How much of a cash reserve should you have?
There will always be storms that come in, and you must be able to endure those storms. Most people don’t build enough of a cash reserve in their business, or they always spend any spare cash, often running the business without an adequate cash buffer.
How much cash should you have in your business? What is a good or bad cash buffer? Why is it important to maintain a cash buffer in your business?
We answer these and more questions in this week’s episode.
Why you need cash reserves to weather the storms
Episode 106 – The Growth Whisperers
The Growth Whisperers is a weekly podcast hosted by Brad Giles and Kevin Lawrence two advisors to mid-market businesses, one Australian, one Canadian, who each work with CEOs and Leadership Teams across the world with a mission to build enduring, great companies. Each weekly episode covers interesting situations and questions from the world of strategic planning, leadership development, talent and hiring in high growth entrepreneurial companies where real results matter.
Why you need cash reserves to weather the storms
Brad Giles 00:12
Hi there, welcome to the growth whispers, where everything we talk about is building enduring great companies, building companies that matter companies that last people that companies that people want to work in, you know, the kind of companies that we all aspire to being a part of, in one way or another. My name is Brad Giles. And as always, I’m joined today by my co host, Kevin Lawrence, Kevin. Hello, and how are things in Canada today?
Kevin Lawrence 00:40
Things are great today, Brad. It’s the in the evening. It’s getting a little dark. And but it’s not getting dark as early and we’re really happy about that. So yeah, things are good. The economy is booming. COVID has allowed a lot of restrictions masks almost nowhere except for airports think
Brad Giles 00:58
- Yeah, life’s good. Very good. Very good. Well, as always, we’d like to. We’d like to propose that people start their meetings with a word or phrase of the day. And then we tend to try to observe the awkward moment where Kevin tries to stitch them together. I’m sorry, that was not meant to be something I’d say out loud.
Kevin Lawrence 01:20
That’s just in your side, your brain. your inside voice, Brad. I just went outside. Yeah.
Brad Giles 01:24
So what’s your word or phrase of that? Okay.
Kevin Lawrence 01:29
Yeah, so why have used a lot of just gratitude, like, life is pretty granted. I’m constantly humbled and amazed and grateful for this amazing place that we live. Like, it’s pretty awesome. I just, I’m just on an airplane last on a couple days ago, I’m amazed at the distances that we can travel, like human beings are just freaking awesome. And I’m just grateful for all the great things that we do. And, and humbled and inspired by all the innovations and when you look at the last couple years, and how people have handled COVID And hopefully it’s behind us permanently to a great extent, but whole league so I’m just yet I’m grateful for the awesomeness of human beings.
Brad Giles 02:17
Very good mind today is about a players. And it’s just, it’s just don’t skip steps. So across several fronts recently, I’ve been involved in hiring or talking about hiring and a player’s, and especially through the book that I’m writing about onboarding. Like just don’t skip steps when it comes to onboarding template. I mean, when it comes to a player’s, it’s worth spending the time to get the best people. Yep, it is.
Kevin Lawrence 02:51
And then it’s also worth spending the time to onboard them right? And then retain them and keep them happy and nephrosis. Awesome. So what the heck are we talking about today? Last week, we talked about garbage? And or sorry, stretch goals being garbage. But what are we digging into this week?
Brad Giles 03:11
Yeah, this week, we’re talking about cash reserves to weather the storms or why you need cash reserves to weather the storms. I think in large businesses like you know, listed businesses or multinationals, it’s kind of a bit of a given where they’ve got more sophisticated CFOs perhaps. But as you kind of drop a zero drop in another zero coming down the revenue, you know, mountain, as it were, the importance for cash reserves, becomes less front of mind. And is ever so important. Because these business models are often a little bit more volatile with a little bit more going on. So yeah, we’re talking about why you need cash reserves to weather the storms.
