What are Cash Reserves?
Cash reserves are funds that businesses set aside in case of emergency situations. They can be used to cover any unplanned or unexpected expenses. Typically, cash reserves are specifically used for short-term needs. Instead of accumulating debt from credit cards or loans, you can use your reserves to pay what is owed and avoid taking on additional loan debt.
How Much Goes in a Cash Reserve?
When determining how much money to put into your reserve, there are a couple of things you need to consider. Depositing too little funds can leave your business vulnerable in the event that an emergency comes your way. On the other hand, putting too much money in reserves means the company may not be taking full advantage of the opportunity to invest in the growth of the business.
Financial experts generally recommend that a solid business reserve should have enough funds to cover anywhere from three to six months of ordinary expenses. By subtracting expenses from your total revenue, you can determine the total amount of money spent on your business’ expenses. Divide that figure by the number of months in an accounting period to calculate the monthly cash burn rate.
It is crucial for businesses to keep a cash reserve. The reserve holds funds that can be used in emergency situations or when unexpected costs arise. The global COVID-19 pandemic is a great example of why it is very important to keep sufficient cash reserves. During the pandemic many companies were forced into bankruptcy because they didn’t properly manage their cash flow. Having the foresight to keep an optimal cash reserve will provide your business with some leeway if unanticipated circumstances ensue.