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Cash flow and cash cushions are important in any business that wants to be around in the future. Too often business owners keep almost no extra cash in their business(es) and function on a hand-mouth existence. Problems can occur if a swift downswing in sales happens, a delay in needed upgrades, a city inspection that goes bad or an unexpected expense suddenly rises. Whether you are a large business or a small business having a cash reserve and a positive cash flow is a strategy that you cannot do without. Stephen King, the president of Virtual growth (a financial consulting firm) state, “Business owners should be thinking about this issue (cash reserves) from day one” (Andresky, 2005). Most business owners simply don’t think about keeping cash on hand for emergencies or operating expenses. Too often these business must borrow to meet payroll or other unexpected expenses. There are two things that need to happen in order to create a cash reserve that are absolutely critical. First, one must increase cash flow and the second is saving the money. Methods of Receiving Cash Flow: 1.) Sales: The easiest method for a business to receive a positive cash flow is from sales. People typically purchase in cash or cash equivalents like credit card payments or check. Encourage your customers to make payments as much as possible by cash or cash equivalent methods. This money is on hand when you need it and can be deposited at anytime (if automatically done so). Avoid extending credit when possible because credit is a liability and not a cash payment. Once the product is received by the customer you become responsible for it whether or not they pay. 2.) Investment: Strong businesses put their money away into an investment vehicle. The interest or Return on Investment (ROI) is cash that can be withdrawn and placed into a cash reserve account. Most businesses would prefer to keep the money in the investment account and let it grow instead of withdrawing it. However, if cash is needed this becomes wholly possible. How Much Money Should One Reserve? Since businesses often move through an upswing and downswing cycle it may be necessary to place as much as 6-months of operating expenses into a cash reserve account. This money can be drawn upon anytime there is a financial problem or expense that one is not aware of. For example, if you are a business owner who does not have cash reserves, and sales immediately drop, you are going to be forced to borrow money from a lender who is going to charge you interest or close your doors. Business owners don’t seem to think about the potential dangers and don’t keep the 6-months of cash reserves that is necessary in order to protect their business(es). Places to Keep/Invest Cash Reserves: Money Market Deposit Accounts: Money Market Deposit Accounts are federally insured interest bearing accounts that allow for limited check writing. This limited checking writing feature is beneficial if paying an unexpected bill. Most accounts of this type require $1,000 or more and pay a slightly higher rate than a checking account. Money Market Funds: These type of accounts can give you more interest than a checking or Money Market Deposit Account but there is no Federal protection. However, if you expect not to use your money soon you can invest in government bongs, COD’s, or other large funds and be relatively sure you will not lose money. The advantage is that you can sell your shares and receive your money back in a reasonable time. These types of funds can be sought through investment brokerages online or in your home town. Certificates of Deposit: Certificates of Deposit (CDs) are federally protected up to $100,000. CDs earn a fixed rate of return from 3 months to 5 years which can be an advantage for money lying fallow. However, if you withdraw the money early you will have to pay a penalty that can be steep. This type of account should only be used once you have fulfilled your emergency cash needs. Murad Ali is a three time book author, a Ph.D. candidate, a human resource manager. http://www.thenewbusinessworld.blogspot.com http://www.onlinebusinessconcepts.blogspot.com
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