Navigating the financial landscape of a small business can be quite a challenge. One of the most pressing questions that small business owners often grapple with is: “How much money does the average small business have in the bank?”

Okay, great question. But is it the right question, I don’t really know depending on your reason for asking. Also, the amount of cash a small business should have in its account should be based on its needs and goals. What are the financial needs to operate, and what are the goals of that business?

Let’s talk about some facts Research has shown that the median small business holds an average daily cash balance of $12,100. However, this figure can greatly vary, with some businesses reporting less than $10,000 across all their banking accounts. These figures are influenced by various factors such as loans, credit availability, financing options, and basic money management principles. Moreover, the revenue generated also plays a crucial role, with the average small nonemployer business making $46,978 annually, while small businesses with one to five employees average $387,000 per year. Understanding these financial intricacies is vital for the growth and sustainability of any small business. But

What’s the Average Small Business Bank Balance?

The answer to “how much money should a small business have in the bank” can vary significantly based on factors such as industry, business size, and operational costs. However, in my opinion, and in the opinion of experts, I suggest that small businesses should have enough cash in the bank to cover three to six months of operating expenses. Really having a year saved up is best. As the company grows, that savings account should as well.

So here are some other items to think about. The average bank balance of a small business is a critical financial indicator that directly impacts its ability to meet its business objectives, cover operating expenses, and invest in growth opportunities. Small businesses, on average, maintain a daily bank balance of about $12,100. However, this figure can vary greatly depending on the type of business, industry, and seasonality. A healthy bank balance should be able to comfortably cover the business’s operating expenses such as payroll, rent, utilities, and inventory costs. Additionally, it should also allow for investment in growth opportunities, such as product development or marketing initiatives. These are numbers that you are going to have to figure out for yourself. There is no one size fits all, whether you are looking to start a company, currently building one, or looking to buy one.

That being said, determining what constitutes a ‘healthy’ bank balance is not just about having a large sum of money in the bank. It’s about maintaining a balance that aligns with the business’s cash flow needs, operational expenses, and financial goals. This requires understanding key metrics like cash flow, profit margins, and revenue trends. For instance, a business with high operating expenses and irregular cash flow might need a larger buffer compared to a business with lower operating costs and steady income. Therefore, effective financial management for small businesses involves closely monitoring these metrics and adjusting the bank balance accordingly to ensure financial stability and facilitate growth.

The Importance of Cash on Hand

Understanding “how much cash should a business have on hand” is crucial. Cash on hand refers to the total amount of cash a company has after all its expenses have been paid. It is a vital indicator of a company’s short-term financial health and liquidity. It’s the lifeline that fuels the daily operations, pays the bills, and enables the company to seize growth opportunities when they arise. Having sufficient cash on hand is especially important for businesses that operate in industries with high transaction volumes or significant seasonality, such as the retail and food industry.

In sectors like these, having cash readily available can mean the difference between being able to restock inventory in time for a peak shopping season, or missing out on sales due to stockouts. For example, in the food industry, businesses often need to pay suppliers promptly to secure fresh produce and other perishables, necessitating a healthy level of cash on hand. Similarly, in the retail sector, businesses might need to purchase large volumes of stock ahead of peak seasons like Christmas or Black Friday.

On the other hand, service providers such as IT-managed services companies might not require as much cash on hand. Their business model usually involves longer-term contracts, predictable monthly revenue, and lower upfront costs. However, even these businesses need to maintain a certain level of cash on hand to cover operating expenses, handle unexpected costs, or invest in new equipment or technologies when needed.

Regardless of the industry, managing cash flow effectively and maintaining a healthy level of cash on hand is crucial. It provides the financial flexibility to navigate through challenging times, meet unexpected expenses, and invest in opportunities that can drive long-term growth.

