How to create constructive cash reserves

Evaluate prices

Small businesses may not always charge what things are worth. Evaluate regularly whether prices can be increased or decreased by checking your costs and what competitors are charging.

If you don’t keep up with inflation, you’re going backwards, so as a general rule of-thumb, customers should be paying more each year, unless your input costs are also falling. A small increase in price without any fall in sales, or increase in overheads, adds up over time. Identify services you provide or products you sell that are price insensitive and increase the price by a small amount.

Decrease stock levels

Reducing stock levels can transfer cash directly to your bottom line. You might be able to reduce the stock and raw materials you hold by making better use of online ordering and more efficient warehousing software so that you stock only what you need for the immediate future.

Have a sale! By holding a stock review every few months you may be able to eliminate any redundant products and slow sellers. You may also be able to buy stock from suppliers just a few days before you need it. The money saved can then go straight into the bank.

You can sometimes receive large discounts by buying stock or materials in bulk, but always weigh this against the fact that this cash is then not available for anything else. This is especially critical when times are tough and you need cash for wages, rent and general running costs.

Chase debts

Contact the customers who owe you money. Many small businesses feel uneasy about asking their best customers for overdue payments as they fear being pushy might send the customer elsewhere. But they do owe you money — money that could be spent on growing your business or getting you through a rough patch. 

Trim your costs

Reducing your costs can be a fast and effective way of increasing the amount of cash in the bank. Look carefully at your expenses to see what items you can reduce or eliminate. Even small changes will add up to significant amounts over time. Look at each item and ask yourself if it’s really contributing to the profitability of your business.

• If you own your premises — think about the opportunity cost of the money tied up in the building. How could you use it to build new business opportunities? For example, do you have unused space you could rent out?
•  If you have equipment — make sure it’s being used effectively. Is your equipment costing more to maintain than it makes? For example, too many vehicles are costly to maintain and may not be generating any income.
• If you have subscriptions to services you don’t use — this could include such items as cleaners, online subscriptions for software or data and servicing of unused equipment.

Look internally

Sell unused assets — do you have equipment that’s underused? If you use an asset only a few times a month or year, then could it be a better option to rent or lease similar equipment when you need it? Many businesses have assets that, if sold, create cash that may be better used as working capital to keep the business going.

Look for alternatives — do you always need brand new assets? Sometimes the latest technology can be a business advantage, but sometimes the newest, shiniest gadget can be money better saved. Are second-hand office furniture and equipment sourced through auction sites a better option? Could you downgrade business vehicles to save cash?

Evaluate your business borrowing

Many small business owners make the common mistake of using their line of credit to finance larger capital purchases. They tie up a significant portion of their line of credit for a period of time, reducing their ability to get them through short-term, day-to-day fluctuations in cash flow, unexpected business emergencies and downturns.

Look at other options. Securing a loan with real estate, for example, may offer you a better interest rate and longer repayment period. Lines of credit also allow you to pay only the interest, while term loans will require you to pay back the interest and principal within a fixed time frame. Fixed rate loans help smooth out cash flow, by eliminating fluctuations in payments due to changes in interest rates.

While you want to minimize business debt, and may prefer to be debt free, borrowing can offer you a means to effectively grow your business and take it to the next level — generating greater revenues far in excess of the costs of borrowing. Just ensure if you do borrow or increase your existing borrowing that the costs don’t leave yourself too cash strapped to manage your business effectively day-to-day.

Crunch the numbers 

Remember that small improvements over time can create large cash reserves. Know your numbers and explore your account options to see where you can save money. To save on fees and view your cash inflow and outflow trends, compare our CIBC Business accounts. Analyze your cash reserves to identify improvements. If you don’t already have a business savings account, talk to an advisor to explore your options today, transfer your surplus funds and begin earning a competitive interest rate.