Podcast EP 106 | Why You Need a Cash Reserve to Weather the Storms

How much of a cash reserve should you have? Cash gives you options when the storms come — and they will come.

Most peo­ple don’t build enough of a cash reserve in their busi­ness, or they always spend any spare cash, often run­ning the busi­ness with­out an ade­quate buffer. Prof­itable com­pa­nies run out of cash and go bank­rupt every sin­gle day.

So how much cash should you have in your busi­ness? What is a good or bad cash buffer? Why is it impor­tant to main­tain a cash buffer in your busi­ness to endure the storms?

Brad Giles and Kevin Lawrence answer these ques­tions and more in this week’s episode of the Growth Whis­per­ers podcast.

EPISODE TRAN­SCRIPT

Please note that this episode was tran­scribed using an AI appli­ca­tion and may not be 100% gram­mat­i­cal­ly cor­rect – but it will still allow you to scan the episode for key content.

Brad Giles 00:12

Hi there, wel­come to the Growth Whis­per­ers, where every­thing we talk about is build­ing endur­ing, great com­pa­nies, build­ing com­pa­nies that mat­ter, com­pa­nies that last, com­pa­nies that peo­ple want to work in, you know, the kind of com­pa­nies that we all aspire to being a part of. My name is Brad Giles. And as always, I’m joined today by my co host, Kevin Lawrence. Hel­lo, and how are things in Cana­da today?

Kevin Lawrence 00:40

Things are great today, Brad. It’s the in the evening. It’s get­ting a lit­tle dark. And but it’s not get­ting dark as ear­ly and we’re real­ly hap­py about that. So yeah, things are good. The econ­o­my is booming.

Brad Giles 00:58

Yeah, life’s good. As always, we’d like to pro­pose that peo­ple start their meet­ings with a word or phrase of the day. And then we tend to try to observe the awk­ward moment where Kevin tries to stitch them togeth­er. I’m sor­ry, that was not meant to be some­thing I’d say out loud.

Kevin Lawrence 01:29

Grat­i­tude, like, life is pret­ty grand. I’m con­stant­ly hum­bled and amazed and grate­ful for this amaz­ing place that we live. I’m just on an air­plane a cou­ple days ago, I’m amazed at the dis­tances that we can trav­el, like human beings are just freak­ing awe­some. And I’m just grate­ful for all the great things that we do. And, and hum­bled and inspired by all the inno­va­tions and when you look at the last cou­ple years, and how peo­ple have han­dled COVID And hope­ful­ly it’s behind us per­ma­nent­ly to a great extent, but whole league so I’m just yet I’m grate­ful for the awe­some­ness of human beings.

Brad Giles 02:17

Very good mind today is about a play­ers. And it’s just, it’s just don’t skip steps. So across sev­er­al fronts recent­ly, I’ve been involved in hir­ing or talk­ing about hir­ing and a play­er’s, and espe­cial­ly through the book that I’m writ­ing about onboard­ing. Like just don’t skip steps when it comes to onboard­ing tem­plate. I mean, when it comes to a play­er’s, it’s worth spend­ing the time to get the best people.

Kevin Lawrence 02:51

And then it’s also worth spend­ing the time to onboard them right? And then retain them and keep them hap­py. So what the heck are we talk­ing about today? Last week, we talked about garbage? And or sor­ry, stretch goals being garbage. But what are we dig­ging into this week?

Brad Giles 03:11

Yeah, this week, we’re talk­ing about cash reserves to weath­er the storms or why you need cash reserves to weath­er the storms. I think in large busi­ness­es like you know, list­ed busi­ness­es or multi­na­tion­als, it’s kind of a bit of a giv­en where they’ve got more sophis­ti­cat­ed CFOs per­haps. But as you kind of drop a zero drop in anoth­er zero com­ing down the rev­enue, you know, moun­tain, as it were, the impor­tance for cash reserves, becomes less front of mind. And is ever so impor­tant. Because these busi­ness mod­els are often a lit­tle bit more volatile with a lit­tle bit more going on. So yeah, we’re talk­ing about why you need cash reserves to weath­er the storms.

