How Much Cash Does Your Business Need on Hand?

Many small businesses, especially in their early days, discover a need for a cash infusion to keep operations running smoothly. Small firms often turn to working capital loans to help bridge the gap in funding. If your business is considering such a loan, you will need to a good idea of how much money is required. Lenders will want a detailed plan of how you plan to use their loaned dollars. So how do you know how much cash you need on hand?
First, you can take a look at your operating expenses. This includes your overhead costs, things like monthly rent and staff salaries as well as the money you have to spend on inventory and to market your product/service. Don’t forget to factor in taxes and current loan debt payments. Then you can calculate your total current assets – including bank account balances, accounts receivable and the value of any real estate property, machinery or inventory. Subtract the operating expenses and any other liabilities from your assets and then divide by 365 days to determine how much money you currently have each day to work with. Based on that number you can figure out how much more you need for your business to thrive.
Another factor to take into consideration is any seasonal dips in income. You will need to have enough working capital on hand to cushion those months when cash is scarce, not just your typical months. Ideally it would be nice to have six months’ worth of operating expensed saved up in order to prevent any breaks in service during the leaner times.
Beyond knowing how much working capital your need, you may want think about requesting additional funds from your lender for the purpose of improving or expanding your business. Hiring new staff, boosting your marketing budget or updating equipment are all worthy pursuits that could be financed with your working capital loan.