For any business, a cash reserve is a great thing to have on hand: It can act as a backstop should your company go through a rough season. To start building one up, the following strategies are key.
Set a Target
Before you begin building a cash reserve, it will behoove you to set a target amount. There’s no one-size-fits-all answer to the question of how much cash to have on hand, but a good goal is to build up enough money to cover your business’s operations for three to six months.
Create a Dedicated Account
Setting up a separate banking account for the cash reserve is helpful for multiple reasons. It’ll make it easy for you to track your progress. And if you’re the impulsive type, having the money in a separate account may make it harder for you to break into the funds for unnecessary purchases.
Identify and Cut Unnecessary Expenses
For many businesses, building up a cash reserve becomes much easier once they cut out unnecessary expenses. Take a detailed look at where your business is spending money, and ask if each expenditure can be eliminated or reduced. Unused subscriptions, bloated utility bills, and redundant equipment or vehicles are common areas in which businesses bleed money. The funds from everything you cut or sell off can be redirected toward your cash reserve.
Allocate a Percentage of Profits
Redirecting freed-up money from your expense reductions likely won’t be enough on its own to create a cash reserve. Therefore, it’s helpful to set aside a set percentage of your profits and deposit it into your cash reserve. As your business’s circumstances shift, you can increase or decrease this percentage, but it’s critical to make significant, recurring deposits.
Maintain the Reserve
After you’ve reached your cash reserve goal, revisit it periodically. For instance, if your business’s operating expenses go up, you may want to boost your cash reserves accordingly.
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