The best rule is to know your buiness and do forecasts with a bunch of different senarios (delayed billing, delayed collections, etc.) and then ensure that you have some financing in place (i.e. line of credit) to cover the worst contingencies.

Planning for this with your bank ahead of time gives you more credibilty than if you run in at the last second with your hat in hand.

The next most important thing is to carefully manage growth. Don’t blow your wad chasing sales while ignoring cash flow and the bottom line.

Of course, this is directly related with your management style. You may decide to share the annual profit at the end of every year and of course this will avoid you to have a good cash in your bank account for rainy days.

In my opinion a small business or start-up shouldn’t distribute annual profit to partners for a few years at the beginning. In this way, in just 2 or 3 years, you can have a good cash in your bank account for rainy days. But I must admit, this is hard to achieve :)

I aim to get 3 months in the ‘just in case’ account but something always seems to stop it happening - equipment goes belly up, late-payers cause cash-flow angst, colour laser needs whole set of new toners etc.

‘hand to mouth’ is not a good basis for running a business but it’s what I’ve got used to dealing over the years. The ‘feast or famine’ nature of my workflow has been a significant factor in this.

I’m now at the stage where I want to bring in a junior to help grow the business, to do some of the ‘doing’ so I can work ‘on’ the business.

I’m doing the plan for the next few years where I hope to stabilise the workload - I building the plan on the basis of needing a consistent 3 month buffer. 12 months would be nice but in my experience, I just can’t see it as a realistic option.

Thinking this through that would be:

Small business with 3 employees (on a salary of £30,000? each) plus rent (£12,000?) plus business expenses (£25,000? pa) that’s £127,000 in the bank as a contingency - it would be nice if you could - but seems like an awful lot to me.

Are these the kind of figures people are looking at when they say they have a years money?

Looking at different company’s balance sheets I’d say many companies (of this kind of size) do not have anything like this “cash in hand” at the bank. In fact, from what I’ve seen the bigger companies seem to have less cash in the bank per employee head than smaller businesses.

I think this is a really interesting discussion and I agree that other useful ways of looking at it would be to say “we have 3 x our monthly business costs (including all salaries) on hand at the bank at any given time.”

Anyone else care to share an opinion?

If sales slow down and grind to a halt everything gets “restructured”. Look at Andersen and you’ll see, 90 days after the scandal they were gone.

When you dip below 6 months - it’s time to raise money - or re-think your business model.

Dave

But if you are selling a service or software and need to achieve the at least same revenue every month, it will be wise to keep buffer period high.

Comments?