Minimum cash balance is the amount of cash your business should have available to cover shortfalls in cash flow. But if you’re like many business owners, you probably don’t have a big enough reserve. This article presents six solutions for increasing your minimum cash balance.
How Big Should Your Minimum Cash Balance Be?
Many business owners believe that they should have enough cash available to cover a month’s worth of expenses.
In fact, you should have enough cash to cover a full operational cycle, which is the period of time between when you start to spend money to create the goods and services you’re selling and when you’re finally paid. In many cases, this cycle is longer than one month.
By running your numbers, you may have discovered that you need to increase the amount of cash you keep on hand to cover expenses when you’re in a cash flow crunch. Here are 6 ways to increase your minimum cash balance.
Cash Increase Strategy #1: Secure or Increase a Line of Credit
If you don’t currently have a line of credit, the very first thing you should do is apply for one.
A line of credit is an ideal solution for cash flow shortages. You may draw against the line of credit only when you need cash, pay interest only for the period that you are using the lender’s money, and pay off your loan on your own schedule as your cash flow increases.
The size of your business will dictate the process you need to follow for securing a line of credit, as well as what documentation you need to provide.
Cash Increase Strategy #2: Secure a Term Loan
A term loan differs from a line of credit in that the loan is made for a specific amount, for a set period of time, for a specific interest rate. You receive the money as a lump sum and are expected to begin repaying the loan almost immediately.
A term loan can be a great solution if you have a specific loan amount in mind and/or if you have a specific use for the money. Consolidating high-interest debt or investing in equipment or infrastructure are two examples.
Cash Increase Strategy #3: Strategic Alliance
A unique way to increase cash flow and your minimum cash balance is to create a strategic alliance with a complimentary business that serves the same target audience. You can refer business to each other, increasing your marketing reach. You could also subcontract work to each other.
One Evolve CFO Services client created a strategic alliance with another vendor to shore up its ability to be profitable during the pandemic. The two partners have an agreement to buy a certain amount of business from each other. Our client’s guaranteed revenue is enough to cover its monthly fixed costs. Management can then focus attention on controlling variable expenses to increase profitability.
Cash Increase Strategy #4: Increase Your EIDL
When the coronavirus pandemic hit, the Small Business Association responded by offering Economic Injury Disaster Loans (EIDLs) to qualifying businesses in certain industries. Originally, up to $500,000 in loans were granted to cover up to 6 months of financial obligations and operating expenses that could have been met had the pandemic not occurred.
In March 2021, the SBA increased the size of potential loans and length of coverage. You can now secure up to 24 months of coverage, while increasing the amount of your loan up to 300 percent. Not only are EIDLs offered at a low interest rate of only 3.75 percent for for-profit businesses, you can get a loan of up to $500,000 with only a personal guarantee.
EIDL funds are available on a first come, first served basis. Whether you want to expand your existing EIDL or you’re considering this option for the first time, it makes sense to pursue this relatively low-cost source of borrowing.
Cash Increase Strategy #5: Increase Sales
Increasing sales of your products and services is probably the fastest way to increase cash flow – and generate profits that can be set aside to boost your minimum cash balance.
You may find that rolling out a new product or service is an excellent way to generate bigger sales. Just be sure to control your marketing expenses to ensure that you don’t spend more than you make.
Cash Increase Strategy #6: Bring in a Partner or Investor
Investors run the gamut from individuals who want only to invest their money for a significant return to partner businesses who want to have a say in how your business operates.
If you’re looking to increase cash flow and your minimum cash balance, an individual who is willing to invest cash into your business — yet wants no decision-making power — is ideal.
If you’re considering an investor or partner who wants to weigh in on decisions, you may want to look for a person or team that has cash, as well as experience, connections, or other resources that can help you company grow.
Need Cash? Understand Your Why
Maintaining a minimum cash balance to cover one full operating cycle is recommended to carry your business through cash flow shortages. But when your minimum cash balance isn’t adequate, you may need to turn to one or more of the suggestions outlined in this article to cover your shortfall and/or boost the amount of cash you keep available.
If you have a financial forecast or strategic financial plan that shows good profitability, a plan for the future, and a compelling story about your business and its ability to repay any loans given, you should be able to secure funding.
Addressing your cash flow shortage is certainly the top priority. But a close second should be identifying why you experienced the shortfall in the first place.
Understanding how you ended up in the position of not having enough cash to cover your expenses will help you make better strategic decisions in the future. But it may also help you secure the financing you need to dig yourself out of the financial hole.
To demonstrate that you’ll be a good steward of a lender’s money, you should have a written plan that explains how you’ll use the money, how the money will help you strengthen and grow your company, and how you’ll use the investment to produce a return to pay back the loan.
Want help identifying the reason you’re experiencing a cash flow shortage, securing loans to rectify the shortfall, or creating a strategic plan to present to lenders? We’re here to help. Book a complimentary 45-Minute Strategies and Solutions Session.