Profits are meaningless without a cash reserve. From 23 years of personal experience and two very difficult periods of my life I want you to realize cash is king. It doesn’t matter if you make money in the next 90 days if you don’t have enough cash reserves to pay the bills from ongoing operations.
But is it stupid to benchmark profit without benchmarking cash flow?
Yes, it is. The most critical business indicator at this moment in time is the concept of ‘reserves.’ Reserves simply mean: How long will you last if you stopped working today?
Would you last three months?
Six months?
A year?
So this brings up a very pertinent question:
Do you know how long you can last without earning an income?
Do you even know how much you need to earn?
Most people don’t.
They pursue profits and revenues like androids.
They earn. They spend.
Never any talk of reserves.
And then a splendid year like 2009 rolls along.
Customers are few and far between. They are buying less.
Work slows down. And then comes to a grinding halt.
It’s time to dip into the reserves.
Get yourself trained and ready for 2010. How are you going to do that if you have no reserves? You’re wondering how to pay rent. How will you buy fresh inventory? You’re cutting back on everything in sight.
The real reason you got into business was to create more control over your life.
Not to earn endless amounts of money then blow it all. This is not meant to be painful. Remember the old English idiom, “A fool and his money are easily parted.”
It sure ain’t a fancy balance sheet with fancy gross revenue and handsome profits that keep you in business- it’s cash. After personally painful lessons, I’ve learned to help others learn from my mistakes. You should learn these lessons before you are forced too.
One of my favorite singer-song writers, Steve Earle, says, “I got a job but it ain’t nearly enough, a twenty thousand dollar pickup truck – belongs to me and the bank and some funny talkin’ man from Iran.” Let’s narrow the ownership pool.
