Small businesses and their owners are often closely tied, particularly around finances. SunTrust Research of 515 small business owners found that many owners sacrifice retirement savings, salaries and personal purchases to focus resources on their businesses.1 Seventy-five percent of businesses experience regular cash fluctuations,1 and as the financial backstop for the business, owners can feel stress on their personal finances.
Small business owners say that putting aside a business reserve in a business savings or money market account is the most important cash management task, and 61 percent say the first place to put any extra funds at the end of the year would be a reserve account. Yet, less than half of owners state they are doing a good job building a business reserve.1 Only a quarter of the time have owners built a large enough reserve to cover cash shortfalls.1
While building reserves is a top action to contain funding crises, predicting operating seasonality and growth needs can convert cash surprises into planned events, decrease personal financial risk, distraction and stress, and allow owners to reach their goals.
Build cash reserves
Accessing reserves is one of the top three strategies to cover a cash crisis1 and part of a business owner’s tool kit. Take these steps to build a healthy reserve:
- Set a target – Use your cash flow statement to determine the reserves needed to cover cash fluctuations.
- Share your target with your management team and advisors – Show your commitment to targets by communicating them broadly and to allow others to help you reach your goal. Advisors like your CPA and banker, along with employees and family members have a stake in the business’s success and will support you.
- State what happens if you don’t build a reserve – Spell out the consequences of missing your reserve target. If the lack of a reserve during a funding shortfall could force reductions in employee hours or production time, state that. Outlining cutbacks or additional financing needed provides motivation to everyone.
Anticipate and plan
Planning ahead can turn a “cash flow surprise” into a planned event and reduce the risk to your business and personal finances.
Owners can protect themselves with a plan to mitigate the effects of cash fluctuations:
- Seasonality – The top action for better cash management is to monitor and forecast flows, while supplier-side negotiations extending payment terms can moderate seasonal cash shortfalls1. Offering your customers incentives to pay faster can smooth ebbs and flows.
- Loss/financial problems of a key customer – Owners say their top investment this year will be attracting more profitable niche markets1, a sound strategy to increase the business’s pipeline, create customer diversification and lessen the impact of a major customer loss.
- Increase in material/labor prices – Today’s shifting global markets can mean higher prices. Hedge material prices with advance purchases. Use multiple supply sources and temporary or outsourced labor to explore ways to control costs.
- Output disruption – The loss of a key employee or a machine failure can bring production to a standstill. Cross-train personnel and keep backup plans up to date.
- Other events –Unanticipated events (think fraud, weather, loss, etc.) can lead to financial stress. A wide variety of available business insurance policies can alleviate most situations.