Just Fold It In

WHAT DOES THAT MEAN!??

The accounting equivalent for “just fold it in” is, “just set this aside”. Or maybe something using the word “allocate”.

We’ve covered recently how much to set aside and where to put it but when it comes to how, the actual plan and mechanisms for doing it, the advice starts to get hazy. We hear this all the time - ok but what does that mean? How do I actually DO that. And they often describe a conversation with their accountant, financial planner, older cousin, whatever, that goes very similar to this Schitt’s Creek scene.

So. How should you be setting money aside for reserves, for strategic spending, for taxes, for whatever. How does it actually work?

By now you should’ve spent some time figuring out the amount you need in your accounts and what types of accounts you need. And if you’re struggling with that reach out and we can help. Let’s cover next the protocol for setting money aside and funding these reserves.

How do you fold it in?

Buckets

Think of a series of buckets tipped slightly and hovering over each other. As the one at the top is filled, the excess starts pouring into the next one, and so forth down the line.

We go in terms of priorities down the line.

1. Operating Capital - Primary Checking

2. Operating Capital 2 - Secondary Checking

3. Savings Reserves - HYSA

4. Strategic Priorities - HYSA #2

5. Distributions

Let’s walk through this and assume you’ve decided you need 4 months of reserves on hand and you have a handful of short-term and long-term strategic investments you’d like to make.

Your business requires $20,000 / month to operate, and you’d like to invest about $30,000 in growth, product improvements, and infrastructure over the year.

Let’s set it up.

Operating Capital

Your top bucket is your operating capital. The money you need day in, day out, to run the business. Until that bucket is filled, we don’t move onto the next.

For Operating Capital I like to keep about 1.5 months of cash on hand. That’s enough to more than weather some lagging receivables, a slow month, an unexpected one-time expense, or a small emergency personal distribution.

I’d split this into two checking accounts with two different banks. Remember, on any given day weird stuff can happen. Put one month into your primary checking account and then half a month into a secondary backup checking account - or the equivalent of one payroll run. So if something happens Thursday afternoon before a payroll Friday and freezes your account, you don’t sweat it.

$20,000 or 1 month into Bank A Checking

$10,000 or .5 months (or 1 payroll) into Bank B Checking

$30,000 total saved

“But… I don’t have that yet, so… how do I GET there?”

If you only have $10k right now, that’s fine. This is process. As you make money each month, keep stashing it away here. Don’t worry about any of the other accounts or buckets until this one is funded. $1k at a time, $10k at a time, don’t stress it, just be disciplined and save each month.

“Dude, on any given day I have $4,000 or $40,000… so how do I know when I’ve got $10k?”

I gotcha. Sometimes it’s hard to know when you’ve hit that with your primary account because with money going in and out on any given day you’re either above or below that mark. And truth is, you might have to do a little math.

Basically, after your second payroll for a month runs, and you’ve paid that month’s bills, but BEFORE you count any money from the next month, that’s your number. Worst time to count it is first week of the month when you just got paid your monthly retainers but haven’t yet run any payroll. Do your best to figure out what you have after all the month’s expenses have gone out and only count receivables that are HIGHLY likely to arrive.

When you hit 1.5 months, that bucket starts overflowing and it’s time to start pouring some into the next bucket.

Emergency Savings Reserves

Ideally, this is a high-yield savings account (HYSA) that is liquid enough to make immediate transfers from. This is where you’ll keep the rest of your emergency reserves.

Your goal was 4 months and you have 1.5 so far. so you need 2.5 months of cash, or $50,000 in here.

As your Operating Account hits $35k, $40k, $50k, etc. you can start pulling money out and depositing it into your HYSA. At month end, you do your calculation, figure out you’ve got $42,000 in Op Checking, you can transfer $12,000 into your Savings Reserves.

$50,000 or 2.5 months of cash into Bank C High Yield Savings (or A or B, we just need minimum of 2 banks)

As long as your Op Checking Account is full, then all your profits from a month should go into that Strategic Reserve Savings Account. When that fills up you now have full funded emergency reserves. Congrats! Bask in the glow of your new found stability! You can now weather 80%+ of the bumps your business could face. When your brain invents horrible what-if’s at 3am you can smile and go back to sleep knowing you’re set! Oh the RUSH of conquering this milestone!

