4 Crucial Reasons to Ensure Your Business and Family Retain the Right Amount of Cash.

Phil Hendry13/10/2020

If the Coronavirus pandemic has taught us anything from a finance perspective, it’s the importance of having enough cash (or immediately liquid assets) to hand.

 

Having an abrupt halt in revenue or income means that holding adequate levels of cash has been essential.  But equally this isn’t just the case for a pandemic, you should always be ready for unforeseen events and have a cash balance which allows you to navigate these times.

As a business or a family,  understanding anticipated cashflow is crucial, which you would do via some in depth cashflow forecasting as a business, or more likely through some expenditure analysis as a family / household.  These exercises tell you what is going into your bank accounts, and what is going out over a given period.  This in turn allows you anticipate any pinch points.

Armed with this information, here are 4 reasons why doing this is so important

1) Peace of Mind – Having an ample amount of cash for emergencies, both those you know are possible, and those which you can’t foresee, such as the Coronavirus is essential.  If you hold a figure which you know gives you peace of mind, it helps you think rationally about other decisions in your business and at home.

On the other hand, holding an inadequate amount of cash means we don’t always think rationally, because it makes us focus on the short term, relying solely on month to month revenue or income.  Focusing on the short term rarely allows us to develop and grow.

A rough rule of thumb we have seen is to set aside 6-12 months expenditure in cash.  This varies depending on your natural inclination towards more or less of a comfort blanket.  Each business and household is unique, but as long as you take the time to understand your own cashflow, you can arrive at a figure which provides security and peace mind.

2) Too much cash can hold you back – It is also common to hold on to too much cash.  In a business context, if you have growth ambitions, this need to hoard cash can be a serious drag on the business’s potential.  If you are thinking about this in the context of an exit, it is also important to note that acquirers do not view excessive levels of cash as a positive.  Often it is viewed that there were no other ways to deploy it to grow the business, which would be worrying, or just as a burden to extract at some point.
For families, hoarding too much cash really holds back from the lifestyle they could have.  If investing cash rather than hoarding it could allow you to spend one more day a week with your family rather than in the office, or allow that once in lifetime trip, surely this is worth pushing through the cheap emotional comfort of sitting on a huge cash balance.

3) Allows you to confidently invest – A reason some entrepreneurs never make that step to invest for growth, is that fear of income drying up and leaving inadequate cashflow to maintain the status quo.  This might be a new member of staff, putting resource into new marketing channels, or developing new services / products.  All of which you are doing to increase revenue and business value, but are initially a drain on cash.
The same can be said for individuals / families considering investing in the stock market or property,  instead of leaving their savings to languish in a bank account paying  0.01% interest, when inflation is makes the spending power of your money go down.  Investing is essential to maintain your money’s value, in terms of what it can buy in the future.

Understanding and holding the right amount of cash you need immediately accessible in an emergency, or if your income stops, allows you to confidently make that investment. It gives you enough time to reap the rewards of that investment, without worrying about being able to sustain day to day operations / life.

4) No Nasty Surprises (Tax!) – For those who are business owners or self-employed, ensuring you have enough cash set aside for Corporation and Income tax is your responsibility.   Because you are paying these taxes after submitting your accounts or doing self-assessment, you require the discipline of setting aside your tax as your money comes in….or not!
All too often, businesses or families don’t do this, meaning they use next year’s income, to pay last year’s taxes (if you have done this, you know what I mean!).  Without a handle on this, you can be presented with a tax bill which is greater than you expected, which could come at the worst possible time, such as when a key member of staff is leaving after losing a large client.

At least if you understand and pre-fund you tax bill, you can have peace of mind, but also look ahead.

Its definitely not the most sexy part of planning ahead from yourself or your business, but without doubt, keeping on top of your cash is essential.  It can be a bit arduous to spend the time, but I can assure you, doing so really allows you to focus on what is important to your family and your business.