New business owners often wonder how much cash they should keep in their business checking accounts. I’ve seen two extremes: some businesses run hand-to-mouth and always carry a very low balance while other businesses seem to be uncomfortable when their bank balance drops below six figures!
My general recommendation is that you should always have enough cash to cover one month of your “normal” month’s expenses, such as rent, payroll, monthly fees, and so forth. This rule of thumb only holds true, though, if your business has access to a line of credit. Between your cash and your available line of credit, you should have access to enough funds to carry your business for three to six months. Why so much? This “contingency fund” is what will carry you through a significant natural disaster, a serious illness or medical emergency, or any other crisis that keeps you from earning money for a couple months.
So, if your cash reserves aren’t up to this level yet, start pinching your pennies and work with your banker about opening up a line of credit. But what do you do if you actually have more cash than you need? Well, some suggestions might be:
- Spend some money on equipment or training that helps you increase your sales or make higher profits from the sales you already have.
- Take advantage of early payment discounts from your suppliers. Even terms like “2% 10, net 30” may make sense when savings rates are as low as they are these days.
- Cover yourself with Uncle Sam. Double-check that your estimates are up-to-date and adequate. If your bank balance is so healthy, it may mean that your business profits are ahead of forecast and that it’s time to send in some more estimated tax payments!
Knowing how much cash to have on hand is just one more piece of the puzzle in running a successful small business. Is all this enough to leave your head spinning? Maybe it’s time to hire a professional to help you manage your business funds. Our Virtual CFO Services might be just what you need!
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.