Working Capital in Your Business Pt. 2
If your income stopped coming in tomorrow would you be able to survive for a month? Would your bills go unpaid?
Take your expenses that are due in the first 10 days of the month and make sure you have that amount in your account at all times. If your business tanks for two weeks or there's a natural disaster, how nice would it be to already have the bills due on the 1st-10th already taken care of?
I find that if people are running into a negative situation with their bank account, their feelings of success begin to diminish. That feeling of not being successful leads clients I've worked with to begin to believe that they should no longer be in business. I have a client whose business was growing by 8% each year but because she had a negative balance during one particular hard time, she felt that maybe she should quit. She didn't know how to match her cash with her expenses and she therefore felt she should close her business.
Expenses are cyclical and a working capital cushion would fix the problem of not stressing out during the first 10 days of each month. When you aren't running in the red or bouncing checks, that makes you and your company better.
Protecting Your Working Capital
At the first of every month, before you write out checks to pay your bills, look at how much cash you have in your account and see if you've met your working capital cushion or if you're about to dip into it. Once you write all of your bills, on day 10 is your cushion still there?
I've seen people be tempted to spend their working capital once they have the relief of not being stressed by being in the red. But spending more means your working capital cushion will decrease and before you know it you'll be back in the feeling of being stressed and anxious by not having enough.
I want you to feel confident and get in the habit of protecting your cushion. Don't allow your perception of need to change when you look at your balance and see you have savings. Don't let your happiness cause you to spend and don't allow your expenses to rise and your perception of what your needs are, to change. The new bottom line is your new zero and that is the base at which you should operate every month. If your new zero is $2500, once you spend $1 and your account is at $2499 consider yourself in the red.
The working capital cushion helps move you out of a sense of crisis and into a sense of control. Being and feeling in control of your business is the best way to maintain your personal health as well as the health of your business.
The Cocky Factor
Financial advisors and your parents alike have told you to have three months worth of your core expenses saved in a savings account. The reason for those 3 months worth of savings is so that you don't get cocky. The anxiety that exists when you're below your 3-month core makes you feel like your business is slipping away. When you have the 3-month core you feel like there's nothing to be anxious about and you get cocky. The good part about that is when you have 3-months saved up you start looking for ways to improve, more freedom shows up, and you start looking at ways to grow your business or even take a vacation for yourself.