Financial Guidelines For Small Businesses

Financial management is the cornerstone of any successful small business, and adhering to certain guidelines can help ensure stability and growth. Firstly, maintaining accurate and up-to-date books is crucial. This includes tracking all income and expenses, reconciling bank statements, and regularly reviewing financial statements. Utilizing accounting software or hiring a professional bookkeeper can streamline this process. Secondly, monitoring key performance indicators (KPIs) and metrics such as gross margin, net profit margin, operating expense ratio, and cash flow can provide valuable insights into the business’s financial health.

Additionally, small businesses should have a comprehensive business plan that outlines their financial goals, projected revenue, and market strategies. This document is not only essential for guiding business decisions but also for securing loans or investments. Speaking of loans, while they can provide the necessary capital for growth, it’s important to fully understand the terms and only borrow what you can afford to repay.

Furthermore, diversify your revenue streams to reduce reliance on a single source and to mitigate risks associated with market volatility. Think about it this way, if one client makes up for a majority of your revenue you are in danger. Ask yourself this, What happens when they leave you?

Lastly, consider opening a market account for your business. These accounts typically offer higher interest rates than regular savings accounts and can be an effective way to grow your cash reserves while keeping them accessible. Try and get the most bang for your buck while your money is sitting. Remember, prudent financial management can mean the difference between merely surviving and thriving as a small business.

Small Business Money Principles

Okay, so I am a huge propionate of principles. They help keep you grounded and are a solid framework for decision-making in life and in business. Adherence to certain money principles is especially crucial for small businesses that are navigating the challenges of growth, profitability, and financial stability.

First and foremost, regular review of the books is essential – aim to do this at least twice a month. This will not only help keep track of income and expenses but also identify any discrepancies or potential issues before they become significant problems.

Secondly, every small business should have a comprehensive financial plan and a realistic budget. These tools provide a roadmap for your business’s financial future, helping you make informed decisions about spending, investing, and growth strategies. They also serve as a benchmark against which you can measure your business’s actual performance.

Another important principle is to maintain a cash reserve. Unexpected expenses are inevitable in business, and having a reserve fund can help you navigate these situations without jeopardizing your operations or financial health. I personally think that having a year saved up in the bank is a good number. If you are not there, save a percentage every month off the top and put it into an account that you never touch unless it is an emergency.

Finally, don’t hesitate to seek professional advice. Whether it’s a bookkeeper to help with your accounts, a financial advisor to guide your investment strategy, or a lawyer to ensure you’re compliant with regulations – investing in professional expertise can save you money in the long run by avoiding costly mistakes. These principles, when consistently applied, can significantly contribute to the financial success of a small business.

Small Business Insurance

Business insurance is a crucial risk management tool that can protect businesses from unforeseen losses and liabilities. It’s particularly important for businesses operating in industries where there’s a high risk of property damage, lawsuits, or professional errors. These include construction, healthcare, food service, retail, manufacturing, and any business offering professional advice like law firms, consultancies, or financial services.

Businesses in these sectors often deal with substantial assets, potential health hazards, or sensitive information, making them particularly vulnerable to significant losses. For instance, a restaurant might need insurance to cover damages from a kitchen fire, while a consultancy firm would require professional liability insurance to protect against claims of negligence or errors in their advice.

There are several reasons why a business would invest in insurance. Firstly, to protect against financial loss. Whether it’s damage to property, legal fees from a lawsuit, or compensation for business interruption, insurance can cover these costs. Secondly, many clients, partners, and regulatory bodies require proof of certain insurance before they will do business with a company. Finally, having adequate insurance coverage can provide peace of mind, allowing business owners to focus on running and growing their businesses without the constant worry of potential risks.

Small Business Revenue

When it comes to small business revenue, a one-size-fits-all approach does not apply, to what constitutes a healthy revenue. Numbers can vary widely based on industry, geographical location, and the size of the operation. For instance, a boutique retail store in a small town might consider $500,000 in annual revenue to be healthy, while a tech startup in Silicon Valley may need millions in revenue to sustain its operations.