Kevin Lawrence 04:01
Yes. And I propose no matter what the size, it’s a critical topic. And it’s a hearty debate, because in many ways, it’s almost like politics in the US. It’s extremely, extremely different views. It’s almost polarizing, no, wasn’t going to stop and start talking about certain candidates who just saying, you know, the Democrats and Republicans are very different camps. And when it comes to cash, there are very different camps, except for when you have none. And when you have not everyone’s in the same camp, when you run out of it, everyone’s in the same camp, but we’re trying to avoid the crisis that rallies people together, and figure out, you know, and this is, Brad and I have a view. But we want you to think about what we talked about today from a perspective of enhancing your view and pressure testing your view of how you handle a cash or your balance sheet in your business. So we got to we do have a clear view, but you might not have Rule is what we’re saying, but use it to pressure test your thinking. And maybe it’ll help to enhance your thinking a little bit. But the root of what we’re talking about today is cash reserves. And this is big conflict between the desire for growth or fast growth and high ROI return on investment. And the desire for having a war chest and a plan B, and, and cash reserves. And both are important. What you’ll generally find is companies that have been around many decades or a few generations, they’ve already learned their lesson. They’re all over cash reserves like you wouldn’t believe. Yeah, younger companies are the ones where they haven’t been battle tested fully yet. They haven’t been in special accounts, they haven’t had to hand the keys back to the bank yet. And so sometimes they have unvalidated belief systems about this, because they haven’t been through the meat grinder called the cash crunch. Yeah,
Brad Giles 06:03
and it is a meat grinder, that’s a lovely way to put it.
Kevin Lawrence 06:06
It’s the worst time like working with companies that are in cash crunches and special accounts with the banks and living penny to Penny minute to minute in terms of cash. That is not fun for anybody.
Brad Giles 06:18
Yeah, I’ve been in I’ve been in meetings in quarterly planning sessions. And from the morning till the evening, all we’ve spoken about is how to save the company. And, and I’ve been in those types of meetings several times. But what you know, there’s a mindset that some entrepreneurs can’t help but get into, which is, I need to maximize every single dollar like I need, I can’t have lazy cash sitting around not being used in the bank. Because if I got $100,000 sitting in the bank, I’d be better off buying a new piece of machinery, employing another person, like getting that growth to happen quicker. That mindset, I can understand, like, I’ve been there. I know why people get there. But it can be such a dangerous instinct to follow.
Kevin Lawrence 07:17
Well, it’s, it’s only dangerous when you hit a cash crunch, and you hit something weird. It’s almost like there’s studies around people that text message while they drive. And the reason it’s so lethal, is 92 times out of 100 You probably could send or receive a text and you’re fine. Time number 93 You die, or somebody else dies. Yeah. And the reality is it’s just playing the odds. And the odds are is that if you’re doing that all the time, or whatever happens, it’s sooner or later, it’s going to bite you. And the odds are there is going to be a nasty economic event in your business sometime in the next 20 years. It could be tomorrow. It could be 20. Year we don’t know but we know for sure what’s coming. Like it’s a guarantee. It’s yeah,
Brad Giles 08:11
we that’s why we say what this what we called this episode to weather the storms like we know there will be storms coming like no one can disagree or debate that. I mean, I know in Vancouver, you guys Kevin had what a once in 100 year storm four or five months ago. And it wiped out all of the bridges going into Vancouver,
Kevin Lawrence 08:34
