As a business owner, you’ve heard “cash is king.” And the truth is, it is. Besides the cash that keeps your business operating every day, you need to prepare for extra cash needs you and your business have.
To start, let’s clear up the confusion between profit and cash. Profit isn’t cash you can spend. Too many times when I talk with business owners, they tell me about all the money they make, and then they start telling me about some new toys they want to buy.
I bet that most of you don’t want to take your profits and blow them. Having cash isn’t just about paying your bills or buying new stuff. It’s also about living a financially protected life now and in the future. Keeping enough cash to take care of these items helps you sleep better at night.
1. Lean times. There’s always a disaster around the corner. If your business is doing well, that’s great. But if you are in business for a while, you know that good times don’t last forever.
You need a disaster fund for your personal expenses as well as business ones. During a downturn in the economy (which is a question of when, not if), you’ll be glad you put away some cash.
2. Retirement. Every time I hear people say they’ll retire on the proceeds from the sale of their business, I want to scream: “Are you crazy?” I can tell you that very few business owners can do that. The rest of us have to make sure we save on a regular basis.
Take some of your profit and put it away so that you can afford to retire. This gives you the choice on when it’s time to leave. Isn’t that something you want?
3. Cash flow hiccups. For example, an accident or illness can keep you out of work for a long time. I know this one from firsthand experience. When I went through my cancer treatments, I was lucky I had a cash cushion. As much as I wanted to work, it took me over two years before I was even close to being able to come back.
4. Business growth. If you think you can get all the cash you need from your bank to grow your business, think again. It is going to want you to come up with a significant amount of cash from alternative sources. Your bank is probably willing to be your partner, but not the only one providing the money.
All of these extra cash needs add up. Do yourself a favor. Take a few minutes to write them down and save for them. It’s a giant step toward living a life that is financially secured.
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Josh Patrick is a founding principal of Stage 2 Planning Partners in South Burlington, Vt. He contributes to The New York Times You’re the Boss blog and works with owners of privately held businesses helping them create business and personal value. You can learn more about his Objective Review process at his website.
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