Today, uncertainty often runs through businesses. Between employee turnover and a tumultuous global economy, it is challenging for small and mid-sized enterprises to compete. However, a few steps can be taken to weather any storms the future holds. A cash buffer is one of them. But what exactly is a cash buffer? If you want to know the answer to this question, read on as we break down everything that you need to know about cash buffers.
What Is a Cash Buffer?
When you run a business, cash on hand is important. You never know when you might need it, but when you do, it can make the difference between keeping your operations running smoothly and having to shut shop. A cash buffer is money that your business has set aside for any unplanned expenses.
Why Is a Cash Buffer Important?
Any fluctuations in seasonal sales can lead to some months being very profitable while others may not be. For example, a global crisis can cut your business's revenue during slow periods. If your business can compensate for less income with money from its reserve fund, your business will survive during these times. But you shouldn't just rely on the reserve fund to cover your losses. Business forecasting can be inaccurate, and you might have overestimated how much income you'll have for the year. Instead, use cash buffers so that if you don't have enough money at the end of the year, your business still has what it needs.
Preparing a cash flow forecast can help you plan out the future trajectory of your accounts. However, unexpected expenses may arise in the form of a defaulted payment from a client, an interest rate hike, or even a natural disaster. A cash reserve would help you manage your liquidity needs during a cash flow crunch so you’d have the funds needed to keep your business running smoothly. You wouldn’t have to feel pressured by financial anxiety or have to shut down your shop simply because of low funds.
How Much Do You Need?
The main thing that you need to understand is that there is no one-size-fits-all amount for cash buffers. It will completely depend on your business and your finances. Here are a couple of things that you need to consider when coming up with your optimal cash buffer amount:
Keep track of your business’s current and past performance and the volatility of your daily cash flow. Failing to consider the cash flow of your business can lead to unrealistic expectations.
When you separate your standard expenses (like rent and wages) from your one-time expenses (like a marketing strategy), consider how much cash you would need to cover any unexpected, major expenses that you should expect.
If your business generally takes in income slowly or if your inventory doesn’t move quickly, you should have more cash reserves.
We hope this article proves to be useful when it comes to helping you further your understanding of cash buffers. Now that you know what cash buffers are and why they’re important, use this information to prepare your business and secure your future success.
Make smart financial decisions with the help of Swell Financial Planning. We are a financial consultant in Queensland that aims to work with you as you learn more about investment, insurance, budgeting, cash flow and more. Consult with us today and secure your future tomorrow.