the four highways that take people from Vancouver to the rest of Canada, every single one of the highways was washed out and you couldn’t draw, you couldn’t basically we became an island. Now we could thanks to our friends in the US, we could go down south and go around through the US to get back up into the other parts of Canada. But who plans for that stuff? Right? And then there’s Nevermind the pandemic and all this other stuff. It’s just generally it generally Intel people have had to deal with how the day of reckoning when they render to cash. People are often more aggressive or don’t pay attention to it as much as at the end of the day. Or just saying your today is that we know some people love living on the edge and gambling. And others like to have cash in the bank. We’re just going to talk about having cash reserves and why it’s critical and give you some guidelines to think about in terms of it and at the root of it. highly profitable companies go bankrupt regularly. You know, it was really interesting. I had an entrepreneur I worked with in the US he built he grew up in the business, no formal education. And he once he took over, bought the company and took it over after working on the floor. Got it up to 100 million And of revenue and 20% EBIT, da. So 20 million of EBIT, da million dollar business is pretty damn good. Well, I did a workshop for him and his team, I got a call from him one day. And he called said, Kevin, I really need your help. Like, what? What’s going on? While I’m running out of cash? I’m like, Okay, that’s interesting. What’s going on? Oh, I don’t know what’s going on. Cuz he wasn’t that sophisticated in terms of the data. So we’ll get your CFO to put some numbers together, guys, because I need to meet you. I said, I don’t have time. It was where are you? Well, I’m in Vancouver. Okay. All right. Can I meet you tomorrow? No. We’re going to go in Chicago. Okay, can I be in Chicago. I said, Well, I’ll be in Chicago next week. I’m in Chicago on Wednesday, Thursday, I could meet you on Friday, because I’ll meet you on Friday. And I get a confirmation he booked us into the Trump Towers, which is a speaker at the Trump Hotel in Chicago, which is spectacular. Anyways, he flew in on his private jet, his driver brings him to the airport like he’s not, you know, underperforming as a company. And we long story short, at the end of the day, he normally operated on about 7 million of cash. And it was all gone and going the wrong way. And he was terrified. Turns out, he made a deal to save money on a major resource he bought in his business. But he shortened the payment terms from 60 to 15 days. If you take $100 million business doing 20 million of EBIT, and you break down the math, that’s about six or 7 million bucks that vaporized the point of it is that he actually had an okay reserve, but he just didn’t understand cash that well. And he was going to lose the business, he was going to have to go and get external equity, because he literally couldn’t pay his bills. Right. And this is what happens with cash. Cash is something that a lot of people don’t understand well, and what we want to talk to you about today is that the good companies go out of business because they don’t know how to manage it. So that’s what we’re going to say and we don’t know your business, your operating conditions, whatever it is. But somehow, my recommendation, if you’re whether it’s three 612 months of operating cash, at least within 30 days, you need to guaranteed be able to have probably 12 months of cash, 12 months of cash, maybe not available in pure cash in the bank. But you can get it no matter what the economic conditions are within 30 days in your hands.
Brad Giles 12:26
Because the storms always come, you know, we started off talking about the weather. But every year, there’ll be a winter, every year, there’ll be storms, some storms will be worse than others. And it’s just, it’s just a gamble. And the gamble is might be exciting. But we’re about building enduring great companies, the companies that don’t survive, never get to endure until their story. Like they go they disappear, right?
Kevin Lawrence 12:56
They get bought up by somebody else along the way, or whatever happens.
Brad Giles 12:59
But you point there it is that profitable companies, it doesn’t matter your business model, it doesn’t matter how many AI players you got profitable companies run out of cash and go bankrupt every single day. And that’s the importance of having enough cash to weather the storms. You’ve got to be able to weather those storms to survive. Or else there’ll be nothing. There’ll be nothing. I’d been in meetings with people where we’re talking about an a brilliant strategy, a brilliant strategy, and they go that’s fantastic. But really what I’ve been thinking about for the last 10 minutes is how I can’t make wagers next Thursday. Yeah. And it’s like, it doesn’t matter how, how good your strategy is, how good your team is, everything will come back to cash.