Kevin Lawrence 04:01

Yes. And I pro­pose no mat­ter what the size, it’s a crit­i­cal top­ic. And it’s a hearty debate, because in many ways, it’s almost like pol­i­tics in the US. It’s extreme­ly, extreme­ly dif­fer­ent views. It’s almost polar­iz­ing, no, was­n’t going to stop and start talk­ing about cer­tain can­di­dates who just say­ing, you know, the Democ­rats and Repub­li­cans are very dif­fer­ent camps. And when it comes to cash, there are very dif­fer­ent camps, except for when you have none. And when you have not every­one’s in the same camp, when you run out of it, every­one’s in the same camp, but we’re try­ing to avoid the cri­sis that ral­lies peo­ple togeth­er, and fig­ure out, you know, and this is, Brad and I have a view. But we want you to think about what we talked about today from a per­spec­tive of enhanc­ing your view and pres­sure test­ing your view of how you han­dle a cash or your bal­ance sheet in your busi­ness. So we got to we do have a clear view, but you might not have Rule is what we’re say­ing, but use it to pres­sure test your think­ing. And maybe it’ll help to enhance your think­ing a lit­tle bit. But the root of what we’re talk­ing about today is cash reserves. And this is big con­flict between the desire for growth or fast growth and high ROI return on invest­ment. And the desire for hav­ing a war chest and a plan B, and, and cash reserves. And both are impor­tant. What you’ll gen­er­al­ly find is com­pa­nies that have been around many decades or a few gen­er­a­tions, they’ve already learned their les­son. They’re all over cash reserves like you would­n’t believe. Yeah, younger com­pa­nies are the ones where they haven’t been bat­tle test­ed ful­ly yet. They haven’t been in spe­cial accounts, they haven’t had to hand the keys back to the bank yet. And so some­times they have unval­i­dat­ed belief sys­tems about this, because they haven’t been through the meat grinder called the cash crunch. It’s the worst time like work­ing with com­pa­nies that are in cash crunch­es and spe­cial accounts with the banks and liv­ing pen­ny to pen­ny, minute to minute in terms of cash. That is not fun for anybody.

Brad Giles 06:18

Yeah, I’ve been in I’ve been in meet­ings in quar­ter­ly plan­ning ses­sions. And from the morn­ing till the evening, all we’ve spo­ken about is how to save the com­pa­ny. And, and I’ve been in those types of meet­ings sev­er­al times. But what you know, there’s a mind­set that some entre­pre­neurs can’t help but get into, which is, I need to max­i­mize every sin­gle dol­lar like I need, I can’t have lazy cash sit­ting around not being used in the bank. Because if I got $100,000 sit­ting in the bank, I’d be bet­ter off buy­ing a new piece of machin­ery, employ­ing anoth­er per­son, like get­ting that growth to hap­pen quick­er. That mind­set, I can under­stand, like, I’ve been there. I know why peo­ple get there. But it can be such a dan­ger­ous instinct to follow.

Kevin Lawrence 07:17

Well, it’s, it’s only dan­ger­ous when you hit a cash crunch, and you hit some­thing weird. It’s almost like there’s stud­ies around peo­ple that text mes­sage while they dri­ve. And the rea­son it’s so lethal, is 92 times out of 100 You prob­a­bly could send or receive a text and you’re fine. Time num­ber 93 You die, or some­body else dies. Yeah. And the real­i­ty is it’s just play­ing the odds. And the odds are is that if you’re doing that all the time, or what­ev­er hap­pens, it’s soon­er or lat­er, it’s going to bite you. And the odds are there is going to be a nasty eco­nom­ic event in your busi­ness some­time in the next 20 years. It could be tomor­row. It could be 20. Year we don’t know but we know for sure what’s com­ing. Like it’s a guarantee.

Brad Giles 08:11

We that’s why we say what this what we called this episode to weath­er the storms like we know there will be storms com­ing like no one can dis­agree or debate that. I mean, I know in Van­cou­ver, you guys Kevin had what a once in 100 year storm four or five months ago.

