Business savings, simplified
3 straightforward steps to increase your cash reserves
Table of Contents
It’s no surprise that having cash reserves is important for long-term business success. But it’s also no surprise that, amidst fluctuating markets and rates, it can be hard to prioritize setting aside funds. Here are some tips and tricks to increase the amount in your savings accounts.
Step 1: Make a plan
Budgeting may not seem fun, but it is essential. How can you know what amount to set aside if you don’t understand your business’s general flow of funds?
- Know your financials. Look at your balance sheet and your P&L to see if you can identify trends through the years. Develop a detailed budget that outlines all income and expenses. Learn more about how to use key financial documents.
- If you find that you do not have any surplus cash to move into savings, keep working with those balance sheets, P&Ls, and budgets. Review expenses and eliminate or reduce non-essential costs. Don’t forget to explore renegotiating contracts or searching for more cost-effective suppliers.
- Set clear goals. Having learned where and when you can expect surplus funds, you can determine reasonable goals. A common goal is to have an emergency fund that can cover 3-6 months of operating expenses. Or maybe you have a technology upgrade in the future, and you want to save up for a large down payment.
- Establish a timeline. Keep in mind your current cash flow and financial obligations, then determine a realistic date for reaching your savings goal. This provides accountability, and motivation to track your progress.
Step 2: Make it automatic
Once you know your goal and your timeline, the best trick of the trade is to automate savings as much as you can. Life gets busy, and as simple as it can be to transfer funds to savings, it’s also a very easy task to forget month after month. Most financial institutions can set up automatic transfers between accounts. Talk to your financial partner to learn what options are available to you. Options may include:
- Arranging for a portion of your revenue to be automatically transferred from your checking account to a dedicated savings account. This could be a lump sum, or it could be a fixed percentage of deposits that come into your account.
- Deciding on a fixed percentage of your income to save regularly. Even a small, consistent amount can add up over time.
- Analyzing your sales cycle to determine a time of year when income increases but expenses remain the same. Set up alerts or automatic transfers into savings at that time of surplus.
Step 3: Ladder investments
Investments often offer higher interest rates than standard savings. However, certificates of deposit (CDs) require that the invested funds remain untouched until their set maturity date. Laddering investments means staggering maturity dates. This ensures regular access to funds while benefiting from long-term interest rates.
How to ladder:
- Determine the total amount you plan to invest and split it into equal parts. For instance, if you have $100,000, you might divide it into five $20,000 investments.
- Invest each portion into certificates with different terms. For example, $20,000 into a 1-year certificate, $20,000 into a 2-year certificate, etc.
- As each certificate matures, the funds become available for a planned business expense, or you can reinvest the principal and interest into a new long-term certificate.
Summary
It can feel difficult to prioritize setting aside savings, and even harder to treat those savings as an emergency fund, only to be used for either unexpected expenses, a downturn in business, or funding necessary growth. But by making a plan, automating it, and laddering a few key investments, you will set your business up for stability and longevity.