Kevin Lawrence 13:55
Yes. So we want to encourage you to have your target of what you think it should be not what you think your model can do. What you think it should be, you know, we both push people to build up cash in their businesses, for the privately held, you know, family businesses that want to be around for a long time we’ll talk about private equity in a minute. Private equity has a different approach to catch which to cash which works because private equity has a lot of cash. Now they generally run businesses with maximum debt, minimum cash, and it creates a psychological environment where the team has to produce but the private equity always has access to cash so they can they’ve got backup plans if the operator so it’s okay for the operators to not think they have cash, but someone has to have it aside from just the bank. So I want to give you an example of something in the auto industry called its service absorption rate. Basically, it’s the service or the fixed operations part of a car dealership. The parts sales, The Body Shop, the service shop that fixes your car hours. And service absorption rate is the ability of that part of the business to soak up the overheads of the entire automobile operation. Meaning if they couldn’t sell any cars, zero cars, which, for some dealers has been coming, almost true, not zero, because they can’t get inventory right now in this market, it’s hard. But if they didn’t sell a single car, could the service of the fixed ops cover the nut so the business could break even. So that’s called service absorption. So the auto industry has that target, typically a healthy auto business will be about 85% ish. You know, when companies we work with want to push past 100, to know that we can cover that and be facing be healthy without selling a car. And that’s another version, it’s like, it’s in the same direction as a cash reserve. Although, you know, one of the auto businesses that I’ve worked with in the past, you know, not only would we have a service absorption rate of at least one, we would also have large sums of cash set aside. And when we would need to do projects, we would go borrow the money from the bank. So we have our big war, chest, big war chest, and then we go borrow money when we need it. Because the business was generating great cash, but we would borrow the money, because then if something came along that we wanted to do, we can go and use our money. We don’t need the bank’s permission. Right? The
Brad Giles 16:29
Yeah, the bank is a partner in a business that’s strong, like
Kevin Lawrence 16:36
a fair weather friend, we call them. Yes. Yeah.
Brad Giles 16:39
Like we don’t the bank should be viewed in that. We don’t, we don’t need them. We want them. Okay, we don’t, we’re not necessarily like our business won’t collapse without them. Like we’ve got to be able to because, you know, it was only 10 or 12 years ago, that a whole range of banks, they themselves went under, and their job is to manage cash. Right. So they any that and that was a storm, a big storm. But that was a big storm that had a lot of impact on people. So we’ve got to have a strong enough business that we can withstand that shock. I remember there was a customer that I was working with many years ago. And every month, I’d say to him, what’s your capital target on? How are we progressing towards them? And how are we going, and we set an amount of money, and we put it in there. And he, I think he took the advice. And I think that he, he took the concept. And then I remember distinctly a couple of years later, it was a Saturday morning. And I was at the farmers markets with the family. We were walking around and he rang me which was in never rang me on a weekend. And I thought, well, I better take this call picked it up. And he’s like, it’s all just, it’s all just collapsed. And it’s all collapsed. Like we’ve got some real problems. In the preceding months, he was telling me how this major competitor went under that major competitor, the industry had structurally changed. And if we hadn’t been saving up that cash, when the industry had that structural change, he would have been wiped out. Now he’s going on, and he’s going fantastic. But it was only because we changed his thinking and said we’ve got to have a pool of cash that we can draw on. In case we have to weather the storms. Yeah.
Kevin Lawrence 18:36
Or sometimes it can be acting on a big opportunity. You know, Warren Buffett, who is known for having lots of cash is also known to get some amazing deals on businesses, because he can have a discussion today and send the money tomorrow. Because he has it. He’s not needing to get permission and so so it’s an opportunity chest as well not just problems where you can move. And you don’t got to worry about fun because sometimes there’s amazing deals that come along. And if you have cash you can act no matter what the economy is. Okay, so we got some points to think about. So we understand the point. And again, every business is different. You just need to have access to it. Guaranteed in some way so that you’re not going to end up giving the keys to business to someone else to run. So number one thing to think about from this is that cash allows you to stick to your plan and your values when things get weird. Weird things happen all the time and you can stick to your values and stick to your plans. One of my clients in the Middle East when things went Oh 506 The market crashed bad like real estate fell 50% In three weeks. It was insane. It was the most insane economy I’ve ever been in this economy kind of reminds me of it anyways. But I remember isn’t we’re in a meeting deciding what to do. And you know, business fell fell fell dramatically and We were able to stick to the values of the company, which means our last option was to lay people off. Right, we had a whole bunch of plans because the company was about taking care of people. Interestingly, the company got tremendous benefit from that in the future, because in the market, people were slashing jobs like crazy. And we ended up with a reputation of handing ourselves like true professionals, and taking care of our people in a really tough time.
