Across the globe and in all types of economies, small businesses rely on the cash they have at hand to provide them with flexibility and choice when it comes to spending. Strategizing for the future in this way means that a company does not have to rely on investors or lenders for a bailout when the unexpected happens.
In the US, a small business is defined by the Small Business Administration as having under 500 members of staff. Between them, these companies employ huge numbers of people and play an important role in the health of the economy. Having spare cash provides these vital businesses with security, ensuring that they keep the workflow moving when times are tough with payments to suppliers and employees. Here’s a closer look at the benefits of holding on to a cash reserve.
A healthy cash flow can be maintained
The phrase ‘cash flow’ refers to the transfer of money in and out of a company. When this is managed well, the business can pay its invoices on time and maintain a healthy relationship with suppliers. For retailers, managing physical cash can be time-consuming and may lead to security concerns. Perativ provides cash optimization solutions such as ATMs, which help to drive down a business’s banking costs and increase foot traffic at the same time.
Loans are not essential for expansion
Whether a business needs capital to expand, purchase more stock, or finance a new asset, a loan can seem like a great solution. In many cases, loans provide a quick cash injection, but you may be stuck with high interest rates and a repayment schedule that is not particularly flexible. Many banks are also more circumspect when it comes to lending money, and it can be difficult to find a lender for spur-of-the-moment acquisitions. On the other hand, with available cash, businesses can take advantage of profitable opportunities as they arise.
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The business can survive tough times
From global events to local crises and personal emergencies, a small business is vulnerable to unexpected downturns. In these circumstances, it is often necessary to pay at least a percentage of expenses immediately. These could include essentials such as wages, rent, loan repayments and utilities. If a company fails to budget for potential emergencies, its access to cash will be limited and it will be harder than ever to stay afloat.
Investing in capital is simpler
Starting a business is a challenge, but growing it is equally hard. When employees are working well, but sales targets remain out of reach and processes are slow, further investment may be called for. Whether the upgrade is for larger premises, more staff or better marketing, the cost of keeping up with the competition can be significant. If a company lacks the resources to invest, its long-term growth and achievements will be hindered.
Payments are cleared on time
Businesses that regularly allow bills to go over 60 days risk damaging their credit score. This practice can also result in late fees or interest being added to the final amount and the refusal of future credit. Having the ready cash to pay bills is important because it saves a business money and early payments can also lead to discounts further down the line. Moreover, by proving itself to be a reliable payer, a business is likely to develop a favorable reputation. As a result, the business will find it easier to attract clients and see an increased turnover.
Improving the liquidity of a business
Aside from keeping well-organized and regularly updated accounts, there are other ways for small businesses to keep a tight grip on their cash flow. One of the most important factors is the speed with which payments are collected from debtors. Invoices should be sent out regularly and the early payment of bills can be incentivized. The company’s interests can also be protected by carrying out credit checks on customers who prefer to pay on monthly terms. This provides an insight into whether they will be able to clear their invoices on time. Finally, companies can consolidate their financial position by storing cash in a high-interest account. Although it requires no effort on their part, the invested cash will grow while remaining accessible.
To remain successful in the long term, small businesses will always need to accrue and ring-fence a substantial cash buffer. Preparing for leaner times through forward planning ensures that a company remains resilient and is a sensible way of staying ahead of the pack.