Cash is king when it comes to running a successful small business. To operate smoothly, you will need cash to pay salaries, fund marketing programs, purchase supplies and inventory, cover rent and invest in equipment, along with all other day-to-day expenses. But how do you know how much cash your business really needs? Do you have enough in reserve to weather unexpected financial situations and seasonal fluctuations?

The following questions will help you analyze your current cash-flow and determine how much cash you really need:

What does your cash-flow statement say?

To find out how much cash your business has been using, you don’t have to look very far. If you are an established business owner, take a closer look at your monthly cash-flow statement. What does the report show on cash received from sales and cash spent? What is your “gross burn rate”? This amount will be the net of sales and expenses. (e.g. $60,000 in sales and $40,000 in expenses is a net burn of +$20,000). If you are not sure how much cash your business is using, going over your cash-flow report to determine historical spending patterns is a great place to start.

How much cash do you need in the future?

Now it is time to look at your monthly budget or your financial forecast. If your business is a startup, you can find the answer to this question in the financial section of your business plan. Take a closer look at sales (cash in) and expenditures (cash out). Keep in mind that you should be conservative in your forecast. Actual results will likely differ from what your business plan says, and expenses are more predictable than revenue; expenses tend to be relatively fixed (e.g. rent and payroll).

What stage of growth is your business in?

A huge factor in determining how much cash your business needs is the stage your business is currently in. Are you an established small business with steady sales?  Or is your business a startup in the first year of operation? Is your established business surrounded by business opportunities? Your business’ situation will impact the amount of cash you need now and in the future. If your business is established with benchmarks to rely on, determining working capital needs will be a little more straightforward. However, if your business is a startup, you will have to consider the possibility of rapid growth; this situation will require an increase in inventory, staff, supplies and accounts receivable.

How quick do you need extra cash?

After assessing past cash-flow reports and creating a financial forecast, now you know how much cash you will need in the coming months. The next question is how long it will take you to secure the extra funds you need. Obviously, you want to be able to have access to cash when you need it. Without this boost in cash-flow, your business will be unable to quickly cover operating expenses when you need to or seize business opportunities when they occur. If you need cash within a few days or weeks, a traditional business loan will not be the ideal solution. The complicated contracts and documentation requirements often lead to long wait times. Your business could wait weeks or months, only to hear that you have been denied funding (traditional lenders have strict requirements).

What is your best source of cash?

If working with a traditional lender is simply not fast enough – or you cannot qualify due to credit issues, past bankruptcy, limited financials and collateral, etc. – there are other options available to you. Many businesses are turning to alternative lenders like First American Merchant for their business funding needs. As a high-risk specialist, FAM has years of experience in working with businesses that need cash fast but are a “risky” business type. The application process is fast, simple and hassle-free, and merchants hear back in as little as 24 hours.

If you would like to learn more about how First American Merchant can help you with your business’ cash needs, contact us today.

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