Brad Giles 20:26
It’s a really different conversation going to the workforce and saying, we’ve run out of cash, we need to lay people off compared to when losing money, we need to figure out how to recover, and we’re not going to lay people off, and it’s going to hurt us, it’s going to mean that we’re losing money. But when in order to save these jobs, we need to turn this ship around.
Kevin Lawrence 20:47
Yes. So number two is that scarce, scarce cash does lead to creativity. But if you are so scarce, that you can’t do payroll, and you can’t pay the bills this week, everyone gets focused on by the minute, and just surviving, and generally not how to build a great business, it starts to create small thinking and survival thinking. So there is a benefit to a certain point. But when you’re running day to day, hour to hour on cash, nothing good happens. And a huge amount of energy gets wasted just trying to balance the dollars and the pennies and nickels to stay in business.
Brad Giles 21:26
This is what we were saying at the beginning of the pandemic, when we started this podcast is what happens if 80% of your revenues disappear? Yeah, you know, that’s a storm, right. And for some people that happened, and some didn’t, but it’s, you know, only the prepared will survive. So you know, having that scarce thinking like you have limited options. What we want to do is say the cash gives you the options when the storms come and they will come.
Kevin Lawrence 21:56
Yes. And when the opportunities come to the third thing, even in private equity, even though they run companies maxed out balance sheets, and you know, minimum cash, they always have access to more because they’re capital organizations. So the operators, as I mentioned earlier to show the operators are operating on very tight, you know, in very tight lanes, and very tight expectations around cash. But there’s more in the system, and there’s that balance. Again, even private equity, if they get too tight, and they’re not thinking they’re gonna be able to stick to their covenants, then everyone gets short term thinking, which is not what we’re to short term. But there’s a balance and somewhere there’s but in the case of product, there’s always
Brad Giles 22:43
that’s how they run their business. You know, and in private equity, the companies that they’re investing in like they’re the product. Yes. So your business is the product, if you’re backed by PE or V and VC Mercy, the way that they run their business is deep cash reserves, while said so they can endure?
Kevin Lawrence 23:09
Yeah, so let’s talk about the cash. Like, what is this, I’ve had lots of discussions with different people about this. Lots of clients are because we have you and I both have clients that have been in business for decades, and during great companies we work with a lot of it can be in many forms, it can be pure cash, right. And in my mind, basically, it’s a 30 day cash is what I like to call it. Yep. So it can be pure, pure cash. And you know, you might as you get bigger, you need to get someone to manage your treasury and decide where you’re going to put it to get the reasonable return based on what the uses. It can be personal assets that you have, you know, if you’re an entrepreneur and building it, and you know, you run your company fairly tight, you’d like to pull the cash, you know, maybe you’ve got it in and investments are other assets that you can access it. The other one, you know, one of my clients, so they have a notable business. And they they they use their as much as their cash they can in their operations. They don’t leave a lot in your operations. But there’s entrepreneurs said, look, at the end of the day, I have a whole bunch of assets my business owns that I can always convert to cash and a bunch of its real estate in 30 days. And I always have either assets with almost no financing or no financing on it, that I am 100% in control over have no partners, no anything. And I can easily even if the assets worth $20 million today. And then in a horrific economy, it’s worth 12. And even at moderate leverage at 50% leverage, I can get 6 million bucks within a month in the world. Today I could get 15 million of cash, but in a worst case scenario and they looked at the worst case value of that asset and they that thing, even though it’s always there’s 6 million bucks, there are 6 million bucks there. And in 30 day terms even though there’s not cash sitting in the checking account, well,
Brad Giles 25:13
it’s its liquidity, right? It’s your ATM cat, how much cash can you access in? In 30 days? If any scenario evolves, because maybe your bank, you know, and this is one that we get all the time, or we’ve got an overdraft. Surely an overdraft is okay. But an overdraft is a bank. And, you know, you look at the financial crisis over time, the banks are the ones that tighten up the economy. So, there’s no, you know, what if the bank pulled that overdraft? Or what if the bank said, Yeah, we don’t kind of want to do that anymore. I mean, that would be
Kevin Lawrence 25:56
which they have the right to, with we call it a line of credit here, or could be it over No, they have the right to, it’s not a fixed loan, you get a fixed loan five or 10 year term at a set rate set terms, they can’t pull that unless you know, unless you’re way off, way, way off. And not making your payments, etc. or meeting your covenants. But on line of credits, they can actually pull those back, they’re not cash, they’re in tough times they can go away. Yeah,
Brad Giles 26:24
so very specific, like a line of credit, or an overdraft. This is not included. Now, we’re talking about, we want to have three, six months of cash, or equivalent ability to access three, six months of operating expenses in a separate account or the availability revealed availability part of me to get it that isn’t an overdraft or dependent on the bank.
