How Much Cash Do I Need as Safety Net for My Small Business?

Liquidity. This is the most important part of a business. As an entrepreneur, you need to ensure that you have good cash flow for your business. And what is cash flow? Cash flow is the amount of money going in and out of a business on a daily basis. What is good cash flow? Well, good cash flow is when a business has more money going in then going out, in the form of expenses and payments of debts. When a business’ cash going in is greater than or equal to the amount of cash staying in the business, the business is doing great.

A small business is a business that has the potential to grow and give the entrepreneur greater profits. Small businesses are however at risk of having rough trading days especially if they are just starting out. Bookkeeping habits are important when it comes to monitoring times when the business does well or not.

A safety net is an amount of money set aside to help the business keep a float when trading is bad. It is money used to ensure the expenses are catered for even when there is little or no money coming in. A negative cash flow can be damaging but having no cash flow at all is dangerous. Small businesses should ensure that their safety net is at least three months’ worth of the money they spend each month. This will ensure that even though the business is not making any money during this season, production will continue and salaries can still be paid.

If a business saves more than the 3 months safety net target, it will not hurt the business. However, entrepreneurs should be careful to ensure that they do not have too thick a safety net that they end up derailing the growth potential of the business by withholding cash.


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