Kevin Lawrence 08:34

And it wiped out all of the bridges going into Van­cou­ver, the four high­ways that take peo­ple from Van­cou­ver to the rest of Cana­da, every sin­gle one of the high­ways was washed out and we became an island. Now we could thanks to our friends in the US, we could go down south and go around through the US to get back up into the oth­er parts of Cana­da. But who plans for that stuff? Nev­er mind the pan­dem­ic and all this oth­er stuff. It’s just gen­er­al­ly it gen­er­al­ly Intel peo­ple have had to deal with how the day of reck­on­ing when they ren­der to cash. Peo­ple are often more aggres­sive or don’t pay atten­tion to it as much as at the end of the day. Or just say­ing your today is that we know some peo­ple love liv­ing on the edge and gam­bling. And oth­ers like to have cash in the bank. We’re just going to talk about hav­ing cash reserves and why it’s crit­i­cal and give you some guide­lines to think about in terms of it and at the root of it. high­ly prof­itable com­pa­nies go bank­rupt reg­u­lar­ly. You know, it was real­ly inter­est­ing. I had an entre­pre­neur I worked with in the US he built he grew up in the busi­ness, no for­mal edu­ca­tion. And he once he took over, bought the com­pa­ny and took it over after work­ing on the floor. Got it up to 100 mil­lion And of rev­enue and 20% EBIT, da. So 20 mil­lion of EBIT, da mil­lion dol­lar busi­ness is pret­ty damn good. Well, I did a work­shop for him and his team, I got a call from him one day. And he called said, Kevin, I real­ly need your help. Like, what? What’s going on? While I’m run­ning out of cash? I’m like, Okay, that’s inter­est­ing. What’s going on? Oh, I don’t know what’s going on. Cuz he was­n’t that sophis­ti­cat­ed in terms of the data. So we’ll get your CFO to put some num­bers togeth­er, guys, because I need to meet you. I said, I don’t have time. It was where are you? Well, I’m in Van­cou­ver. Okay. All right. Can I meet you tomor­row? No. We’re going to go in Chica­go. Okay, can I be in Chica­go. I said, Well, I’ll be in Chica­go next week. I’m in Chica­go on Wednes­day, Thurs­day, I could meet you on Fri­day, because I’ll meet you on Fri­day. And I get a con­fir­ma­tion he booked us into the Trump Tow­ers, which is a speak­er at the Trump Hotel in Chica­go, which is spec­tac­u­lar. Any­ways, he flew in on his pri­vate jet, his dri­ver brings him to the air­port like he’s not, you know, under­per­form­ing as a com­pa­ny. And we long sto­ry short, at the end of the day, he nor­mal­ly oper­at­ed on about 7 mil­lion of cash. And it was all gone and going the wrong way. And he was ter­ri­fied. Turns out, he made a deal to save mon­ey on a major resource he bought in his busi­ness. But he short­ened the pay­ment terms from 60 to 15 days. If you take $100 mil­lion busi­ness doing 20 mil­lion of EBIT, and you break down the math, that’s about six or 7 mil­lion bucks that vapor­ized the point of it is that he actu­al­ly had an okay reserve, but he just did­n’t under­stand cash that well. And he was going to lose the busi­ness, he was going to have to go and get exter­nal equi­ty, because he lit­er­al­ly could­n’t pay his bills. Right. And this is what hap­pens with cash. Cash is some­thing that a lot of peo­ple don’t under­stand well, and what we want to talk to you about today is that the good com­pa­nies go out of busi­ness because they don’t know how to man­age it. So that’s what we’re going to say and we don’t know your busi­ness, your oper­at­ing con­di­tions, what­ev­er it is. But some­how, my rec­om­men­da­tion, if you’re whether it’s three 612 months of oper­at­ing cash, at least with­in 30 days, you need to guar­an­teed be able to have prob­a­bly 12 months of cash, 12 months of cash, maybe not avail­able in pure cash in the bank. But you can get it no mat­ter what the eco­nom­ic con­di­tions are with­in 30 days in your hands.

Brad Giles 12:26

Because the storms always come, you know, we start­ed off talk­ing about the weath­er. But every year, there’ll be a win­ter, every year, there’ll be storms, some storms will be worse than oth­ers. And it’s just, it’s just a gam­ble. And the gam­ble is might be excit­ing. But we’re about build­ing endur­ing great com­pa­nies, the com­pa­nies that don’t sur­vive, nev­er get to endure until their sto­ry. Like they go they dis­ap­pear, right?

Kevin Lawrence 12:56

They get bought up by some­body else along the way, or what­ev­er happens.

