A robust risk management plan can help identify business specific risks and determine the appropriate amount of cash reserves to mitigate those risks. The amount of cash reserves required for a business differs by industry and organizational structure. Businesses that maintain cash reserves are also equipped for unforeseen market conditions which can lead to downturns in demand, shortages in supply, and logistical delays. Adequate reserves allow a business to react quickly when machinery breaks, buildings need maintenance, or stock is damaged. When determining how much cash to keep in reserve, a business should consider their ability to do each of the following: React to Unforeseen CircumstancesĬash flow management strategies should ensure that operations are not interrupted when a company incurs unexpected costs. They could also be positive, like outgrowing a facility or the development of new technology to meet customer needs. These circumstances could be negative, like decreased demand for products or unexpected costs. An Effective Cash Flow Management Strategy Ensures Adequate ReservesĪ successful cash flow management strategy will allow a business to adapt to any circumstance. So, to successfully strike that balance, a cash flow management strategy should cover each of these objectives.
When deciding how much cash to keep in reserve, business leaders must find equilibrium between long-term safety and short-term productivity. On the other hand, insufficient reserves can lead to insolvency, operational delays, and the inability to fund expansionary projects. When a business maintains excessive cash reserves, it can limit current productivity. It also includes striking a balance between working assets and cash set aside for long term growth.
Cash flow management involves more than forecasting cash inflows and outflows.
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