5 steps to building a cash reserve

Building a cash reserve is vital for the financial security of your business – but many small firms have no reserves at all.

New research from Simply Business and YouGov has found that the majority of businesses have cash reserves to last them just two weeks, while one in five have no savings whatsoever. The findings raise major concerns about small businesses’ ability to weather unexpected disasters that could force them to stop trading.

Your business needs a cash reserve if it is to remain stable. However, as our research shows, far too many businesses have no ‘slush fund’. So how do you go about building a cash reserve?

1. Manage your debt better

If your business is carrying debt, you can help to ease your financial situation and build up a cash reserve by managing that debt more efficiently. Try to renegotiate your loans with your existing creditors. Many may be willing to agree a longer loan term, which would provide you with a lower monthly repayment, allowing you to set aside more cash each month. If your creditors are not receptive to this, and providing that your business has a good credit history, you may be able to move your debt elsewhere on better terms. Alternatively, you may choose to pay down your debt more quickly in order to begin setting cash aside once it has been settled. Read more about how to pay off business debt.

2. Tighten your invoicing process

Often, cashflow problems can arise not because you are not securing sales, but because you are not getting paid on time. By making sure that your invoices are settled in a timely manner you can better manage your cashflow while allowing yourself to set aside cash at more opportune times. Read more about preventing late payment, and about the potential for seeking compensation for overdue invoices.

3. Cut your outgoings

This might seem more challenging, but one of the most important ways in which you can save some cash is by reducing the amount that you spend. There is a range of ways in which you can do this, but you might begin by trying to renegotiate your contracts with your suppliers. These businesses will recognise that times are tough for many of their clients, and they are likely to be willing to offer better rates or terms in order to keep your custom. Budgeting is another key skill if you want to build a cash reserve. By setting out every absolutely necessary expense, you can identify how much cash you have left over, cut unnecessary spending, and more efficiently plan for future outlay.

4. Consider invoice finance

Invoice finance allows you to borrow against the value of your unpaid invoices. A proportion of the face value of the invoices is paid by to you by an invoice finance company and, as this payment can often happen within as little as 24 hours, this method of alternative finance can be a highly efficient way of smoothing over cashflow issues. It can also enable you to better plan your finances, giving you the opportunity to set aside money rather than constantly fighting late payment fires. Simply Business has partnered with Aldermore to offer invoice finance services. Read more about invoice finance.

5. Always pay it back

Finally, in the event that you make withdrawals from your cash reserves, you should make sure that you replenish them accordingly. There is often a temptation to run down your cash reserves without making provision to pay back the cash that you have taken, but you should think about this as a form of debt to yourself. It must be paid back in order to help secure your business’s long-term financial stability.

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