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  • Writer's pictureMarcus Williamson

What's in the bank?

Short post for today but it is an important point all business owners need to know: what's in the bank? Or more specifically, how much is in the bank and how long will that last?

For many service-based businesses your revenue cycle looks like this:

  1. Perform the service on the 12th of the month

  2. Bill for the service on 31st of the month (19 days later!)

  3. Get paid potentially 30-45 days after that (meaning you are floating the expenses you incurred - labor, materials, etc. - for nearly two months)

And that is in the best-case scenario. What if your client doesn't (or can't) pay you all at once? What if they are later than the 45 days to pay? You have become their de facto line of credit. Except you also have employees who enjoy receiving regular paychecks and bills that come due each month. So I ask again: what's in the bank?

First, evaluate your business's typical monthly cash needs. Include things like wages, rent, utilities. supplies, and anything else that must be spent every month. Now take a look at what you have in liquid, readily-accessible reserves. Do you have two weeks of reserves? 2 days? 2 months? My advice would be to set your working capital target at two months and adjust upward from there if necessary. In a worst-case scenario, you need to know how long you can keep the lights on and people employed. Some businesses - software development for example - may have an even longer lead time between incurring the expenses and receiving payment from clients.

Sometimes cheesy podcast ads have a nugget of truth: if you don't know your numbers, you don't know your business (hat tip to NetSuite).

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