How Much Cash Reserve Cover Should Your Business Have?

How much cash reserve cover should your business have?

Recently in discussions with clients the focus is still on effective reporting, strategy, banking relationships and the 4 levers that drive a business, but in these uncertain times a new question is being asked… how much cash cover should our business have? We currently have ($ x) based on an internal theory and are building with multiple bank accounts for key items etc. Is this the right amount and how will this affect us long term in meeting our core strategic goals?

In past reviews of annual dividend and repatriation polices, the focus is on forecast cashflow (key inflows and outflows), required capital expenditure and potential investment strategies aligning to regulatory requirements. Whilst this still holds true, business owners are now more focused on what they should be holding as a reserve – and equally maintaining.

A good conversation starter with your financial advisor / CFO / Board advisor is; what is comfortable to the key stakeholders in maintaining? Consideration in the conversation must be given with transparency and thought towards:

1. Reserve amounts and best use effectively: Focus on building the reserve to comfortable or adequate levels.
2. Historical Cash flow forecast review: How much do you spend each month and seasonality effect of that spend required. Regular review of what you are spending and timing, especially with key items such as taxes etc.
3. How much is right for your business? 3 months or 6 months – keeping in mind that a large reserve may also limit potential growth and profits.
4. How to build it? This is where your CFO / Board Strategic advisor will best help in ways to do this and maintain via financial scenarios including factoring and additional bank lines of credit.

If you would like any help with determining how much cash reserve cover you should have please feel free to reach out to us via 0800 422 121

 

Article written by Brendan Raftery – CFO at The CFO Centre.