8 tips for building and maintaining a cash reserve
As we all know, opening a business of any kind is risky. But the real challenge lies in keeping that business alive. Between market oversaturation, economic recessions, personal hardships, and unexpected crises, there are many factors that may threaten your business.
While you can’t control everything, you do have a say in how you run and manage your business. And this includes how you approach unforeseen events.
As the world continues to deal with the impacts of COVID-19, many technology solution providers (TSPs) are relying on their cash reserves to see them through to the other side.
Situations like this are precisely why it’s so important to build a healthy cash reserve. Knowing that you’re well-prepared to survive the unexpected allows you to place your focus elsewhere, like helping your clients navigate through.
If you are just starting your business or are wanting to get more strategic about prioritizing your cash reserves, here are some tips you can follow.
A word of advice: when implementing a new, significant strategy such as this, take it one step at a time. Slow and steady makes it less likely you’ll get overwhelmed and more likely you’ll successfully follow through.
1. Create a cash team
Designate specific people to handle your cash flow. This cash team should be tasked with maintaining the reserves and making decisions on ways to grow it or use it.
Most likely, this team will be composed of both internal and external individuals (bankers, attorneys, CPAs, etc).
Having it set up this way means when there’s an urgent situation, you have the right people to call upon to make things happen.
2. Plan to fail
It may seem odd to think this way instead of adopting a constant optimistic approach; however, while you should do everything you can to ensure your business is a success, you should prepare for what happens if and when you bring in less or no revenue.
When creating your budgets, devise a plan of action for 3 circumstances:
- Your expected annual plan
- Cutting 10%
- Cutting 30%
Map out your approach for each of those scenarios and be specific. Know what you will cut and when. And be prepared to adjust your budget on-the-go as your real situation develops.
3. Be smart and conservative
When taking a good, hard look at your budget, be ultra cautious about your spending. For each line item, ask yourself, “is this expense necessary?” If it’s not, do away with it. Redirect those funds to your cash reserve.
Also, be on the lookout for hidden fees from credit cards or bank accounts. While seemingly nominal, those costs add up quickly.
4. Track your finances
Use business intelligence to keep an eye on your finances. This isn’t just about ‘cash in bank’, but also your profits, expenses, accounts receivable, MRR, and anything that impacts your budget.
Monitoring these numbers in real-time on a daily basis can help you understand where you stand and see where changes need to be made.
Staying on top of your finances is a great way to get ahead in terms of stockpiling your cash reserves.
5. Draw loans before you need them
In economic crises, banks are less lenient about who they will loan money to. How can they know you’ll pay back your loan? Taking out a loan before you really need it will secure the funds you need when you need them.
6. Have a contingency plan
If the COVID-19 pandemic has taught us anything, it's that having a business continuity plan in place is critical. Take time to properly and formally put together your plan, and be specific about the details. Plan for the worst possible scenario so that you’re prepared for anything. Your business will be better off if you’re prepared to execute your plan versus scrambling to figure out your next move.
7. Turn to your peers
Join a peer group and talk with other TSPs about their approaches and experiences. These groups are a great way to lean on your colleagues in the industry whenever you need personal or professional advice.
Discovering how other TSPs have maintained their cash reserves can help you assess whether you’re on the right track or need to implement some changes.
8. Invest in software
There are tools that can help automate some of the processes for you, or at the least, make it easier to manage your cash flow. Consider how you're collecting payments from your customers. Do you have an option that enables them to make electronic payments easily?
Ensuring you're providing them a frictionless process allows you to collect payments easily and maintain as much income as possible. Leverage these tools and use them to your advantage. They require some financial investment, but if it means making your business stronger and helping you weather any unforeseen crisis, then it’s worth every penny.
There’s no 100% guaranteed formula for getting your business to survive any situation, but there are measures you can take that certainly make you better prepared. Being smart and purposeful about your cash reserve is a necessary step in the right direction.
A healthy cash reserve buys you time and peace of mind. When disaster strikes, you’ll be prepared to act quickly and efficiently, placing your focus on what comes next. The alternative is getting caught off guard and likely succumbing to the impacts of the given situation. Protect what you’ve worked hard for and you’ll be in good shape.