The thing is that bad stuff happens, and will happen to all of us at some point. The difference will be how we’re able to deal with it. When there’s no spare cash it tends to be panic, knee jerk reactions and swerving way off the plan or strategy.
These are things I’ve seen happen recently to great businesses:
- The senior management team and main fee earners walked out to set up in competition.
- A large contract was cancelled by the customer days before it was due to start, leaving a huge hole in the finances.
- Changes in government legislation putting back decision on sales that were about to land.
- Sales staff just not hitting their targets and having to re-recruit.
- Long term illness of a director
- Losing a key customer
- Significant changes to the market making the business model unviable
- Sales falling off a cliff
In three of these cases, we’d helped the client to build up enough spare cash that they didn’t need to panic. They could take time to calmly think through what they needed to do next, and knowing whatever happened they had a few months breathing space before cash would tighten up.
So how much cash is enough?
Well this depends on just how volatile your business is, and what is the worst thing that could happen. Also on your attitude to risk and comfort. We recommend at least 2-3 months of overheads – so you’d be able to pay the staff, yourself and all the bills for 2-3 months even if you had no sales at all. Personally I like to have 6 months money. This lets me sleep at night and know I can pursue long term strategies without needing to panic and abandon my plans just because something isn’t working out just now.
Work out what this figure is, and then get a plan to put that money away in a separate account. It might take you a year to build your buffer up, but that time will pass anyway and won’t it be great when you’ve got that security?
What if I could use that money to grow the business (or spend on myself)?
If you keep growing without a cash buffer, you’re just increasing the risk of your business not being able to cope when the inevitable happens. Because something will happen one day. You might love risk and living on the edge, in which case go for it. But if you really value your business and want it to be around long term, then just grow more slowly and get the cash put away that could help your business to survive just when you need it most.