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Earlier this week, I saw a video where a centimillionaire said that he keeps 6-years worth of cash on hand but he advises others to keep at least 2-years of cash reserves. Other genius entrepreneurs would say 6-months to 1-year of reserves. With all the opinions out there, who should we listen to?
Given there are so many successful business-people with differing opinions on how much cash to have available, the only answer that I feel is correct is, as much cash on hand as it takes to get you through whatever squeeze you don’t see coming down the pipe.
Another 2020 shutdown may not happen again for the next 100 years, but if I’m wrong and the government shuts down your non-essential (whatever that means) business again, you will want to be sitting on enough cash that allows your business to survive.
The advice that I’ve received and believed for some time now is that my cash shouldn’t just be sitting in my bank account, but I should put it to work. I still believe that. I also experienced three very uncomfortable financial scenarios last year that I had not planned for and the stress that I felt as I looked at my dwindling reserves made me realize I was working my cash a bit too hard.
In times of economic cooling, the businesses that double down on their growth activities inevitably come out better and stronger on the other side. How? They have the cash to be able to do so. But survival for most businesses in a cooling economy means they have to make significant cuts to their growth activities. They cut their marketing, their advertising, their workforce, and ultimately, even with those cuts, many businesses still run out of cash. For the ones that barely survive and make it through those squeezes, they’re in desperate need of recovery on the other end, so they often turn to credit. While debt isn’t always bad, relying on debt for my survival doesn’t allow me to sleep very well at night.
From 2020-’22, my practice exploded with growth. There was stimulus money flying around, there were people who took the plunge and started that business they’d only ever thought about up to that point, so I easily got a lot of new business during those years. Then in ‘23, the market pulled way back and our new growth flatlined. The things we had been doing to gain new clients were suddenly and dramatically no longer working. Government stimulus money started to run out. Many newer businesses didn’t know how to sustain their cash flow, so many have since gone out of business.
The effects of a cooling economy are not immediately visible. Most of the time, you don’t see the bleeding right away, which brings us to 2024. The bleeding has begun. Stimulus money has dried up. The IRS just hired 88,000 new agents who’ve been mandated by crazy Uncle Sam to raise revenue. On top of that, they’ve rolled out the Corporate Transparency Act which is going to be a nightmare for owners to deal with (DYK - the CTA allows low level bank tellers to freeze your account for any reason!).
Now more than ever it’s important to have cash. I’m not going to tell you how much to keep on hand. I like the 1-2 year reserves on hand rule. Perhaps you’re so confident in your sales process that you feel comfortable with 6-months on hand. One way I think of it is, if I had had 1-year of reserves on hand during 2023, I would’ve slept much better all last year.
So, here are my two rules (for myself) when it comes to cash on hand:
For me, that’s at least 1-year of cash reserves on hand. Now, I’m not saying your cash should just be sitting in a 0% interest bank account. It should at least be earning some interest. The idea is that you can quickly access those funds within a few days to be able to counteract the unpredictable without losing sleep!
I hope this helps.
- Speakeasy Bookkeeping