Cash Reserves: This Could Kill Your Business
A few days ago I told you about my earliest work experiences, and how working alongside my dad gave me my first true taste of what hard work really is. (click here if you missed that blog)
When I initially started working for my dad, we were carrying drywall up flights of stairs together…but within a couple years, his business had grown to the point where he didn’t have to do the physical labor anymore. Instead of swinging a hammer, he managed the business, worked with clients, and spent a lot of time on marketing and sales. He had positioned himself as one of the best basement finishing contractors in the St. Louis area.
I continued to work for him when I came home from college in the summers. First as a trim carpenter, hanging doors and baseboard, and whatnot. Eventually, I began overseeing jobs and doing more management type work.
The business grew nicely into a seven figure operation. My Dad and I had even talked about me working full time in the family business when I got done with school. The future looked bright!
Until, the tech bubble stock market dip. That’s when work started to dry up.
Rainy Days Can Kill Your Business
Problem is, in the good times…business owners think the cash flow will continue forever. We feel like we’ve got it all figured out. King of the world!
We forget or don’t think it’s necessary to prepare for the worst, by building up a cash reserve.
I speak to business owners all the time that barely have enough money to meet payroll. They’re operating hand-to-mouth. Maybe it’s because they don’t understand their costs and margins, or because they simply don’t have enough work. Whatever the case, playing the “if we only had a few more clients” game is a recipe for disaster.
Many times, it’s simply poor planning. Spending too much money. The business version of “living beyond your means.” So let me put it really simply.
You can NEVER have enough cash reserves.
Unfortunately, the downturn was too much for my Dad’s business to withstand. The nest egg was nowhere close to enough to weather the storm. One day, while I was in his office, he asked me to help review the financials. We went over all of the payables, the receivables, and the sales outlook.
It was clear. The hole was too big. The doors had to be shut. And that was his last day in business.
Twice I’ve been a part of substantial businesses that met that fateful day. Both times, there was not enough cash to keep going.#Entrepreneurs, you can never have too much #CashReserve! Click To Tweet
Cash Reserves Done Right
If you want to have a lasting, sustainable business…you need to be consistently socking money away and building your war chest. But how much is too much, and when should you reinvest?
I’ve heard from some smart financial minds that you should have 3 months’ worth of operating expenses in cash reserves. Meaning, if you had no money coming in for 3 months, you would have enough in the bank to weather the storm. Once you get past the 3 month reserve, reinvest the surplus. Either back into the company, or in yourself (harvest for personal financial wealth). That’s a quick rule I’ve come to rely on.If you want a lasting, sustainable #business…you need to consistently put money in your #CashReserve Click To Tweet
In the case of my Dad’s company, the war chest wasn’t big enough. And the storm was too severe.
But there was a silver lining. I learned all about thinking “on the fly” and how to “figure it out” along the way. That adaptability is so important to an entrepreneur.
More on that in my next Journey post.
Want to learn how to use Caveman Psychology to grow your business?
It turns out that modern-day humans (like you and me) are actually wired in much the same way as our ancient ancestors….And you can use this to grow your business.
It’s the foundation for the LinkedIn playbook you’ll discover in my new book Connect.