The amount of money your small business should in the bank is between three to six months worth of operating expenses. This means if your businesses operating expenses are £5,000 per month you will need £30,000 in reserve to cover the running of the business should something go wrong.
Cash flow is key for small business ventures. Not only does it help you to pay employees and suppliers when your profit margins fall a bit short for a period, but it also helps you to stabilise while clients are slow in paying you.
Consistent cash flow isn’t only important when the going gets tough, however. It also proves to be handy when trying to grow your company and can offer you the cash injection needed to reach the next stage in your development.
Strangely, the best time to fund your business with a service such as a business loan, is when you aren’t struggling for money. This is because you will be acting with precaution and having ‘emergency funds’ in the bank, which will offer you some breathing space when you do run into more difficult moments. With this, you’ll be able to recover from slower sales periods far more easily.
As it is currently the run up to Christmas, many UK small businesses have been boosted by the likes of Black Friday, Cyber Monday, and the busy shopping season in general. However, January is often a much slower time for ventures of all shapes and sizes, so you’ll soon need backup funds to cover the slowdown. Maintaining a steady cash flow is more important than ever before, so read on further to discover how to do this and learn exactly how much your business should have in the bank at any one time.
There is no one set amount of cash all businesses need to have in the bank, o to work out how much you require, you’ll need to answer a few questions. There are also some general rules you will need to follow.
What are your business outgoings every month?
The first thing you’ll need to discover is how much your business spends each month. Add up the total cost of things such as rent, utilities, inventory costs and other stuff that springs to mind, so that you can work out your SME’s expenditure. When you have done this, you’ll further understand how much money you need to have stored in the bank in case you run into trouble or want to purchase something that will aid your growth.
Working out your monthly expenditure isn’t as straightforward as it would seem. This is because you may spend slightly different amounts each month, and there can be seasonal alterations to spending that alter every year. Different industries obviously require different levels of spending, so don’t try to go by a fellow businessperson’s numbers; it probably won’t work.
Working out your monthly operating expenses
There isn’t a single simple process to working out your monthly expenses, and it will be different for each venture in the country. You may find that using either an accounting software or analysing your bank statements will help here.
Here’s a general three-step system you can utilise:
- Analyse your cash flow statements from the past 12 months. This will also inform you of any seasonal variations.
- Write down what you spend every month. You should also jot down the highest and lowest spending months of the year for your business.
- Add all of this together and divide it by 12. You will now have your average monthly spending amount.
If you’re a smaller seasonal business, for example an eCommerce venture that sells baseball caps, it means your expenses will likely be more concentrated in certain months aligned to your sales. It is vital that you understand when these periods are. Therefore, working out the average across 12 months will be a huge help to you. Analyse a full year rather than a smaller length of time, such as six months, etc.
How much should my business have in the bank?
Certain business experts propose having three months of operating costs in the bank, while others recommend closer to six. The most compelling thing to recall is that you should feel comfortable and not under any strain while saving this cash, which often relies upon the personality of each entrepreneur.
In spite of the fact that having a decent amount of cash in the bank can uphold your business through difficult stretches, it’s not the most important thing in the world. Truth be told, having a massive amount of savings in the bank can be a misuse of assets that could be put all the more effectively back into your company
The best methodology is to tailor your cash reserves to meet your business’ particular needs. Take a gander at your small company’s year-long trajectory and cautiously work out your future objectives, planning out your forecasts.
If you are planning to grow your business and make expansions to the company, having a large amount of money simply sitting in the bank can be just the thing you need. Assuming you’re a more established venture, you may feel better about keeping a decent reserve in the bank in case you experience any hiccups throughout the year.
In any case, making sure that you have cash in the bank and positive cashflow going through your business is the thing that each SME ought to strive for.
Understanding your ideal cash reserve
Once you understand how much your business spends each month, it’s time to work out the perfect amount you should have in the bank at any given time.
You’ll make your calculations slightly differently depending on whether you have a steady month or costs that are prone to fluctuation. Follow the below process to calculate how much you need to keep in the bank.
How much should my non-seasonal business have in the bank?
In the event that your business’ month to month expenses remain genuinely predictable consistently, increase your normal month to month costs (determined prior) by one or the other three or six, subject to how long you need in your reserve.
For instance: If your normal month to month expenses is £30,000 and you need a three-month reserve, your aggregate would be: £30,000 X 3. Along these lines, making your cash saving £90,000.
How much should my seasonal business have in the bank?
Like with working out your normal month to month spending, if you run a seasonal business, the process is somewhat unique. You should be adequately saving to cover your one high month, yet additionally those normal months in the middle.
Investigate the accompanying guide to work out how much cash to place in the bank as a seasonal venture:
Say your high expense month is £100,000, your ordinary months are £20,000 and you need a three-month cash reserve.
- Multiply £20,000 by two months to get the total for the first two months = £40,000
- Add the £100,000 high-cost month
- Your total of £140,000 is your three-month reserve, which ensures a strong cash flow for one high month and two regular months
How to build a cash reserve for a small business
Okay, so now you know how much your business needs to have stored in the bank. It is now time to learn how to build cash reserves for future use. There are multiple ways of doing this, so we’ll walk you through some of the most effective ones.
Self-financing for SMEs
One simple option is to take a certain amount of money from your profits and put it away each month. Move a specific sum of your income to a different ledger or a bank account every month until you arrive at your ideal cash reserve. This will build over time and the longer you do it for, the more you will be rewarded.
Only ever use this cash when you absolutely need to, and replace it quickly, to ensure you generally have your financial security net. Remember to make contemplations for everything you’ll have to pay out for, including VAT and corporation tax bills which aren’t month to month costs.
Different funding sources for SMEs
On the off chance that self-financing isn’t a possibility for you since you want to keep your private venture’s full income each month, you can look to other funding sources. A line of credit or a small business loan could be potential answers for you to consider. This may be useful when trying to build up a cash reserve for your venture.
This additional cash injection will mean your independent company can begin placing cash in the bank as a form of saving or to help cash flow, without agonising over cutting money from different areas of the business.
Build up your cash reserves
These two strategies are not always appropriate for small businesses as they can regularly rely upon the organisation having valuable assets and an adequate cash flow set up to be considered eligible.
Alternative financing solutions, for example, an unsecured business advance, could be a considerably better fit for your SME. They will not expect you to have enormous amounts of cash in the bank and are significantly more open to UK independent ventures.
Then again, a business cash flow loan could help your firm begin to assemble its financial savings inside 24 hours of utilisation. This speedy cash injection will help your independent venture set money aside in the bank, giving your business a safety net. These function very well for seasonal businesses – especially those that are coming up for a bustling month and think they’ll need extra funding available to them in the bank
Frequently Asked Questions (FAQ’s)
How much cash should I keep in a business operating account?
The amount of cash you should keep in a business operating account should be between 3 to 6 months' worth of operating expenses in cash at any given time
How much cash should you have in reserve?
The amount of cash you have in reserve should be equal to six months of expenses. If your business needs £5,000 to survive every month, save £30,000.
Lee Jones is a seasoned Business Finance Specialist with over two decades of invaluable experience in the financial sector. With a keen eye for market trends and a passion for helping businesses thrive, Lee has become a trusted advisor to countless organizations seeking to navigate the complexities of finance.