to see if you can negotiate a better deal. Take a look at your:

• Communications – reduce landline usage, adopt Internet communication services like VOIP (voice over internet protocol), ZOOM, and Google Meet, and make sure you have a competitive mobile plan.
• Technology – upgrade to more efficient technologies and utilize handy new apps. For example, more fuel-efficient staff vehicles can make a significant difference to your operating expenses.
• Energy – install energy-saving lighting, power-off office equipment when not in use, and ensure heating and cooling devices (like heat pumps) are switched off when your business is closed.

Get rid of unused assets

It’s almost inevitable that over time as your business grows and changes, you’ll have some assets that aren’t put to full use like they used to be. Perhaps you have idle printers that aren’t really used anymore, a company vehicle that’s past its use-by date, or outdated computer equipment.

Now’s the time to scrutinize your business for assets that aren’t really being used – and to sell them. Make a conscious effort to cash in on clutter.

You might want to consider setting up an automatic payment that adds to your cash reserve each month. Or even take a tiny percentage of your sales each month to help build a buffer. Either way, set your business a cash reserve target for the end of the year and try to stick to it.

Next steps

• Discuss your business’s assets, inventory stock, costs, and accounts receivable management with your CFO so you can work out some avenues for building a cash reserve.
• Speak to your bank manager about opening a specific cash reserve account.

If you want to learn more about building cash reserves or our CFO services visit our website and schedule a strategy session.

ABOUT THE CREATOR OF LAGNIAPPE

Angela Randolph is the Founder/CEO of Stellar Ledgers? LLC a boutique financial firm that serves small to medium-sized businesses by providing financial accounting, fractional CFO, management consulting, and training services.

Angela has been licensed as a CPA in Texas with experience that spans over 20 years in accounting, finance, tax, and audit across various industries with Fortune 500 companies, Big 4 Public Accounting, and state and federal government. Angela is very passionate about empowering entrepreneurs with the tools, resources, and support they need to build sustainable and profitable businesses.

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