Wyoming Business Tips for March

When it comes to cash reserves, how much is enough? Determining the right amount of cash to keep in your business account is crucial.

Many business owners take one of these approaches: keep an arbitrary amount that “feels” right; ignore it until payroll or expenses are due; stockpile excess cash; or they carefully calculate their cash needs.

Cash reserves matter. Maintaining an adequate cash balance helps with:

-- Cash reserves ensure a business can cover payroll, rent, utilities and loan payments.

-- Working capital cushion manages cash flow gaps caused by accounts receivable and inventory.

-- Growth capital funds a company’s expansion, hiring or equipment purchases.

-- Emergency reserves protect against unforeseen financial challenges.

There are strategies for determining cash reserves. One approach is the basic rule of thumb to have a minimum cash on hand that is equal to two months’ worth of operating expenses. For example, if annual expenses for a business are $300,000, that equates to $25,000 per month; so, a company should have a minimum cash reserve of $50,000.

The limitation of this method doesn’t account for profitability, working capital needs or expense-to-revenue ratios.

A more precise method is the working capital approach. This formula considers expenses, profitability and cash flow cycles. In this example, cash on hand would equate to daily business expenses multiplied by the cash conversion cycle, plus a safety buffer. The cash conversion cycle is the length of time a business's funds remain tied up before being converted into cash.

Using the above example, a business with annual expenses of $300,000 breaks down to $892 in daily expenses. 

If a business’s cash is tied up for 50 days, the business needs $44,600 cash on hand ($892 x 50 days). If its cycle is shorter, say 25 days, the business needs $22,300. If the cash is tied up for a longer period, say 100 days, the business would need cash on hand in the amount of $89,200.

A company with seasonal fluctuations should maintain a larger safety buffer, while a business with steady revenue, such as with subscriptions and memberships, may require less cash on hand.

A business doesn’t need to calculate cash reserves constantly. However, reviewing them a few times a year is essential. Ensuring adequate reserves helps sustain operations, covers cash flow gaps, supports growth and safeguards against financial downturns.

To learn more about the financial operation of your small business, contact your Wyoming SBDC Network adviser who is available to provide no-cost, confidential assistance. To get started, go here.

The Wyoming SBDC Network offers no-cost advising and technical assistance to help Wyoming entrepreneurs think about, launch, grow, reinvent or exit their business. In 2024, the Wyoming SBDC Network helped Wyoming entrepreneurs start 46 new businesses; support 1,870 jobs; and bring a capital impact of $2.9 million to the state. The Wyoming SBDC Network is hosted by UW with state funds from the Wyoming Business Council and funded, in part, through a cooperative agreement with the U.S. Small Business Administration.

To ask a question, call 1-800-348-5194, email wsbdc@uwyo.edu, or write Dept. 3922, 1000 E. University Ave., Laramie, WY 82071-3922.