MBA2157 How Much Cash Should You Always Have in the Bank? + Free Ride Friday

Let me tell you about Intuit QuickBooks. When I was starting out my business, I remember sitting at my desk late at night not working on my business but cleaning up numbers, tracking and reconciling payments and wondering how this became my life. But once I automated the admin side of things of my finances, those nights had disappeared and I felt a whole lot better. Outdo it with intuit QuickBooks QuickBooks is the trusted end to end solution that businesses rely on for getting paid, managing finances, paying employees, finding new customers, and more. QuickBooks provides a team of AI agents and trusted experts, so doing it yourself no longer means doing it alone. Their payment agent gets you paid faster, their customer agent finds leads, follows up and secures more sales, and the accounting agent automates and categorizes transactions. Get your critical business jobs done with QuickBooks on the Intuit platform. Ready to save on new tech? It's time for Dell Tech Day's annual sales event celebrating our customers with fantastic deals and benefits provide. Perks include Dell rewards, free shipping, premium Support and more. PCs like the Dell 14 with Intel Core Ultra processors will help you do more faster and with a premium suite of monitors and accessories, you can upgrade your whole setup with amazing savings. Visit Dell.com deals. Hey oh welcome to the $1 RMBA Show. Business Advice you can count on every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of Webinar Ninja, an independent software company I started with my co founder back in 2014 and today's episode is Free Riot Friday. On Free Riot Fridays, we give away a lifetime membership to one of our programs. We're giving away easy course, our 30 day course on how to automate your leads and sales with automated webinars. It retails for $500 over@webinarninja.com Aw. Or you can win it for free. Just leave us an Apple podcast rating and review and you enter our weekly random draw we call Free Ride Friday. Listen in on Friday just like today to see if you won. We announce this week's winner a little bit later in the episode. In today's episode you will learn how much cash you always have in the bank for your business. This is often called Runway. What's your Runway for your business? What's your burn rate is another term for this. How much is comfortable? How much is too much cash in the bank and how do you work your way to the point where you have enough money in the bank. How do you set a goal and achieve it? So you do have that burn rate that you need for today's episode. In this topic we're going to focus on bootstrapped businesses, self funded businesses, not businesses with funding or investment. And I'll tell you why in today's episode. It's very important for you to have that liquidity, that cash in the bank to secure the future of your business. Things can change quickly, markets can change, economies can change and your cash flow can change to cause you to be in a pickle. So having the cash reserves in the bank is imperative to having a stable and long term business. So let's find out how much cash you should have in the bank for your business in today's episode. So let's get into it. Let's get down a bit. Business.

