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Merry Christmas to all. I have been off on vacation the last week enjoying a little R&R on the beach. Beach sitting is a good time to think. What I started thinking about was the tide and the natural cycles of things. The tide comes in and the tide goes out on a regular cycle. If you don’t know this, these boats look like they are in a lot of trouble. But they are just waiting for the tide to come back in.
There are many things in life that have such natural cycles. Your business probably has a natural cycle to it too. You probably have high tide and low tide for sales and cash flow. If you have been in business for a while you can probably identify those points. If you aren’t already in tune with it, look through your historical records to try and identify them.
Growing up on a farm, these things were pretty obvious. You planted in the spring and a lot of money went out. Then you wait for harvest before the money comes back in. Not all businesses have as much dramatic fluctuation as this so it may be a little harder for you to pinpoint your natural rhythm.
Knowing these historical high and low watermarks is valuable information in managing your cash flow. In the months that you have greater inflows you may feel like you have some extra money to reinvest in the business. But if you aren’t taking into account the low tide months, it is easy to over project how much of these funds are available for expansion. And in the low months it is easy to get discouraged if you don’t keep in mind that this is your natural low watermark. Again, on the farm, it is easy to know that the money that you take in at harvest can’t all be spent on new equipment. Spring will come again and you will need seed and fertilizer. So these funds need to stay in reserve until spring time comes.
Planning your cash reserves for this natural cycle will take some of the stress off when the low tide hits. This is why it is helpful to have a cash projection on a month to month basis. When you have a good cash flow projection you can start building your reserves. Take into account the highs and the lows as well as an emergency reserve of 3 to 6 months of expenses. Build this reserve before you add to your monthly commitments or use your cash for expansion.
To some, this may seem like an excessive amount of cash. Shouldn’t you be “putting that cash to work” for your business? Investing in the future? Yes, but you need to make sure that your immediate future is secure first before you move on to additional “investments”. What if the weather is bad this year and your yield is down. You will need that extra reserve to buy more seed the following year.
Lets look at another example. Say you are in the construction business. Sometimes you need to have a backhoe to complete your work. You have been renting the backhoe. After a while you start to think that you should “invest” in your own backhoe instead of paying someone else to rent it all the time. You have some available cash to make the down payment and you take out a loan for the rest…..then your business slows down……and you are stuck with the payment even when you have no income generated from the backhoe. If you used all of your reserve and added to your monthly commitments, a business slowdown can create some serious issues.
The other reason to keep cash is so you can take advantage of unexpected opportunities. Maybe your competitor is going out of business and selling his equipment at a deep discount. Maybe you want to experiment with a new product. If you have the cash, it will take some of the risk out of experimenting. Cash lets you take advantage of opportunities.
The absence of cash also changes how you run your business day to day. If you are always in panic mode about your cash position, it will seriously detract from focusing on your customers needs. You will be focused on your cash needs instead. You will have to be because once you run out of cash, it’s game over.
Are you prepared for low tide?
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