Small businesses and their owners are often closely tied, particularly when it comes to finances. In Truist’s 2021 Market Pulse survey of 527 small business owners, owners said they not only sacrifice income when cash is tight but also use personal lines of credit, home equity, and savings to keep their businesses afloat.
The economic challenges of the pandemic added stress on both business and personal finances as 51% of businesses reported inadequate cash reserves.1 Among owners, 86% said cash shortfalls had a negative impact on their personal finances.1
Impact of cash shortfalls on owner finances1
An overwhelming majority—97%—of small business or money market account is important.1 However, only 43% of owners felt they were doing a good job at building a business reserve.1 Yet those who focused on building reserves also implemented strategies—like cash infusions, bank and Small Business Administration (SBA) loans, and cutting expenses—to extend their cash further, as 45% of business owners built enough reserves to cover a few months of cash shortfalls1
How cash shortfalls are covered1
As a business owner, you might consider a strong cash reserve to be your main strategy to contain funding crises. At the same time, if you can predict seasonal fluctuations and growth needs, you can convert cash shortfall surprises into planned events, decrease your personal financial risk, and focus on reaching your business goals.
Build cash reserves.
When it comes to covering cash shortfalls, accessing reserves should be a part of your business owner’s tool kit. Take these steps to build a healthy reserve:
- Set a target – Use your cash flow statement to determine the reserves needed to cover cash fluctuations.
- Share your target with your team and advisors – Show your commitment to targets by communicating them broadly to allow others to help you reach your goal. Over the past year, small business owners turned to advisors like their CPA and banker more frequently.1 Employees and family members will also support you as they have a stake in the business’s success as well.
- Know what happens if you don’t build a reserve – Understand the consequences of missing your reserve target. If you can’t fund your reserve adequately, be ready to dip into personal finances, raise funds or cut back on staffing or production time when a shortfall happens.
Anticipate and plan.
Planning ahead can turn a “cash-flow surprise” into a planned event and reduce the risk to your business and personal finances.
Know when a cash shortfall is coming1
Protect yourself with a plan to lessen the effects of cash fluctuations:
- Seasonality – The top action for better cash management is to monitor and forecast flows, while supplier-side negotiations extending payment terms can moderate seasonal cash shortfalls.1 Offering your customers incentives to pay faster can smooth ebbs and flows.
- Loss/financial problems of a key customer – Owners say a top investment this year will be finding more profitable niche markets1, a sound strategy to increase the business’s pipeline, create customer diversification, and lessen the impact of a major customer loss.
- Increase in material/labor prices – Today’s shifting global markets mean higher prices. Hedge material prices with advance purchases. Use multiple supply sources and temporary or outsourced labor to explore ways to control costs.
- Output disruption – The loss of a key employee or a machine failure can bring production to a standstill. Cross-train personnel and keep backup plans up to date.
- Other events – Unanticipated events (think fraud, weather, loss, etc.) can lead to financial stress. Talk to McGriff Insurance Services about the best business coverage for your business’s risks.