Cash is like fuel for your business. You need it to keep your business running. But how much cash should a business have on hand?
Continue reading to learn how much cash your business needs.
It’s the money a business has in cash assets or assets easily converted to cash.
Cash on hand can include money held in:
Cash on hand, in general, excludes the value of:
Keeping the right amount of cash on hand is useful in a few key ways:
Now, you see how vital it is for your business to have an ample cash reserve. But you might be asking, “How much cash should a business have on hand?”
In general, you want to keep cash reserves equal to three to six months of expenses. The idea is that these funds should be enough to meet your obligations even in months when you have no cash inflow.
To start, analyze the expenses listed on an income statement. Then factor in both overhead costs (e.g., rent, utilities) and production costs like cost of goods sold.
Run a year-round business with stable monthly expenses? Figure the average monthly costs for the last twelve months. Multiply the result by three to six to get a sense of how much cash on hand your business needs. So if you have $5,000 in average monthly expenses, aim for a cash reserve of between $15,000 and $30,000.
But what happens if you run a seasonal business with all expenses concentrated in a few months? Aim to cover one high-expense month and a couple of months with average costs. Say you incur $10,000 in expenses in your highest-expense month.
The average expense of the other months is $7,000. To calculate a three-month cash reserve. Multiply 7,000 by two and then add $10,000 to get $24,000.
Whether you go with the three- or six-month rule (or somewhere between) depends on:
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