Overstreched and underfunded.
This is how a newly married couple with two kids in three years felt when they bought a house on two incomes with only one of them working.
It was the mid-2000s, and talk radio was still the vehicle of choice. I found this Dave Ramsey guy. He repeatedly told me.
“Debt is dumb, cash is king, and the paid-off home mortgage has taken the place of the BMW as the status symbol of choice.”
We took that message to heart and changed our lives. We got out of debt, funded an emergency fund, and more. One of the most important lessons I learned during our transformation was the value of cash.
That cash acted as a security blanket to our family. It enabled us to not only fund an emergency fund, invest in our future, give to organizations we are passionate about, and save for vacations and major purchases. It changed our mindset from one of scarcity to one of abundance.
In business, cash does the same thing. It changes how you make decisions and changes the mindset of your company. An emergency fund enables you to take care of problems the right way, not just apply the bandaid, which isn’t going to hold. Cash also fuels the growth of your business and allows you to capitalize on opportunities to expand and take care of your customers and their needs. Most importantly, having cash enables you to pay your people, suppliers, and operational costs so you can keep moving.
One calculation that enables every business owner to sleep better at night is how many days of cash they have on hand. Days of cash on hand is how much cash you need to cover operating expenses only. It does not take into account sales coming into your business. The recommendation for how much cash to have on hand varies from industry to industry, but I recommend at least six months. The formula for calculating days of cash on hand is
Cash on hand ÷ ((Operating expenses – Noncash expenses) ÷ 365)
Today, the economy is rebounding, but there is still a sense of uncertainty in the air. Most of us have never been through a pandemic, and we want to make sure we can face whatever comes at us next. The best advice I can share is to keep your debt low, your cash levels high and always know how many days of cash you have on hand. You never know when you will need that security blanket or the funds to handle an emergency.