to buiI don’t want to save money and then spend the financial nest egg to get through our slow months. Every year it feels like we give back all our profits when it gets quiet. Help!
THOUGHTS OF THE DAY: Saving a financial nest egg is essential. So is fiscal discipline. Know what you can and cannot afford to do. As the business grows, be careful not to increase volatility. Consider getting into the complementary business.
A nest egg is a long term strategy
Without enough savings to fall back on, time gets wasted managing cash flow. Vendor relationships fall apart when bills are past due. Discounts are lost. Customers catch on and look for other options. Employees find out and get nervous. Missed marketing opportunities put more pressure on sales. The list goes on.
Having three to six months of operating revenue in cash, in the bank and readily accessible is just plain smart. Most businesses aren’t even close to that number. Why so much? Multiple things can go wrong at once. You run out of the juggling room. And then the business closes its doors.
Take a hard look at why the business is or could be short on cash. Spending more than you make is a bad idea. Is overhead productive? Can the cost of goods sold go lower? Will customers pay more?
In today’s service-oriented economy, most businesses’ biggest expense is payroll. Admit when you don’t have enough work or when you don’t need everyone. Use layoffs. Mandate vacations during slow times. Use vacation blackouts when all hands are needed on deck to maximize revenue.
A margin of safety
Look at turnover; it’s costly to ramp up people and then let them go, only to train someone else later. Good employees will look for opportunities to be busy all the time. Encourage people to pitch in and learn additional tasks.
Consider how much goes into training. Get more efficient and trainees can produce revenue sooner. Automate and standardize training to ensure all bases are covered. Set up tests to know if people are catching on. Track and eliminate mistakes.
Think in terms of budgets, breakeven, forecasts, return on investment, and profit margin. Work the problem to build a financial nest egg.
Know how much you have to pay in principal on loans, what’s in accounts payable, how much to put into reserves and how much to set aside for future expenses. These things show up on the balance sheet, not the profit and loss statement and they’re easy to forget.
Negotiate every expense. Cut corners in one area to free up funds elsewhere. Have a priority spending list. Don’t waste time on diversions.
An insurance policy against setbacks
If you can’t afford to do something, have the discipline to wait until you can afford it. Team up with someone else and share resources. Learn to do more and bring things in-house, or cut people loose and farm things out. Get creative.
Whatever you do, don’t overspend. If you spend money as fast as it comes in, put someone else in charge of putting money away.
Additional profitable revenue can solve a lot of problems. Look carefully at the margin on every customer and every project. Deliver only what the customer will pay for. Free up time and energy by walking away from high-demand/low-profit customers. Figure out what makes a profitable customer. Then go get more of them.
Look at the peaks and valleys in revenue. You may be losing money trying to keep everything intact while you jump from one peak to the next. It may seem counterintuitive. Turning away revenue in peak work periods can make a business more profitable. Profitable builds the financial nest egg.
Make a list of other services or products to offer. Buy, instead of bootstrapping growth — that usually has a faster impact on revenue and profits. A seller with limited options will often settle for payments over time in order to make more on the sale.
Looking for a good book? Try “The Small Business Savings Plan: 101 Tactics for Controlling Costs and Boosting the Bottom Line” by Timothy R. Gase.
