If your small business has begun to make a profit, it is tempting to funnel the extra cash into your pocket.
It is difficult to know how you can keep enough cash on hand to avoid small business funding, or, as an owner, to decide if it is time to finally draw an income. The following points will provide some clarity on when and how much cash to keep available in your business.
Cash and Your Small Business
When funding your new business, it is imperative to make every penny count. How to make payroll is always at the top of new business owner’s priority lists. It is cash that greases your business operations from payroll to marketing, equipment, rent, supplies, and more. Cash is still king in these scenarios.
However, at some point, your business gets ahead and there is extra cash on hand. When this first happens, it is tempting to take the profit and spend it on upgrades or perhaps, as an owner, just enjoy it as a reward. Instead of doing any of these things, try to look at your extra cash objectively to determine what to do with it. Before deciding, take a moment to recognize the breathing room that a cash reserve can provide.
Now ask yourself the following questions:
- How long did it take to get the extra cash and how long will it take to make more of it? You may consider a small business loan or an angel investor to keep the cash flow going, but ultimately, the goal is to become self-sustaining. If you use the first profit you make extravagantly, how quickly can you replace it?
- Consider how much cash you spend each month. Having a good idea of monthly expenses is imperative for any business, no matter the size. If yours is a seasonal business, your expenses are likely concentrated within a few months. If not, the cash outlay may be more fixed on a monthly basis and easily predictable. When you finally have expendable cash, look at your balance sheet for the last six months to see what you are spending.
- Determine how much cash reserve could help your business. Generally, a three- or six-month reserve is advisable, but be sure to consult with your accountant to figure out the number that is right for you. Then multiply the monthly average cost of your business by the number of months you want in reserve.
Creating a cash reserve is an important first step toward the true solvency of your small business. It is a milestone that can be built upon to ensure your company stays afloat even in a slower economy. Ironically, it is also the best time to consider the additional cushion of small business funding.
When to Seek Small Business Funding
When starting a small business, one of the best times to seek small business funding is when you do not necessarily need it. Small business funding keeps cash flow optimized during lean times, but it should not be the pillar of your business. Consider it more like a support post. This means the best time for seeking a loan is when you have some cushioning; it gives you the breathing room to shop for the best rates and terms. And if you want to save time finding those rates, turn to a funding partner with experience in small business funding.
Benetrends’ comprehensive suite of funding options gives you choices, from SBA loans to 401(k)/IRA rollovers or ROBS (Rollovers for Business Startups). We call ours the Rainmaker Plan®, and with this option you can not only tap into cash reserves at a moment’s notice, but you can draw a regular salary to keep your personal life afloat. Plus, it is an investment and not a loan, so you do not owe interest payments to a creditor or your plan nor do you incur upfront taxes or early withdrawal penalties. Your retirement dollars can be used tax-deferred to directly capitalize your small business.
Before you seek small business funding, download our Innovative Funding Strategies For Entrepreneurs to explore your options thoroughly.