Maximizing Growth Potential: The Importance of Cash-on-Hand for Retail Success
The question often comes up…
How much cash should I have in my business?
It is not only a good question but also a good goal to achieve. Having adequate liquidity enables peace of mind, creating better focus on managing your business.
When discussing cash on hand we also want to talk about liquidity. For an independant retailer, liquidity can be viewed primarily as cash on hand, which is the money your business has available to spend, either in cash or in bank accounts. Liquidity would also include the value of current assets that can be turned into cash easily.
It is important for a business to have enough cash on hand to…
Pay current liabilities including accounts payable, taxes, payroll, rent, etc.
Cover unexpected expenses or emergencies, such as equipment breakdown, legal fees, or market downturns.
Take advantage of opportunities or deals that require quick payment, such as discounts and off-price opportunities.
Avoid debt or interest charges that come with borrowing money or using credit cards.
Show financial stability and strength to potential lenders, investors, or partners.
When calculating current liquidity consider the following…
+Current cash in checking and savings accounts.
+Revenue expected in the next 30 days
+Availability of credit lines (but keep in mind that using credit lines adds to debt and interest expense)
= Total cash available
There are also the options of using credit cards - with caution - and of the owner infusing their personal capital into the business.
The amount of cash on hand that a business needs depends on various factors, such as the terms from vendors, the stage of the business, access to cash from outside the company, the historical spending, and the business goals. A common rule of thumb is to have at least two to three months worth of operating expenses and current accounts payable, in cash on hand, but this may vary depending on the situation.
It is also important that the business be able to generate positive cash flow from its operations on a monthly basis. In other words, after all expenses and short-term obligations like loan payments and current account payable have been satisfied, is the business’s bank account growing? In a healthy business the answer should always be “yes”, unless you’ve made a conscious decision to invest in something that will turn cash flow negative now, but with high confidence it will grow in the future due to the investment.
A valuable exercise is to do a break even and 12 month cash flow on your business.
You can also contact us to receive breakeven and expert advice in guiding you through the process. It is also a good idea to monitor your cash flow with the 12 week cash flow tool.
A great goal for 2024 is to have your current assets to be twice your current liabilities. In an upcoming webinar we will discuss your balance sheet and answer questions that may arise from this blog. For example if the owner is adding capital to the business how should that be represented in the company financials.
Comment “sign me up!” below to save your seat!
Onwards and Upwards,
Marc Weiss
