As a business you need a cash safety net. Here’s why and how much.

Cashflow. It’s the lifeblood of all businesses. Over time, the amount of cash that flows into your business needs to be greater than the amount that flows out. 

You may be able to sustain a negative cash flow in the short term but longer term, this can prove damaging to your business’ survival.

Having a cash safety net is, therefore, vital to  your business. 

A safety net can be made up of a cash reserve or access to cash via a bank overdraft or other finance sources. The safety net means you will sleep better at night during tough trading periods.

How much cash do you need to weather a storm?

The answer depends on your business. How volatile is the sector in which you operate?  How concentrated are your sales – few or many buyers – and how reliable and speedy are buyers to pay?

In stable business sectors, a cash reserve of a couple of months’ worth  of your monthly outgoings (payment obligations) may be enough.

However, if you operate in a volatile sector, access to cash representing six months or more of your outgoings may be necessary.

The first step to take is to understand your business expenses and the different business scenarios that might happen – from slow to very quick payment – and what you might do to speed up receipts from buyers and to manage cash outflows from your businesses. Speak to your financial advisors and compile a detailed plan. 

It’s also worth remembering, having significant amounts of cash on hand can be an inefficient use of capital. You could be investing it back into your business to help it grow. Getting the right balance is important. 

Understanding how much cashflow your business needs is key  for business survival and you need to develop a plan to achieve the right balance.

Useful guides

You can download the ThinkBusiness.ie Cashflow Template, a detailed resource for businesses that explains how you can project your business’s cash flow on a month-by-month basis and help establish what the financial needs of your business will be.

You can also download the ThinkBusiness.ie Business Plan Template here. It is a comprehensive document that gives you a detailed insight into how you should structure and deliver on a business plan.

Image Shutterstock.com.

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