Determining How Much Cash Your Business Needs
Many would agree that cash flow is the lifeblood of a business. If not managed properly, it’s likely your company will suffer. Determining how much cash your business needs will help strengthen its foundation and keep you moving forward.
Why is Cash Important?
Business owners should focus on a cash budget to help make day-to-day decisions. If you aren’t aware of your cash position on a daily basis, it can lead you to make decisions your business isn’t capable of funding. For instance, companies sometimes will get a large order, commit to do the job, then run out of cash before the job is finished or before they get paid. They often grow faster than their cash forecast allows.
This is why it’s important for businesses to have a plan of action for their short- and long-term cash needs.
How Much Cash Should Your Business Have on Hand?
Each business should understand its operating cycle—get an order, perform the work, bill it, and receive the cash. In terms of the amount of cash needed, there’s no real consistent rule of thumb. Consider having at least three to five months of operating cash on hand, that way you can cover any costs that pop up without an issue.
There is a balance. You want to deploy cash and have it working for you. But it’s also important to have a strong balance sheet so that you can withstand any hardships during economic downturns.
How to Manage Cash Flow Successfully
Once you have a good, realistic cash budget, it’s important to understand the management ratios that are used to keep an eye on your cash and how quickly you’ll get it—inventory, turnover in days, accounts receivable in days, and how often you make payments to vendors (accounts payable). If it’s all in sync, you can successfully manage your cash flow.
A business’ cash conversion cycle (how quickly it goes from creating the product, selling it, creating the accounts receivable, and then collecting the cash) tends to be a struggle for many. There’s no substitution for experience. If you haven’t been through a lot of cycles, then it’s hard to know what to expect when something happens for the first time.
PlainsCapital Bank wants to help your business manage cash flow. We can provide the financial expertise you need along with a full suite of business tools, including commercial and small business lending as well as treasury management and merchant services.
In addition, a revolving line of credit may be a good option for your business. You can obtain financing to help support your operational expenses and manage your working capital. A line of credit can also help your business purchase additional inventory, grow and expand, offset seasonal cash flow fluctuations, and obtain letters of credit.
To apply for financing or to learn more, stop by any PlainsCapital Bank location or call us to speak to a loan officer. Our experienced banking professionals are equipped with the tools and expertise to help you make the right choices for your small business to solve cash flow challenges.