How Much Cash Do You Need?

Reading Time: 2 minutes

By: Ruth King

 

It depends on your appetite for risk.

If you love risk and the thrill of skating on the edge, only have enough cash to pay your bills and squeak by with payroll each week. Generally this cash is in your operating account and there is zero, or close to zero, in a savings account.

If you are risk averse and take no risks at all with your business, then you probably have at least a year’s worth (or two) of operating expenses in a savings account (either in the business or personally) at all times.

What’s a good middle ground?

  1. Determine your payroll expense for the busiest month of the year. Then multiply this number by three.
  2. Determine your overhead expense for the busiest month of the year. Then multiply this number by six.
  3. Add the two numbers together.

The addition of the two numbers is a “middle ground” of the cash to be stored in a savings account.

Some of you already have this amount saved.  If you don’t and what to use this cash formula, then one of your goals for 2022 would be savings to this level.

How do you do it?

  1. Save 1% to 2% of every dollar that comes in the door. If you get payments of $10,000 put $200 in the savings account.  You still have $9.800 to operate on.  The small amounts add up quickly.
  2. Put all of your recurring revenue money received (or all of the renewal money received) in a savings account.

The fastest I’ve ever seen a savings account built on recurring revenue savings is $1.7 million dollars in 5 years.  It can be done with focus and growth of maintenance.

Determine the amount of cash savings you want and put it away!  You’ll have less money stress knowing that if an emergency arises you have the cash to take care of it.

 

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