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In a perfect world your small business will have ample cash flow to pay all your bills on time, buy the equipment you need, meet your payroll and invest in new opportunities. Needless to say, the world doesn’t always choose to participate they way we would like it to. Customers fall short of paying their invoices, costs for materials increase, equipment malfunctions and sales don’t close when they were expected. It’s easy for stress levels to rise under these conditions. When you are feeling pressured a “Murphy’s Law” effect happens that seems to compound the issue. You know it – you are already anxious and this provokes more “bad” things to happen.
The best way to avoid the stress of a bumpy cash flow is to build a cash cushion for your small business. This is a reserve in your bank account sufficient to cover all your expenses for up to half a year. Having this much money in your bank account is the insurance you have cash on hand to cover your business needs when your plans don’t go according to schedule.
It took me a few months when I first started my small business to get my cash cushion to a point where I felt totally comfortable. It was not easy to set money aside because there were so many startup costs to consider. I did not see how I could possibly squeeze out any more money from my sales to put into a cash reserve. It was costing me everything that was coming in to keep afloat. I made the decision to be more organized about how to allocate my funds and that’s what turned it around.
I already knew how much I needed to cover my basic operating expenses but every once in a while I would get hit with a once-a-year expense such as renewals for certain licenses that ate a big chunk of income during the month it was due. The first action I took was to take 10% of my accounts receivable right off the top and deposit this in a special account. This would be used for emergencies, unusual expenses and expansion.
I also used the 10% to make purchases for large quantities of items I needed for my daily operations. I knew a restaurant owner in Miami that would buy tractor trailer loads of supplies when they were on sale and warehoused these for distribution to his storefronts. He was able to drastically cut down on his food and operating costs.
Additionally I set aside another 5% of my small business income into a bill-paying account until I had enough to cover 6 months of operating expenses. I never again experienced the desperation of getting too close to the wire when I came time to pay the bills. As a matter of fact, having the cash cushion created a relaxed atmosphere throughout the entire business that helped increase company sales.
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