I want you to think about cash for a few minutes. I want you to know that it means you need to keep cash on hand so when the inevitable rainy day comes along you don’t run short on cash.
I’m a walking testament to learning about keeping powder dry the hard way. I learned that it’s easy to burn through all of the cash you have and when you really need it, no one wants to help.
Let’s start with my story.
For those of you who have been reading my blog posts for a while, this story will sound familiar. It starts with a young and arrogant brat (me) and ends with a much more subdued and humble (if that’s possible) business person.
You see when I was 24 years old I bought part of my fathers vending company from him. I was way more successful than I should have been and frankly most of my success was luck. Then as always my good luck went the other way.
My business was growing like crazy. In fact, it was growing way too fast. I was paying attention to all of the great profits my company was making. And then it happened, phone call after phone call came in wanting to know when my suppliers were going to be paid.
I was sure that we were doing great. I couldn’t believe that this was happening. After all, my financial statements showed that I was making tons of money. How come I didn’t have cash to pay my bills?
That’s when I learned there’s a big difference between creating excess cash and making a profit.
In a private business it’s always about the cash.
I got confused. I thought that because I was profitable everything was great. I learned a hard lesson and learned it very quickly. It’s not about how much your P&L says you’re making. If you own a private business it really matters how much cash you have in your checking account.
My father used to call this checkbook accounting. He believed that if the cash balance was growing in your checkbook things must be going pretty well. I learned that in most cases he was right and that was my first big lesson. It’s not about your top line (sales), it’s about the cash you have on hand and if it’s growing or shrinking.
If you ignore this fact, you do so at your peril.
We’re all one phone call away from disaster.
My friend Rob Slee loves to use this line. And, it’s true. We are all really one phone call from disaster.
In the case of this blog post we’re talking about cash in your business. At the same time I could be talking with you about your health or a really big problem that happens with your family.
I’ve learned to love scenario planning. This is where I put together three or four different ways ideas of mine can play out. I want to know what happens if I’m really wrong and whether I can afford to take the risk I’m thinking about.
If I can’t figure out where the cash is going to come from, it’s time for me to tone down my ideas. You’re going to find that the best business people never really bet the store. It just looks like they do. Successful business people never forget that running out of cash is one the biggest sins you can make as a business owner. And it’s one that can force you out of your business.
When you’re short on cash you make really bad decisions.
You don’t want to always chase your tail. When you run out of cash you are forced to make decisions you might regret later. When you run out of cash you’re forced to stop following through on promises you have made.
When you’re under pressure you make bad decisions. Your IQ drops and you just don’t think about things the same way as when you’re flush with cash.
When you run short on cash it’s just too easy to put yourself and your business in a position that you might not be able to recover from. I think it’s why the vast majority of new businesses don’t make it past five years. New business owners don’t understand cash management and that lack of knowledge can prematurely end their business.
Don’t let this happen to you.
You want to be able to take advantage of opportunities.
We all have a certain amount of good and bad luck. When good luck comes you way you want to be able to take advantage of it.
If you’re short on cash and can’t find a place to raise more you’re going to have to just sit on the sidelines and watch that great idea go by without you taking any action. It’s that missed opportunity that could be the difference between hitting a home run and just having a business that scrapes by.
Which position do you want to be in? For me, I love it when I can take advantage of a great opportunity when it presents itself to me.
I bet you really want to be able to sleep at night.
This was the really big one for me. Once I stopped focusing on top line growth and started to focus on cash I also started sleeping better.
I no longer wait for the other shoe to drop. I put some reserves put away for a rainy day.
You might ask how much you want to have in reserve. In my opinion it’s somewhere between six months and a year of operating expenses. When you have this much cash on hand, you have time to make adjustments if that phone call actually comes.
Then instead of it being a total disaster, that phone call becomes an inconvenience. For me, that’s a much better place to be.
What about you? What do you think about keeping enough cash around? Why don’t send me an email and let me know.