The Bottom Line series – 3. Benefits of becoming a Cash Rich Business
The benefits of becoming a Cash Rich Business:
1. The War Chest is a rainy day fund, a backup when storms hit but this fund is specifically for those really bad storms. It is not something to be accessed unless it is an emergency. When storms hit it can trigger a panic of trying to scrape together money that belongs to another important part of the business this is called stealing from Peter to pay Paul, which NEVER works out in the long run. This is why setting up a War Chest is so important so you have enough funds to go around!
2. You will adjust the spending and build a healthy business using the money leftover AFTER you withdraw the War Chest percentage.
3. The Cash Rich Business model is a simple monitoring system. Once you have an established habit of donating to the War Chest for a year or so, you can watch the trend of the Equity Distribution every quarter. If the 50% you take from the war chest every quarter is growing, so is your business. If the drawing is flat or going down. So is your business. You don’t need an Accountant to tell you that!
4. A company that shows a consistent profit, quarter after quarter is much more valuable to a prospective buyer since when you sell your company, that’s when you make some REAL money.
5. Being a Cash Rich Business is a great way to get access to major lending. The more you have in your War Chest, the more you have willing to lend. Good luck trying to get a bank line of credit if you have no War Chest. But as the reserves in the War Chest grow, the bank lines of credit will increase and so will others.
It’s simple, and it works.
Here are the steps to take -
Research financial trends to find out what industry leaders make as profits. Calculate industry profits as a percentage of revenue. e.g. I surveyed many Accounting firms and discovered that 30% is a healthy profit percentage and is achievable amongst the top performing companies in our industry.
30% is our target War Chest percentage.
That being said, 30% may be too much for a young business.
So initially, your company may be best served by having 5% of revenue going to the War Chest.
Then we might look at adjusting contributions to 8% in the following quarter. And 11% in the next, and so on.
Continue to ratchet up the War Chest deposits slowly, quarter by quarter until you are at the optimal amount determined by your research.
Establish your War Chest, so it’s not easy to transfer money out of your account. We recommend a separate account, with a separate bank to your usual operating account.
Most business owners have one account where everything goes in, and everything goes out. In this case, if too much goes out, and not enough comes in, you run out of money.
Immediately begin transferring your starting War Chest Percentage from your very next sale. And I do mean EVERY sale into your War Chest. It’s not about the money that goes there just yet; it’s about building the habit of paying your War Chest.
Use the remaining percentage of money to run your company and pay your salary. This way, you’re covered. We encourage you to celebrate and enjoy that money. Even if it’s just $50, you never have to feel guilty for spending it. The best part is, as you get better at putting money away, you get better at paying yourself!
Distribute 50% of the War Chest balance to equity owners on a quarterly basis and leave the remaining amount for back up.