Building a “profit war chest” is just like riding a bike. A crucial step towards becoming a cash rich business
Most business owners agree that cash is the oxygen that keeps the heart of a commercial enterprise pumping. It doesn’t matter if we’re talking about trades, financial services or product sales and distribution, without a healthy cash flow, things start looking pretty sickly. So it’s always a good idea to build a cash reserve, an easily accessible emergency fund, a war chest. But the question is how?
This June 2nd and 15th, we’ll be conducting “Cash Rich Business” workshops aimed specifically at helping small business owners rid themselves of the anxiety and stress that comes with cash flow problems. During these workshops we directly address the topic of building your “profit war chest.” Something sturdy and reliable that will be there for you if unforeseen circumstances create a sudden need for cash.
Keep your eyes on the road and your finger on the pulse
At Inspire we believe that your finger must stay firmly on the pulse of your business’s critical numbers at all times. One of the reasons for this is that it will help you “pick a number” between 10 and 25. That number is the percentage of income that most businesses are able to claim as profit. What’s yours? Got it? Great, so after paying your regular outgoings, tax, salaries, paying down some debt and of course paying yourself, you’re ready to commit your agreed set percentage to your war chest.
But here’s where the riding a bike part comes in. We suggest starting off by committing an amount smaller than your target percentage to get started. Have you ever seen someone try to mount a bike that was already travelling at or near top speed? Disastrous, painful and ultimately you don’t end up getting anywhere (maybe the hospital). It’s best to start your contributions off at around 5% - see how the business reacts. Keep your finger on the pulse. Does the heart keep beating steadily when you up it to 10-15% a couple of months later? Is there a spike in blood pressure, sweaty palms, rapid breathing? Adjust accordingly, when you find equilibrium, stick with it.
By knowing your numbers and understanding what they are telling you about your business, you’ll be able to rest easier at night knowing that your war chest is there for you should the need arise.
How big is too big?
When it comes to war chests keep in mind what it’s there for. Its purpose will determine the amount you keep on hand. As a guide, understand that many crises can be safely navigated within a month or two. We recommend growing your war chest so that your business can comfortably stay afloat for three months. With three months’ worth of funds on hand, should major difficulties arise, you can work through your circumstances without dealing with the usual white hot panic.
Once your war chest funds exceed that three month funding level, you might consider distributing a dividend to say thanks and well done. Cash on hand for your business is one thing – and it’s an important thing. But as always, remember why you decided to own a business. It’s a vehicle to provide for your family and ensure you get to spend more valuable time enjoying life with them.
A cash rich business will get you there. Join us in June to learn more.