The Basics of a Business Safety Net
According to most finance and accounting services, if there is one word that carries a lot of weight across different businesses in the US, that word would be "liquidity".
Liquidity is a cornerstone of finance and accounting, and it's important to any business. If your business lacks liquidity, you won't have adequate financial resources to pay for the upkeep of your business. To that end, the main goal here is to make sure that the provider of your financial management services knows the value of a strong and reliable safety net.
In order to stay competitive in today's global economy, you must know how to manage your finances effectively. Budgeting will help you make better decisions about your spending and savings.
What is a Business Safety Net?
A business safety net is a practice put into place to protect people and businesses from harm. It includes insurance, training, and even emergency response plans.
A good example of this is the way that large companies hire contractors to do work on their sites. To prepare for potential medical expenses, they make sure to have workers' compensation insurance in place, so that if an accident happens, they'll be able to cover any medical bills.
At a certain phase, your business will likely encounter a negative cashflow. Such unfortunate situation could be the result of bad business decisions or the outcomes of a worsening economy. Either way, getting through a negative cashflow requires dipping into your cash reserves. And you can only do that if you have a business safety net.
READ: How to Avoid Bad Debt in Business
The Specifics of your Safety Net
The question is, how much cash do you need to stash away for your safety net? The answer is not as easy as it seems. Initially, you need to consider the volatility of your business, the status of your sales, and the effectiveness of your payment collection method.
Assuming that your business is relatively stable, you could easily survive a negative cashflow if you have a safety net amounting to a couple of months’ worth of your regular monthly outflows. On the other hand, if your business is volatile, you might need a larger safety net - at least six months’ worth of your regular monthly outflows. Of course, these are all based on the assumption that while you are using up your safety net, you are also looking into implementing new strategies to improve your annual revenues.
Related: Tips and Tricks to Improve Your Small Business' Cash Flow
Safety Net How-to’s
In achieving a reliable safety net, you should remember that your business expenses and how you manage your cashflow are vital to building your cash reserves. Hence, budgeting is a key element here. It would also be good to be mindful of your cash on hand.
The rule of thumb is to invest or use the money you have to expand your business operations. Your money earns interest better this way. In addition, you also need to look into how you can improve your credit collection program in order to earn more cash for your business.
A safety net can help your business go a long way, especially in this fluctuating economy. So now what are you going to do to build your cash reserves?
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This post was first published on 12 October 2015 and updated 02 December 2022. Edited by: Angelica Garcia