Money: it’s one of those topics that can make us nervous to talk about, but without it, our businesses wouldn’t succeed. Still, there is one very important topic that entrepreneurs can’t avoid, and that is cash reserves. If you have asked yourself, “how much cash should I keep in reserve?”, then this episode is for you!


If you have listened to our most recent episodes of Systematic Excellence Podcast (which you don’t want to miss, by the way) we have been covering the Business Hierarchy of Needs, and in the latest episode, we talked about cash reserve and how to effectively build it up.


Our guest for this episode is finance expert Ron Parisi. Ron is the managing member of CPA on Fire, and he is dedicated to utilizing his 25+ years of accounting and tax experience to assist online entrepreneurs. We highly suggest you read this article so you can learn all about cash reserves and use them to make better decisions for your business. Keep on reading!


How to determine how much cash reserve your business needs 


Amalie: Do you want to talk a little bit about how to determine how much they should have in, and what’s a goal that they should set?

Ron: My rule of thumb is usually 10% to 30% of annual sales. And there’s a lot of factors that go into that, depending on the life cycle of your business and what are your plans. I always say 90 days, one year, three years, and then lifetime. We always try to cram as much as we can in the 90 days, and we never hit our goals in the 90 days, but over a lifetime or over five years, over 10 years, if you’re a creative entrepreneur, you’ve got to give yourself time to be successful. I’ve been doing this 25 years, so I’ve seen a lot of successful businesses and sometimes it takes time to be successful, but to be successful, you need the engine, you need the fuel for the engine and that’s your cash.


Amalie: Do you have any specific examples of people that you’ve worked with or clients that you’ve worked with that struggled with that part, but what adjustments did they make in order to build that up without losing all the business?

Ron: The first thing is you gotta know your numbers and you have to have a budget. Through technology nowadays, it can go a long way with online platforms: QuickBooks Online, Xero, Wave. You can get your books in pretty quick order.

The thing that I tell my starting off entrepreneurs that are going to catch them is loans, taxes, and inventory. I think a lot of folks are very good at, “okay, this is what I took in this month.” But they don’t understand that usually those three very rarely hit the profit and loss statement. And every December and January when we’re doing the taxes, they say “Oh my goodness, Ron, how do I owe these taxes? I don’t have any money in my bank account.” And a big thing to know is your profit and loss can only get you so far. So number one: when you make the money, you put the money away for your tax liability.

Particularly if you’re in the eCommerce space, a limitation to growth is cash; growth consumes cash. So plotting out that growth, how much is that going to cost?

You’re going to make a lot of money in year two, year three, but you’ll get there with the cash that you currently have. So we really are big proponents of forecast budgets and looking at consumption of cash toward a very high growth trend.

I don’t want to say everybody has to have 30% to be a successful business, but you have to understand where you are in the life cycle. And sometimes you do have to go under a Ritz crackers diet to be successful. But once you have a sustainable business, this is where the Profit First’s putting money away comes into play.

Here’s an example: Let’s call this client Paul. Paul’s been very successful in his business the last 10 years, but then you look at Paul’s balance sheet, both as a business and personal and you say, “Oh man, you’ve been doing great the last 10 years and you have almost nothing to show for it. You haven’t built any personal vault.” And there’s the ability to build personal wealth as you’re successful if you are disciplined.

When Paul comes and has almost a zero balance sheet, things have to have to change because most likely Paul’s working 12 hours a day and is getting burnt out. Sometimes entrepreneurial life can be up and down and you need certain markers to show you are making progress and you are going to be successful. And make sure that a certain amount of that money goes back into his pocket and into a savings account.


Amalie: I think that’s really important the part about paying yourself. That’s something that Janine and I have set up and that money that’s our cash reserves goes into an account that we actually labeled “the vault.”

And as the business grows, everything has to grow at the same time; your inventory, your advertising, and your team, and all of those things need to be included in that when you’re doing the forecasting. Have you found that to be true as well?