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Now the reason why today we're going to focus only on bootstrapped businesses is because if you're funded, if you have investors, running out of cash is not as dire of a situation. If you're bootstrapped. Why? Because if you're bootstrapped you don't have a bailout. You will close your doors. You will go out of business. If you run out of money with a venture backed or businesses that have investors, it's in their interest for you to keep on going so they can get a return on investment so they are more likely to bail you out and keep the business going with an injection. Of course you're gonna have to give up more equity, but you're going down the bootstrap route, your bottom line, your cash flow is in your control, and it's your responsibility. It's very hard for you to shift gears and say, hey, I need to raise capital all of a sudden as a bootstrap business, to make up for all the losses or to have enough cash flow to pay my expenses. It's very rare for a business to be able to switch gears, raise capital in time to make that work. So let's focus on your bootstrap business. And for the time being, you're not looking for investment. You just want to make sure you have enough money in the bank. Now, traditionally, you'll hear many people give the advice that you should have one year of Runway or one year as your burn rate. And what does that mean exactly? Well, that means look at your monthly expenses, your total monthly expenses. Look at your P and L, your profit and loss. What are you spending your money on? How much is the total? Times that by 12, that's one year of expenses. That's how much money that should be in the bank. So if all your expenses for your. Your business, let's say, is $40,000, that means you need $480,000 in the bank for the full year. Now, if you're hearing this and you're like, wow, that's a lot of money, it's almost a half a million dollars in the bank just sitting there as an insurance policy. And I would agree with you, most startups, small businesses, bootstrap businesses, simply can't afford to have 12 months of Runway, 12 months of burn in their bank. And this is why I don't agree with that conventional advice. And it's for several reasons. And I'll explain in today's episode, in my opinion, the ideal amount of cash you should have in your bank account, and this is just from my experience, I'm not a financial advisor. I'm not giving you financial advice here. I'm just giving you. My experience is 6 months, 6 months of your expenses. So in the same example, my expenses were $40,000. I would need to have $240,000 in the bank. That's the ideal situation. Now, the reason why I prefer 6 months over a year is because that's a lot of cash to have on hand. And of course, this will be seen as a surplus of cash in your business, which you'll have to pay taxes on. I'm okay with that if it's six months, because anything can happen within six months. And I like the six months period because it's enough time for me to be able to pivot and change things and make some changes in my business to accommodate for whatever storm hit my shores, storm hit my business. I want to make sure if I got a loss in revenue or loss of sales because some market dried up or I need to go after a different clientele, I have enough time to pivot, change and supplement or make up for that lost revenue within six months to have a game plan and get it done. And three months is too short. You can have a bad month. You can have a month where churn is high because the economy is really tough. You have a tough time getting new sales. You might have a personnel problem where your sales executive or a person that brings in your customers leaves. And three months is tough to rebound from. Meaning in this example, can you replace this person? Get them up to speed, get them to the point where they're making just as many sales? 3 months is kind of tight. Now, I'm not saying your revenue is going to go down to zero all of a sudden. You know, that could happen. But I'm just saying in most cases, you know that doesn't happen. But your job as an entrepreneur, as the lead of your business, is to always think of the worst case scenario to cover your rear. Now, if you're listening to this and you're like, okay, that's still a lot of money, Omar. Six months of my expenses just sitting in the bank in reserves. I barely have a month or two months sitting in the bank. Maybe you don't have any reserves. And I want to just say it's okay. We can start from any position you're at. And I said, ideal. So you're going to work your way to get to six months of Runway in the bank. This means not spending all your profits after all your expenses and you've paid yourself, of course. One of the expenses I like to add to my P and L, so to speak. Now, it's not a real loss, but it's a way for me to budget is my Runway fund. And if you're not at the six month mark yet, then you should have a reasonably high percentage of cash going to your Runway fund, like 50%. So let's say after all your expenses, at the end of the month you had $10,000 in profit, $5,000 goes to your Runway fund, meaning that it goes straight into that fund. So that you six months of Runway and every month you're adding to it, one month will be five, maybe next month will be 10,000 and another month will be 7,000. And you're only going to do this until you hit the six months. Once you get to the six months, you don't have to give 50% of your profits to the fund anymore. It's like forced savings. And you can automate this in your bank, where you can have a separate savings account for your business account and have it deduct a certain amount of money every single month. And you could just see this as like a bill, one of your expenses until you get to that six month Runway. The other 50% of the profit, you can choose to do what you want to do. You want to invest back into the business, into marketing, to sales, making a hire. But now you're working with a smaller amount of cash. You got to be a little bit more resourceful, and that's okay because you're saving for a rainy day. You're making sure you have those funds available just in case. Now, I highly recommend you talk to your accountant. You talk to somebody who has some financial knowledge or, and some knowledge of the laws of your country or your area of the world. Because there might be some stipulations about having this money in the bank. There might be some forgiveness here or some sort of way for you to avoid paying a lot of money on taxes, or a way to invest this money in a way you can liquidate it if you needed to, to tap into that Runway fund or that burn rate. Now, there's an advantage to having this kind of cash in the bank, especially if you're bootstrapped. If you ever want to take a business loan out, if you ever want to get a line of credit, whatever it might be, having that asset, having that cash in the bank helps you tremendously. It gives you leverage. It allows them to say, hey, if they default, we have this cash that they maintain. It looks like this person can pay the loan. Now some advice. When it comes to this fund, you can't see it as cash on hand. You can't see it like, oh, I got all this cash that I can spend. This is not money that you can spend. You gotta forget that. This is like money that you could tap into. You only do it if things change financially in the cash flow of your business and you need to make up for it so they can, you know, pay your bills, pay your payroll, all that kind of stuff. And obviously, if you have to tap into it, you have to go back to that savings scheme that we talked about to top up your six months of Runway. Now, I want to make it very clear, do not be discouraged if you're not even close to this yet, we all start somewhere. Even if you can only put away a few hundred dollars every month to that saving, to that Runway fund, that's fine, okay? You're working towards it. You're mindful of the fact that you have to have this. Some people even say, hey, I'm gonna be a little bit more aggressive and put, like, 80, 90% of my profit into this fund. So that way I don't need to take forever to get to six months of Runway. Now, when I say fun, I'm literally just talking about your account, a savings account in your business account where you put this money so that way you're ready for those rainy days so you have that Runway.

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To wrap up today's lesson, the way I like to look at this is milestones. If you have no Runway whatsoever, see yourself working towards one month of Runway and then two months and then three months. Try to find out what your targets are, how long it's going to take you to get those targets, how you can speed that up by maybe making more profit, lowering your expenses, bringing in more sales. This is like a mini game for you to achieve, to win it. And trust me, as a business owner, you are going to feel a whole lot better once you get to the point where you have six months of Runway. You're going to feel a sense of, hey, relief. You're going to sleep a whole lot better. If anything happens, you're good, okay? You have planned for it, and you and your team will be taken care of with plenty of time for you to pivot, to change, to make some moves, to make sure you bounce back from that blow. Thanks so much for listening to the $100 NBA show. Today's episode's not over, though. It's Free Ride Friday. Let's see who won this week's Free Ride. And the winner is. Finn Rider. Finn Rider says great summary on how to podcast. Five stars. I just listened to episode NBA 2132, which provides a great overview of how the podcast business works. Omer provides clever insights on how podcasting differs from other media. Very helpful introduction to the topic. Well, thank you, Finrider, for that great review. Your mission is to email me over@omar00mba.net so I can hook you up with the lifetime membership to the automated Webinar Challenge. It retails for $500 over at webinarninja.comawc or you can win it for free. Just leave us an Apple Podcast rating and review and you enter our weekly random draw we call Free Ride Friday. Listen in on Friday just like right now to see if you won't. It's that simple. Thank you in advance for showing us love on Apple Podcasts. Before I go, I want to leave you with this Cash is like oxygen for businesses. You need to make sure you have enough oxygen on hand, some spare tanks for yourself can't run out of oxygen. My buddy Ayman Abdullah, the former president of AppSumo who took the business from 3 million to 80 million, always says any business can recover from pretty much any challenge, product, market fit, employee issues, economy issues, whatever it might be. But they can't recover from a lack of cash. It's the kiss of death. So having that Runway protects you, allows you to think creatively, to solve problems creatively, to have less pressure on yourself on the day to day life of running a business. Thanks so much for listening and I'll check you in Monday's episode. I'll see you then. Take care.

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