One of my favorite country songs bears the same title as this blog post. Recorded in 1978, Warren Zevon describes a fateful night in Havana with a waitress who happened to be “with the Russians too.” What started as innocent gambling turned into a terrible fiasco with the author hiding out in Honduras. Although this song can apply to any late night mishap, the refrain is just as often sounded by business owners when the fit hits the shan. Blame and allegations will fly around the company, but most crises can be attributed to one of two things: being unprepared or underfunded. We discussed the importance of preparation a few weeks ago, so today we will talk cash money.
How much cash do you have on hand? The general heuristic is that you should keep 20% of your annual revenue in cash equivalents on hand. Sometimes you can vary from this metric depending on your margins or the seasonal nature of your business, but the exceptions are few. Anyone around in 2008 learned that a cycle of financial distress could greatly reduce your enterprise value where cash is short. In the modern economy, a strong cash position is critical for knowledge-based companies to maintain investment in their technologies and intangible assets to retain value. Even if you run a traditional business in a very traditional industry, a strong cash position will allow you to seize opportunities when they arise.
But aren’t we losing money to low rates? The two greatest myths of our generation are that you lose money by renting and that sitting on cash means you’re losing out on market returns. These chimeras only hold true when you believe real estate and markets go up forever, and we all know how that worked out last time. By renting your property and holding sufficient cash you are not wed to a unidirectional bet on the future and preserve the mother of all business success, optionality. Having the option, but not the obligation, allows you to keep the good and avoid the bad. A good portfolio of T-Bills will provide a lot more staying power and liquidity than a diversified portfolio of bank stocks.
How do I raise cash? Everyone is trying to grow sales, and that’s hard. It is true that revenue cures all sins, but the best way to get saved is to stop sinning. First, commit to zero-based budgeting this year and relentlessly evaluate your expenses. The technologies that bring so much uncertainty to our modern economy can also bring you tremendous efficiency if you learn how to use them. Second, invest in your people. Well-trained, happy workers are much more productive, and they will help you innovate if you can make them feel truly part of the team. Third, pay attention to contingencies. You don’t want a law suit or a natural disaster to destroy months of hard work to build cash reserves. Take a good look at your insurance policies and come see the lawyers at Campbell Teague. With good counsel and enough cash, you won’t even have to worry about the guns.
