In our experience, most small businesses don’t have nearly enough cash reserves in case of a significant economic downturn or other disruption. A J.P. Morgan report from 2016 seems to bear this out, too, determining roughly half of all small businesses held a cash buffer only large enough to support 27 days of their typical outflows.
The old cliché about cash being “king” is really insufficient to emphasize how critical it is for small businesses to maintain an abundant supply of liquid reserves. “Lifeblood” is really a better term when you consider the role of cash in paying your employers and suppliers, especially when you are dealing with an unexpected downturn in business.
That JP Morgan Chase Study of almost 600,000 small businesses found that fully a quarter of them had enough cash on hand to pay their bills for less than two weeks. How is your business doing in this critical area?
We know small businesses are more optimistic than they have been in a while. The January 2018 Wells Fargo/Gallup Small Business Index found 77 percent of small-business owners rated their company’s cash flow as very good or somewhat good over the previous 12 months, up from 73 percent in November 2017.
Still, that leaves 23 percent who are concerned about their cash flow. And while hope and optimism are wonderful, they won’t pay the bills if your business faces the unexpected, whether it’s a sudden drop in income or a surprise expense you can’t avoid.
We’ve discussed some of the strategies you can use to maintain a steady stream of cash, such as promptly billing and collecting payments, carefully managing your payroll, and having a cash management plan.
Cash balances are equal to the amount of cash your company holds at the end of the day across all business deposit or savings accounts. Cash buffer days are the number of days of cash outflows your business can sustain paying outflows from cash balances if all inflows stop.
Determining your cash buffer days is a useful tool for gauging the health of your business. Make it your goal to increase your cash buffer days. Managing your company’s liquidity and cash reserves can help you weather the inevitable storms that you will face, and flourish during the good times. If you’re finding, like so many other companies, that you don’t have enough in cash reserves – or you aren’t sure how to even calculate cash reserves, then I’d love for you to reach out to me and my team and let’s discuss how you can make those a reality.
If you or your clients have any tax issues or problems with the IRS/State or other federal tax problems, please feel free to contact me directly at (909) 570-1103 or by email at Carlos@HealthcareTaxadvisor.com
Carlos Samaniego, EA
Enrolled Agent
Licensed by The Department of Treasury to represent taxpayers
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1255 W Colton Ave, #535
Redlands, CA 92374
Ph. (909)570-1103
Fax (909)586-9190
