Why Small Businesses Should Keep More Cash in the Bank
In this series, we’ve looked at the ups and downs of small business finance topics through the narrative of two rival small town bakeries: Buddy’s Bakery and Callie’s Cupcakes. The respective owners have grasped financial concepts and discovered their respective businesses’ potential financial strengths and weaknesses. However, learning is a lifelong pursuit and learning to keep cash in the bank can be an important lesson.
Conventional textbook wisdom says that all firms have their own views on “appropriate cash level.” Moreover, the theory goes that in addition to a small emergency fund, it is favorable for a company to keep enough cash to cover their interest, expenses and capital expenditures.
Neither Buddy and Callie saw the merit behind keeping more cash in the bank. But after recent meetings with their colleagues and accountants, the following reasons made them recognize why this is a fantastic idea.
1. Business opportunities
Having more cash on hand can make it easier to seize potential business opportunities.
For instance, after a conversation with another local small business owner, Callie discovered that having more cash could come in handy. For example, if she wanted to take on investors, or have the option of taking on more risks. The amount of cash available to the business can make or break the opportunities.
2. Saving money on debt
The more money paid upfront, the less money has to be paid back at the end (and in interest).
For Buddy, the question of expansion is always in the back of his mind. While he knows taking on debt is a way to finance an expansion, he wants to be proactive. Buddy sat with his accountant to have a conversation about the best way to approach financing expansions. He also learned about the variety of options available to him. His accountant told Buddy that instead of depending solely on loans and financing to expand or to purchase equipment, having more cash in the bank that he can use upfront can help him save money in the long run. It could also garner him a lower interest rate.
Potential vendors or partners will always wonder exactly what they are getting into when they take on another business.
If potential investors require a deep dive into the business, this could mean taking a close look at the books. Both Callie and Buddy have encountered this with the same supply vendors and financing institutions. They have each learned that having more cash on hand puts their businesses in a positive light with both the vendor and financing firms. Essentially, the more cash on-hand a business has, the less risky they look to potential vendors and financial institutions.
4. Generally having more control
Entrepreneurs choose their paths for a variety of reasons, but freedom and responsibility are frequently at the forefront. Being one’s own boss and able to make the major decisions can be a tenuous position if your business is beholden to investors holding significant stakes. With more cash in the bank, businesses and business owners can be empowered to maintain their autonomy.
When growth or potentially bigger, better opportunities present themselves, being confident in how they will be financed can take a lot of stress and anxiety off the table. In essence, the more cash a business has in the bank, the easier it will be to take advantage of opportunities. It will be equally as easy to pass on them and wait for other opportunities to come along.