What has happened to your business because of the global pandemic? Do you have enough cash available to you to meet your expenses for three months? Six months? A year?
COVId-19 aside, many other things can also happen that put a halt on your immediate cashflow. We’ve worked with clients who have experienced significant cashflow impact due to illness, injury, disruptions to stock availability or their supply chain, for example. Basically, the businesses that come out on the other side are those which have planned for the unplanned - with a robust cash buffer.
Contingency Plan. Buffer. Reserve. Safety net. Cushion. Different names, same concept.
We like to use the term ‘cash buffer’ to describe the amount of money sitting in a separate account to meet the operational costs of running a business for an extended period of time, where day-to-day income has dropped off for whatever reason.
How much cash should be set aside for an appropriate cash buffer?
Well, there’s no one answer for every business. The amount must be determined against your specific needs and your business’ financials. The bottom line is to have enough of a buffer to cover your expenses — business and personal — for at least three months, but ideally six to nine months. The way to determine this is to deep dive into the past twelve months’ worth of your data, which (if you’re keeping your accounts current) won’t be as intimidating as you might think.
As you go through your financial reports, determine what it costs you to run your business for a year — for example, to pay your employees, your rent, your stock and equipment. Examine your expenses with close analysis:
Did you have some months where your earnings were significantly higher than your expenses?
Conversely, did you spend a lot of money setting up a new staff member?
Did you deck out your office in new hardware that won’t need to be replaced for several years?
Now, complete your forecasting and your projected income for the next year. Of course, be guided by the previous year:
Have you committed to more networking this year to enhance your visibility in an attempt to increase your client list?
Do you have some marketing strategies planned for the year ahead which should lead to revenue increases?
Is the coming year one where you need to invest in your business such as a change of venue, new website or education?
As you work through your numbers, you’ll have a clear dollar amount to indicate an appropriate buffer. Your buffer can be grown over time and built slowly. Some quick wins can come from trimming expenses where possible and moving those costs across to your buffer. If you have an unexpected windfall in your business such as a dream client falling into your lap, or a significant cost saving, then consider moving parts of these amounts into your buffer.
A common misconception about a cash buffer is that it’s solely for when circumstances have a detrimental effect on your business. While this is certainly a critical purpose of a cash buffer, it can also be a game changer when an opportunity for your business pops up. Having cash ready to go for an invaluable asset investment gives your business agility. It means your business has the ability to respond to positive circumstances as well as negative — which are the hallmarks of success.
Do you have enough of a cash buffer for when the unplanned strikes? If you’d like support with determining the right buffer for your business, please reach out.