Having a safety net is always a good idea, no matter what you’re doing. So having a cash safety net for your business is just common sense. Every business experiences periods of great profit, alongside dry spells that can be quite lengthy.
A major client may have paid their bill late, or perhaps you’re experiencing a prolonged downtime in sales, which can occur for many retail businesses between January and March.
Whatever the reason, if you need to delve into your safety reserve of money, it’s comforting to know that you’ve calculated the right amount to cover your business’ needs. Having a safety net will allow you to navigate these tough periods without going under. Unfortunately, there isn’t one figure that every business should aim to save. Here are a few questions that you need to ask yourself when determining the amount of cash you need in your business safety net.
How much does it cost to run your business?
Now is the time to sit down and have a really good look at your overheads. Go through your bills and receipts from the last 12 months and add everything up with your accountant. And we mean everything. How much did you spend on rent for your office or shop, insurance, internet, phone calls, utilities, ongoing marketing, legal fees, wages and repairs? Once you’ve reached your final figure (don’t be shocked!) divide this by 365, and you’ll know what it costs to keep your business running every day, even when you aren’t making sales or manufacturing products. This will help you determine how much money you need to put aside to keep your company afloat during inactive periods.
How risky is your business?
The next thing you need to determine is how long you may find yourself operating without making a profit. This largely depends on how risky the nature of your business or industry is, and what outside influences affect it. For example, if you’re a greengrocer, you know that your ability to sell produce relies on farmers, and their ability to grow produce relies on the weather and various other environmental conditions. So you know that there is an element of risk involved in your business from the get-go.
Look at past trends in the industry and gage how long similar companies have previously had to deal with shortages or times of hardship. The key here is to be prepared; if you know that there is a more significant amount of risk associated with your business than others, budget for a couple of extra months in your safety net. Most businesses will budget for 3-4 months times the daily cost of running their business. So you might want to budget for a minimum of 6 months.
Are there any significant, foreseeable changes occurring in your industry?
A critical step involved in being prepared for times of little cash flow is knowing what’s going on in your industry. Say your company manufactures android mobile phones. Is there a new Apple product hitting the market next year? Because you can bet your bottom dollar that sales for androids will drop for a month or two, or maybe three while consumers live the hype that’s the latest model of iPhone. You can try your best to counteract this change, and mix up your marketing strategies to offer a product that’s the complete opposite to the iPhone, hoping to get the attention of a niche audience. But the reality is that you still need to plan for the worst just in case things don’t pan out. And that means ensuring that there’s enough cash in your safety net to get you through a dry spell. Always be aware of what your competitors are doing, and how the outside influences that affect your ability to do business are behaving.
How much are you spending on overheads?
Let’s jump back to your overheads again for a quick moment. You spent all that time analysing your accounts to come up with how much it costs to run your business per day. Did you have a good look at what you were spending your money on? Your business may be flourishing at the moment, so you could be throwing cash at overheads like there’s no tomorrow. However, simple things like splashing on the fancy pens at Officeworks rather than buying your good old-fashioned BIC’s can have a huge impact in the long run. Everything adds up over time and once again, you need to plan ahead. What may not seem like a lot of money now, could really affect your savings for the future when business isn’t doing so well. Be frugal and think conservatively in regards to your overheads. When you aren’t putting your profits into your safety reserve, invest in overheads that will help your business grow, like human capital, and leave those stainless steel pens on the shelf. Your safety net will thank you when you come across harder times.
Toohey Reid are accountants that also offer strategic business advice. When we work with our clients, we don’t just offer stock standard solutions that may not suit your business model. The team at Toohey Reid will conduct a full risk analysis for your business, to ensure that it can make it through thick and thin economic climates. Contact us today for better peace of mind, and greater support for your business.
General Advice Disclaimer
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
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