You may have heard the phrase “Cash is king.” For a business, this is especially true. Cash is the lifeblood of a business, and keeps it afloat. Without cash, a business cannot pay its employees or expenses and all operations stop.
The success of a business can be broken down into individual business transactions. The way every incremental dollar is spent and earned is how all of a business’s dollars are spent and earned. Good decisions about spending and earning revenue in the short term lead to success in the long term.
So what actions should businesses take to target long-term success? The keys are cash flow management and cash reserves. A company should track and manage its cash inflows and outflows to ensure money comes in faster than it goes out. A company should also keep some amount of cash reserves in the bank for situations when cash flow management becomes difficult (such as the loss of a major client, an economic downturn, or unexpected expenses). During hardship, cash reserves keep cash flowing through the business.
In general, a company should target keeping 2-3 times its monthly operating expenses in reserves. However, this can differ depending on the business and the economy. During periods of high risk and low opportunity, keeping more cash may be best. A balanced perspective is important because the downside of keeping too much in cash reserves is that it’s unproductive and could be used to earn additional money elsewhere.
Sentinel Finance Group helps our clients with cash flow management by creating cash flow reports and creating budgets and forecasts to plan for the upcoming year. We evaluate different options to invest limited resources, calculate the return on investment of pursuing various opportunities, and make recommendations about cash reserves.
Sentinel Finance Group is an outsourced CFO firm in Kansas City and provides fractional CFO services and controller services to local businesses.
