As your business grows, so do your financial obligations. Payroll, rent, supplier terms, tax payments, and capital projects all drain cash. If you don’t have enough working capital to meet these commitments or respond to unexpected events, your growth can stall. Whether you're managing multiple locations, juggling a seasonal revenue cycle, or investing in new equipment, having enough cash on hand is essential to keeping your business stable and resilient.

 

Understanding cash on hand

Cash on hand refers to the funds your business can access immediately or within a few days. That includes physical currency, checking, and savings accounts. In financial terms, this is your liquidity, or your ability to meet short-term obligations without disrupting operations or selling long-term assets at a loss. The more liquid your business is, the more flexibility you have to act quickly, whether you're navigating a crisis or seizing a time-sensitive opportunity.

High liquidity enables you to:

• Manage any sudden threats such as covering your working capital in an unforeseen crisis. A large customer may have delayed an expected payment, tax due is more than you’d budgeted for, or sales have slowed unexpectedly and not picked up, causing pressure on being able to pay bills.
• Take advantage of opportunities, such as large discounts from suppliers, developing new products, trying different business models, or investigating new markets. Spare cash in the bank allows you to quickly pivot without worrying about any impact on working capital.
• Manage unexpected expenses without stress. For example, if equipment needs unexpected repairs, cash is available without the need for financing.
• Minimize the risk of any market fluctuations, changes in interest rates or the need to borrow.
• Increasing borrowing power. Showing healthy liquidity can lead to better terms on lines of credit or expansion loans.

Businesses with low liquidity who have trouble finding the cash to cover expenses will find it harder to manage their business day-to-day.

 

Improving your liquidity

Ultimately anything you can do that frees up cash will help your liquidity. Having a surplus each month will also do wonders. Ways to improve liquidity include:

• Managing your inventory more effectively and making changes where needed. Too much inventory on hand and your cash is tied up in things you need to sell. Possibly you’re also spending money to store or warehouse that inventory. Implementing Just-In-Time (JIT) inventory methods where you receive goods only as they’re needed without warehousing, will free up some of your cash.
• Sell any assets you don’t really use and deposit the cash in the bank. • Lease out assets you aren’t using, such as equipment or real estate, which generates cash without having to sell your assets.
• Instead of buying assets, consider leasing yourself. A large, one-time purchase might use up a significant chunk of cash that could otherwise be saved if you lease.
• Pay off any debts or financial obligations.

Finally, reviewing your costs and expenses to make sure you’re only paying for necessary expenditures and aren’t paying more than you need to may improve your cash situation. Negotiate payment terms with vendors, outsource non-core activities, and keep track of your budget to see where else you can tighten up.

 

Why have cash in the bank

While having cash on hand is important for liquidity, keeping that money in a business bank account provides additional levels of safety and security. Even small amounts of cash in your business premises exposes you to an increased risk of theft, burglary, fire, or even misappropriation. A bank will have proper security systems and vaults to protect your deposited funds. You’ll also be able to see when accounts were accessed and possibly who accessed them, giving you an added level of security.

Your business bank account will also be insured by the Federal Deposit Insurance Corporation (FDIC), for up to $250,000 per dispositor per bank.

Depositing your money into your business bank account enables you to earn interest. Depending on the type of business bank account you have, you may earn a reasonable interest rate, allowing your money to grow over time.

Additional benefits of having cash in the bank include:

• Improving your chances of securing a loan or line of credit. Banks may look at your cash flow and deposits when determining how creditworthy your business is.
• Bank statements detail all transactions which help your accounting processes and enable you to track your income, expenses, and other financial transactions more easily and accurately.
• You can use banking tools and software to forecast your cash flow, enable automatic transfers and bill payments and more effectively manage your working capital.

In addition to the benefits to your business, depositing your money in the bank allows your bank to lend money to other businesses. This helps other small businesses grow and take advantage of opportunities, which in turn contributes to the local economy.

 

Next steps

• Review your current liquidity to make sure that your business has enough cash to meet short-term obligations and take advantage of opportunities.
• Consider adjusting your inventory management practices, such as implementing Just-In-Time (JIT), to free up cash and avoid unnecessary expenses.
• Look at your assets and determine if any can be sold or leased to generate additional cash without disrupting operations.
• Set a goal to build a cash reserve that you can use to manage unexpected expenses, giving your business more financial flexibility.

Cash on hand is a vital asset for any business, providing flexibility, security, and the ability to respond to both challenges and opportunities quickly. Keep focused on maintaining a healthy balance between cash reserves and operational efficiency to safeguard your business’s future growth.