How much cash?
If a certain pandemic has taught us anything from a finance perspective…
It’s the importance of having enough cash (or immediate liquid assets) to hand.
An abrupt or unexpected halt in revenue or income means that holding adequate levels of cash is essential.
Equally, this isn’t just good practice for challenging economic times. You should be ready for unforeseen events and have a cash balance which allows you to navigate these times.
Whether you’re a business owner or a family, having a basic understanding of cashflow is a good idea.
Knowing how much you have going in or coming out each month means you’re in the mindset to respond to the short term.
For looking long term, however, understanding anticipated cashflow is crucial. This can be done via in-depth cashflow forecasting as a business. Or through some expenditure analysis as a family or 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 to prepare for any pinch points.
Armed with this information, here are FOUR reasons to ensure your business or family has enough cash…
Peace of Mind
Having enough cash for whatever life seems to throw your way is essential.
It helps to have a figure in your head which you know gives you peace of mind. This can help you think rationally when making other decisions for your business or at home.
On the other hand, not having enough means we don’t always think rationally.
Because it makes us focus on the short term, relying on getting by month to month, living hand to mouth. Focusing on the short term rarely allows us to develop and grow.
A rough rule of thumb we have seen is to set aside anything from 6-12 months’ income as cash. Make sure you factor in how long it may take you to find a new job. If your profession is a niche role, or competition for a role is high, more income set aside can help.
This amount varies depending on a person’s natural inclination towards more or less of a comfort blanket.
We know that every business and household are unique.
So as long as you take the time to understand your own cashflow needs, you can arrive at a figure which provides security and gives you peace of mind.
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.
After all, that cash could be working for you elsewhere.
If you have worked out how much your expenses are, you can also put that money to work for you.
Or maybe you’re thinking about exiting your business? It’s also important to note that potential buyers 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. Investing cash, rather than hoarding it, could allow you to spend more time with your family rather than in the office. It could allow that once in a lifetime trip. Surely that’s worth pushing through the emotional comfort of sitting on a huge cash balance?
Allows you to invest with confidence
A reason some entrepreneurs never make that step up to investing for growth is the fear of income drying up. Leaving them with inadequate cashflow to maintain the status quo.
But investing doesn’t have to be anything overcomplicated or even traditional.
It could be hiring a new member of staff.
Upgrading your company’s infrastructure (getting new computers, rather than relying on old technology)
Improving your brand awareness resource via marketing channels.
Or developing new services or products.
All of which you need to do to increase revenue and business value, but are initially a drain on cash.
The same can be said for individuals or families considering investing in the stock market or property. Instead, they opt to leave their savings to languish in an account paying 0.01% interest.
All the while, inflation makes the spending power of their money go down.
Investing is essential to maintain your money’s value.
No Nasty Surprises (Tax!)
If you are a business owner or self-employed, ensuring you have enough cash set aside for the taxman is your responsibility.
Because after submitting your accounts or doing your self-assessment, it is ultimately you who is paying these taxes. You’ll need the discipline to set aside cash for your tax bill. Regardless of how you really feel about paying the taxman!
All too often, we see businesses or families not doing this, meaning they use next year’s income, to pay last year’s taxes (if you have done this, you know what we mean!).
Without self-discipline, you could end up with a tax bill which is greater than what you expected. Which just so happens to come at the worst possible time, such as when a key member of staff is leaving. Or just after you’ve lost a large client…!
At least if you understand and pre-fund your tax bill, you’ll not only have peace of mind, but you can also look ahead.
In conclusion…
It may not be the most interesting part of financial planning. Making sure you plan ahead for yourself or your business, but above all, keep on top of your cash.
Understand and hold the right amount of cash you need.
You’ll need it to be accessible in an emergency, or if your income stops.
This in turn will allow you to choose investments. It gives you enough time to reap the rewards of that investment, without worrying about being able to sustain day-to-day operations or life.
So although it can be a bit of a chore to spend the time, rest assured – doing so really allows you to focus on what is important.
