Building a cash reserve is essential for small businesses to manage unforeseen expenses, stabilise cash flow, and prepare for growth. Cash reserves act as a safety net, providing financial security during tough times or sudden market changes. We’ve laid out a few hints and tips that you can use to start building a robust cash reserve for your business.
Understand your business’s cash flow needs
The first step in building a cash reserve is understanding how much cash your business needs to cover regular expenses. Track your monthly operating costs—such as rent, salaries, and utilities—and aim to set aside enough to cover at least three to six months of these expenses. This buffer ensures your business can continue to operate during periods of reduced income or unexpected costs. Regular cash flow forecasting can help you understand your financial patterns and better plan your reserve needs.
Start small and build gradually
For many small businesses, setting aside a large cash reserve in one go isn’t realistic. Instead, start small by allocating a percentage of your profits each month towards your reserve. This could be 5-10% of your net profit, depending on your business’s financial situation. Over time, this gradual approach will help you build a substantial reserve without impacting your day-to-day operations.
Separate your cash reserve account
To avoid the temptation of dipping into your cash reserve, it’s a good idea to keep these funds in a separate account. This not only helps you mentally separate your reserve from your working capital but also makes it easier to track how much you’ve saved. Consider opening a high-interest savings account or a business savings account to store these funds, as this will allow your reserve to grow while remaining accessible in an emergency.
Plan for unexpected costs
No matter how well you plan, unexpected costs will always arise—from equipment breakdowns to tax increases. Having a cash reserve means you can handle these surprises without disrupting your cash flow or borrowing at high-interest rates. Make sure your reserve includes a buffer for these unpredictable expenses.
Use profits wisely
When your business experiences a profitable period, it’s tempting to reinvest all of it back into growth. While reinvesting is important, ensure you’re also prioritising your cash reserve. Consider splitting your profits between growth investments and your reserve to keep your business financially stable.
Review your cash reserve regularly
Once you’ve started building your cash reserve, review it regularly to ensure it’s still adequate for your business’s needs. As your business grows, your operating costs will likely increase, and so should your reserve. Regular financial reviews will help you adjust your reserve target and ensure your business remains financially secure.
A strong cash reserve is the foundation of a financially stable business. By understanding your cash flow, starting small, keeping your reserve separate, and reviewing it regularly, you’ll build a safety net that protects your business from financial shocks and supports long-term growth.
Did you know?
At Evolve Accounting, we specialise in helping SMEs build financial resilience. Our team offers expert advice on cash flow management and building robust cash reserves to secure your business’s future. Contact us today to learn more.
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