However, it’s crucial to note that revenue, while important, is not indicative of a business’s financial health on its own. High revenue does not automatically equate to high profit. Profit is the amount left over after all expenses have been deducted from revenue, and it’s this figure that truly determines a business’s success.

Moreover, cash flow — the net amount of cash and cash equivalents being transferred into and out of a business — is another vital metric to monitor. Even profitable businesses can fail if their cash flow is negative, meaning they’re spending more money than they’re bringing in. This could result in an inability to cover day-to-day operational costs or invest in growth opportunities.

So, while revenue is a significant part of the financial picture and will be a part of calculating your profit margin, small businesses should focus more on profitability and maintaining positive cash flow to ensure sustainable operations and growth.

Small Business Credit Score

A business credit score is a measure of a company’s creditworthiness, similar to how personal credit scores work. It’s based on several factors including payment history, length of credit history, outstanding debts, and the type of credit in use. Businesses might need a good credit score for a variety of reasons such as securing loans or lines of credit, leasing equipment or premises, or negotiating better terms with suppliers.

Business credit scores are typically rated by major business credit bureaus like Dun & Bradstreet, Experian Business, and Equifax Business. These agencies gather data from various sources to create a comprehensive picture of a business’s financial health and ability to repay debts.

Building a strong business credit score often involves some key steps:

1. Establish your business as a separate legal entity: This might involve incorporating your business or forming an LLC, which separates your personal finances from your business finances.
2. Get an Employer Identification Number (EIN): This is essentially a social security number for your business, which you’ll need for tax purposes and to establish business credit.
3. Open a business bank account and credit card: Use these for all business-related transactions to build a history of financial responsibility.
4. Work with vendors that report payments: Regular, on-time payments to these vendors will help build a positive credit history.
5. Pay your bills on time or early: Late payments can negatively impact your credit score, while early payments may boost it.

If you don’t have any business credit yet, start by following these steps. You might also consider a secured business credit card, which requires a cash deposit as collateral. Over time, regular, responsible use of this card can help build your business credit from scratch.

Understanding Small Business Loans

Small business loans are financial tools that provide businesses with the capital they need to expand, maintain operations, or recover from losses. They work much like any other loan: once approved, you receive a lump sum of money that you repay over a predetermined period, with interest. The “average small business loan amount” doesn’t really matter. Because the loan amount is based on your needs, credit score, revenue produced, loan type, vendor, and more. Small business loans can help boost your cash reserves, but they also come with repayment obligations.

To apply for a small business loan, you’ll typically need to provide financial statements, a business plan, personal and business credit scores, tax returns, and details about how the loan will be used. Any bank or lending institution will have their own application process, but many also allow online applications. If you want to see how much you would qualify for lots of bank have an online estimator you can check out.

Businesses may apply for loans for numerous reasons, such as purchasing equipment, buying inventory, hiring staff, or expanding operations. However, it’s essential to consider whether a loan is the best option for your business. If you’re already struggling with debt or if the loan terms are unfavorable (high-interest rates or short repayment periods), it might be best to seek other financing options or become highly creative in finding an alternative solution to the problem you are currently facing.

Moreover, not all businesses will qualify for a loan. Lenders look at factors like credit score, time in business, annual revenue, and profitability. If a business is new, has poor credit, or has unstable revenue, it may be difficult to secure a loan. Therefore, it’s crucial to understand the requirements and evaluate your business’s financial health before applying.

I will say this though, once you get a loan expect to feel pressure right out of the gate if you don’t have all of your ducks in a row to repay it. Have a plan upfront before making a decision.

