Knowing Your Cash Buffer Days Can Help Gauge the Financial Health of Your Business=
Most small businesses hold a level of cash reserves that would provide an insufficient cushion in the face of a significant economic downturn or other disruption.
That’s among the findings in a JP Morgan Chase study titled “Cash is King: Flows, Balances and Buffer Days.” Roughly half of all small businesses held a cash buffer large enough to support 27 days of their typical outflows.
The report is from 2016. Yet our experience indicates many small businesses continue to hold less than kingly sums of cash reserves in spite of the growing economy.
The old cliché about cash being “king” is really insufficient to emphasize how critical it is for small businesses to maintain an abundant supply of liquid reserves. “Lifeblood” is really a better term when you consider the role of cash in paying your employers and suppliers, especially when you are dealing with an unexpected downturn in business.
That JP Morgan Chase Study of almost 600,000 small businesses found that fully a quarter of them had enough cash on hand to pay their bills for less than two weeks. How is your business doing in this critical area?
We know small businesses are more optimistic than they have been in a while. The January 2018 Wells Fargo/Gallup Small Business Index found 77 percent of small-business owners rated their company’s cash flow as very good or somewhat good over the previous 12 months, up from 73 percent in November 2017.
Still, that leaves 23 percent who are concerned about their cash flow. And while hope and optimism are wonderful, they won’t pay the bills if your business faces the unexpected, whether it’s a sudden drop in income or a surprise expense you can’t avoid.
We’ve discussed some of the strategies you can use to maintain a steady stream of cash, such as promptly billing and collecting payments, carefully managing your payroll, and having a cash management plan.
Cash balances are equal to the amount of cash your company holds at the end of the day across all business deposit or savings accounts. Cash buffer days are the number of days of cash outflows your business can sustain paying outflows from cash balances if all inflows stop.
Determining your cash buffer days is a useful tool for gauging the health of your business. Make it your goal to increase your cash buffer days. Managing your company’s liquidity and cash reserves can help you weather the inevitable storms that you will face, and flourish during the good times.