Ask Jo Malone: Plan for the good times and the bad to calculate your cash buffer

Small business agony aunt Jo Malone on the importance of not letting your funds run to the last penny and always planning for the unexpected.

Dear Jo

What do you regard as a “safe” level of cash to run a business with? Do you enshrine a certain amount as a buffer in case of tough times?

It’s wise to run your business with a safe level of cash, whether this is physically in the business or its availability is on hand via the bank as an overdraft or loan, or through a backer or investor.

Make sure you have secured the bread and butter of your business as this is an area you don’t want compromised — it is what pays your rents and salaries.

It’s important that you are in control of this, having played out the various scenarios on a spreadsheet. It’s not too different to how you would plan your personal finances: saving for your summer holiday, tax payments etc.

You wouldn’t allow your personal finances to run to the last penny, nor should you for your business.

Plan ahead using scenario analysis — i.e. what if this or that happened. What if a new project you’ve been working on comes into play, or the contract you had doesn’t get renewed at the end of its term?

At the same time you’ll need to run a sensitivity analysis. This is normally an optimistic, realistic, and pessimistic version of how plans will play out.

The optimistic would take the form of sales being a little more ambitious if all your promotional work went to plan with costs not increasing over and above the plan.

Pessimistic would be the opposite — sales being softer because there could be resistance to the price increase you would have to pass on to your customers, and your cost of goods increasing more than anticipated due to sterling weakening against the euro and dollar.

Finally, what would you need to finance the business through the pessimistic patch, how would you consequently turn it around, and where would you go to secure the finance?