Brad Giles 12:59

But you point there it is that prof­itable com­pa­nies, it does­n’t mat­ter your busi­ness mod­el, it does­n’t mat­ter how many AI play­ers you got prof­itable com­pa­nies run out of cash and go bank­rupt every sin­gle day. And that’s the impor­tance of hav­ing enough cash to weath­er the storms. You’ve got to be able to weath­er those storms to sur­vive. Or else there’ll be noth­ing. There’ll be noth­ing. I’d been in meet­ings with peo­ple where we’re talk­ing about an a bril­liant strat­e­gy, a bril­liant strat­e­gy, and they go that’s fan­tas­tic. But real­ly what I’ve been think­ing about for the last 10 min­utes is how I can’t make wagers next Thurs­day. Yeah. And it’s like, it does­n’t mat­ter how, how good your strat­e­gy is, how good your team is, every­thing will come back to cash.

Kevin Lawrence 13:55

Yes. So we want to encour­age you to have your tar­get of what you think it should be not what you think your mod­el can do. What you think it should be, you know, we both push peo­ple to build up cash in their busi­ness­es, for the pri­vate­ly held, you know, fam­i­ly busi­ness­es that want to be around for a long time we’ll talk about pri­vate equi­ty in a minute. Pri­vate equi­ty has a dif­fer­ent approach to catch which to cash which works because pri­vate equi­ty has a lot of cash. Now they gen­er­al­ly run busi­ness­es with max­i­mum debt, min­i­mum cash, and it cre­ates a psy­cho­log­i­cal envi­ron­ment where the team has to pro­duce but the pri­vate equi­ty always has access to cash so they can they’ve got back­up plans if the oper­a­tor so it’s okay for the oper­a­tors to not think they have cash, but some­one has to have it aside from just the bank. So I want to give you an exam­ple of some­thing in the auto indus­try called its ser­vice absorp­tion rate. Basi­cal­ly, it’s the ser­vice or the fixed oper­a­tions part of a car deal­er­ship. The parts sales, The Body Shop, the ser­vice shop that fix­es your car hours. And ser­vice absorp­tion rate is the abil­i­ty of that part of the busi­ness to soak up the over­heads of the entire auto­mo­bile oper­a­tion. Mean­ing if they could­n’t sell any cars, zero cars, which, for some deal­ers has been com­ing, almost true, not zero, because they can’t get inven­to­ry right now in this mar­ket, it’s hard. But if they did­n’t sell a sin­gle car, could the ser­vice of the fixed ops cov­er the nut so the busi­ness could break even. So that’s called ser­vice absorp­tion. So the auto indus­try has that tar­get, typ­i­cal­ly a healthy auto busi­ness will be about 85% ish. You know, when com­pa­nies we work with want to push past 100, to know that we can cov­er that and be fac­ing be healthy with­out sell­ing a car. And that’s anoth­er ver­sion, it’s like, it’s in the same direc­tion as a cash reserve. Although, you know, one of the auto busi­ness­es that I’ve worked with in the past, you know, not only would we have a ser­vice absorp­tion rate of at least one, we would also have large sums of cash set aside. And when we would need to do projects, we would go bor­row the mon­ey from the bank. So we have our big war, chest, big war chest, and then we go bor­row mon­ey when we need it. Because the busi­ness was gen­er­at­ing great cash, but we would bor­row the mon­ey, because then if some­thing came along that we want­ed to do, we can go and use our mon­ey. We don’t need the bank’s permission.

Brad Giles 16:39

The bank should be viewed in that. We don’t need them. We want them. Okay, we don’t, we’re not nec­es­sar­i­ly like our busi­ness won’t col­lapse with­out them. Like we’ve got to be able to because, you know, it was only 10 or 12 years ago, that a whole range of banks, they them­selves went under, and their job is to man­age cash. Right. So they any that and that was a storm, a big storm. But that was a big storm that had a lot of impact on peo­ple. So we’ve got to have a strong enough busi­ness that we can with­stand that shock. I remem­ber there was a cus­tomer that I was work­ing with many years ago. And every month, I’d say to him, what’s your cap­i­tal tar­get on? How are we pro­gress­ing towards them? And how are we going, and we set an amount of mon­ey, and we put it in there. And he, I think he took the advice. And I think that he, he took the con­cept. And then I remem­ber dis­tinct­ly a cou­ple of years lat­er, it was a Sat­ur­day morn­ing. And I was at the farm­ers mar­kets with the fam­i­ly. We were walk­ing around and he rang me which was in nev­er rang me on a week­end. And I thought, well, I bet­ter take this call picked it up. And he’s like, it’s all just, it’s all just col­lapsed. And it’s all col­lapsed. Like we’ve got some real prob­lems. In the pre­ced­ing months, he was telling me how this major com­peti­tor went under that major com­peti­tor, the indus­try had struc­tural­ly changed. And if we had­n’t been sav­ing up that cash, when the indus­try had that struc­tur­al change, he would have been wiped out. Now he’s going on, and he’s going fan­tas­tic. But it was only because we changed his think­ing and said we’ve got to have a pool of cash that we can draw on. In case we have to weath­er the storms. Yeah.

