<\/p>\n
You\u2019ve no doubt heard the old business clich\u00e9 \u201ccash is king.\u201d And it\u2019s true: A company in a strong cash position stands a much better chance of obtaining the financing it needs, attracting outside investors or simply executing its own strategic plans.<\/p>\n
One way to ensure that there\u2019s always a king in the castle, so to speak, is to maintain a cash reserve. Granted, setting aside a substantial amount of dollars isn\u2019t the easiest thing to do \u2014 particularly for start-ups and smaller companies. But once your reserve is in place, life can get a lot easier.<\/p>\n
Common metrics<\/p>\n
Now you may wonder: What\u2019s the optimal amount of cash to keep in reserve? The right answer is different for every business and may change over time, given fluctuations in the economy or degree of competitiveness in your industry.<\/p>\n
If you\u2019ve already obtained financing, your bank\u2019s liquidity covenants can give you a good idea of how much of a cash reserve is reasonable and expected of your company. To take it a step further, you can calculate various liquidity metrics and compare them to industry benchmarks. These might include:<\/p>\n
\u2022 Working capital = current assets \u2013 current liabilities,\u2022 Current ratio = current assets \/ current liabilities, and\u2022 Accounts payable turnover = cost of goods sold \/ accounts payable.
\nThere may be other, more complex metrics that better apply to the nature and size of your business.<\/p>\n
Financial forecasts<\/p>\n
Believe it or not, many companies don\u2019t suffer from a lack of cash reserves but rather a surplus. This often occurs because a business owner decides to start hoarding cash following a dip in the local or national economy.<\/p>\n
What\u2019s the problem? Substantial increases in liquidity \u2014 or metrics well above industry norms \u2014 can signal an inefficient deployment of capital.<\/p>\n
To keep your cash reserve from getting too high, create financial forecasts for the next 12 to 18 months. For example, a monthly projected balance sheet might estimate seasonal ebbs and flows in the cash cycle. Or a projection of the worst-case scenario might be used to establish your optimal cash balance. Projections should consider future cash flows, capital expenditures, debt maturities and working capital requirements.<\/p>\n
Formal financial forecasts provide a coherent method to building up cash reserves, which is infinitely better than relying on rough estimates or gut instinct. Be sure to compare actual performance to your projections regularly and adjust as necessary.<\/p>\n
More isn\u2019t always better<\/p>\n
Just as individuals should set aside some money for a rainy day, so should businesses. But, when it comes to your company\u2019s cash reserves, the notion that \u201cmore is better\u201d isn\u2019t necessarily correct. You\u2019ve got to find the right balance. Contact us to discuss your reserve and identify your ideal liquidity metrics.<\/p>\n
\u00a9 2018<\/p>\n","protected":false},"excerpt":{"rendered":"
You\u2019ve no doubt heard the old business clich\u00e9 \u201ccash is king.\u201d And it\u2019s true: A company in a strong cash position stands a much better chance of obtaining the financing it needs, attracting outside investors or simply executing its own strategic plans. One way to ensure that there\u2019s always a king in the castle, … Continue reading “Keeping a king in the castle with a well-maintained cash reserve”<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":817,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-818","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting"],"_links":{"self":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/818","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/comments?post=818"}],"version-history":[{"count":2,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/818\/revisions"}],"predecessor-version":[{"id":825,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/818\/revisions\/825"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/media\/817"}],"wp:attachment":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/media?parent=818"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/categories?post=818"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/tags?post=818"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}