[IMGCAP(1)]Small business is said to be the lifeblood of the nation’s economy.

Cash can be the lifeblood of any small business that wants to survive and thrive through a choppy economic environment. Building up a sufficient cash reserve to help see a business through lean times can be a challenge, but it should be a priority for any small business owner and their accountant.

Just as individuals and families should have enough emergency cash on hand for a rainy day, the same is true for a business. A three- to six-month reserve of cash is critical to help a business overcome periods when business slows or any number of other factors that can affect cash flow. Here are four important ways that a sufficient cash reserve can help your client’s business:

Keep up with payroll and bills. Employees count on a regular paycheck, but cash flows into the company might vary unpredictably from month to month. Having a stash of extra money in the bank can provide a necessary cushion to meet payroll and monthly expenses during times of tightened cash flows. It can also help cover the costs of supplies, equipment and services necessary to conduct business.

Avoid borrowing. Financing can be a challenge for a small business, particularly in today’s economic environment. Business loans are not always easy to obtain. If they are available, the interest charges and other fees have a negative impact on the company’s bottom line. In many cases, business owners utilize high-cost credit card debt if other sources of borrowing are not available. Having money in the bank to meet cash flow needs or to make large investments designed to help grow the business always gives a company greater flexibility and lowers costs.

Reduce current debts. Many business owners started their company with some debt. As cash reserves build up, some of those dollars can be used to pay down existing loans, reducing interest costs and fixed monthly payments. That will help improve the cash flow and general financial health of the company.

Stay afloat through challenging times. Perhaps the most important function of a cash reserve is to provide a bit of an “insurance policy” for a small business. The economic environment of recent years has proven to be unpredictable. More small business owners are being forced to find creative ways to keep their company relevant and profitable. As business ebbs and flows, a cash reserve helps keep operations running smoothly.

Build and maintain sufficient reserves. A lesson that many small business owners probably learned during the most recent recession was that the good times can’t be taken lightly. When business is booming and money is coming in, it makes sense to tuck some of it away in a cash reserve. Having that kind of foresight may be what helps the business survive through more difficult times and also might help facilitate its next growth phase.

An important point about a cash reserve – this is money that needs to be fairly liquid and readily available when needed. It should not be invested in long-term assets (such as stocks, bonds or real estate). Try to earn a competitive return, but without taking undue risks with the money. The most important role of a cash reserve is to be there when the business needs it.

Rich Van Loan is a senior financial advisor and Chartered Retirement Planning Counselor with Ameriprise Financial Services, Inc. He can be reached at (617) 337-3233 or via email at Richard.r.vanloan@ampf.com.


Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access