Kevin Lawrence 18:36

Or some­times it can be act­ing on a big oppor­tu­ni­ty. You know, War­ren Buf­fett, who is known for hav­ing lots of cash is also known to get some amaz­ing deals on busi­ness­es, because he can have a dis­cus­sion today and send the mon­ey tomor­row. Because he has it. He’s not need­ing to get per­mis­sion and so it’s an oppor­tu­ni­ty chest as well not just prob­lems where you can move. And you don’t got to wor­ry about fun because some­times there’s amaz­ing deals that come along. And if you have cash you can act no mat­ter what the econ­o­my is. Okay, so we got some points to think about. So we under­stand the point. And again, every busi­ness is dif­fer­ent. You just need to have access to it. Guar­an­teed in some way so that you’re not going to end up giv­ing the keys to busi­ness to some­one else to run. So num­ber one thing to think about from this is that cash allows you to stick to your plan and your val­ues when things get weird. Weird things hap­pen all the time and you can stick to your val­ues and stick to your plans. One of my clients in the Mid­dle East when things went Oh 506 The mar­ket crashed bad like real estate fell 50% In three weeks. It was insane. It was the most insane econ­o­my I’ve ever been in this econ­o­my kind of reminds me of it any­ways. But I remem­ber isn’t we’re in a meet­ing decid­ing what to do. And you know, busi­ness fell fell fell dra­mat­i­cal­ly and We were able to stick to the val­ues of the com­pa­ny, which means our last option was to lay peo­ple off. Right, we had a whole bunch of plans because the com­pa­ny was about tak­ing care of peo­ple. Inter­est­ing­ly, the com­pa­ny got tremen­dous ben­e­fit from that in the future, because in the mar­ket, peo­ple were slash­ing jobs like crazy. And we end­ed up with a rep­u­ta­tion of hand­ing our­selves like true pro­fes­sion­als, and tak­ing care of our peo­ple in a real­ly tough time.

Brad Giles 20:26

It’s a real­ly dif­fer­ent con­ver­sa­tion going to the work­force and say­ing, we’ve run out of cash, we need to lay peo­ple off com­pared to when los­ing mon­ey, we need to fig­ure out how to recov­er, and we’re not going to lay peo­ple off, and it’s going to hurt us, it’s going to mean that we’re los­ing mon­ey. But when in order to save these jobs, we need to turn this ship around.

Kevin Lawrence 20:47

Yes. So num­ber two is that scarce, scarce cash does lead to cre­ativ­i­ty. But if you are so scarce, that you can’t do pay­roll, and you can’t pay the bills this week, every­one gets focused on by the minute, and just sur­viv­ing, and gen­er­al­ly not how to build a great busi­ness, it starts to cre­ate small think­ing and sur­vival think­ing. So there is a ben­e­fit to a cer­tain point. But when you’re run­ning day to day, hour to hour on cash, noth­ing good hap­pens. And a huge amount of ener­gy gets wast­ed just try­ing to bal­ance the dol­lars and the pen­nies and nick­els to stay in business.

Brad Giles 21:26

This is what we were say­ing at the begin­ning of the pan­dem­ic, when we start­ed this pod­cast is what hap­pens if 80% of your rev­enues dis­ap­pear? Yeah, you know, that’s a storm, right. And for some peo­ple that hap­pened, and some did­n’t, but it’s, you know, only the pre­pared will sur­vive. So you know, hav­ing that scarce think­ing like you have lim­it­ed options. What we want to do is say the cash gives you the options when the storms come and they will come.