Understanding the Right Loan Amount for Your Small Business

Determining the right loan amount for a small business is a delicate balancing act. Unlike large corporations, small businesses often operate with thinner margins and may not have as much financial flexibility in terms of revenue streams or cash reserves. The loan amount should be sufficient to cover the specific need without becoming a burden on the business’s financial health. For instance, if a small business wants to buy new equipment, expand into a new location, or increase inventory, the loan amount should be enough to cover these costs, but not so large that it jeopardizes the business’s ability to repay. It’s also important to factor in the cost of the loan itself, including interest and any associated fees. A business’s debt-service coverage ratio, which measures its ability to repay debt, is a critical metric lenders look at. If this ratio is too low, it could be harder to secure a loan. Therefore, small businesses must carefully evaluate their financial situation, growth plans, and repayment capacity before deciding on the right loan amount.

Big Banks Cash Reserves

Big banks, like all financial institutions, maintain cash reserves as a part of their operational strategy and to meet regulatory requirements. As of August 23, 2023, U.S. banks’ cash assets were reported to be $3.26 trillion, up 5.4% from the end of 2022. This is significantly higher than pre-pandemic levels, indicating an increase in caution amid economic uncertainties.

Cash reserves are essentially the minimum amount of money that banks are required to hold as dictated by central bank requirements. They serve as a safety net, ensuring that banks have enough liquidity to meet immediate transactions and unexpected withdrawals. Furthermore, they also enable banks to invest in growth opportunities or cover operational costs during downturns.

However, holding excess reserves – the amount over and above the mandatory requirement – is a strategic decision. Excess reserves can act as additional security against unforeseen financial shocks and can be deployed for investment purposes.

For businesses, understanding a bank’s cash reserve strategy can provide insight into the bank’s stability and its ability to lend. A bank with healthy reserves is typically more stable and better positioned to provide loans, which can be crucial for business operations and expansion efforts.

Big Business Cash Reserves

As of the quarter ending June 30, 2023, Apple had a cash reserve of $62.482 billion, marking a significant increase of 29.55% year-over-year. This substantial cash reserve is reflective of Apple’s impressive financial health and strategic business practices.

One might wonder why a company with such a large cash reserve would choose to take out loans rather than spend its own money. The reasons for this are multifaceted. Firstly, interest rates have been historically low, making debt financing an attractive option. Secondly, taking on debt can provide tax benefits; interest payments on debt are tax-deductible, effectively reducing the cost of borrowing. Thirdly, maintaining a large cash reserve provides a safety net against unforeseen circumstances or market volatility, ensuring the company’s long-term stability.

Big companies like Apple operate differently from small businesses in several ways. Due to their established revenue streams, significant market share, customer loyalty, and broad audience reach, big companies have more financial flexibility. They can use their cash reserves strategically to invest in new projects, make acquisitions, buy back shares, or pay dividends to shareholders, all while still being able to borrow at low rates when needed².

However, it’s also important to note that maintaining a large cash reserve doesn’t come without challenges. It can lead to scrutiny from investors who may prefer to see the money returned as dividends or used for share buybacks. Yet, Apple’s strategy so far has proved successful, allowing the tech giant to navigate market uncertainties and invest in future growth opportunities.

Calculating Your Cash Balance

A helpful tool for small businesses is the “average cash balance formula”. This formula can help you calculate the average amount of money you have in the bank within a specific period.

Calculating your cash balance involves keeping track of your starting cash balance, adding any incoming cash (cash inflows), and subtracting any outgoing cash (cash outflows). Your starting cash balance can be found on your bank statement or in your cash register if you run a retail business. Cash inflows might include sales, loan proceeds, or capital injections. Cash outflows could be expenses like rent, salaries, supplies, or loan repayments.

For example, let’s say you start the month with a cash balance of $5,000. Over the course of the month, you make sales totaling $10,000, and you have expenses totaling $7,000. Your ending cash balance would be calculated as follows:
Starting Cash Balance + Cash Inflows – Cash Outflows = Ending Cash Balance
So in this case, it would be:
$5,000 (starting cash) + $10,000 (inflows) – $7,000 (outflows) = $8,000 (ending cash balance)

This means at the end of the month, you have $8,000 in cash. Regularly calculating your cash balance helps you understand your business’s financial health and plan for future expenses.

