Your agency’s cash cover level directly correlates to your anxiety levels.
If you maintain a higher cash cover in the bank, say six months or more, you’ll feel more at ease knowing that your agency can handle a decrease in new business or the departure of a team member.
Managing cash flow can be a stressful experience, especially when faced with tough decisions like prioritizing payments to suppliers, paying taxes, or deciding whether to pay oneself for the month. If you’ve ever been in this situation, you understand the pressure it can create.
But having a cash buffer doesn’t just serve you well when your business is going through tough times. It also allows you to react to opportunities quickly as they arise. There may be an unexpected chance to hire a new staff member, buy a property or invest in a new business stream. If you’ve got the cash at your fingertips, it is easier to leap on those chances.
Until recently, most business owners didn’t need to think about what would happen if they suddenly stopped trading. But these days, we’re all more acutely aware of the importance of a backup plan (hint hint, pandemics and recessions).
Because of this, it’s essential to calculate your cash cover to help you understand your business’s position if your finances unexpectedly go south. But what exactly is cash cover, and how do you measure it?
What is cash cover and how much should it be?
Your cash cover refers to the amount of money your agency has in its bank account compared to your monthly operating costs. It determines how long your agency can survive if there is a loss of income.
For example, if your monthly operating costs are £12k and your bank balance is £36k, your cash cover is 3 months.
As a rule of thumb, having enough cash to cover 3 to 6 months of your spending is often held out as a good cash buffer. Certainly, holding a cash reserve of anything less than three months’ worth of spending leaves your business vulnerable to unexpected events.
The amount of cash cover needed in your agency at any time will depend on your unique circumstances, the nature of your business, your client base, and what stage your business is at – amongst other things.
If you want to create a more tailored cash buffer for your business, look at your cash flow forecast. Your cash flow forecast will show you when you will likely have peaks and troughs in your cash balance. Plus, it’ll show you when you might need to dip into your reserves to meet your payment obligations.
If you want to get super fancy, scenario planning can also help you determine your cash needs. We recommend you run your cash flow forecast and see what it looks like if you lose your biggest client.
Benefits of calculating and tracking your cash cover
It is crucial to monitor your cash reserves as it can provide a cushion in case of any unforeseen circumstances. By calculating your reserves, you can gain a better understanding of your business’s financial well-being and avoid potential cashflow issues in the future.
Furthermore, if you discover that you don’t have enough to last you two to three months, you can look at your expenditure and take the necessary steps to build a better financial safety net.
Alternatively, you may have enough money to last you much longer than that. While having a healthy amount in your back pocket is essential, a high cash reserve may indicate that you need to reinvest more into your business.
If you need some support with working out what cash buffer your agency needs or how to set about building it, we’re here to talk. Let’s jump on a call to see how we can help.
