A cash reserve for a business is what a personal savings account is for an individual:  a pool of savings to draw on when unexpected financial issues arise. A cash reserve can be the difference between going out of business and growing profitably. Our 20+ years of experience has shown that nearly every case of a trucking company having to shut their doors is due to either a lack of cash or poor accounting practices. We have discussed the latter in another insight here. So, for this insight, we will illuminate the importance of a cash reserve as a mechanism for cash account stability.

How to Build a Cash Reserve

How do carriers begin to add cash reserve protections to their accounts? Our most popular way is by having a small percentage of each invoice set aside in the funding phase. For our purposes here, we will say a carrier has a 5% cash reserve. Simply put, this 5% reserve is $5 out of every $100 set aside to draw on at a later point. For every $1000 that is $50 set aside, et cetera. It adds up quickly with regular invoicing and builds a powerful shield against unexpected expenses like emergency repairs, surprise damages, overages or shortages on weight dependent loads, a lost lumper receipt, or that detention you were promised which the customer denied.

How Cash Reserves Can Improve Reinvestment

Cash reserves also improve reinvestment. Reserve accounts are very flexible but less available than something like an ATM, which we all know can be easily accessed (and drained) for personal expenses. The action of having cash set aside automatically within a factoring reserve account has the effect of earmarking that money for business-related operations or reinvestment of capital into improvements. It is possible to withdraw for non-business expenses, but the owner has to grapple with the fact that they are removing capital, and in-turn financial protection, from their business. Current market situations have demonstrated exactly how crucial that protection is to keep in place and how essential reinvestment is for overall stability. A cash reserve account encourages businesses to do both.

How to Withdraw, and When to Hold

Regardless of its necessity, cash reserves typically do not need to grow infinitely. Some carriers build these funds to thousands of dollars, while others prefer to operate with a 1st and 15th disbursement. These twice a month cash injections help improve daily operations. However, if at any time there is suspicion that additional ill-timed expenses (right before payroll or an insurance payment) are coming down the line, the 1st and the 15th disbursements can be skipped temporarily to shore up against that incoming blow to cash flow. The amount of relief this protection provides is invaluable and we have seen it save numerous carriers from painful and potentially disastrous strains on their cash flow.

In Summary

Cash reserve is an incredibly powerful tool of stability when working in tandem with the predictable cash flow of factoring. It provides a rock-solid cash on hand foundation for a business to operate. We recommend it for all our customers. Just another cost-free value-added service to help improve and stabilize daily operations for our successful clients! Learn about other CarrierNet Solutions here.

About the Author: Devin Kirschman

Vice President at CarrierNet

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