Kevin Lawrence 21:56

Yes. And when the oppor­tu­ni­ties come to the third thing, even in pri­vate equi­ty, even though they run com­pa­nies maxed out bal­ance sheets, and you know, min­i­mum cash, they always have access to more because they’re cap­i­tal orga­ni­za­tions. So the oper­a­tors, as I men­tioned ear­li­er to show the oper­a­tors are oper­at­ing on very tight, you know, in very tight lanes, and very tight expec­ta­tions around cash. But there’s more in the sys­tem, and there’s that bal­ance. Again, even pri­vate equi­ty, if they get too tight, and they’re not think­ing they’re gonna be able to stick to their covenants, then every­one gets short term think­ing, which is not what we’re to short term. But there’s a balance.

Brad Giles 22:43

In pri­vate equi­ty, the com­pa­nies that they’re invest­ing in like they’re the prod­uct. Yes. So your busi­ness is the prod­uct, if you’re backed by PE or V and VC Mer­cy, the way that they run their busi­ness is deep cash reserves, while said so they can endure?

Kevin Lawrence 23:09

Yeah, so let’s talk about the cash. Like, what is this, I’ve had lots of dis­cus­sions with dif­fer­ent peo­ple about this. Lots of clients are because we have you and I both have clients that have been in busi­ness for decades, and dur­ing great com­pa­nies we work with a lot of it can be in many forms, it can be pure cash, right. And in my mind, basi­cal­ly, it’s a 30 day cash is what I like to call it. Yep. So it can be pure, pure cash. And you know, you might as you get big­ger, you need to get some­one to man­age your trea­sury and decide where you’re going to put it to get the rea­son­able return based on what the uses. It can be per­son­al assets that you have, you know, if you’re an entre­pre­neur and build­ing it, and you know, you run your com­pa­ny fair­ly tight, you’d like to pull the cash, you know, maybe you’ve got it in and invest­ments are oth­er assets that you can access it. The oth­er one, you know, one of my clients, so they have a notable busi­ness. And they use their cash they can in their oper­a­tions. They don’t leave a lot in your oper­a­tions. But there’s entre­pre­neurs said, look, at the end of the day, I have a whole bunch of assets my busi­ness owns that I can always con­vert to cash and a bunch of its real estate in 30 days. And I always have either assets with almost no financ­ing or no financ­ing on it, that I am 100% in con­trol over have no part­ners, no any­thing. And I can eas­i­ly even if the assets worth $20 mil­lion today. And then in a hor­rif­ic econ­o­my, it’s worth 12. And even at mod­er­ate lever­age at 50% lever­age, I can get 6 mil­lion bucks with­in a month in the world. Today I could get 15 mil­lion of cash, but in a worst case sce­nario and they looked at the worst case val­ue of that asset and they that thing, even though it’s always there’s 6 mil­lion bucks, there are 6 mil­lion bucks there. And in 30 day terms even though there’s not cash sit­ting in the check­ing account.

Brad Giles 25:13

It’s its liq­uid­i­ty, right? It’s your ATM, how much cash can you access in? In 30 days? If any sce­nario evolves, because maybe your bank, you know, and this is one that we get all the time, or we’ve got an over­draft. Sure­ly an over­draft is okay. But an over­draft is a bank. And, you know, you look at the finan­cial cri­sis over time, the banks are the ones that tight­en up the econ­o­my. So, there’s no, you know, what if the bank pulled that over­draft? Or what if the bank said, Yeah, we don’t kind of want to do that anymore.

Kevin Lawrence 25:56

Which they have the right to, with we call it a line of cred­it here, or could be it over No, they have the right to, it’s not a fixed loan, you get a fixed loan five or 10 year term at a set rate set terms, they can’t pull that unless you know, unless you’re way off, way, way off. And not mak­ing your pay­ments, etc. or meet­ing your covenants. But on line of cred­its, they can actu­al­ly pull those back, they’re not cash, they’re in tough times they can go away.

Brad Giles 26:24

So very spe­cif­ic, like a line of cred­it, or an over­draft. This is not includ­ed. Now, we’re talk­ing about, we want to have three, six months of cash, or equiv­a­lent abil­i­ty to access three, six months of oper­at­ing expens­es in a sep­a­rate account or the avail­abil­i­ty revealed avail­abil­i­ty part of me to get it that isn’t an over­draft or depen­dent on the bank.