What is a Cash Buffer?

A “cash buffer” refers to the number of days a business can continue operating using only its cash reserves if no new money comes in. It’s essential to know your cash buffer as it provides insight into your business’s resilience in the face of unexpected expenses or income loss.

A cash buffer is an extra amount of cash that a business keeps on hand to cover unexpected costs or financial emergencies, much like a personal emergency fund. This cash reserve can be used to manage unforeseen expenses, such as equipment repairs, or to cover operating costs during periods of lower-than-expected revenue.

For example, consider a restaurant business. The owner might keep a cash buffer equivalent to one month’s operating expenses. If a crucial piece of kitchen equipment suddenly breaks down and needs immediate replacement, the cash buffer could cover this unexpected cost. Alternatively, if there’s a slow period where revenues dip significantly, the cash buffer can help cover fixed costs like rent and salaries, ensuring the business can continue to operate until revenues increase again.

Having a cash buffer provides businesses with financial stability and resilience, allowing them to navigate challenging periods without resorting to expensive borrowing or drastic cost-cutting measures. It’s a key component of prudent financial management for any business, large or small.

Monthly Bank Balance

The question of “how much money should a small business have in the bank per month” depends on your monthly expenses. You should aim to have enough money to cover at least one month of operations, although more is always better. It really depends on your goals, operating needs, and other factors. Having a financial strategy and model to operate with will help determine this number for you.

Cash Reserve Formula and Savings Account

The “cash reserve formula” and a “small business savings account” are two additional tools that can help you manage your cash flow. The cash reserve formula helps you determine how much money you should keep in reserve, while a savings account can provide a safe place to store your cash reserves while also earning interest.

The cash reserve formula is a method used by businesses to determine the amount of cash they should keep on hand to cover regular operating expenses and potential emergencies. The formula is typically expressed as:

Cash Reserves = Operating Expenses (per day) x Desired Number of Days of Coverage

Operating expenses include costs such as rent, salaries, utilities, and other day-to-day business expenses. The desired number of days of coverage is based on how long the business expects it might need to rely on its cash reserves.

For example, let’s say a small business has daily operating expenses of $500 and the owner wants to have enough cash on hand to cover 30 days. They would calculate their necessary cash reserves as follows:

Cash Reserves = $500 (daily expenses) x 30 (days) = $15,000

This means the business should aim to keep $15,000 in cash reserves to ensure they can cover their operating expenses for a month, even if no additional cash comes into the business during that period. This can provide a safety net in case of unexpected events or financial downturns.

Savings Account Pro Tip

Also when it comes to picking a savings account to hold your cash in. You want to find an account that will accrue a higher interest rate. That way while you are using the savings account to hold your cash for liquidity reasons, it is still making money for you. Depending on how much you have in an account, a jump from 2% – 5% could be a net of 20K per year. Do some research on a Money Market Account. It’s worth looking into especially because you won’t have to work for that stream of revenue.

The Ideal Number of Days Cash on Hand

“How many days cash on hand should a business have?” is another common question. This number can vary, but having enough cash on hand to cover 30-45 days of operations is a good rule of thumb. It depends on your industry, operational factors, and goals. There is no one-size-fits-all all answer to this question. If read anything above you will have a better understanding of what you need to do to figure this number out for yourself.

Year-End Business Account Balance

Finally, the “money left in the business account at the end of the year” can provide a snapshot of your business’s financial health. It can help you assess your financial performance over the past year and plan for the future. You can compare previous years to see if you are growing or shrinking. You can also use this number to forecast growth percentages for future years as well.

The Conclusion

Ok, this has been a super long post with a ton info. But I think it’s important to cover a lot of the topics above to help give a total picture of Small Business Monies.

To recap real quickly. The amount of money the average small business has in the bank can vary widely. However, understanding key financial concepts and using tools like the average cash balance formula and the cash reserve formula can help you manage your cash flow effectively.