A crisis brings difficult challenges, but disruption can also uncover huge opportunities. Some companies may need to actually increase production, or there may be inventory or equipment available at cheap prices. During times like these, adequate cash reserves can help your business proactively take advantage of new possibilities.
I reached out to Dan Graff, a Director, Client Advisor at Sullivan, Bruyette, Speros & Blayney, an independent financial advisory firm in Virginia. Dan helps business owners and entrepreneurs navigate key financial questions that affect their business and personal finances.
I interviewed Dan on cash reserves and how business owners can use these to take advantage of all the changes we are now experiencing:
How much in cash reserves should I have?
Ideally, you should have four buckets of cash reserves:
- Operating Account – A good rule of thumb for this account is 1-2 months of your normal business expenses. This operating account can help avoid painful short-term layoffs, furloughs or pay cuts.
- Emergency Fund – This fund would in general have 3-6 months in reserves to be able to weather a longer storm without having to tap into other assets.
- Tax Set-Aside – This bucket should generally have 1-2 quarters of tax payments reserved.
- Opportunity Fund – This fund depends on your goals (and financial reserves) but would ideally hold enough money to take advantage of a larger opportunity. For example, this money could enable the purchase of a competitor or a real estate location at a deep discount. Your business could retool to take advantage of a new demand (such as distilleries that have started manufacturing hand sanitizer). This set-aside fund enables you to quickly jump on opportunities.
If I do need cash, where should I go?
Of course, these funds are an ideal scenario. So where can you go to build up your cash reserves?
- Tap into your business line of credit. While your business value is likely at its strongest, you may want to consider working with your banker on a new or expanded line of credit. After the 2008 crisis, many banks later capped business credit. Apply for the most you can and draw on this line to show activity.
- Take full advantage of any amounts available under the CARES Act. Even if you are fine at the moment, apply for a Paycheck Protection Program (PPP) loan and use the money available to create cash reserves for the future.
- Personal investment accounts (non-retirement). If you are selling from a portfolio, it is generally better to sell bonds in a down market rather than equities. Speak with your personal financial advisor.
- Apply for an equity line. While this may seem counter-intuitive, it may be a good idea to apply for a Home Equity line of credit now on your home or other property. Acting now allows you to have your property evaluated in a strongly valued state and gives you access to cash if you need it, at advantageous interest rates.
This option can be much riskier for several reasons. First, you are now risking your future and family reserves. Also, 401K’s are often protected in the event of bankruptcy.
The key is to assemble a team of your tax accountant, personal financial advisor, your banker, and the person running your finances to talk about options. It can often be advantageous to have a relationship with a smaller bank (under $10B) due to reduced regulatory requirements and a better understanding of your individual needs and challenges. Speak with your team in order to make a rational decision on limits now. You can then devise a game plan in advance and execute it. In this way, you can work to convert challenges into opportunities.