…ok probably not. But that’s how it should feel. It’s a big deal! Good for you!

But we’re not done yet.

Strategic Reserves

Growth requires capital. Product iterations, experimentation, and R&D requires capital. Hiring, investing in new tools, and building out infrastructure requires capital. So we need to set aside some funds for you to reinvest in the business.

Once those emergency reserves are funded, profits now flow into a third bucket - Strategic Reserves.

Now. Here’s where it can be squishy and that’s ok.

Of course you can set a number and fund that bucket same as the others until it’s funded and then spend it.

But often the timing doesn’t work that clean, opportunities come up, sometimes there isn’t a clear amount you need, so be prepared to be flexible.

Set a goal for how much you’d like to have, in our case $30,000, and follow the same protocol.

However, if things come up, opportunities arise I’m fine with using some emergency reserves for investment PROVIDED:

1. You are profitable. And really, if you’re not, reserves and strategic reserves are all the same - money to help you stay alive and/or grow into profitability.

2. The investments you’re planning to make have a relatively safe and short return on investment. Don’t take flyers with this money. You need this to come back.

If you don’t have specific things in mind, I’d suggest keeping some money around to experiment with, try things out, hire contractors to build something, bring in an agency to test a new channel, whatever. Limit the experiments to what you have set aside.

Distributions

Now the fun stuff. Once you’ve got these reserves funded, it’s time to start putting some of it into your pockets.

After, you have your working capital.

After you have your emergency reserves.

After you have reinvested into your growth, product, and margins.

Then you can start taking distributions home.

Now you may need to take distributions earlier to live off of. Sure. That’s fine. That’s more of a technicality since I’d treat that like payroll even if it comes through distributions. But once you’re more or less secure in your regular payroll and have these accounts funded, then the excess can start going home.

Timing and Refilling the Buckets

Couple of tactical questions.

When do you do this?

I’d put money away every month and take distributions at most quarterly. Preferably every 6 months so that you continue to live on an amount that doesn’t assume those distributions but can be putting some away personally more often than once a year.

How do I move the money around?

Within banks it’s pretty simple, you’re familiar with that. Between banks most of the new online banks will allow connecting accounts to move them within banks. You might have to set up an ACH transfer. And WORST case scenario go get a cashier’s check. But that really shouldn’t be necessary. Even distributions should be as simple as moving funds to a personal account. MAKE SURE THIS IS PROPERLY ACCOUNTED FOR THOUGH.

What happens if I need some of the funds?

This is where the bucket analogy helps out a lot. Let’s say you have your $30k in ops checking, $50k in emergency savings, and $10k in strategic priorities. You have an unexpected vendor bill for $10k. Or maybe a deal falls through and this month you have a $10k loss.

Your ops fund is now light.

Two options.

1. If it was an expense and you’re still profitable, you can just refill it with profits. Those profits just wouldn’t go into another account at the end of the month or go to distributions. They’d stay in your primary account.

2. If it was a loss or you’re concerned that bringing it back up with savings will take too long, then you backfill from the other accounts down the line. Move funds from your emergency or strategic reserves into your ops account. Then replenish that account with profits over time.

Just keep that picture of buckets in mind. If an account is light, money doesn’t flow out of it to anything down the chain until it’s replenished.

Hopefully that all makes sense. It won’t happen over night. This will take time. Which is why it’s important to have a plan and methodology that makes sense. Now you have a plan. You have intention.

And If it doesn’t make sense, or, if you want someone else to manage this and track your cash flow and reserves, reach out and I’m happy to help.

Best,

Chase “buckets” Spenst

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As you can tell, we love this stuff. And we’d love to work with you on it. Grab some time to talk with us about whatever is on your mind right now. Maybe keep it to just business stuff, but hey, if you want to talk about the state of the Dodgers pitching, your thoughts on Anora, or the latest episode of My First Million, sure, I’m down.