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Is Your Business Properly Managing Its Cash Reserves?

Home | Blog | Is Your Business Properly Managing Its Cash Reserves?

15 Jan
2017

Is Your Business Properly Managing Its Cash Reserves?

by Todd William | in Blog
Is Your Business Properly Managing Its Cash Reserves?

JP Morgan Chase  constructed a comprehensive study of 600,000 small businesses to find out how small businesses are managing (or trying to manage) their cash reserves.  Cash reserves take on special meaning for those smaller businesses that have limited access to credit – and the reserves are often critical, especially in difficult times such as a natural disaster or extreme stock market volatility that can affect available credit sources.

JP Morgan Chase coined the term “cash buffer days” to compute the number of “…days of cash outflows a business could pay out of its cash balance were its inflows to stop.”  JP Morgan Chase  says that most small businesses do not have the cash reserves required to help during a financial crisis, and that could have wider repercussions among the small business community.

The fact is, cash reserves are a “key measure” in the security and growth of a small business, according to JP Morgan Chase.  However, in these days of vast expenses, education is a necessity to teach small businesses the value of reserves and how “… diversified credit offerings can help small business owners better understand and manage their liquidity, and substantially improve the financial resilience of the small business sector.”  JP Morgan Chase also notes that this report is not designed just to educate small businesses but to encourage policy makers and small business coaches  to encourage larger cash reserve buffers.

Key findings of the small business report found that reserve cash flow often is dependent on the industry.  While JP Morgan Chase reported that the median small business has average daily cash outflows of $374 and average daily cash inflows of $381, this figure varies across industries.   Such businesses as the high- tech sector are going to have different financial needs than retail establishments with lower wages, and products that might not bring in as much capital, for instance.

At Imperial Advance, we often counsel small businesses to consider current and potential short-term financial needs when considering a working capital loan or business cash advance.  It is often better to request more than your company may need than to find your cash reserves short when you have an immediate need.

JP Morgan Chase noted that the median small business holds an average daily cash balance of $12,100 but that number changes depending on the industry.  In the Personal Services industry, the median small business held a cash balance of $5,300 and in the High-Tech Manufacturing industry, the median was a balance of $34,200.

Below are some key highlights of the report that shows how cash reserves, inflows and outflow, vary by industry:

  • The restaurant industry has the highest daily cash outflows and inflows at $957 and $968-dollars.
  • The personal services industry, such as dry cleaners, hair salon and related businesses had the lowest daily cash outflows and inflows were at $216 and $219-dollars,
  • The median small business holds 27 cash buffer days in reserve
  • Small businesses in labor-intensive or low-wage industries hold fewer cash buffer days than those in capital-intensive or high-wage industries.

About Todd William

Todd William is the founder and CEO of Reputation Rhino, an online public relations company in New York City serving small- and midsize businesses and individuals with a complete range of brand management and internet marketing services.

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