How Much Should Your Business Keep in the Bank Before Year-End?
As we head into the last quarter of the year, you may be looking at your business bank account and thinking:
We had a good year. There’s money in the bank. What should we do with it?
Before buying equipment, giving year-end bonuses, or taking additional money out of the business, there’s a better question to ask:
How much of that cash is actually available to spend?
Your bank balance doesn’t tell the whole story.
Start With What It Costs to Run Your Business
Look at your average monthly operating expenses: payroll, rent, insurance, software, loan payments, contractors, supplies and other recurring costs.
If it costs $20,000 a month to run your business and you want three months of operating expenses available, that’s $60,000 you may want to keep in reserve.
Suddenly, $75,000 in the bank looks a little different.
Now Look Ahead
Before deciding you have “extra” cash, consider what’s coming:
Payroll and payroll taxes
Tax payments
Annual insurance or software renewals
Year-end bonuses
Vendor bills
Planned equipment purchases
A potentially slower first quarter
For example, you might have $75,000 in the bank but $20,000 is needed for upcoming expenses and another $40,000 is your operating reserve.
Your truly available cash may be closer to $15,000.
Don't Let a Strong Q4 Fool You
If the end of the year is typically busy for your business, your bank balance may be unusually high right now.
Look back at what happened last January, February and March.
If revenue normally slows while payroll, rent and other expenses continue, some of your Q4 cash isn't really extra. It's what gets you through Q1.
What Should You Carry Into Next Year?
There's no single number that's right for every business.
Instead, consider your monthly operating expenses, upcoming obligations, seasonality, taxes, planned investments and how predictable your revenue is.
Then ask yourself:
If revenue dropped 20% for a couple of months, would I still feel comfortable with the amount of cash in the business?
That's a much more useful way to think about your cash reserve.
As we head toward year-end, don't just ask:
“How much money is in the bank?”
Ask:
“How much of that money does my business still need?”
Current, accurate bookkeeping helps you answer that question—and make better decisions about what to do with the rest.