Skip to main content

Edition 127 – Strong Cash = Strong Growth

In the first week of the new financial year, let’s take a moment to get financial.

In all my years of advising family business, I’ve observed businesses that have strong cash reserves and strong cashflow have always done better than businesses that don’t. Notice the deliberate emphasis on “and”.

The Banking Royal Commission has exposed some horrendous stories recently as to the poor way business banking customers have been dealt with. My gut feel is that there will be:

  1. Legislative change come out of the Royal Commission’s findings, driven by a Government looking to take the ascendancy going into an election year.
  2. Operational change inside the banks brought about by the need to quickly arrest the PR disaster they’re facing.
  3. Institutional change brought about by the fact that lending is all well and good provided you get the money back – and perhaps some of the lending shouldn’t have happened in the first place.

I’ve seen plenty of family business in 30 years and you’d be astounded at the number of them that have access to cash of less than four weeks operational outgoings.

In layman’s terms, it means they’ve only got either cash on hand, or credit available, that will pay the bills for 30 days. That is both risky and incompetent. My personal feeling is that this is a reflection of a variety of factors including:

  1. Relaxed credit over the past decade.
  2. Rising property prices underpinning equity positions for financing.
  3. Big infrastructure projects generating significant economic activity, creating the sense that things will always be this way.
  4. Laziness on the part of family business owners to pay down debt.

Access to only 30 days cash means that, very quickly, if your family business was to lose one of its major customers, your entire financial strategy is like driving your car on a wet road with bald tyres. You’ll be at the wheel, but you’ll have no control over the direction of the vehicle, the speed it is travelling, what it will hit, or how hard the impact will be.

Here’s my advice. Every family business, bar none, needs to build a strategy over the course of the next 12 months to build a bigger cash buffer. I’d go so far as to say you need to double it if you have less than 90 days available cash.

Try out this exercise today:

Step 1

  1. Tally up the available cash in all your bank accounts right now.
  2. Add to this number the available limits your have on overdraft facilities.
  3. Add to this the available credit limit in any business credit card facilities.
  4. The total is what I’m calling Family Business Cash Reserves.

Step 2

  1. Tally up all the money that you paid out of your main business bank account in June. Don’t exclude anything. You’re adding all the cash outflows.
  2. Don’t count the cash inflows.

Step 3

  1. Divide the answer from Step 1 by the answer to Step 2. So, if Step 1 is $500K and Step 2 is $400K, you’ll end up with a number of 1.25.
  2. This number is the Family Business Cash Reserves Ratio.

Step 4

  1. If your ratio is less than 1.00, you’re in trouble. You’re running too cash-lean and I’d suggest that you’re not that far off insolvency.
  2. If your ratio is greater than 1.00 but less than 2.00, you’re just getting there but if someone sneezes, you’d better get out the Codral.
  3. A number of 3.00 and above is what you want to be aiming for.

There is change coming. I truly believe that the banks are going to get tight on lending in this next 12 months. This is a heads-up for you to start preparing for that eventuality right now.

This Week’s Tip

“There’s plenty of ways you can quickly improve your Family Business Cash Reserves – it usually starts with targeting lazy expenses and eliminating raiding of the cash tin. Let me know if you’d like some tips on how to tidy each of these up.”