How Much Cash Do You Need?
I bet you’ve heard/read enough solid advice about the importance of keeping plenty of cash on hand these days, especially when we may be in/going into a recession. But how much is plenty of cash? How much is too much cash on hand? Do you know how your cash flow would be affected by a continuing period of rapid growth or by a slowdown in new work? How do these situations affect your cash inflows and outflows?
Of course, we are not talking about profits here. You may have profits, but we know that profits are not the same as cash available to pay your obligations. You need actual cash on hand to pay your employees, your vendors and to pay your loan obligations. Do you know much cash you need to cover those payments? This can be especially tricky if you haven’t had to worry too much about cash because your company has been experiencing a period of steady sales. Alternatively, you may have received a big cash influx related to PPP loans forgiven or other windfalls. Of course, these are not repeatable events, and that “fluffy cushion” of cash won’t last forever.
You may find it useful to prepare a cash budget for a forecast period in the future. This budget would be a list of all the cash you expect to receive and all the disbursements you expect to have during that same forecast period. Essentially, this is a tool to look at your future cash flow without accrual accounting taken into effect. Here is a simple example:
Example Cash Budget for Ideal Company
Of course, the best time to review your cash position is when you are in great shape – not after you’ve begun to experience some problems. Take the time now to review your current and potential future cash flow needs based on your company’s situation for your greater peace of mind. Better still, work through some examples of “what if” scenarios based on growth and retraction scenarios. Periods of decline can be opportunities for growth, if you are prepared for it, including having the additional cash required. Alternatively, anticipating a slowdown or reduction in revenues for a period can be helpful as you and your management team prepare possible “pivot” moves to redeploy your resources.
Your company’s cash flow is just one of the many factors that potential buyers will scrutinize. If you’d like to discuss preparing your company for sale, purchasing another company, or the sale of your company to a third party, management, or family members, we’d be happy to have a confidential conversation with you. Our initial conversation is complimentary.
You can reach me via email: [email protected] or on my cell phone a: 224-688-8838.
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