Five Steps to Build a Cash Reserve

Traditional methods like business loans, overdrafts and adding in more of your own capital will work for a time, but it could be timely to identify other ways to increase your cash reserve balance:

• Consider alternative financing options. This could include securing a line of credit or exploring crowdfunding.
• Sell down excess stock and operate with a lower limit.
• Sell any unused assets, or those assets that you use infrequently and can lease back when required.
• Access Government subsidies or grants.

It’s sensible to have contingencies in place to access capital if you need it, enabling your business to continue to trade when the crisis ends.

Here are some steps to increase your cash reserves, which if implemented together, combine to complement each other.

1. Sell more

Existing customers are your best prospects for immediate sales. They offer the most cost-effective way to increase business because you’ve already spent money on acquiring these customers. They already know and trust your business and are therefore likely to reorder or order more from you. You can:

• Visit key customers if you’re selling business to business. You’d be surprised how many will re-order after a visit.
• Use the 80/20 rule, where 20% of customers tend to provide a business with 80% of its revenue. It therefore makes sense to concentrate on this 20% segment first. Use your business data to focus on the best buyers and the customers with the most potential.
• Create a customer contact campaign. Set up an email database and send monthly e-newsletters with specials and ‘customer only’ deals. Find your customers on social media and engage.

Regardless of how long the buying cycle is, from a few days to a few years, the effort spent on returning customers will always the best use of your time and money.

2. Find new customers

The best new customers are likely to match the profile of your current best customers. You should:

• Take active steps to gain referrals. Where appropriate, ask existing customers for referrals and develop incentives for customers to refer others.
• Use social media and search profiling to create ads that target your specific demographic.
• Implement a set timeline, such as 90 days, to actively seek new clients with promotions, direct contact, in-bound and out-bound tactics.
• Identify businesses you could partner with, sharing marketing costs. If you have similar targets, you could refer business to each other. Network and communicate to your industry that you’re keen for new business.
• Use content marketing to gain prospects. Create valuable and informative content, such as blog posts, videos, whitepapers and infographics, that addresses the needs and interests of your target audience. Share this content through various channels to attract potential customers.

Run webinars and other thought leadership vehicles such as podcasts and talking at events or conferences if it will generate qualified leads.

3. Set up a savings plan

The best way to build a cash reserve over time is to automate savings as much as you can. Develop a detailed budget that outlines all income and expenses. This will help you understand where your money is going and identify when you can afford to save, for example during any seasonal increases in revenue.

In addition:

• Review your expenses and eliminate or reduce non-essential costs. This might include renegotiating contracts, cutting discretionary spending, or finding more cost-effective suppliers.
• Arrange for a portion of your revenue to be automatically transferred to a dedicated savings account. This ensures consistent contributions to your cash reserve.

Decide on a fixed percentage of your income to save regularly. Even a small, consistent amount can add up over time.

4. Ladder your investments

This involves investing with staggered maturity dates. This balances the need for liquidity with the desire for higher returns, as it ensures regular access to funds while benefiting from long-term interest rates.

How to ladder:

• Split your total investment into equal parts. For instance, if you have $100,000, you might divide it into five $20,000 investments.
• Invest each portion into certificates with different terms. For example, $20,000 into a 1-year certificate, $20,000 into a 2-year certificate, etc.

As each certificate matures, reinvest the principal and interest into a new long-term certificate, or use the funds for what it was tagged for.

5. Find more cash

If you can, invest more of your own money in the business. For example, raise more money against an asset such as a property you own. Be sure to consult with your personal financial advisor and accountant before adding more of your own funds to make sure you can afford it.

Other ways to raise cash include:

• Borrowing from relatives or friends, though take care. It’s not always the easiest source of funds.
• Sell part of your business to employees, other business owners or investors who see the potential of your business and know there is a long-term benefit.

Think about the possibility of a short-term loan if you need some cover.

Next steps

• Determine how much you want to save based on your monthly cash flow. A common goal is to have a cash reserve that covers 3-6 months of operating expenses.
• Establish a realistic timeline for reaching your savings goal, considering your current cash flow and financial obligations.
• Treat your cash reserve as an emergency fund, only to be used for either unexpected expenses, a downturn in business or to fund your growth.
• Talk to us if you need a savings plan.

Building a strong cash reserve is essential for business resilience and flexibility, allowing you to weather downturns or seize new opportunities. By focusing on a mix of strategies you can effectively grow your cash reserve over time.

*These resources are guides only and should neither replace competent advice, nor be taken or relied upon as financial or professional advice.