Kevin Lawrence 26:51

And I would sug­gest at least a year is ide­al tar­get. But wher­ev­er you are, just make it bet­ter. And make it bet­ter. Awe­some. So what how, and you know, one of the things that we both do is hav­ing cash accu­mu­la­tion tar­gets, like I remem­ber, one of my com­pa­nies knew us, when we start­ed with them. They were doing about 30 or 40 mil­lion or rev­enue and Okay, prof­it. And I remem­ber I kept say­ing, we need to dri­ve this thing, increase the prof­itabil­i­ty, but as we grow, we’re gonna get min­i­mum 10 mil­lion bucks of cash. We have fights, they thought I was an idiot. Right now, I think they’re sit­ting at about 60. Yeah. Right. And, and it’s kind of burn­ing a hole in their pock­et a lit­tle bit. But it’s, it’s like, part of it is you got­ta believe it’s pos­si­ble. And I am big for com­pa­nies that don’t have it on build­ing it. And for those that have it, keep­ing it, because stuff comes along and you need it. Some­times. I have anoth­er client that’s, you know, only been wild­ly suc­cess­ful, but in busi­ness less than a decade, and they haven’t been through a down­turn yet. I remem­ber I was in a meet­ing with the CEO, said, I got­ta sign some papers. I got­ta sign a lot of cred­it. We got to get there got to take some of the cash out of my house. We’re a lit­tle tight on cash. And I lost it on him. Like, what do you mean, in a boom­ing econ­o­my in a boom­ing busi­ness? You’re bor­row­ing mon­ey against your house? Okay, I think I said when you told him he was an idiot. But I love the back­sto­ry a lit­tle bit. But it’s like, if you in this mar­ket, need to bor­row mon­ey against your house, because cash is get­ting too tight. You’re mak­ing bad deci­sions. Like some­thing’s wrong, because it was a sur­prise. It was­n’t planned for it was­n’t a strate­gic move.

Brad Giles 28:40

If that sce­nario was because he was going to acquire a busi­ness that was at a dis­count, you know, you could maybe jus­ti­fy it, but I’m not hear­ing that.

Kevin Lawrence 28:49

No, and his back­up cap­i­tal is his house. He has­n’t been in busi­ness long enough to pull a lot of oth­er cash into oth­er things. It’s all tied up in his busi­ness any­ways, just now we’ve had we had amaz­ing debates and dis­cus­sions with the CEO, CFO, and we dra­mat­i­cal­ly over the last nine months, reworked a bunch of the cap­i­tal and fix things. And he’s now got a strat­e­gy actu­al­ly had, I’ve talked to a num­ber of my oth­er clients in sim­i­lar indus­tries, about their cap­i­tal strate­gies, peo­ple have been around 30, 40, 50 years.

Brad Giles 29:24

So that com­pa­ny that you said, they’ve got 60 mil­lion cash and it’s burn­ing a hole. So what’s their rev­enue? Give or take? Like, is it 60? Or is it 500 mil­lion or 700?

Kevin Lawrence 29:37

It’s clos­er to 500. It’s just so it’s just don’t just under 500 million.

Brad Giles 29:41

Okay. So for con­text for lis­ten­ers, what does 10%

Kevin Lawrence 29:45

of rev­enue that’s one year’s profit?

Brad Giles 29:48

Yep. Tim cen­ter rev­enue are about what so that gives a bit of a frame that peo­ple can begin to think, Okay, I’m doing 20 mil­lion there­fore 10% they can begin to think about like that.

Kevin Lawrence 30:01

That would be an actu­al real inter­est­ing bench­mark, like a healthy years prof­it. Yep. Or I would pre­fer a year as OpEx. But you know, you fig­ure out your own. You’re smart peo­ple, isn’t it a good? Point is it’s substantial.

Brad Giles 30:18

It’s prob­a­bly more than you think. Because most peo­ple have about two to three in small medi­um busi­ness about two to three weeks of, of cash avail­abil­i­ty. And as soon as some­thing stopped all the gears grind to a halt.

