by Debi Enders
When a small-business owner is applying for a loan, a cash reserve shows the bank that the business is prepared for the future and for unexpected events that could create cash flow problems. The cash reserve helps the bank determine the possible loan amount. When a banker is making a loan, he or she will look at the full financial picture of how much money a customer has on hand versus how much that customer wants to borrow.
Business owners should look into the future and have a financial plan to determine the level of cash they need on hand. This includes:
• Cost and risk associated with obtaining new customers.
• Evaluation of upcoming equipment cost and when to purchase.
• Tracking cost and needs associated with inventory.
Without a cash reserve, what problems might a small business encounter?
Without short-term operating capital, an otherwise profitable and successful business could find itself in trouble, losing valuable customers. Business owners should look for ways to avoid being short on cash and plan ahead. If there are seasonal needs that affect inventory and number of employees, those needs should be paid far ahead of the receipt of payment of goods. The business owner will want to build up cash on hand ahead of time. A business also can sell and lease back company assets and sell inventory. If a business purchases inventory on credit, it should make sure there is a good sense of inventory aging and related accounts receivable. Businesses can also request payments in advance if they cannot afford to extend credit or ask solid customers to pay earlier in return for larger discounts.
To avoid not having a cash reserve, a business owner should take on only debt that the company can truly afford.
Debi Enders (debi.enders@commercebank.com) is assistant vice president, small business banking at Commerce Bank.
Submitted 9 years 236 days ago