Managing Cash Reserves & Savings

Here’s a great way to grow fast.

Position yourself in a large market with intense and growing demand. The more hyped the better. Frothy. Bordering on scammy. Everyone wants a piece of it.

Now wait for a major market correction, huge economic slow down, or your every-day-run-of-the-mill bubble collapse. Watch it completely obliterate the industry and bankrupt dozens of your competitors.

Now, and this is the tricky part… don’t die.

Stay in business.

On the other side of this is probably still a big market and growing demand - not AS big, significantly less than it was, but… big enough? - and now there is 1/10th the competition.

Ta-daaaaaa!

This is not real advice. I mean, it could be, but it’s not GOOD advice. Lots of holes in it. But here’s the important part to take away: sometimes building a resilient business IS the thing. It’s not your brilliant sales funnel, your killer lead magnet, or your benchmark crushing copy. It’s just sticking around longer than anyone else.

Worked for Amazon. Worked for Google. Worked for a lot of companies that survived major industry declines.

I wouldn’t make it your ONLY strategy, but when it works, it really works.

Previously we talked about building a resilient banking stack and I used an example of ours where we were able to weather a pretty substantial temporary¹ loss of funds because we had multiple bank accounts. Well, the other half to that is you have to have money in those accounts.

I know, you’re shocked; well, that’s why you subscribe.

So today we’ll get into that. How much do you actually need and what are the protocols for moving it around?

How much should you keep on hand?

Here’s the short answer: most likely between 3 and 9 months of cash assuming that it’s unlikely you’d go to zero without warning. So 3-9 months might get you 6-12 months depending on how much of your monthly expenses you can offset with revenue. For example, if you spend $10,000 per month and you have $20,000 in the bank then revenue dropping to $5,000 per month gets you 4 months, not 2.

But we can do a bit better than that so let’s take a slightly more thoughtful approach.

Let’s tackle a couple of important questions:

1. How much do you need for 1 month?

2. How tolerant of risk are you?

3. How consistent and reliable is money coming in?

4. How fast and how far you can flex down expenses?

5. How quickly you can spin revenue back up?

Define “Month”…

First, what do we mean by and how do we calculate “months” of cash?

Easy answer? Take your last three months, average the total expenses, and there is your cost of 1 month.

To be more sophisticated about it:

• Look over 3-6 months of expenses laid out by month.

• Normalize the amount by removing one-time discretionary payments - things you don’t HAVE to spend on or could be spread out monthly.

• Remove or reduce expenses that if there was a big drop in revenue would fall as well - things like sub-contractors, bank fees, commissions on sales/referrals, etc.

• Get to a “lean” 3-6 month trend using actual numbers and average that out.

• Be aggressive but be realistic. You aren’t doing yourself any favors by being unrealistic… but remember the scenario in which this becomes relevant.

That is your minimum monthly expense number to keep the lights on and represents 1 month of cash.

We don’t want a fully loaded month’s costs because if you’re in a tight spot you’ll start cutting stuff and you won’t need as much variable costs since… you know… the lack of customers and work.

We also don’t want to get too nuts and end up with something like, “all I need is a laptop and wifi!”. Acknowledge if you’re in this situation you’re going to be making dramatic cuts but be realistic about what is needed to operate.

Be aware of how aggressive you were and let that factor in when figuring out how much you need in reserves.

How risk tolerant are you?

As you’re approaching this whole exercise, you need to consider, and be honest about, how risk adverse or tolerant you are.

Will it make you sleep better at night to have a bit extra? Will you be short with your staff and family if the pressure builds up?

Sometimes it’s as simple as acknowledging up front what level of risk you’ve prepared for so when it comes, even if it’s hard, you know you were intentional about it.

How consistent and reliable is money coming in?

That might sound like the same two things but they’re slightly different. Consistency is more about a known amount coming in frequently. Reliability is more about the trust you have that it will continue. Saas revenue may not be reliable because a user can cancel at any time, but it’s consistent because it’s spread across a lot of users, comes in monthly and is for the same amount each month. Event project management revenue might be wildly inconsistent but reliable because you have an annual contract to produce the next four years of events.

Point is, think about how consistent your cash flows are and how much trust you can have that they’ll happen again.

The factors to consider are:

• How concentrated are your clients? Is 80% wrapped up in 3 customers? Or is it spread out?

• How known and frequent does revenue come in? If you lose a customer will you know in 30 days? Or will it be a year from now when they decide to renew or not? If you sign a new client, do you know pretty accurately what the deal will be for or can the final deal amount swing dramatically?

• How much trust do you have customers will return? Are they under contract to do so?

If you’re on the more variable end, plan to be more conservative with reserves. If you’re more stable, then you can probably hold a little less knowing that if things change you’ll have time to make adjustments.

How fast can you flex expenses?

If you’re revenue changes either quickly or slowly, how fast can you respond with changes to expenses?

If you’re mostly using contractors on a project to project basis then if the work dries up, so do your costs. If you’re carrying a lot of office space and overhead, you need to make sure you can support it if business slows.

How quickly can you spin up more work?

I don’t see this one mentioned very often but it’s important. The consistency of your channels, the control you have over them, and the duration of your sales cycle should factor in here.

If you have a 6 month sales cycle for large projects, you’ll probably see a slow down in your pipeline coming early on giving you more time to respond… but it will also be harder to react quickly.

Businesses reliant on referrals and inbound traffic have less control should they need to boost business short term to make up for a large lost client.

Having a reliable outbound channel that you have more control over and a short sales cycle will help you be more responsive to changes. Being passive in your business development and requiring a long sales cycle will require more time to recover.

Think in terms of scenarios

Don’t just think about the numbers, imagine the scenarios that might happen. Think about what is most likely, what COULD happen, and then what is a one-in-a-million catastrophe.

Think through the most likely scenario and imagine what happens that causes a slow down - loss of a big client, a referral partner slowly sends you fewer and fewer introductions, an industry wide slow down puts pressure on your customers to tighten their belts.

Think through the possible but severe things that aren’t as likely but if they do, it’s a real problem.

And while I used to advise ignoring the black swan events because you can’t run a business bracing every month for catastrophe, those one-in-a-million events seem to be much more common. And these are the ones that if you survive, a big IF, you stand to be one of the few remaining when things come back.

Understand the likelihood and impact of these scenarios and how much time you’ll likely have to do something about it.

Then consider how quickly you can right-size to those changes. Would you see it three months out and be able to adapt in 30 days? Or will you see it suddenly and need 6 months to right size.

Lastly think about how much control you have to get it back. If you adapt in time, how long will you have to wait? How much control do you have?

Based on that thought experiment you should start to see a timeline emerge for how many months you’d need to ride it out.

Hopefully this is helpful. Regardless of how prepared you are, it’s always hard. This isn’t about avoiding pain. It’s about hanging in there and knowing the whole time you’re fighting that you’ve been intentional about this and you have a plan.

Appreciate you reading and as always, let me know if I can be of further help.

Best,

Chase “what if…” Spenst

Interested in working with us?

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.

¹ Still waiting on that check though…