Good cash management is essential
It’s important for your business to have cash on hand to meet everyday expenses, pay salaries and suppliers, invest in new equipment, real estate or technology, fuel growth and expansion – and manage unexpected expenses and economic downturns.
Cash can offer a buffer in times of stress or opportunity, so you want to manage it well. Generally speaking, you should have enough cash to cover two to six months of operating expenses. It may also be smart to have a line of credit available – just in case.
Striking the right balance
There’s a balance between having too much cash and not enough. If your business is holding too much cash, you could be missing out on opportunities to invest it and potentially generate additional earnings. Conversely, with an inadequate supply, you may have to borrow and pay interest, or sell off assets.
Don’t confuse profit with good cash flow
You can’t accurately measure your cash flow by simply studying your profit and loss statement. Many factors must be assessed, including accounts receivable and payable, capital expenditures, inventory and taxes. Your financial advisor can help you assess your cash flow in conjunction with your accountant.
Effective cash-flow management requires a laser focus on each of these drivers of cash, in addition to your profit or loss. Rules of accounting define profit simply as revenue minus expenses. However, a smart business owner understands the fact that whether you earned a profit is not the same as knowing what happened to your cash.
How can a business put its cash to work?
CDs offer higher yields than savings accounts, but you may have to tie up your savings until it reaches maturity. Money markets have a lower earning potential, but offer easy access to your savings – so you can make quick adjustments when rates change.
You might want to also consider a securities based line of credit. You can use the borrowing power of one or more personal or business brokerage accounts to establish a loan. Approval is typically done in just days, and there are no upfront, maintenance or closing costs. There are flexible repayment options, as well.
- Account for cash on hand and conduct a cash flow forecast.
- Work with your financial advisor to strike a balance between cash and credit to leverage the advantages of both.
- Ask your financial advisor about how to access liquidity to help you and your business.
Investments or strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. CDs offer FDIC insurance and a fixed rate of return whereas both principal and yield of investment securities will fluctuate with changes in market conditions. Money Market Funds: Although fund managers strive to maintain a stable net asset value, the funds are not federally insured and there is no guarantee that a stable net asset value will be maintained.
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