How to Know If You Really Do Have Enough Cash Reserves

(And what to do if you don't!)

Understanding your cash reserves is crucial for ensuring the financial stability of your business. In this guide, we’ll walk you through getting the most out of your Hello Cashflow reports to assess if your cash reserves are sufficient for both day-to-day operations and long-term planning. With screenshots from our software as a reference, you’ll learn to evaluate your cash position and make informed decisions.

What Are Cash Reserves, and Why Are They Important?

"Cash reserves" is just the technical name for the funds your business keeps on hand to cover unexpected expenses or operational shortfalls. They are your financial safety net, ensuring that you can continue operating even when cash flow is tight.

In your accounting software, cash reserves are shown on the balance sheet under "Current Assets," often labeled as "Cash and Cash Equivalents." In Hello Cashflow, we show you how much cash your business has on hand and how it moves over time in your "My Cashflow" tab. This guide will walk you through each report in detail. We suggest you have your Hello Cashflow My Cashflow Tab open to look at alongside this guide.

Important note before we get started: Hello Cashflow defaults to reporting on a Cash Basis. Therefore, your Accounts Payable and Accounts Receivable are not taken into account unless you ask it to. You can make this change in your Organisation Settings at the bottom of your left hand tool menu, and then selecting "Switch to Accruals Basis" . We recommend that unless you have an in-depth understanding of accrual accounting principles, you stick with the cash basis reporting.

Key takeaway: At Hello Cashflow, we often refer to your Emergency Fund which means having enough cash reserves to help you weather unforeseen expenses and maintain smooth operations.

Interpreting Your Cashflow Forecast Report

Monthly Line Graph: This report tracks the money coming in and going out of your business, across all of your bank accounts. It displays over the last 12 months in the white area and predicts your future cash flow in the grey area, so you can see how much money you’ll likely have in the bank moving forward, based on the budget you have entered in your Budget Editor.

What to Watch For: Tick the "Cash In and Cash Out" to look for patterns in your cash flow. Are there months when more money goes out than comes in? Is your cash flow steady or unpredictable? If your cash flow is often negative, your savings might run low soon. If it’s unpredictable, you’ll need a bigger buffer to handle slow months.

Action Step: If there are any upcoming dips near or below zero, scroll down your Cashflow reports to look at "You have enough cash to last [number of months/days]". Ideally, you would aim to have 3-6 months' worth of expenses set aside. Use the Scenario Tool in Hello Cashflow to explore ways to boost your cash reserves.

Analysing Your Profit vs. Cash

Did you know that looking back can help you look ahead, but it doesn't tell you the full story? Your profit is a historical result, so it is important to look at more than just profit when thinking about cash flow. Even if your business shows a net profit, that doesn’t mean all of that money is available to spend right away. Other spending such as loan payments, sales taxes and other upcoming expenses still need to be considered. This ensures the business has enough cash to keep running smoothly, not just on paper but in reality.

Snapshot Report: This report displays the change in your cash position compared to last year. An increase or decrease in your bank balance indicates a Positive or Negative Cash Flow and is displayed in the right hand box. Positive cash flow indicates that the business is generating enough cash to cover its expenses, while negative cash flow may signal financial instability or cash flow problems.

What to Watch for: First, look at the difference between the net cash you generated from business activities during the year and the change in your bank balance. Then, based on your average cash generated each month and your increase or decrease in your bank balance, consider the business's ability to meet it's short-term financial obligations.

Action Point: Make a monthly appointment with yourself to dive into your Hello Cashflow Revenue and Expenses reports to identify areas of your business that might be causing a decline in revenue or an increase in spending.

Setting Cash Reserve Goals That Are Right for Your Business

So why might your Net Profit be looking good but your Cashflow looking dire?

As mentioned above, your profit doesn’t tell you how much cash you have today so this graph shows you how much you spent on Non-Operating activities such as:

• Buying assets, that is, things the business now owns.

• Paying off existing loans or raising funds through new loans.

• Meeting Income and Sales Tax obligations

• The business owner taking drawings or contributing to the business from their own pocket. 

What to Watch for: A large percentage of profit should, ideally, convert into cash reserves. If your bank balances are decreasing while profits are increasing, you may be underestimating non-operating expenses, such as loan repayments.

Action Point: Deep dive into the Where did the rest my cash go on your Cashflow tab to see if there are any higher than expected areas of spending such debt servicing and income taxes. Ask yourself: are there one-off items that could be spread out better? Or, is expenditure ongoing and your sales strategies need adjusting to generate more cash to cover these?

Planning for the Unexpected

This report is based on either your current or budgeted average spending. It gives you an indicator of how long you could keep operating at current levels of spending if your revenue suddenly dropped or stopped for some reason. This is your Emergency Fund and is an essential financial safety net during unexpected events, such as economic downturns, equipment failures, or sudden cash flow shortages.

Remember: this is separate to, and in addition to, reserves set aside to take up opportunities, as they come along, such as investing in new equipment or development of new revenue streams.

What to watch for: An adequate reserve of 3+ months to ensure you can:

• continue meeting your obligations to suppliers, staff, taxes and borrowings if your income streams suddenly dry up

• meet urgent unexpected expenses

Action Point: Consider multiple scenarios using best-case, worse-case and most-likely-case scenarios to help prepare for unexpected events or changes in market conditions. Refer to your Revenue and Expenses tabs to estimate these scenarios based on your real-time data and enter these into the Hello Cashflow Scenario Calculator. You can adjust your reserve strategy as your business grows or contracts to ensure you’re prepared for any scenario.

Conclusion

Assessing your cash reserves involves more than just looking at your profit. By understanding how to interpret the key financial reports from your Hello Cashflow software, you can confidently plan for the future, knowing your business has the financial buffer it needs to thrive.