Cash reserves in your business are what will not only keep you afloat but also ensure that you have what you need to prevent an inevitable crisis should…I don’t know, a pandemic hit.
It’s something we need to…we must talk about.
If you have a copy of “Fix This Next,” go to page 115 and read (or re-read) that section. In fact it is so powerful that I am going to include the first paragraph here:
“Desperate people do desperate things. This is not a position you want to be in. Cash will help you avoid it, and generally speaking, more cash will help you avoid it more. An adequate reserve of money enables you to navigate unforeseen circumstances with confidence. To allow business operations to continue unabated, or to take advantage of an unexpected opportunity, your business needs two to six months of your average monthly revenue reserved in a VAULT account.”
The last question on the Profit level of the Business Hierarchy of Needs is:
“Does the business have enough cash reserves to cover all expenses for three months or longer?”
Most businesses we start working with would have to answer “no,” even before the present crisis hit.
For many business owners, these are desperate times. And while we can’t change the past, we can learn some lessons in order to help us prepare better next time.
And keep the ensuing panic at bay a bit.
Trust us, there will be a next time. It may not be pandemic level, but even the normal business cycle can cause a cash crunch on our businesses. And we can’t and shouldn’t count on the government to bail us out every time.
The good news is implementing the Profit First cash management system systematically and reliably starts building this long term savings (VAULT) account, month-by-month, by creating the good cash habits your business needs. The initial goal is to be able to cover three months of Operating Expenses, and then three months of Sales Income, into that account.
You may be thinking “no way can I do that,” and frankly you need to check that thinking at the door. Instead, start thinking how life would be different if you had been working on this before 2020.
I’ll wait while you think that through.
It’s not all negative, either. Your VAULT account has two primary functions: to cover expenses in case of unexpected business disruption and to take advantage of an unexpected opportunity. Imagine having the amazing property you have had your eye on forever come up for sale cheap, and you could pay cash for it, or even just put a huge down payment on it. Or paying cash when a closing business has a fire sale on their equipment. It’s a great feeling and so worth the effort.
Now that we have had THIS talk, give me a call and let’s talk about how to set it up in your business. Click here to tell us a little about your business and schedule an appointment.