accounting, finance, cashflowAs a startup seeking growth, there is always money you could spend in one area or another of your business to pursue faster growth.
But constantly running with an empty bank account in the name of growth generally isn’t the most responsible thing to do, especially when you’re employing people who are counting on you paying them next month.
For personal finance, a common rule of thumb is to have 6 months of expenses set aside in a rainy day fund.
From a business standpoint, it’s hard not to see that amount of money sitting in the account as underutilized - but where is that line between responsible management of funds and under-utilizing financial resources?
Is there a similar rule of thumb generally advised as far as what amount of “rainy day” fund should be kept for the business?
Another way of asking it: Is there a commonly used rule of thumb for how long a business should be able to continue to operate if all incoming revenue catastrophically dried up tomorrow?
Ideally, excess cash should be reinvested in a business, though having a cash reserve for unexpected expenses, or dips in cashflow, is often vital to the long-term survival of a business.
That said, while creating a cash reserve is often of value, reserves are not that common in startups; reason being that they are often not cashflow positive when they are starting out, and as a result, it can be difficult to establish a reserve fund of the size your describing.
Much more relevant in my opinion to a startup is expense scaling and opportunity flow. The key is to where possible and with limited overhead, flex expenses to the demands of opportunity. Next, where possible, bank opportunities, not cashflow; by this, I mean push the cost of demand to the party requesting the service or product.
Once the business is no longer a startup, then that’s the time to start a cash reserve.
Lastly, depending on the cashflow of the business, especially if the business has a seasonal cashflow, a line of credit might be a better option than a reserve, but that’s beyond the scope of this question.
All content is licensed under CC BY-SA 3.0.