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Gene (00:02):

Hey everybody. This is Gene Marks. And welcome to this week’s episode of The Hartford Small Biz Ahead. Today I wanna talk about cash, just for a few minutes. The question I want to answer is a question that I get from a lot of my clients. A lot of my readers, a lot of people in the small business community is exactly “how much cash should you actually have in the bank?” How much cash do you have available? Like what, what’s the right number?” I mean, if you ask any small business owner, we’ll tell you that having plenty of cash in the bank is probably the most important indicator of our financial health, but unfortunately managing cash flow, that continues to be one of the biggest issues we face. Almost two thirds of small business owners are regularly stressed or have anxiety to cash flow concerns.

Gene (00:46):

According to a recent survey that was done of more than 500 entrepreneurs from the Small Business Lender Kabbage. More than a quarter of them said they have gone as much as six months without receiving a paycheck. I mean, obviously cash is a big headache for us and it’s a big stress to us. Six months, of course, without a paycheck seems pretty bad to me. And the question is, “does it really have to be that way?” The answer is, “of course not.” Now most businesses today, we are benefiting from a recovering economy, which is good news, small business sentiments. According to the National Federation of Independent Business’ is still at a pretty strong level. But we all know as we learn from COVID, that things can turn south pretty quickly.

Gene (01:28):

And we are dealing with things like high prices and labor shortages as well. I mean, even the most profitable business can still be short of cash. If you and as an owner are not paying attention, which is why it’s important for you as a small owner to target a minimum cash reserve to keep on hand and manage your expenditures around running your business. I mean doing so would go a long way towards helping both you and me decide whether or not we’re able to afford that next employee or make that capital investment or commit to a large inventory purchase. So the question is like “what’s the magic number,” “What is that cash that we should have available?” “What is the amount that we should have in reserve?” Well, I’ve spoken to lots of different experts about this, and of course, in my own humble way, I’ve got a lot of experience with this.

Gene (02:17):

And here’s what most people think. Accountants, attorneys, business advisors, most people I talk to believe that a business should maintain cash reserves to cover operations over a three to six month period. That’s just a general rule of thumb. Now, remember, every small business is unique, your own cash flow needs based on your operational model. Your business cycles may be unique, but a rule of thumb should be that you have cash on hand or cash available for three to six months. Now, listen, when we talk about unique needs, okay, maybe you’re a manufacturer that buys materials at specific times during the year, or maybe you run a retail business that makes most of your money during the holidays, or you run a restaurant. You are in a vacation area where your business times are during the summer, or maybe you’re simply like a personal trainer that, you collect your fees upfront for a service or a service firm.

Gene (03:11):

That you pay your people as much as 60 days before you get paid by your clients. But listen, the right amount of cash to leave on hand it’s different for every small business. It’s hard to come up with an amount that without first considering whether you’re a startup or a stabilized business or you’re subject to those industry needs and all of that. But the right reserve, be it three or six months of cash, depends on how much you spend now and what you plan on spending in the future. So that’s why it’s important to get a handle on your monthly expenses and prepare a forecast or a budget. Doing a forecast will tell you how much cash you need to be having on hand, at least for the next 60 to 90 days. And doing a forecast is not that tough to do.

Gene (03:57):

You can start by reviewing your revenues and expenses by month over the past 12 months. You can add in your cash balance today and then look to the future using what you know from the past, forecast your monthly overhead over the next 12 months with each month showing your available cash at the end. Now, listen, no one has a crystal ball. I get that. But think about putting together a forecast for your business. You know what your overhead is, you pretty much know what those monthly expenses are, your payroll, your internet, your rents, you know what that is. You should know what your margins are on your sale, and it doesn’t have to be exact, but maybe when you sell products or services, your margins are about 20%, 30%, 40%, whatever they may be. Choose a round number that you think is reasonable. The toughest thing for you to forecast of course, is your sales.

Gene (04:45):

What will your revenues be next month or the month after or the month after that? Well, there, you’ve got some information that you can rely on too. You’ve got historical data, you’ve got your pipeline. Maybe you’ve got a list of open quotes and proposals. You can talk to your sales people as well. You can make estimates based on what customers normally order. I think it’s pretty reasonable to assume that if you think about it long enough, you can come up with what your revenues are gonna be over the next 60 to 90 days. Take those revenues, take the margin out of them, take the overhead, your monthly overhead out of that margin. That’s gonna leave you with what your cash flow should be over the next 60 to 90 days. One final thing, though, you wanna add in any extraordinary payments that you need to make, maybe it’s a tax payment or some big equipment purchase that you’re making or a balloon payment for your debt.

Gene (05:36):

But the bottom line is that you forecast. And when you forecast ahead, you will get a better understanding of what your cash should be on hand to manage through the next 60 to 90 days. Always look forward. Now, I said earlier that you need to have, most experts say you should have three to six months worth of cash. I’m gonna give a little caveat to that as well. Yes, you should have about three to six months worth of cash. Most small business owners have a lot less, the average amount of cash on hand for a typical small business is about two months. It’s not enough, but you don’t necessarily have to have the cash in the bank. You need to have the cash available, which means you might have a line of credit available. You might have assets to cash reserves in your business.

Gene (06:21):

You might have your own savings that you can draw on if you need to, even a home equity loan, if need be. The bottom line is that if revenues fell off the cliff and you only had to pay your overhead, your operational expenses over the next three to four months, “What do you need to have on hand?” You should have at least available the cash that can see you through the next three to six months. That’s what I thought on cash. This is not a rainy day fund. This is like a critical benchmark for running your business. Now be aware having too much cash may mean you’re not making the best use of your capital, on available lines of credit. Or it may be providing you with a false sense of comfort, pull some cash out of your business, keep yourself lean and mean, put it away into savings or somewhere out of your eyesight.

Gene (07:08):

So you can operate your business as if you have a little bit less than you really need, cuz that will keep you on your toes. But then again, having two little cash can restrict your growth or create stress and ultimately cause you like so many business owners to potentially go without a paycheck. You certainly don’t want to be in that situation. The amount of cash in your bank account can have a big impact on your decisions. There’s no reason though why we should be making these decisions in the dark. Target three to six months, have that available cash there. That’s not only cash on hand, but lines of credit and other resources and forecast your next 90 days of operations. If you do that on a regular basis, you will find yourself becoming a lot more comfortable about the cash that you have on hand and what you’re really gonna need. Hope this information helps. Those are my thoughts on cashflow. My name is Gene Marks. If you want any more tips or tools or advice for running your business, please visit us at That’s also where you can pick up some of our other podcasts that I do with my friend, Jon Aidukonis. See you next week. We’ll be back with another tip and thoughts on what’s going on to help you run your business again. My name is Gene Marks. Take care.

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