- Get your most recent balance sheet and income statement from your accountant
- On the balance sheet, subtract your current liabilities from your current assets to determine your working capital, which represents your firm’s short-term liquidity.
- Take a look at your total operating expenses for the past 12 months on the income statement, and divide that figure by 365 (number of days in year) to calculate your daily operating expense (this is the amount it costs to run your business each day).
- Then divide your working capital by your daily operating expense and you can see how many days of funds you have on hand to cover operations.
I maybe writing this during a time of a pandemic, but this is something you should think about at any time. Yes, It’s 2020 and we are all home trying to suppress the Corona virus’s spread. Unfortunately business or personal, money is going to be tight. Government has been thinking of rolling out a stimulus, but the numbers they are thinking about are not going to be making a major dent. We should all really start to be frugal before the time of need. via GIPHY One financial decision all people in general, need to make is how much to save. Save too much you take away from your growth. You will have less to purchase assets or buy tools etc. Save too less, and when you don’t have enough revenue you will suffer and possibly even go out of business. In reality there is no one-size-fits-all approach that applies to everyone’s business. You need to assess where your company is in its lifecycle, as well as a look at some quantitative factors and a bit of worst-case scenario planning. If you’ve got an early-stage company without much revenue, then it probably isn’t practical or sensible to stash away enough cash to cover six months or more of operating expenses. But it’s definitely smart to start planning for the future and adopting a prudent approach to cash management. Strategize to Determine Your Cash Reserves In my opinion startups should consider setting aside a small portion of their revenues, five to ten percent, in a reserve account and then re-assessing their needs as the business grows. Only once you are past the start up phase and have a steady revenue stream, you can start to determine the right size for your cash reserves: