Business advice

How Can You Increase Your Cash Reserves?

By 24th October 2019 No Comments
How can you increase your cash reserves Rory Finegan

How often do you discuss the issue of cash in your business? People find it easy to talk about profit, but I’m here to say that cash shouldn’t be a dirty word! In this blog, I want to put cash directly in the spotlight and think about how cash moves in a business. Once you can see where your cash is going, you can target it and begin to increase your cash reserves.

Banks and investors today are as interested in your cash flow statements as they are in your profit and loss results and projections. Therefore, it makes sense for business owners to be interested as well! Given that cash flow is what makes the wheels go around in business, it’s a good idea to keep a close eye on it.

How cash flow forecasting works

If cash flow is tight, people tend to dive into the world of cash flow reporting. Modern accounting software, such as Xero, has answered our need to better understand cash with real-time reports for cash flow, profit and loss, and the balance sheet. Xero is great for providing reports for all three, making it easier than ever before for business owners to track how cash is moving through the business.

But I always think of cash flow as something which is resultant, as in it results from whatever has occurred in the profit and loss sheet. Being aware of this allows you to influence what happens to cash. Focusing on a few key numbers can make all the difference if you want to increase your cash reserves. In particular, collections and stock have a big effect on the health of your cash reserves.

Collections

If your credit window is too generous, you can bet that your cash flow will be directly impacted because receipts are not coming through quickly enough to keep your business running smoothly. If you are a young or growing business, ideally you will find ways to reduce or avoid giving credit at all. This can be achieved by invoicing upfront, issuing interim invoices, introducing a monthly charging model, only delivering the goods or service once receipt of funds have been confirmed, and direct debit collections. Luckily, there are some super automation tools such as GoCardless, Chaser and Reminders in Xero that are handy for connecting your credit days with your cash flow.

Stock

Another important number is your stock. If you hold a lot of stock, then by default you are tying up your cash. Stock management is fundamental for improving cash flow and making sure you keep unnecessary costs down. By streamlining your stock, you can ensure you’re not holding stock for too long, maintain positive credit terms with suppliers, avoid wasting stock and improve stock turnover. There is no doubt that efficiencies in stock management directly improve cash flow.

However, it’s also important not to get too granular about your cash flow. Remember that you have to be able to make broad assumptions rather than focusing on individual transactions. If you are completely focused on short-term cash and are exposed if one customer doesn’t pay one invoice on time then it is a sign that your business is being run without sufficient cash reserves. Ideally, a business will have between 3 and 6 months of costs covered by cash reserves and if this is not the case it may be that the business is simply undercapitalised and requires investment.

My advice? Target your cash flow

It is possible for your sales and profits to be doing well but for cash reserves to be low. I see business owners working really hard at their businesses and you owe it to yourself to know your business cash is not being leaked or squandered. That’s why I advise business owners to have a budget for the year that covers both profit and loss AND cash. It’s time to target cash growth as you would sales or profit. In addition, I would incentivise your team to increase cash reserves on a quarterly basis. This way in your January budget you will have a target cash reserve that is compared against what you actually have in the bank. The end result is that cash is now front and centre in the conversation, as it should be, giving you the ability to enter the next year on a stronger footing than the last.