Cash Flow Contingency Plans: Protecting Your Business Against the Unknown
Jul 03, 2024A few weeks back I wrote about what might give you anxiety even if your business is successful. Not knowing or fully understanding what’s driving your success is definitely one option. Another is the lack of preparation for the unforeseen challenges that might arise. Simply put, if something bad happened in your business how would you weather it?
The list of things that can derail your business is long and distinguished, so let’s focus specifically on anything that affects your income. What if all your customers start paying you after 60 days instead of 30? Can you float the expenses an additional month? What if Google changes their algorithm yet again and your customer flow turns into a trickle? Can you keep the business afloat while you adapt to the change?
If your business is entirely dependent on Google’s algorithm you’ve likely got contingency plans in place for this sort of thing, but what I want to talk about is the idea of a safety fund, an emergency fund, or just savings within your business.
The same as with personal finance, if you’re living check to check it doesn’t take much for the bottom to fall out of a workable situation. A couple weeks back I was on a podcast with Dave Toole on Shop Talk Live, and Dave talked briefly about this and how he’s built up his own savings to allow him to grow and expand.
Any business needs to manage its cash flows to be sustainable. It doesn’t matter if you made a million dollars if you only have $13.76 in the bank when it’s time to pay all of your bills. So where this leads us then is back to familiar territory: We need to understand our company and its finances.
How much cash do we need on hand at any given point in time? Beyond that amount, if you’re successful, there is likely money left over each month. Maybe you’re pulling that amount as income, maybe you’re distributing it to your employees, maybe you’re reinvesting in the business and growing your capacity.
Wherever it’s going, whatever you’re doing with it, you should be setting something aside to build a runway for when bad things happen to good people (you). There’s no magic number, or if there is I’m not going to give it to you here. I’m not an accountant, or a financial planner. But have a conversation with your accountant or your financial planner, look at your business, at your tolerance for risk, and create a goal for yourself.
Maybe you want to have a 6 month runway. Unless you’re wildly successful you probably can’t create that for yourself in a day, but what you can do is put something away each month until you’re there. Slowly build up your savings until you’ve got a comfortable cushion to soften whatever blows might come your way.
Imagine the peace of mind you will have when you confidently know what your costs look like throughout the year, and you know you can have zero income for 6 months and the business will be fine.
Honestly, this is how I help business owners. We Explore your business. Develop plans for the future. Execute on those plans. It’s simple, but incredibly effective.
The first step is always knowledge and awareness. Reach out if you want some help, even if it's just with exploring and learning.
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