Kevin Lawrence 26:51
And I would suggest at least a year is ideal isn’t ideal target. But wherever you are, just make it better. And make it better. Awesome. So what how, and you know, one of the things that we both do is having cash accumulation targets, like I remember, one of my companies knew us, when we started with them. They were doing about 30 or 40 million or revenue and Okay, profit. And I remember I kept saying, we need to drive this thing, increase the profitability, but as we grow, we’re gonna get minimum 10 million bucks of cash. We have fights, they thought I was an idiot. Right now, I think they’re sitting at about 60. Yeah. Right. And, and it’s kind of burning a hole in their pocket a little bit. But it’s, it’s like, part of it is you gotta believe it’s possible. And I am big for companies that don’t have it on building it. And for those that have it, keeping it, because stuff comes along and you need it. Sometimes. I have another client that’s, you know, only been wildly successful, but in business less than a decade, and they haven’t been through a downturn yet. I remember I was in a meeting with the CEO, said, I gotta sign some papers. I gotta, I gotta sign a lot of credit. We got to get there got to take some of the cash out of my house. We’re a little tight on cash. And I lost it on him. Like, what do you mean, in a booming economy in a booming business? You’re borrowing money against your house? Okay, I think I said when you told him he was an idiot. But I love the backstory a little bit. But it’s like, if you in this market, need to borrow money against your host, because cash is getting too tight. You’re making bad decisions. Like something’s wrong, because it was a surprise. It wasn’t planned for it wasn’t a strategic move. And I’m like, yeah, anyways, yeah.
Brad Giles 28:40
If that scenario was because he was going to acquire a business that was at a discount, you know, you could maybe justify it, but I’m not hearing that.
Kevin Lawrence 28:49
No, and his backup capital is his house. He hasn’t been in business long enough to pull a lot of other cash into other things. It’s all tied up in his business anyways, just now we’ve had we had amazing debates and discussions with the CEO, CFO, and we dramatically over the last nine months, reworked a bunch of the capital and fix things. And he’s now got a strategy actually had, I’ve talked to a number of my other clients in similar industries, about their capital strategies, people have been around 3040 50 years.
Brad Giles 29:24
So that company that you said, they’ve got 60 million cash and it’s burning a hole. So what’s their revenue? Give or take? Like, is it 60? Or is it 500 million or 700?
Kevin Lawrence 29:37
It’s closer to 500. It’s just so it’s just don’t just under 500 million.
Brad Giles 29:41
Okay. So for context for listeners, what does 10%
Kevin Lawrence 29:45
of revenue that’s one year’s profit?
Brad Giles 29:48
Yep. Tim center revenue are about what so that gives a bit of a frame that people can begin to think, Okay, I’m doing 20 million therefore 10% they can begin to think about like that. because
Kevin Lawrence 30:01
that would be an actual real interesting benchmark, like a healthy years profit. Yep. Or I would prefer a year as OpEx. But you know, you figure out your own. You’re smart people, isn’t it a good? Point is it’s substantial.