Ron: I’ll throw a book out there that is called, “The road less stupid” by Keith Cunningham. speaks about “what hat are you wearing today?” There’s the technician hat, manager hat, CEO hat, then he talks about an investor hat. Then the concept that an investor hat is huge because it really makes you step out of your business because you’re not a hedge fund who’s putting money into the business. You’re putting something even more important to the business and that’s your time, your energy. That’s a very important hat to wear when you’re in that growth stage. So put that investor hat on and say, “What is it going to take to service all those new clients?” Maybe it’s going to take a new project manager. That project manager is going to cost X plus payroll taxes, I’m going to have to buy an individual computer, etc. You literally have to strategize long-term. 

Running your business as if you were going to sell it 


Janine: I was in a conversation the other day about running your business or looking at your business as if you were going to sell it. What takes have you on that?

Ron: That’s one of the first conversations I have, what’s your exit strategy. Everybody needs an extra strategy. With my business, I’m going to be at this until probably they have to remove me. I just love it and I don’t have any plans to retire, but I always do have an extra strategy because you never know what the opportunity or what the offer is going to come in.


Amalie: What role do cash reserves play in the exit strategy? 

Ron: It’s not necessarily how much cash you have in the bank. It’s how well you’ve been utilizing that cash. And if you show a track record of the ability to put money aside every month, that’s a huge feather in your cap, right? It shows that obviously this business has enough cash flow to be able to have a savings account for the owners, be able to pay their bills, be able to tailor their taxes, and be able to fuel future growth. That’s what buyers want to see. They don’t want to see the guy that’s putting every last dime into the business and not seeing super high, positive cashflow.


Steps to build your cash reserves from zero (starting today!)


Amalie: What’s your recommendation for someone that heard the podcast and wants to start having a cash reserve? What would you recommend to someone that doesn’t have that?

Ron: I think that the first step is to save something. Don’t say, “once I get to a million dollars in sales, I’ll start saving.” I think the safe thing would be asking yourself, “how much is my positive cash flow”, then how much are your catches and principles of the ways I’m trying to pay back if you have any debt. Then I would just start off with 10% of positive cash flow, put that aside and then start reevaluating that, but the most important thing is to start. You gotta be patient. Success comes. Just make sure you have a good business plan.


Janine: That impatience can be what drives them to get things done, but it’s also a trap.

Ron: It’s hard to imagine that setbacks are lessons, but overall, it’s part of being an entrepreneur. But how do you guys stress patience with your clients? I’m interested.


Amalie: Make plans with deadlines, and stick to them. Anything that you want to accomplish in your business needs to be forecasted, not just the money, but also the plans, your launches, your services, it’s all planning, and looking at all the little details. It’s uncomfortable, but once you start to see this project come together, you get to see how big it is. 

Janine: And we also give them a place to put all those good ideas. It’s like, “just put it over here and we’ll coordinate next quarterly meeting. We’ll go through the whole list.” So it’s not telling them no or to stop, but it gives them a place to put it, and then focus.


Some final thoughts?


Ron:  I just kinda made a kind of a list of things, like what would drive you to have more cash and have less cash. 

You don’t want to hear about it, but sometimes you do need that joint venture, or you need that investor that comes in and helps you get to the next level. That’s an important sort of a mental hurdle that I have to get over some folks. This is their business, they don’t want to give it up, but sometimes to make that next leap you really have to kind of be open for that. 

And then asking yourself where’s your clientele? If just one client makes up a third or half of your income, that could be gone next tomorrow. If you’re selling a repeatable item, then probably less cash is necessary and you have a reoccurring income.

There’s a lot of factors between that 10 to 30%. But for me, that’s a really good goal to start off with. And again, in the beginning, you’re probably going to have less cash, and as a mature company, you should have more. If you don’t, then you really need to do everything we just spoke about, planning, budgeting, Profit First, or some form of it.


And that’s it for today! We hope this interview has been helpful to you. See you on the next episode!


To listen to the full episode click here.


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