The arrival of the pandemic in 2020 brought home to all of us the importance of having cash reserves. Whether you are a sole trader, a small or medium business or a not-for-profit organisation, there’s nothing better than a healthy bank balance in times of crisis.

Keeping a little more in the tank.

Marathon runners know the importance of sticking to a race plan. They know how to keep a little something in reserve should they ‘hit the wall’ or need that little extra to make a winning pass. The same thing applies in any business.



What are Cash Reserves?

Cash reserves are simply funds put aside for a rainy day. Investopedia refers to it as:

Money a company keeps on hand to meet short-term and emergency funding needs.

Essentially, these are a financial surplus. They are funds you can access at short notice. In that sense, they don’t have to be actual cash in a bank account. If you are in good standing with your bank, an unused overdraft facility or credit card can serve the same function. You will have to pay interest if you use the funds. However, as long as that’s manageable and you have a plan to repay the funds later, that can get you out of a lot of trouble.



Profit is not a Dirty Word

The proliferation of charities and NFP organisations in modern times has drawn much scrutiny from the public eye in terms of financial security and efficacy. There was once a widely-held view that Not-for-Profits are not in the business of making a surplus. Thankfully, most people now recognise that what distinguishes a Not-for-Profit is what they do with that surplus, not how big it is.

This attitude, on the part of both NFP management and funding providers, had led to a reluctance or inability in some organisations to accumulate cash reserves. Naturally, this lead to a higher risk of financial difficulty, should income decline or expenses increase rapidly!

Low cash reserves should ring alarm bells and that’s a prime reason why the traditional concept of financial frugality and lack of reserve planning should be left by the wayside. It highlights the importance of accumulating cash reserves. Profitability needs to be looked upon as a financial surplus and encouraged to ensure ongoing sustainability. Especially for NFPs working under the NDIS, this can drive expansion and growth.



(Not so) Unplanned Situations

The onset of the COVID-19 pandemic took most people by surprise. Even businesses who weren’t directly affected by a lack of income faced considerable uncertainty. For many businesses, the effects on organisational cashflow were devastating.

Even when there was government support forthcoming, the wheels of bureaucracy turn slowly and businesses needed those reserves to tide them over until assistance arrived. Bills and wages still needed to be paid and, for many, there was a sudden drop in income.

This alone goes to show that even though many organisations produce budgets to support their expected income and expenditure, not many would have built in the contingency for the total shutdown of their business. Incorporating the planning of cash reserves will help you in situations like these.



Plan to Expand Using Cash Reserves

Aside from helping you cope with disasters, cash reserves give you the flexibility to take up opportunities for growth and expansion. New opportunities often require additional investment, either in people, machinery or premises.

Having your own cash to fund that investment, or at least a substantial part of it, gives you independence and greater control over the decision-making.

Building cash reserves takes more than just vision and hope. Essential processes include:

  1. Accurate cashflow forecasting
  2. Along with strategic budget analysis.

A thorough knowledge of your organisational capability and an understanding of the true cost of service delivery is also necessary. Above all, this will enable you to generate true financial and operational growth. It may include performing some unit costing to truly understand and create a sustainable pricing model. Unit Costing: The Ultimate Guide will give you a good starting point.



Measuring Your Cash Reserves

Our guide to Financial KPIs includes one to calculate Cash Reserves. This uses the traditional method of looking back at your expenses for the past year to estimate how many days your reserves will cover. An alternate method, particularly useful for a fast-growing business, is to base the calculation on your budget for future expenses. Choose the approach that makes most sense for your organisation.



Building Cash Reserves

Getting it right and putting the systems in place to achieve a cash reserve is not easy. Certainly, you can seem to be daunted from the outset. However, you will find with the correct tools to plan and implement development strategies, it is possible to move ahead despite the challenges.

Check out the Leisure Networks NDIS story. It may just inspire you to push ahead and equip yourself to climb over obstacles. Build a financial surplus to be free to seize any and all opportunities presented.