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Build cash reserves to prevent “Owner’s Nights”
April 14, 2008 | By Neil Ducoff | No Comments
I was 23 when I opened my first business. As I did my research, I kept coming across this one simple statement: “You should keep at least three- to four-months of operating cash in reserve.” As a young entrepreneur, I can’t tell you how many times I thought this cash reserve recommendation was totally absurd. Three- to four-months of cash in reserve – yeah right. But, deep down I knew it was not only dead-on right, it was an etched-in-stone business non-negotiable. It took a couple of tough lessons to learn that you just can’t grow a sustainable and enduring company if its fuel warning light is always on. Cash is the fuel of business.
FACT: Financial stress can wreck you because it keeps you in a constant state of intense worry and high anxiety. How am I going to pay the bills that are due next week? Will I have money to do payroll on Thursday? Where will the money come from if it’s not in the checkbook? How will I ever pay off all those credit cards that I’ve maxed out? I made more money as an employee. How much longer can I work like this? If you’re asking yourself any of these questions, there’s a darn good chance that you’re not sleeping good at night. I call them owner’s nights.
Here are some red-hot strategies to build cash reserves and stop your owner’s nights:
- Confront your financial reality: It’s one thing to experience an occasional bind. It’s another to live in a perpetual cash crisis day in and day out. It’s time to pull your head out of the clouds and look in the mirror. Yup… there’s the culprit. It’s your spending and your business decisions that keep you in a cash crisis. You need to change first.
- Build a roadmap to daylight: You’re kidding yourself if you think working harder and bringing in more cash will fix the problem. You must get a handle on exactly how big your problem is and isolate those areas that need to be fixed first. To do this you must create a 12-month cash-flow plan that projects potential revenues to strive for and a budget you will live by. Don’t know how? Call us.
- Make the tough decisions: A cash crisis doesn’t go away by tip-toeing around the elephant in your living room, or by watching “The Secret” every night hoping the law of attraction will bring you prosperity. Get out the meat cleaver and cut expenses that are nice-to-haves – not gotta-haves. And stop looking at that 55% – 65% payroll cost and do something about it. It’s killing your business. Strategies can help you.
- Stop dragging yesterday’s bad decisions: Your business can’t gain speed dragging along yesterday’s debt. Your cash-flow plan must have a credit card and debt reduction plan built in to methodically pay down debt.
- Build your “sleep good at night” account: This isn’t rocket science. Commit to putting at least 5% of total revenues into a cash reserve account every week. Pay the reserve account first. If you can’t put 5% in one week, than put 2% or 3% in. Just put something into the account. View your cash reserve account as a sacred trust that is not to be touched.
I’ve seen it time and time again. A business that operates in a constant state of insolvency continues to make bad decisions out of desperation because the owner is in survival mode. Likewise, a business with cash reserves makes better decisions because they’re made from a position of confidence and financial strength. Three- to four-months operating cash in reserve. That’s sleep good at night money. I sleep good at night. Do you?
Pass this email on to your business colleagues, managers and friends They’ll appreciate it.
Neil Ducoff, Strategies Founder & CEO and author of No-Compromise Leadership
Categories: Monday Morning Wake-Up