According to Capify’s Business Confidence Survey, most SME owners are concerned about cashflow.
In addition to rising prices throughout the supply chain and the looming recession, many SMEs report negative trends in their cash positions. According to the survey, 53% of respondents were concerned about the amount of cash held by the business, whereas 43% reported having less than $50,000 AUD in the bank (up 6 percentage points from Q4 2021).
What can business owners do to ensure they have enough cash in the bank? With our simple guide, you will gain a clearer understanding of the reserves you need to facilitate growth or overcome cashflow hurdles. In addition, you will discover ways to raise capital to meet these needs.
The first step. Decide what your business objectives are for this year
Every SMEs is different, so there is no set amount your business should keep in cash reserves. Cash reserves should be tailored to meet the specific needs of your business. Plan your future goals and forecasts based on your 12-month trajectory.
It may be advisable for SMEs in growth mode to have a large cash reserve to invest in staff, machinery, or inventory. It might be a smart idea to keep a small reserve in case you encounter any hiccups over the year if you are forecasting a year of consolidation. Every SME should strive to have positive cashflow and money in the bank.
The second is. Calculate your reserve requirements based on your outgoings
You can devise a plan for how much you need to keep in the bank in case of an emergency or growth. You can do this by calculating how much your business spends on average each month on things like rent, utilities, and other inventory costs.
There is a simple process to follow in order to work out your monthly expenditure, regardless of whether your expenses are consistent throughout the year. You can use accounting software or bank account statements to help you.
- Examine your cash flow statements for the past 12 months (seasonal variations will be taken into account).
- Determine how much you spend each month (note down the month with the highest spending)
- Divide all these expenses by 12 to get your average monthly spending
In a seasonal business, expenses will likely be more concentrated in certain months, aligned with sales. This is why it’s critical to know when these times are, which is why you should use a 12-month period.
The third point. Calculate your reserve
You should multiply your average monthly expenses by either three or six, depending on how many months you want in your reserve.
In the example above, if your average monthly expenses are $20,000 AUD and you want a three-month reserve, your sum would be: $20,000 AUD X 3. Therefore, your cash reserve should be $60,000 AUD.
You need to save enough to cover not only your one high month, but also those regular months in between.
To figure out how much money you should put in the bank as a seasonal business, consider the following example:
You need a three-month cash reserve because your high-cost month is A$80,000, and your regular months are A$30,000.
- For the first two months, multiply A$30,000 by two to get £60,000
- This month will cost 80,000 A$
- One high month and two regular months are covered by your three-month reserve of A$140,000
The fourth point. Make sure you have a cash reserve
Cash reserves can be built in a number of ways. You can simply transfer a certain amount of your profits to a separate bank account or savings account each month until you reach your ideal reserve amount.
Self-financing isn’t an option for many SMEs, who need to retain their profits every month. Working capital/cash flow struggles were cited as the primary reason for seeking external finance by 47% of respondents to Capify’s Q1 Business Confidence Survey.
External funding options can help you build your cash reserve without taking funds away from other areas.
Business owners are increasingly worried about cash flow, according to Capify’s Q1 2022 Confidence Survey.
The fifth point is to borrow money before you need it
Cash flow problems are best solved before they occur. A good time to borrow money is when your business is running smoothly or is just starting out.
You can avoid rejection by taking a Small Business Loan when your numbers are high. In addition, you will have resources to fall back on in case you experience any growing pains when starting a business. Regardless of whether a business runs on a cash or accrual basis, Rohit Arora, CEO of Biz2Credit, recommends taking advantage of both.
You might not get what you ask for, but it’s better to have reserves to fall back on when times are tough, he said. Your cost of capital will be much lower if you get a small business loan at 10% or less than if you use credit cards at 19% or higher.”