76% of SMEs have limited or no cash reserves, with 15% having no reserves at all, leaving businesses vulnerable to unexpected disruptions or economic downturns.

‘Seven critical business risks New Zealand SME owners face’, Acclime New Zealand

News from the latest Acclime research reveals that 76% of small and medium-sized enterprises (SMEs) have limited or no cash reserves. That’s a concerning stat, especially when many Kiwi small businesses are facing such turbulent economic conditions.

Let’s take a look at what cash reserves are and why they’re an essential financial buffer.

1. What are cash reserves?

Cash reserves are the funds you set aside to cover your organisation’s cash runway. Think of it as the piggy bank you break open when cash is thin on the ground.

Usually, your cash reserves will be held in bank accounts or short-term deposits that are accessible instantly. In other words, this is money you can access when extra funds are needed to cover unexpected costs and emergency situations.

2. The necessity of having a financial buffer in tough times

In the current unstable conditions, a solid reserve covering three to six months of expenses is vital for absorbing margin-squeezing inflation spikes and rising operational costs.

Having this money in the bank allows you to withstand supply-chain disruptions and revenue dips without the need to take on high-interest emergency debt to keep the lights on.Helping you build reserves when cash is tight

When your finances are already feeling the squeeze, finding enough disposable revenue to funnel into cash reserves can be a challenge. The trick is to focus on small, disciplined structural changes, allowing you to gradually build up these reserves of cash.

Four simple ways to start adding to your reserves

• Get organised with chasing customer payments: Getting paid on time helps you drive the cashflow that’s needed to start moving funds into your reserves. Switch to 14-day payment terms, use automated reminders in software like Xero or MYOB, and offer enhanced payment options to encourage faster payment.

• Create a regular transfer into your reserve account: Set up an automatic daily or weekly transfer of just 1% to 2% of your daily sales into a reserve account. This amount is small enough not to disrupt operations, but large enough to gradually start building up your reserves over time giving you accessible funds as and when needed.

• Audit your non-essential expenses and subscriptions: Review your operational spending and software subscriptions to check for any non-essential costs that could be cut back. Cutting $200 a month in unnecessary spending gives you $2,400 a year to pay straight into your cash reserve safety buffer.

• Ring-fence your tax funds immediately: Treat your tax obligations as a non-negotiable expense. Use a separate tax account to ring-fence your GST and company tax funds the moment you receive the sales revenue, so you’re not borrowing from operational funds to pay these bills. This leaves enough cash available to build up your reserves.

Treating your cash reserve as a strategic asset rather than leftover profit is a solid move.

If you currently have limited or non-existent cash reserves in your organisation, come and talk to our team about setting up regular transfers into a separate cash reserve account.