6 Essential Steps to Business Cash Flow Success
A cash war chest or financial buffer helps a business weather disruptions like reduced sales, unexpected expenses, or economic downturns.
Cash reserves help leaders avoid drastic measures such as debt or service cuts and provide a sense of security and flexibility.
Here are six practical steps leaders can take as they establish and maintain cash reserves:
1. Assess Your Current Financial Situation
What’s the current financial position? Calculate cash reserves, outstanding debts, along with monthly revenue and expense forecasts. This gives a clear picture of where the business stands and what cash can be allocated to building a buffer.
In some cases, accumulating cash reserves may require a cost-cutting strategy by reducing unnecessary expenses or renegotiating contracts. In other cases, a modest price increase could yield surplus cash for allocation to cash reserves.
2. Set Realistic Savings Goals
What financial cushion will provide comfort? This can be expressed as a multiple of expenses, for example the reserve fund could equal 3 months’ of payroll expenses. Alternatively, you could allocate a percentage of monthly profits to cash reserves. Clarity increases the chance of attaining the goal. Remember, you can start small and gradually increase savings as the business grows.
3. Think Long-Term (Expenses)
Developing a reserve fund or financial buffer is a long-term initiative. Therefore if the funds are raised by reducing expenses, choose activities which will not compromise the quality of products or services or otherwise adversely affect business performance. For some businesses, there may be opportunities to trim marketing, operations or overhead expenses.
4. Think Long-Term (Revenue)
Likewise, building cash reserves may require finding additional revenue streams, perhaps through new products or services, expanding into new markets, or improving sales and marketing strategies. These are not trivial decisions and should be taken with a long-term horizon in mind.
5. Create Policies which Govern the Reserve Fund
Policies should govern how reserve funds are accessed, such as gaining necessary approvals and using the funds for very specific purposes. Leaders should acknowledge that these funds are NOT part of operating cash, which would defeat the purpose of establishing a cash reserve.
6. Monitor and Adjust Your Plan
Periodically review financial status to ensure the reserve fund and associated policies are supporting the business. Adjust savings and spending habits accordingly and increase the frequency of these reviews if the business is facing significant risk.
A culture of building financial resilience in the form of cash reserves strengthens a business in the long-term. Consider these strategies for a brighter financial future for your business!
Need help managing your business cash flow? Get in touch with Alliott NZ's team of Chartered Accountants in Auckland.
