How Much Cash for Your Company Do You Need?
As much as I can get, would be the answer from most small businesses and entrepreneurs. But not enough cash or too much can have serious negative consequences.
Not having enough cash on hand or available can cause problems ranging from losing a substantial sale because you don’t have the cash handy to buy the necessary materials to fill the order to having to shut down the company because you can’t make payroll. The remedy to the problem is to apply for additional credit and some credit sources will interpret that as inept management. They may ask themselves why you weren’t able to correctly forecast your needs in the first place. Or even worse, that you aren’t fiscally responsible.
Getting more cash or credit than you need may seem like a good idea but it can lead to a cavalier attitude toward expense control. “If you’ve got it, spent it,” is not a suitable motto for any company. And credit costs money, if you use credit to pay for expenses that you have adequate cash for, you incur unnecessary interest expenses.
So how do you know what level of credit is just right for your business? That’s what cash flow projections are for. Every business owner should sit down once a month and project their cash requirements for the next six months. For example: You may know that the summer months are your busiest months. Sales will double for the months of June, July, and August. But since you offer 60 day payment terms to your customers, you won’t see that cash starting to come in until August. And you’ve had to fund, somehow, the sales for June and July.