[Question] How much money should stay in your business?

[rfnel]

Hi Everyone

Here's a quick question - how much money should stay in your business?

Enough to cover your expenses for x months? The aforementioned plus an extra Ry for unforeseen expenses? What is x and y?

Cheers,
Riaan

[AmithS]

Looking at it from a how many months point of view I would work with at least 6 months.

other than that I would say it depends on you as a person and your business plan going forward i.e. expansion, upgrades, etc... to your business!

[Blurock]

Riaan, I would say that it generally depends on your cash flow and the nature of your business. If excess debt is bad, it does not mean that excess cash is good. You do not want unutilised funds sitting in your account. What you want is access to cash or funding when you require it. Can you use the surplus cash to expand your business or put in another product range?

According to the text books, each firm has its own appropriate cash level, and companies ought to keep just enough cash to cover their interest, expenses and capital expenditures; plus they should hold a little bit more in case of emergencies. Current and quick ratios can help determine whether your company have enough coverage to meet near-term cash requirements.

Successful companies in the software, services and similar sectors do not have the same levels of spending required by capital-intensive companies. So their cash builds up.

By contrast, Capital-intensive firms find it much harder to maintain cash reserves. Companies with high capital expenditure, like steel makers, have to invest in equipment and inventory that must be regularly replaced. Companies in cyclical industries, like manufacturing, have to keep cash reserves to ride out cyclical downturns. These companies need to stockpile cash well in excess of what they need in the short term.
Sitting on cash can be an expensive luxury because of the opportunity cost, which amounts to the difference between the interest earned on holding cash and the company's cost of capital. If a company, say, can get 20% return on a new project or by expanding the business, it is a costly mistake to keep the cash in the bank. If the project's return is less than the company's cost of capital, the cash should be returned to shareholders.

Work out an appropriate cash level for your business by taking into account future cash flows, business cycles, capital expenditure, current and new liability payments and other cash needs.

[Dave A]

If the question is asked from the point of view of calculating distributable cash reserves for dividends, another factor to consider on top of those already raised by Blurock is the business' access to refinancing should the need arise.

[rfnel]

The business in question is primarily concerned customized development/consulting work, so our overheads are very low. We own very few assets, and our running expenses are limited to the bookkeeper's monthly fee. We can put some money towards expanding the company, but that will happen in manageable phases - we won't throw everything that we own into a new venture all at once.

The way I see it, the best thing to do is to sit down once a quarter do proper strategic planning and estimate our income and expenses for three months at a time. We can then leave whatever we need + 100% (for unforeseen expenses) in the account and pay the rest out as salaries. I agree with Blurock - I don't want an abundance of unused money sitting in the company account for no good reason.

@Dave; the question does relate to dividends and/or salaries to members. I'm hoping that we'll be able to plan well enough that there won't be major unforeseen expenses which will require that the business be refinanced. Thanks for pointing that out though - it is definitely something that we'll need a contingency plan for.

[Blurock]

Seems as if Riaan has a good grasp of what is required. Quarterly strategic planning is a very good idea.

You may also consider doing a proper risk audit and assess what may hit your business. Do you have insurance against a flood , fire or other perils? What about business continuity. If your business premises are destroyed, where would you work and how would you communicate with your clients? Do you need key man insurance? Do you have a buy and sell agreement?

You may not require any of this, but a backup plan is always a good idea.

Good luck!

[wynn]

Quarterly is OK but I would say every two months to coincide with your VAT mini budget which happens every two months. so two or four month cycles?

[mother]

Riaan, also check with a Tax-expert (I am absolutely NOT one), but I'm sure there are Tax implications as well when a business simply accumulates wealth, as opposed to using the money to do business. So don't hold back more than you need to.

[BusNavig8]

Taxation is as follows:

28% on Nett profit
SBC (small business corporations) - works in brackets = 0-59750 - no tax, 59751 -300k 10% on the amount above R59750 and over this threshold basically the corporate rate kicks in (28%)

Personal Service provider Companies - 33%

Turnover tax for micro business is also bracketed but I do not subscribe to this taxation at all and don't recommend it, and it does not fit into the scope of the commentry in any event.

For the commentry - really interesting commentry - We are involved in advising clients and feedback and do management reporting - incl cash flows on a monthly basis -some clients we do on a bi monthly basis to coincide with VAT. Strat planning is critical, as is the fine tuning are revising of the business model (not the business plan) in my view.