Hands down when starting and growing your business, cold, hard cash is your most important asset.
If there were an official pyramid of assets, cash would be its solid foundation. Without cash, there is nothing to hold up and protect you and your business. If you don’t maintain adequate cash reserves, you are going to feel the pain at some point.
I certainly did.
My Early Lesson in Cash Management
Fresh out of college and newly married, I accepted a commission in the US Navy as a young ensign in 1990. My wife, Shelly, and I just had our first child, Gretchen. Gretchen was just a couple of months old when my ship conducted a homeport change from Norfolk, Virginia to Charleston, South Carolina.
In standard Navy fashion, our upcoming deployment became the highest priority, despite all of the logistics associated with moving our family. So, instead of weighing anchor and just moving the ship down the coastline, we stayed at sea training for six weeks - while our families had to move on their own.
The move was brutally hard on Shelly - all alone, with an infant. To make matters worse, we didn’t get a single paycheck for those six weeks. There was a glitch in my payroll that only I could resolve, but I was at sea. This being 1990, well before email and cell phones, I wasn’t accessible to turn the payroll back on.
Shelly faced the impossible task of getting herself and our daughter into our new home on whatever cash was available in the bank account.
And that balance was low, to begin with.
Unbeknownst to me, my wife and my new baby slept in a sleeping bag on the floor for most of that six-week period. No furniture. No utilities. Shelly had just enough money to buy baby formula and peanut butter. What a nightmare!
That’s the moment when Shelly and I made our decision. We would build up and maintain at least 12 weeks’ worth of cash reserves at all times. No excuses!
Sage Advice from an Industry Veteran
A few years later, I remember driving to an early-morning event with my mentor, Noel Blaas. We were in his brand-new Range Rover. I, a young, green newbie, had just spilled an entire cup of Whataburger coffee all over myself…and his perforated leather seats. Noel just laughed it off in his good-natured fashion.
Noel was on top of his game. A successful career life insurance agent, he was well-known throughout the country for his consistent high level of production. Noel had already raised and educated his kids and was on the verge of retirement.
I, on the other hand, had just completed my second year in the industry. While I still had a lot to learn, I had some of my own award-winning production numbers that year. My success was finally giving me an opportunity to plan for the future.
And so, I asked Noel for some advice.
“Hey Noel, I’m saving a good amount this year toward my kid’s college funds and retirement. Is there anything else you think I should be doing?”
Noel replied in his usual plain, direct way, “Cash. Cold, hard cash. Without cash, your other assets are just hanging in the wind. Get your cash in line first, then start building from there.
At the time, his response surprised me. It didn’t fit with any of the sales training I had received. But fast-forward 30 years, and I still remember his answer word for word. And, more importantly, I now understand exactly what Noel was talking about!
A Cash Dashboard Built to Fight Insomnia
Since then, my career has taken me far away from where I was way back then. In 2014, I sold out of First Texas, a company I had helped establish in 2000, and started Schulz Wealth, the financial planning and asset management firm I still lead today. Due to my experiences, I knew right away that cash liquidity was going to be an important part of the new company’s success. So I built a dashboard to monitor our liquidity. Here is the graphic representation of the spreadsheet I religiously maintained for the first four years of our existence:
As you can clearly see, there are patterns and trends. Every company has its own unique patterns and trends, and if you track it this way, you can identify and forecast what may be coming your way. As your company grows and matures, a dashboard like this will become less necessary but in the early stages, it’s critical.
Having a handle on where you are with regard to cash will help you find ways to preserve it and hold onto it longer. For example, you can negotiate better terms with your suppliers and customers in order to smooth out your cash flows.
You should always be building a buffer of cash, especially if you are taking on large contracts. I had an electrical contractor client years ago who lost his business when a very large contract he completed didn’t pay fast enough to cover his labor and material expenses. You can avoid this through careful planning and forecasting.
Houston, We Have a Problem
As your company grows and you become more successful, a new problem will arise…..too much cash! How much is too much? It’s hard to say and depends on your unique cash flow situation. Over time, you will have enough data and a sound, accurate enough balance sheet to know what your working capital requirements are. There is a formula accountants use to calculate your working capital number and here it is:
Working Capital = Current Assets – Current Liabilities
Above and Beyond
If your cash is growing and growing, you will want to have your accountant calculate the working capital required for your operations. This will help you decide how much cash you can siphon off for other purposes, like investing back in your business or distributing out towards personal financial goals. Both are important, but they can only be done once you know you are maintaining adequate cash in the business.
The harder you work at smoothing out and managing your cash flows (I know, the graph of my cash flow is a terrible example!), the lower your working capital requirements will be. Why is this important? Because someday, you will want to transition out of your business, and you will be required to leave your working capital cash behind. The rest will be yours to keep!
Conclusion
I have one particular longtime client couple who founded and sold a successful HVAC business many years ago. Most of their long-term success is attributed not to their growth or even how much they sold their business for, but to their outstanding habits around cash. Every week, they made sure they had enough cash to easily meet their obligations. Every year, they took a reasonable amount of excess cash and reinvested it into their business and another reasonable amount and distributed it to themselves towards investments outside of their business.
Today, they hold assets and investments that will last for generations. A legacy of their hard work and habits. It all started with…Cold. Hard. CASH!
Until next time,
~ Rob Schulz, CFP
