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How much cash to keep in your business
1. Define your variables.
Look at the following questions. The more times you say “no,” the more cash you should have in the bank.
Is your business well-established?
Do you have quick access to credit, loans, or liquidity?
Are your clients diversified?
Are your client relationships healthy?
Are macro trends looking up for your industry?
Have you already budgeted for growth?
2. Make 3 projections.
Pull together your financials from the previous year.
For each expense and income, estimate what you’ll earn or spend per month over the next year. Make a best-case, baseline, and worst-case projections.
Tally it up and see where you land.
You’ll end up with a range of possible cash scenarios. Your worst-case numbers will be scary. Your best case numbers may feel ridiculous. Your comfort zone is likely somewhere in the middle.
3. Revisit.
Prediction takes practice. Each month, enter your actual numbers next to your predictions to get a sense of your accuracy.
Make a new set of predictions on a quarterly basis.
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That’s it! What do you think? Did I miss anything?
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