- How much should you have in cash reserves? In standard
The math wasn’t working out.
Our client just relayed to us what he was going to do with the profits of the large account they just landed. But when we added up how he was going to divvy up the profits, he basically was spending the same $100,000 six times over.
We call it the miraculous multiplying dollar syndrome, and many business owners have it.
While we all wish we had the Midas touch, we’d argue no one can make dollars multiply like entrepreneurs can. You can’t beat their optimism and their ever-growing list of their next big idea. They do the multiplication in their head, and it’s all completely “do-able.”
It’s so tempting– especially since the “big” ones don’t happen that often, and most businesses are starved for cash, that any windfall can feel like you’ve won the lottery.
Except that, in reality, $1 equals $1 and it can’t be spent twice.
Unfortunately, we’re the ones who often have to spoil the spending parade and let our clients know they can’t do EVERYTHING they want, so they have to pick a few things they CAN do.
So when you land a big project and you have big plans on what to do with the money, think of this three step approach:
Take some: Enjoy some of the windfall, take home some of the profits (if your cash flow allows) give yourself or your team a bonus.
Leave some: Carve out some of the profits for reinvestment in your business. Look at your plan (you DO have a plan, don’t you??!) to see what needs to be bought, hired or upgraded, then carve out a piece of the profit for that.
Save some: Don’t forget, profits mean taxes. Make sure you allow for the taxes to be paid on the accounts. Make sure you have some reserves in case the “big” one doesn’t materialize in totality.
Boring. I know, and it’s such a downer, and so non-innovative. Yet it’s the practical approach which will ensure that that the windfall isn’t wasted. It’s easy to start miraculously multiplying the dollar but unfortunately that can only happen in our heads.