What-amount-of-liquid-funds-should-I-hold-in-my-company-Beyond-Dublin

Financial advice: what amount of liquid funds should I hold in my company?

When you’re growing your business, it’s vital to have a healthy cash flow. There’s a saying commonly known in finance that states “Revenue is vanity, profit is sanity, but cash flow is reality” and, as with all good sayings, there is truth to be gleaned from it. All businesses aim for profit, but one good month is never enough. Rather, it is how consistent your cash flow is and your ability to cope with fluctuations in payments and expenses that shows how healthy your business truly is.

What amount of funds should I have in reserve?

At Beyond, we ideally recommend you to have six months’ worth of costs as a liquid reserve at any point in time. This means that you could survive, if necessary, for six months without making one sale. For example, if your costs for a year are €300,000 then that would translate into a reserve of €150,000.

This reserve could be in many different forms – for example, €50,000 in cash and €100,000 in an overdraft, or simply investments that can easily be converted to cash. However, we do realise that for some businesses six months in reserve would be a quite a challenge and that three months may be better suited to your needs.

Does that still sound like too big of a challenge?

If the thought of keeping cash in reserve seems impossible and you feel the need to monitor every expense in detail, then you may have bigger problems than cash management on your plate. Only small companies and startups should be looking at cash at a transactional level like this.

Trying to create models to monitor transactional expenses for a larger company won’t work. Instead, you have to make broader assumptions, such as on average our debts are going to be collectable in 35 days. If one customer doesn’t pay their debts within a week and that means that you can’t do the payroll, then, unfortunately, the business is badly financed. This problem is not going to be fixed by putting together a very focused, very detailed, short-term cash flow model.

Clever cash management and forecasting

We identify two main types of forecasting: medium-term forecasting and immediate cash flow forecasting. Let’s have a quick look at each:

Immediate cash flow forecasting

This is forecasting on a much more micro-scale. Immediate cash flow forecasting looks at money going in and out from week to week. This would include the business’s financial details such as when to pay wages, the timing of invoices, what is the best time to pay VAT, etc.

Medium-term forecasting

Medium-term forecasting is usually a budget covering one to three years. This looks at expectations for cash flow, profitability and expenses over time. You can identify patterns from month-to-month and year-to-year with this wide overview. Medium-term forecasting allows for the development and support of business plans and strategies while allowing for new opportunities when a period of surplus comes around. This also makes it easier to keep an eye on relationships with debtors and creditors and understand how this is impacting cash flow.

We recommend medium-term forecasting to our clients. When it comes to monitoring your cash flow, checking what net cash you’re bringing in (how your cash is increasing) is worth doing. Look at a month’s trade – for example, perhaps in the month of June you increased your cash position by €30,000, but your expectations were higher at €35,000. This means you are behind, so you need to keep an eye on it. This is a much healthier style of cash management than monitoring at a transactional level.

Cash flow forecasts are not only good for healthy business growth and your own peace of mind, but should you apply for a grant or a loan your cash flow projections will be one of the first documents requested from you. A healthy company should have reserves, a business plan and be cash generative. Therefore, if you need to be micromanaging your cash flow then something else is wrong and this won’t fix it.

If you would like to talk to someone about your company’s financial health and whether or not a loan is the right option for you, book a free health-check by calling 01 639 2963 or sending us a message.

Rory