What can business owners learn from squirrels, mice and beavers? How about looking both ways before crossing the road! Or maybe knowing how to stay warm during long winter months? Probably the most important lesson we can learn from these animals is that if you want to survive, you have to plan ahead.
It’s easy to understand why mice and squirrels store up food for the winter, it’s their source of survival during a time when food is not readily available. And why don’t business owners build up a cash reserve to ensure their survival? Because they never think there is going to be a time when they will be out of cash!
There is an old adage, expect the unexpected. Sooner or later there will be a need for cash and planning ahead ensures you’re not caught in a painful situation.
So how do you go about calculating the amount of reserve you need? The most direct approach is to determine, on a monthly basis, the amount of your regular ongoing operating expenses. This should include payroll, rents, utilities, insurances, loan payments and any other regularly recurring monthly cost. Then take this amount and multiply by a minimum of three, preferably six, to determine the amount of reserve needed.
The best way we’ve found to build a cash reserve is by opening a corporate saving account. Then on a weekly, bi-monthly or monthly basis setup an automatic transfer from your checking into the saving account. This process is easy, consistent and happens automatically so you don’t have to think about it. Before you know it you have built up an appropriate cash reserve that not only provides an important safety net but also peace of mind should something happen.
Some of our clients keep their cash reserve in a money market account. When we do our cash flow forecast we exclude this amount from our planning. While the money market account provides little interest income, management views it as an important safety net should a cash shortage arise.
Squirrels, mice and beavers have the luxury of knowing that winter is coming and so they store up reserves to survive until spring. Unfortunately, most businesses don’t have the luxury of knowing when a cash shortage is coming and thus may not have the resources to survive. Take an important lesson from these furry friends and squirrel away some reserves!
Need Help?
Subscribe to our blog for more practical, small-business financial tips.
For more information please contact us at info@michiganCFO.com.