Saving cash for a rainy day is something many of us do as individuals, but in business that financial cushion often gets forgotten.
However, having the security of extra funds can go a long way. Not only will a rainy day fund see you through lean times, but it also builds confidence – having it there will empower you to take risks you wouldn’t otherwise.
Sophie Andrews, chief executive of The Accounts Studio, says having “rainy day” money is crucial – and not having it can be an impediment to growth.
“I think a lot of SMEs get in to that three-to-five year market, and they need cashflow to grow. But it’s either too late, or they’re doing something wrong and close the business down,” Andrews says.
Find out how Bankwest can help you set up an emergency fund for your business.
Building up cash isn’t just about doing one or two big things. Andrews says businesses need to experiment with a vast array of methods to boost finances, such as:
One common misstep companies make is subscribing to services and neglecting to cancel them when they no longer need them, Andrews says. This can result in hundreds or even thousands of dollars being wasted.
When reviewing costs, Andrews says businesses should also be reviewing suppliers.
For many businesses, supplier contracts are about much more than business. Doing business with those same, dependable contracts is often worth the extra cost for the reliability. However, Andrews says if you’re not attached then it’s best to review your suppliers – but be reasonable, she warns.
“It’s not necessarily best to go for the cheapest,” she says.
Another way to save cash and boost that rainy day fund is to look at everyday structures that haven’t been analysed. Andrews points to staffing – have small businesses small businesses really done all they can to make their rosters more efficient?
“It’s about tweaking as many things as possible to get those costs down.”
Having cash to draw on is good, but many businesses opt to use credit lines – such as credit cards and overdrafts – for a rainy day. Andrews isn’t against this – in fact, she says it can be a useful tool for businesses.
“I have a client who just got a major deal with a retailer,” Andrew says.
“So they have to fund a major product straight way.”
Incurring debt when they know orders will be coming in soon is simply a timing issue, and – if managed correctly – unlikely to have any long-term impacts.
However, Andrews cautions businesses to be smart about utilising “rainy day debt” options.
“You just need to be able to pay it back,” she warns.
Apart from simply cutting costs, Andrews says businesses need to understand what their biggest profit drivers are.
While this is simply good business practice, Andrew says it will also help businesses focus on the jobs that can quickly add to that rainy day fund.
“A lot of businesses just go for any job without stopping to think about whether it’s making any impact on their profit.”
Andrews says companies often overestimate how much cash they need to survive. Creating a detailed cash-flow forecast and looking at where money goes can sometimes be reassuring.
“A lot of the time, it’s never as bad as businesses think.”
At Bankwest, we know that Business Banking is about more than just financial solutions. Explore our tools, information and products to help you start, manage and grow your business. bankwest.com.au/business/guides-and-tools
