How Long Could Your Business Survive on Cash Reserves?

Most kids have a glass or ceramic piggy bank in which to save up their coins. To a kid, a piggy bank full of coins seems like a lot of money, but in reality, most of them only hold a few dollars.

While that might seem like a lot to a kid at the time, an adult worrying about things like food, rent, clothing, utilities, etc. knows that won’t even last a full day.

As a business owner, you have even more expenses to cover: rent on your office space, paying for your equipment, software, payroll, etc. It can be overwhelming just trying to cover those expenses month to month. What do you do if you have a slow month that doesn’t bring in enough revenue to cover your business expenses?

Hopefully, you’ll never have to worry about this scenario, but it happens more often than you might think. We just saw it happen to a lot of businesses back in 2020 when almost every business was forced to shut down for months at a time.

I hope you’ll never have to deal with this, but a sound policy is to hope for the best while planning for the worst. With that in mind, here are some tips for maintaining enough cash reserves to help your business survive the tough times.

What Are Cash Reserves?

Before we go any further, we need to define cash reserves. It is the amount of money you have in your company’s bank account, ready to hand over in the form of a check or debit card. In some cases, you might even have paper money on hand for cash expenses.

Most businesses have assets they could liquidate if things get really desperate. Things like your equipment, a vehicle, and even real estate if you own it, could all be used to pay your bills if needed, but those are not considered cash reserves.

How Long Could Your Business Survive?

Unless you’re already a client of mine, I don’t know the financial situation of your business. I do know that most businesses have enough cash to pay their expenses for about four weeks before their bank account is in danger of being overdrawn.

About 25% of businesses don’t have enough cash to last them two weeks.

How long should your business be able to survive on your cash reserves is a different question. Ideally, you should have enough in your company’s bank account to be able to cover about 3-6 months of your business expenses without any revenue coming in.

How to Save

Saving money sounds great, but for many of us, it’s much easier said than done, especially if you’re in the process of growing your business.

The solution is deceptively simple: put it in your budget. As business owners, it can be tempting to invest all our profits back into inventory, or equipment, or hiring new employees. But if you’re not careful, you can overextend yourself and end up teetering on the edge of bankruptcy if your investments don’t play out the way you expected.

If you have not already done so, you should set up a savings account for your business and commit to setting aside a certain amount or percentage of your revenue every month or quarter.

It can help to put that money in savings first before you pay your other expenses. That way you won’t be tempted to spend that money before it goes into your savings account.

Know the Rhythms of Your Business

Many small business owners are familiar with the feast-and-famine cycle. They have a lot of business, then it drops off, then it picks up again. This is not the case for everyone, but many businesses do experience these ebbs and flows throughout the year.

By building up your cash reserves during the feast, you’ll improve your chances of being able to survive the tough times when they come around.

If you’ve been in business for a while, you should already be familiar with this cycle. So, when you know a famine is probably headed your way, you can prepare by storing extra cash reserves in your company savings account.

You probably didn’t go into business for yourself to think about cash reserves. Fortunately, that’s why I started my business because I could talk about these things all day. If you have any questions about cash reserves, bookkeeping best practices, or financial planning for your business, you could use some help from a Bookkeeping Doctor. Just fill out this form to start the conversation.