#197 Cash Flow Peace: Escape the 30-Day Stress Cycle

Learn the simplest way to stop living invoice to invoice and getting out of the 30 day panic cycle so many business owners find themselves stuck in so you can feel some peace around managing the cash flow in your business and also free up headspace to think about the future and not just about surviving this month.

Resources mentioned in this episode: Episode 193 - This Mistake Will Make You Hate Your Business

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Transcript

Today, I'm going to show you the simplest way to stop living invoice to invoice and getting out of the 30-day panic cycle that so many business owners find themselves stuck in so that you can feel some peace around managing the cash flow in your business and also free up some headspace to think about the future strategically rather than just thinking about surviving this month. Now, if you don't have a cash cushion between your business and life, things that could have been a minor inconvenience can very quickly turn into a full blown crisis. Things like clients that pay late, a computer that crashes, a labor strike that holds operations. When things go wrong, it seems like it all goes wrong at the same time because clearly Chaos has a group chat and they all coordinate to arrive at once. 

Now after taking control of my money, paying off our mortgage in less than five years, getting rid of all of our debt and also building up six month emergency funds for both my businesses as well as our personal expenses. I want to share with you what has worked for me but also for my clients so that you can get where you want to be financially faster and with less overwhelm. We're going to be covering the top three questions that my clients have around building an emergency fund or cash buffer as we will call it for your business. The first one is how much should I save?

Secondly, where should we keep it? And thirdly, what qualifies as an emergency? I'll tell you this, upgrading all the office chairs to Herman Miller because you have convinced yourself that better posture equals more profit is not an emergency. Now, there are two things that I know to be true. Firstly, cash is king. We all know that profits can be high, but if you don't have cash in your business, your business won't survive for long. Secondly, Murphy is alive and well. Now, if you're unfamiliar with Murphy's law, It states that anything that can go wrong will go wrong. The thing about Murphy is that he doesn't just visit. He land grabs the corner office, redecorates it and watches good girls all day while eating the snacks you got for the quarterly finance meeting. That's why you need to have a cash buffer to protect your business and your sanity. Without it, you will do dumb things from a place of urgency and panic like cashing out your retirement savings to pay for salaries, using your credit card again to buy stock and also laying awake at night making a list of pros and cons of getting a day job. There are so many things that we have no control over as business owners. We can't control when clients pay us. 

We can have 30 day terms with our clients, but that's not a guarantee that they are actually going to pay on time. You may even be in a position where your clients are on a 60 day account, but your suppliers expect payments in 30. So cash flow is always top of mind for us as business owners and also one of the biggest things that we constantly worry about. The one thing we do have control over is having a plan for the money that comes into the business and taking a portion of it to build a cash cushion. Like Frank Sonneberg says, "Save when you don't need it and it will be there for you when you do." So how much should you have in your business cash buffer? Well, ideally three to six months of operating expenses. Now you might have to pick yourself up off the floor because that might be a big number. Often even a month's operating expenses seems like a stretch. Never mind three to six, but we have to start somewhere. So start by saving one to two percent of your monthly revenue.

Remember, consistency is key here. This is all about building habits, healthy habits around money. So commit to saving that one to two percent every time money comes into your business. Set your sights on covering one month's expenses and then gradually build up to three to six months. It's important to note that we don't want to save more than we need. We don't want to hoard cash because there is a cost to holding cash and we want our money to ultimately work for us.

So where should you keep it? The answer is in a separate savings account in the business's name, ideally a high interest savings account. What's important here is that we want to keep it separate from the day-to-day operations or transactions, and also make sure that it's easy to access when we do need it, but not so easy that we'll dip into it without even realising it.

And then thirdly, what is an emergency? The good and the bad news is that you decide what it is. It's important to decide what an emergency is for your specific business in advance so that you're not making emotional decisions when you are faced with a certain challenge. Three questions that will help you to discern when to draw from your cash buffer fund or not is, is it unexpected? Is it necessary? Is it urgent?

When you draw from your buffer fund, remember that you have to top it back up again as soon as possible.

If you're constantly in a cash flow crunch because clients are paying you late, then head over to episode 193 of this podcast, (the link to the episode is in the show notes) and learn how to ditch the nightmare clients and attract more of the ones that you love working with and who also pay you on time. Thank you so much for tuning in this week. I will chat to you again next week.