If I were to boil down small business success to just one crucial factor, I would say it’s that cash is king. Yet according to a 2016 JPMorgan Chase study, most small businesses only have about a 27-day cash buffer, and the top 25% of small businesses only have about a two-month buffer.
That’s more than a bit alarming to me. Here’s why.
Why You Need Cash
Yes, it’s possible to be profitable but run out of cash. That’s not good! Here’s why:
- You need a positive cash flow. Long-term success is about your company’s ability to maintain positive cash flow. If you don’t, you won’t be able to pay your monthly expenses.
- You’re better off with a larger buffer. If you are one of those small businesses that have only about a month’s buffer, that puts your long-term success at risk. What if there’s some kind of significant economic downturn or other disruption (COVID-19, anyone?)? Cash reserves give you a resource to pay employees, vendors, and suppliers during a slump.
- You can’t grow without it.To grow, a company needs to invest in its future, including people, technology, machinery, and real estate. This requires significant funds.
- You can pay bills faster: Some creditors only accept cash. Other accepted forms of payment can take longer to come through and can lead to late fees.
- You can keep transaction costs low. Electronic transactions like wire transfers and PayPal are convenient but often charge excessive fees.
- You will be in a more stable position. Having cash gives you better buying power. While there are times you can borrow money, cash provides greater protection.
- You have greater flexibility. Life happens. Inevitably, there will be some kind of emergency or emerging dilemma. Wouldn’t you rather be in a position to make those critical purchases ASAP rather than wait because of your cash situation?
If You Can Help It, Don’t Pay Cash
On the other side, there is your personal life. Yes, there are some big purchases that in the best-case scenario would be better done with cash. A home, for example, where even if you get the loan, the lender wants a large down payment. I realize it’s tempting. But this is the reality of being a small business owner. Which to prioritize first? Is it possible to finance the car? What other loan programs are available for the house? The question will always be there.
Don’t Dip In. Save Up. Let Me Show You How.
The bottom line is: Small businesses need to build up a cash reserve and figure out how to maintain a more consistent positive cash flow. Brigade Bookkeeping can help you strategize for these goals. Small businesses are our specialty and we look forward to assisting you!