Brad Giles 30:18
It’s probably more than you think. Because most people have about two to three in small medium business about two to three weeks of, of cash availability. And as soon as something stopped all the gears grind to a halt.
Kevin Lawrence 30:33
Yeah, exactly. And then finding the second piece around how is the leverage is you got to learn about cash conversion cycle, and you got to learn about cash flow. There’s some great stuff is a wonderful article, how fast can your company afford to grow? Ah, it’s an HBR article, and learning about cash conversion cycle, and where cash gets buried in your business, and locked up, whether it’s in your business model, how you operate, whether it’s an inventory or things like that. We’ve done work on this with companies and it’s magic, how much cash we can unlock, I probably didn’t, I didn’t math, going back probably five years ago, I think at that point, we’d unlocked $186 million of cash, like taking it from being buried in operations and putting it back into bank accounts in different companies. Yeah, it’s just shocking. Like the client, I told you about the private jet Chicago meeting, where we met me in Chicago. In that case, we swung it, he swung it the wrong way by 7 million. And with just understanding cash conversion, we swung it back by what ended up being by $7.2 million dollars in a matter of about four months.
Brad Giles 31:49
So it’s measured in days. But if you think, Oh, if I improved it by two or three days, on average, across the business, like it’s only a couple of days, that’s not that much. We had one example is about $20 million business, we brought it back, I think it was three or four business and produced about $2 million of cash. So really, really quickly, the average across the board can be massive.
Kevin Lawrence 32:15
It is but it’s learning the levers where it gets buried, and how to speed it up. And you track it in days, because it’s simple. Yeah. And it scales with your revenues. And it’s, it’s game changing if cash is tied into because unless you’re a SaaS business, almost everything or, or your sauce, software type, almost every other business should generate cash. They should if they’re well managed, and many are not well managed and don’t, but they should be generating a fair amount of cash on a regular basis. And you needed if you’re gonna grow, so learning about cash conversion, and also how it relates to growth and how you might change your business model to make it more effective. So, so a quick review. The whole idea here is to think about cash, and what’s the right amount of reserves for yourself, think of what some of the worst case scenarios could come up. And like the car industry, we have no cars or we can’t sell any cars. But we still break even because our service, our back end, or fixed operations covers the amount of the overhead in cash allows you to stick to your plan and stay on track to your values when things get weird. You know, running too scarce allows people to scarce thinking and that takes away growth and takes away people’s willingness or ability to take risks. And even in private equity. They have lots of cash, they never fully run without cash. So they have backup plans, even though their operating companies sometimes have no cash in them and fully leveraged balance sheets, the motherships there to help what to do number four on their bread.
Brad Giles 33:54
Yeah, if if you didn’t have access to your line of credit in 30 days, how much cash could you access? For example, if the bank closed your line of credit? Or shut that down? What is the total amount of cash that you could should could access? That’s what we’re talking about here. And it’s got to be enough to keep the business running to weather the storm. Because the line of credit doesn’t count because it’s not guaranteed. And then I guess next is setting a big cash accumulation target. And then keeping that cash out of in a separate account or away from operations, some way that it can’t get sucked into the working capital of the business and so that it truly is about weathering the storm because we know in a contracting economy, cash becomes scarce. And then finally, understanding the cash conversion cycle days. How fast can your company afford to grow was the HBR article that Kevin mentioned from Neil Mullins, and then make the changes needed make small sooner or later changes all along the way. So Kevin, would you like to move to close this out?
Kevin Lawrence 35:05
Yeah. So the whole summary is learn more about cash and how it operates, how it works in your business and build it up to have it for opportunities or weird storms that happen. So this has been the growth whispers thanks for listening. If you want to get the YouTube version, just search the growth whispers that YouTube, Brad and I both have awesome and informative newsletters that we put a lot of energy into if you want to read them. Brad’s you can get at evolutionpartners.com.au You can also contact him there. And for myself and our firm Lauren cinco, same thing, Lawrence and co.com for our newsletter or just get a hold of us if you want some help. Alright, have a wonderful week. Cash is king. Have a great one.
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