Cash flow management contd ...

The benefits of building a strategic cash reserve

At the moment I am being bombarded by software companies wanting to sell their cash flow forecasting software to our clients and they cannot understand that very, very few of our clients actually need a cash flow forecast. They believe that everyone should prepare a cash flow forecast. I keep thinking back to a classic quote from Warren Buffett along the lines of “Never ask a barber if you need a haircut”.

Perhaps we are lucky with our clients or perhaps we have been nagging them for so long about building their balance sheets and in particular their cash reserves that they have gradually absorbed that mindset of saving for the future and being careful with cash. Having saved cash in anticipation of the regular downturns or recessions which occur prepared them better than most for the 2020 lockdowns. Many have said to us that they are so glad they haven’t been forced to borrow just to survive and can now focus on renewed growth without the drain of loan repayments.

The big problem with many small businesses is that their owners just want to pay themselves a day to day wage and as a result take short term decisions based upon a short term need. They seldom look to the future and adopt the mindset of creating an asset which they can either sell or use to support them in later life. In fact, I read recently that almost 90% of small businesses are unsaleable because the business is totally dependent on the owner who has extracted every penny to support a more and more demanding personal lifestyle with the inevitable result that little has been spent on reinvestment and innovation.

The idea of building an asset over the long term rather than just the instant gratification of a higher income starts with ring fencing small amounts each week or each month and ideally putting them into separate bank accounts so when you look at your current account it doesn’t make you feel too comfortable. I watched my mum do this when I was a child as she took my father’s weekly wage packet and split it into different pots to ensure that she didn’t overspend on any particular area to the detriment of another. She made sure we lived within our budget and even managed to build up a rainy day fund.

Think of your business as a long term asset not just a short term cash generator and perhaps you won’t need to worry about a cash flow forecast in the future.