Why Cash in the Bank Matters

Small business owner working on a laptop
In the world of entrepreneurship, one commonly held rule is that cash is king. While other aspects of business ownership are undeniably important—such as customer relationships and marketing—a crucial element in any successful business is liquidity, or cash on hand.

Where you keep your cash is also significant. You want it to be safe, secure, and working for you. That’s why depositing your money in your business bank account is so critical. But there’s more to liquidity than a bank account.

What is Cash on Hand?

Cash on hand refers to the amount of money on hand to use immediately. It includes physical currency, such as bills and coins, but also funds that are easily accessible in your business bank accounts.

This amount of cash you can tap into at short notice is known as your liquidity. The trick is how quickly and easily you can convert any assets or security into cash without affecting its price. The more liquid a business is, the more access it has to cash, enabling you to meet any urgent financial obligations more easily.

High Liquidity Enables You To:

Icon for High Liquidity Enables You To:
Icon for High Liquidity Enables You To:
  • Manage any 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. Is your supplier offering a large discount on excess inventory or equipment? Spare cash in the bank allows you to quickly pivot without worrying about any impact on working capital reserve.
  • Manage unexpected expenses. Equipment may need unexpected repairs, so you’ll want cash available so you can avoid financing.
  • Minimize the risk of any market fluctuations. Liquidity can help you manage changes in interest rates or the need to borrow.
Learn more about protecting your cash flow.

How to Improve 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: 

  • Manage your inventory. Too much inventory on hand and your cash is tied up in things you need to sell. You’re also spending money to store or warehouse that inventory. Implementing Just-In-Time (JIT) inventory management for small business, receiving goods only as they’re needed without warehousing, will free up some of your cash. 
  • Sell any assets you don’t really use. 
  • Lease out assets you aren’t using. Take stock of equipment or real estate, which can allow you to generate cash without having to sell your assets. 
  • Lease new assets. 
  • Pay off any debts. 
  • Review costs and expenses. Make sure you’re only paying for necessary expenditures. 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. Holding cash at your business 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.

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:

  • By establishing a good banking relationship and maintaining a healthy bank account, you can improve 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.

Next Steps

First, make sure your business is liquid. Review your processes to ensure your money isn’t overly tied up in inventory. Examine your cash flow, expenses, and vendor relationships to see where you can free up more money. Once you’ve done so, deposit the money you free up into your business bank account where it can collect interest safely and securely.

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