Answers to key questions for businesses about managing cash reserves and protecting your credit profile.
How important is it to retain cash reserves and are they assets or liabilities?
Having a cash reserve is one thing that many successful businesses have in common and a crucial aspect of the financial wellbeing of your business. A cash reserve, or emergency fund, acts as a buffer and allows you to pay your employees and yourself during lean times. It is a short-term asset, so it’s basically cash that is available to help with bumps on the road and on the other hand it can help your business take on new growth opportunities when they come along.
“How much cash should be kept in reserve varies from business to business and there is no set number that applies to everyone”
How do you build a cash reserve and how many months of cash reserves should be in place?
How much cash should be kept in reserve varies from business to business and there is no set number that applies to everyone. A general guide that many follow is to have enough funds available that you are able to comfortably cover your expenses for three-to-six months. As it varies business to business it’s important to calculate what your business will need. So, you need to start by reviewing your cash flow statements for the last six months, and if the numbers are more or less the same, take the average amount to get your monthly expenses. Once you have this amount, multiply it by the number of months you want to be able to cover, to get the cash reserve goal you need.
If your business operates in a seasonal industry you will need to calculate two numbers. Start by choosing a six-month period that includes your highest cost month. For the first number, choose the highest cost month amount and for the second number average out the remaining five months. When calculating the cash reserve amount for a seasonal business you should aim to be able to cover one high cost month and a few regular months; the total number of months is up to you to decide.
Once you’ve calculated your goal amount for your cash reserve it’s time to start building it. Setting up a payment like a direct debit or standing order is the easiest way to start growing your cash reserve. A good way to think about your reserve is that it is like another bill, something that has to be paid; this will allow you to consistently grow your cash reserve as you will stop considering the payments to be optional. Try not to dip into your cash reserve, and if you do take funds out of your reserve make sure to replace them.
What are your top tips on how to maintain a good credit profile?
A Credit Profile is a record of how you manage debt! It is important to protect that record. Maintaining a good credit profile is really important for personal and business future lending.
- Treat all of your debts equally when it comes time to pay – it doesn’t matter what the line of credit is, from a credit card to a mortgage or a business loan, you shouldn’t neglect payment and prioritise another payment if say the interest rate was low. All payments will be treated the same in the eyes of your credit profile.
- Talk to your stakeholders if cash is lean or if you expect any disruption to your usual outflows.
- Make sure you pay every bill or loan on time, every time – if you have trouble keeping on top of your bills and get mixed up on dates, then it’s important to automate these payments by direct debit, on their due date, so they are not . The issue of “late payment in commercial transactions” is governed by the European Communities (Late Payment in Commercial Transactions) Regulations 2012 – SI 580 of 2012. Under these Regulations it is an implied term of every commercial transaction that where a purchaser does not pay for goods or services by the relevant payment date, the supplier shall be entitled to interest (“late payment interest”) on the amount outstanding. Interest shall apply until such time as payment is made by the purchaser.
- Check your credit report – Errors can happen, but luckily you can obtain a copy of your credit report. You can check for errors and request an amendment at www.centralcreditregister.ie. This is an important task as, if there are errors unknown to you, it can sometimes affect a lender approving credit for you.
What opportunities does a good credit profile allow for a business?
Our credit profile is our most important profile. As a business owner you could also be subject to other forms of checks. Your financial credit reports are held by the Central Credit Register (CCR). Banks and other financial institutions can have access to reports of arrears and arrangements of this kind on CCR, or another credit reference agency / register. This could have a negative effect on your credit rating, making it more difficult for you to borrow in the future.
Social media can have a massive impact here, for example, if you have a business Facebook page, customers can check reviews and comments, they can get an idea about your business reputation and should they buy from you. Suppliers equally in this sense can also view your page and freely find information on you, do you pay on time, and how reputable you are to deal with. The supplier can decide from this extra checking if they will give you credit going forward.
Therefore, a good credit profile and, even social media are being increasingly used to uncover more information about businesses and their owners. This can play a role from credit applications to dealing with suppliers so just keep in mind that your credit profile is a really important asset for you personally … and your business!
What are the pitfalls that often lead to a poor credit profile?
Some of the pitfalls can be easily remedied when you talk to your provider. It could be a scheduling issue, meaning your payment goes out on a date that could be a bad time of the month. Changing this to a more suitable date can make a big difference.
Unplanned life events can impact on your ability to meet your commitments. For example if a business owner is unable to work due to illness, for instance, it could mean that no funds are coming in and commitments may get missed.
Another common pitfall is errors on your credit profile, which I mentioned already. So I would encourage readers to apply to access their own credit profile from the Central Credit Register and check that it’s correct.
If you feel you can’t manage your repayments, it’s really important to act as quickly as you can and contact your provider. The earlier you do this and engage with your provider, the sooner a solution can be accessed, and you can avoid affecting your credit profile.
Disclaimer: The information prepared above by Bank of Ireland “BOI” is for information purposes only and does not constitute financial or tax advice. You should seek assistance from a professional if you require financial or tax advice. No liability is accepted by BOI for any errors or for any loss to any person in reliance on this information. BOI believes any information to be correct at 18 October 2021, the time of publishing, and the information is subject to change without notice. BOI does not make any representations or warranties in respect of the accuracy of this information and is not responsible for the content of external sites. Please refer to our Term & Conditions for the use of the ThinkBusiness.ie Website for further details.
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