Having enough cash is akin to having a safety net for your business. It can sometimes even mean the difference between staying in business and going out of business. To plan how much you might need for your safety net, you can use a few different methodologies.
One way to plan your safety net is to prepare for the worst-case scenario. How long would your cash hold out if no revenue were to come in but all expenses kept going out? Some questions you might ask:
Another way to plan your safety net is to do what the average business does: acquire the amount of cash you need for two to three months’ worth of operations and keep it on hand. Alternately, you can make a plan to liquidate that much cash on a very fast basis and only put your plan in place if it’s needed.
An easy way to get these numbers is to utilize cash flow forecasting tools. A more manual way is to look at your bank statements in conjunction with your average accounts receivable and accounts payable balances. If that’s all Greek to you, no worries. Feel free to contact us and we can help you figure out a safety net number that you’ll feel comfortable with and that will keep your business risk low.
Once you have a safety net in place, you’ll gain peace of mind for your business. It’s one step in an overall disaster preparedness plan that you can make for your business.
This is general information and should not be acted upon without first determining its application to your specific situation. Please contact us, your CPA or tax adviser for additional details.
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