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.
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 is no upfront, maintenance or closing costs. There are flexible repayment options, as well.
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