In the age of easy credit, having cash on hand can often seem old-fashioned. I say beware of such an attitude. The old saying “cash is king” is as relevant today as it ever was, and as an entrepreneur, it’s imperative that you always have a significant cash reserve to keep your business afloat.
Years ago, I attended a one-day workshop given by a professor from Harvard Business School who presented his ten rules of business:
Rule Number One: Don’t run out of cash.
Rule Number Ten: Don’t run out of cash.
The other eight rules, the professor said, were not nearly as important.
In my current business, I’ve made sure to never end up in a situation where my cash flow drops to zero. One of the biggest benefits of that is the fact that I have always had enough cash to pay my employees, even in the early start-up days. As a result, I earn my employees trust. I know this because they show up five days a week, smile at me, and do what I ask them to do. Many have been with me for more than twenty years. I have found enough money to meet my payroll every two weeks for the past forty-five years. That’s more than 1,170 payrolls!
One of my favorite stories on this point is about the ninety-four-year-old Texas billionaire who married a twenty-five-year-old former Miss America. After several years of marriage he asked his lovely wife, “Darling, if I lost all of my money would you still love me?”
“Honey, of course, I would still love you. I would miss you, but I would love you.”
I don’t want my employees to miss me. I don’t want my lenders to miss me and charge huge default interest payments while they do. I don’t want my landlord to miss me after throwing me out of my offices.
So how do you avoid ending up in a situation where you’ve run out of cash? The best way is to predict your cash flows accurately and conservatively in advance. Be conservative, not optimistic in your projections. This way, any unforeseen circumstances in your business’ financial flows won’t drain you of your cash reserves. You’ll be prepared. And you’ll be much happier.
I keep two budgets at all times. One for large cash items such as closing an escrow and receiving money from my investors. While the second budget is for my regular monthly income and expenses.
Since real estate is inherently cyclical—that means money in and money out is inherently unpredictable. I paid off the loan on my home as soon as I could. And I will never take out another loan on my home, no matter how tempting that may be. Today’s interest rates on home loans are attractive, but I want to sleep soundly every night, without fear of ever being forced out of my home.
Whatever your business, work to structure yourself financially so you always have cash on hand. Even if your business is something more stable than real estate, life is unpredictable—and you never know when you might need to seize an opportunity or get yourself out of a jam. So for your own sake, whether for your business or your personal life, take the time to predict and analyze your cash flow as accurately as you can. Try to do it every week or every day, if necessary. This way you’ll do your best to make sure that you NEVER RUN OUT OF CASH.
About the author
President of a property management company worth $1.5B and New York Times bestselling author, Alan Fox shares powerful advice on careers, relationships and self-improvement in his award-winning series PEOPLE TOOLS. Follow Alan on twitter @alancfox