If you’re a small business owner in New Zealand, you likely understand the importance of having a cash reserve. While financial advisors often mention the term, the process of building a cash reserve for small business owners might seem challenging.
Cash flow problems can arise unexpectedly, often due to factors beyond your control. However, a well-managed cash reserve can be the difference between your business surviving or facing a financial crisis.
Why You Need a Cash Reserve for Your Small Business
A cash reserve acts as a crucial financial safety net for small businesses. It’s the cushion that allows you to cover essential costs—like payroll, insurance, and utilities—when times get tough. You can’t always rely on the banks extending an overdraft quickly.
For small business owners, having a strong cash reserve offers:
– Financial stability to keep operations running smoothly
– Assurance that critical expenses will be covered
– Resilience and flexibility, as you reduce your reliance on borrowing
A general rule of thumb for small business owners is to save enough to cover 3-6 months of business expenses, overheads and fixed costs. This buffer can provide the security you need in uncertain times.
How to Build a Cash Reserve for Your Small Business
1. Calculate How Much to Set Aside
The common advice of saving 3-6 months of expenses might not suit every business, so it’s important to customize this based on your unique needs. Review your cash flow reports and recurring costs, such as payroll, rent, loan repayments, marketing, and overheads. Identify the total expenses your business needs to cover each month, then set a target to build reserves for at least three months.
2. Choose the Right Account
While your regular business checking account might seem convenient, consider opening a liquid, interest-bearing account for your cash reserve. This allows you to access funds easily while earning interest on your balance, helping your cash reserve grow over time.
You might also feel more in control by opening multiple bank account suffixes to save for expenses like PAYE, Holiday Pay, ACC, and other taxes.
3. Regularly Assess Your Financials
Continuously monitor your financial reports to identify any excess cash that you can safely set aside. Even small, consistent contributions will add up. For small business owners, it’s not about the amount but the habit of saving consistently to build your cash reserve.
4. Use Funds Wisely
If you must dip into your cash reserve, make it a priority to replenish it as quickly as possible. Keeping your reserve intact ensures you’re prepared for any unexpected challenges, which can be crucial for **small business owners** in New Zealand.
Tips to Maintain Your Cash Reserve Like a Pro
– Plan for Seasonality
Use your busy periods to build up your reserves, ensuring you’re covered during quieter seasons. Seasonality is a major factor in cash flow for small businesses, so preparing in advance can offer significant protection.
– Be Smart with Expenses
Just because you have the funds doesn’t mean you need to spend them. Evaluate each purchase—do you really need it, or is it just an extra cost? Small business owners must carefully weigh every expense against the need to maintain a healthy cash reserve.
– Monitor Your Cash Flow
Keeping a close eye on your cash flow is key for small business owners. Monitoring cash flow can help you spot potential shortfalls before they become serious problems. If you’re unsure where to start, reach out to us for guidance on building and maintaining your cash reserve.
In business, there’s no external safety net to catch you when cash flow issues arise—you need to create that cushion yourself. By building up your liquidity during peak times, you’ll be better prepared for slower seasons.
Speak to a Professional Accountant
While we’re not financial advisors, we are qualified accountants who specialise in understanding business data. We can help small business owners like you spot trends, highlight peaks and troughs in your financials, and provide a clear overview to make informed decisions. With our help, you can build a cash reserve that protects your business in any situation.
Be proactive in securing your business’s future. Contact us today to schedule a consultation and discuss your financial strategy for building a strong cash reserve.
