The Cash Formula that Will Save You from Bad Decisions
Cash balance + Projected monthly collections − Monthly cash expenses = Growth decisions
This, my friends, is the single most important monthly calculation that you, as a qualified entrepreneur need when making decisions to spend money. With this data in hand, you simply can’t get sucked into a bad deal.
For Example…
If the new business you’re considering requires two new employees, and you can see that the expense will bring you to a negative cash position in six months or less, you now have some real data with which to ask yourself, is it worth it and can we fund it?
If you anticipate decreased collections for some reason, this formula will confirm that you can’t take on the additional expense. If you’re convinced that the new opportunity you’re considering is risky but important, you will be able to very quickly determine that the only way forward is via increased investment or an expanded line of credit—and the model will give you the lead time you need to pursue your options.
That’s exactly what happened in my business in 2004. In January of that year, I alerted my business partners that we would have to put more money into the business. Without the infusion, our growing company would burn through its cash before summer, I told them. Their response was less than enthusiastic until I showed them the facts.
The bank, on the other hand, was immediately receptive and very appreciative. Remember, bankers are conservative and want their money back. Not only did my detailed cash projections give them confidence in my ability to proactively run the business, but they also found it impressive that my partners and I believed enough in the company to reinvest from our personal funds.
When You Take Care of Your Cash, You’ll Be Taken Care of
I’m convinced that giving our lenders an increased level of comfort always pays dividends, and this episode certainly solidified the banking relationship for our company. The bank flexed for us whenever it could, and when we renewed our line of credit, it was on better terms.
Apply this formula to your business – doing so will give you an accurate view of your current and future cash health. Because remember, cash is king – you need it to be success. You want to grow? It takes cash. You want to hire people, open offices, add inventory, buy supplies, or pay rent? Everything you do requires cash. The fact is, lack of cash makes every top 5 or top 10 list of why small businesses fail. Year after year, even some of the most reputable and well-respected fast-growth companies fall victim to a crisis of liquidity. Don’t allow your business to fall victim to it – manage it and manage it well!
Learn more about this topic and get information on my book, The Second Decision.
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