How does your business cash balance stack up against industry averages?
Cash is king. You’ve probably heard the phrase before. Cash is the lifeblood of any business, large or small. But for small businesses in particular, cash management is even more critical given the relatively less credit availability in the market segment. To provide an example of its importance, let’s say you’ve just received a large amount of customer orders and sent out corresponding invoices to customers – congratulations, that’s new business coming in the door. However, what happens if payroll is due this week and you don’t have enough cash on hand to cover it? You cannot pay an employee with an outstanding invoice. In fact, no amount of accounts receivables can be used to cover unexpected cash needs that may arise in the immediate term. This is why, here at Finfox, we stress the importance for small businesses to maintain a cash cushion at a level that is meaningful to their particular business. One of the research / think tank arms of JP Morgan would seem to agree.
The JP Morgan Institute has recently released a report, their first on the small business sector in the U.S. They’ve constructed a broad data set covering over 450 million transactions and account balances from over half a million small businesses across United States metropolitan areas.
According to their research, the average daily cash balance across all small businesses is $12,100. “Balance” here is to include cash being held by a business across both operating deposit accounts and savings accounts. Take this figure with a grain of salt though. The balances differ widely across different industry groups. For example, the average daily cash balance for businesses in the wholesaler segment is almost double the cash balance for the construction segment. See below for this breakdown by major industries.
What’s more important to highlight from the report is that despite the importance of holding an adequate cash reserve, most small businesses hold cash reserves that would prove insufficient to cover needs in the face of a business disruption or economic downturn. This is something to keep in mind as you compare the financial management of your own business to that of existing industry averages.
So if these averages aren’t the right figures to benchmark to then what is? That’s where we at Finfox can help you. We deploy the latest in financial research together with machine learning technologies that learn the trends of your business quickly and guide you towards the right cash reserve amount that is optimal for your particular business. If you would like to know how much cash your own business should save, sign up for access at Finfox. Access will be free for our next batch of users!
At Finfox, we find the small business sector to be an extremely underserved market. Although small businesses employ almost half of all US workers and are responsible for over 40% of net job creation, there still seems to be a lack of support for owners of small businesses in the public realm. When the economy hits a downturn, small businesses are the first to feel the impact as credit markets dry up. We are glad to see increasing focus on the sector, especially from a large financial institution such as JP Morgan. Download their full report here. Stay tuned for a follow up blog post from us where we highlight another very interesting insight for small businesses from research.