The Benefits of Cash on Hand
In the world of entrepreneurship, one commonly held rule is that cash is king. While other aspects of business ownership are undeniably important—such as customer relationships and marketing—a crucial element in any successful business is its liquidity, or its cash on hand.
Where you keep your cash is also significant. You want it to be safe, secure, and working for you. That’s why depositing your money in your business bank account is so critical. But there’s more to liquidity than a bank account.
Understanding cash on hand
Cash on hand refers to the amount of money you have available to use immediately. It includes physical currency, such as dollar bills and coins of course, but also funds that are easily accessible in your bank accounts such as checking and saving accounts (anything where you can draw funds to use within a few days).
This amount of cash you can tap into at short-notice is known as your ‘liquidity’. The trick is how quickly and easily you can convert any assets or security into cash without affecting its price. The more liquid a business is, the more access it has to cash, enabling you to meet any urgent financial obligations more easily.
High liquidity enables you to:
- Manage any sudden threats, such as covering your working capital in an unforeseen crisis. A large customer may have delayed an expected payment, tax due is more than you’d budgeted for, or sales have slowed unexpectedly and not picked up, causing pressure on being able to pay bills.
- Take advantage of opportunities, for example, confirm any large discounts from suppliers (inventory or equipment), develop new products, try different business models, or investigate new markets. Spare cash in the bank allows you to quickly pivot without worrying about any impact on working capital.
- Manage unexpected expenses without stress, for example, if equipment needs unexpected repairs, cash is available without the need for financing.
- Minimize the risk of any market fluctuations, changes in interest rates or the need to borrow.
Businesses with low liquidity who have trouble finding the cash to cover expenses will find it harder to manage their business day-to-day.
Improving your liquidity
Ultimately anything you can do that frees up cash will help your liquidity. Having a surplus each month will also do wonders. Key ways to improve liquidity include:
- Managing your inventory more effectively and making changes where needed. Too much inventory on hand and your cash is tied up in things you need to sell. Possibly you’re also spending money to store or warehouse that inventory. Implementing Just-In-Time (JIT) inventory methods where you receive goods only as they’re needed without warehousing, will free up some of your cash.
- Sell any assets you don’t really use and deposit the cash in the bank.
- Lease out assets you aren’t using, such as equipment or real estate, generating cash without having to sell your assets.
- Instead of buying assets, consider leasing yourself. A large, one-time purchase might use up a significant chunk of cash that could otherwise be saved if you lease.
- Pay off any debts or financial obligations.
Finally, reviewing your costs and expenses to ensure you’re only paying for necessary expenditures and aren’t paying more than you need to may improve your cash situation. Negotiate payment terms with vendors, outsource non-core activities, and keep track of your budget to see where else you can tighten up.
Why have cash in the bank
While having cash on hand is important for liquidity, keeping that money in a business bank account provides additional levels of safety and security. Even small amounts of cash in your business premises exposes you to an increased risk of theft, burglary, fire, or even misappropriation. A bank will have proper security systems and vaults to protect your deposited funds. You’ll also be able to see when accounts were accessed, and possibly who accessed them, giving you an added level of security.
Your business bank account will also be insured by the Federal Deposit Insurance Corporation (FDIC), for up to $250,000 per depositor category per bank.
Depositing your money into your business bank account enables you to earn interest. Depending on the type of business bank account you have, you may earn an interest rate, allowing your money to grow over time.
Additional benefits of having cash in the bank include:
- By establishing a good banking relationship and maintaining a healthy bank account, you can improve your chances of securing a loan or line of credit. Banks may look at your cash flow and deposits when determining how creditworthy your business is.
- Bank statements detail all transactions which help your accounting processes and enable you to track your income, expenses, and other financial transactions more easily and accurately.
- You can use banking tools and software to forecast your cash flow, enable automatic transfers and bill payments and more effectively manage your working capital.
In addition to the benefits to your business, depositing your money in the bank allows your bank to lend money to other businesses. This helps other small businesses grow and take advantage of opportunities, which in turn contributes to the local economy.
First, make sure your business is liquid. Review your processes to ensure your money isn’t overly tied up in inventory. Examine your cash flow, expenses, and vendor relationships to see where you can free up more money.
Once you’ve done so, deposit the money you free up into your business bank account where it can collect interest safely and securely.