Kevin Lawrence 30:33

Yeah, exact­ly. And then find­ing the sec­ond piece around how is the lever­age is you got to learn about cash con­ver­sion cycle, and you got to learn about cash flow. There’s some great stuff is a won­der­ful arti­cle, how fast can your com­pa­ny afford to grow? Ah, it’s an HBR arti­cle, and learn­ing about cash con­ver­sion cycle, and where cash gets buried in your busi­ness, and locked up, whether it’s in your busi­ness mod­el, how you oper­ate, whether it’s an inven­to­ry or things like that. We’ve done work on this with com­pa­nies and it’s mag­ic, how much cash we can unlock, I prob­a­bly did­n’t, I did­n’t math, going back prob­a­bly five years ago, I think at that point, we’d unlocked $186 mil­lion of cash, like tak­ing it from being buried in oper­a­tions and putting it back into bank accounts in dif­fer­ent com­pa­nies. Yeah, it’s just shock­ing. Like the client, I told you about the pri­vate jet Chica­go meet­ing, where we met me in Chica­go. In that case, we swung it, he swung it the wrong way by 7 mil­lion. And with just under­stand­ing cash con­ver­sion, we swung it back by what end­ed up being by $7.2 mil­lion dol­lars in a mat­ter of about four months.

Brad Giles 31:49

So it’s mea­sured in days. But if you think, Oh, if I improved it by two or three days, on aver­age, across the busi­ness, like it’s only a cou­ple of days, that’s not that much. We had one exam­ple is about $20 mil­lion busi­ness, we brought it back, I think it was three or four busi­ness and pro­duced about $2 mil­lion of cash. So real­ly, real­ly quick­ly, the aver­age across the board can be massive.

Kevin Lawrence 32:15

It is but it’s learn­ing the levers where it gets buried, and how to speed it up. And you track it in days, because it’s sim­ple. Yeah. And it scales with your rev­enues. And it’s, it’s game chang­ing if cash is tied into because unless you’re a SaaS busi­ness, almost every­thing or soft­ware type, almost every oth­er busi­ness should gen­er­ate cash. They should if they’re well man­aged, and many are not well man­aged and don’t, but they should be gen­er­at­ing a fair amount of cash on a reg­u­lar basis. And you need­ed if you’re gonna grow, so learn­ing about cash con­ver­sion, and also how it relates to growth and how you might change your busi­ness mod­el to make it more effec­tive. So, so a quick review. The whole idea here is to think about cash, and what’s the right amount of reserves for your­self, think of what some of the worst case sce­nar­ios could come up. And like the car indus­try, we have no cars or we can’t sell any cars. But we still break even because our ser­vice, our back end, or fixed oper­a­tions cov­ers the amount of the over­head in cash allows you to stick to your plan and stay on track to your val­ues when things get weird. You know, run­ning too scarce allows peo­ple to scarce think­ing and that takes away growth and takes away peo­ple’s will­ing­ness or abil­i­ty to take risks. And even in pri­vate equi­ty. They have lots of cash, they nev­er ful­ly run with­out cash. So they have back­up plans, even though their oper­at­ing com­pa­nies some­times have no cash in them and ful­ly lever­aged bal­ance sheets, the moth­er­ships there to help what to do num­ber four on their bread.

Brad Giles 33:54

Yeah, if if you did­n’t have access to your line of cred­it in 30 days, how much cash could you access? For exam­ple, if the bank closed your line of cred­it? Or shut that down? What is the total amount of cash that you could should could access? That’s what we’re talk­ing about here. And it’s got to be enough to keep the busi­ness run­ning to weath­er the storm. Because the line of cred­it does­n’t count because it’s not guar­an­teed. And then I guess next is set­ting a big cash accu­mu­la­tion tar­get. And then keep­ing that cash out of in a sep­a­rate account or away from oper­a­tions, some way that it can’t get sucked into the work­ing cap­i­tal of the busi­ness and so that it tru­ly is about weath­er­ing the storm because we know in a con­tract­ing econ­o­my, cash becomes scarce. And then final­ly, under­stand­ing the cash con­ver­sion cycle days. How fast can your com­pa­ny afford to grow was the HBR arti­cle that Kevin men­tioned from Neil Mullins, and then make the changes need­ed make small soon­er or lat­er changes all along the way. So Kevin, would you like to move to close this out?

Kevin Lawrence 35:05

Yeah. So the whole sum­ma­ry is learn more about cash and how it oper­ates, how it works in your busi­ness and build it up to have it for oppor­tu­ni­ties or weird storms that hap­pen. So this has been the Growth Whis­per­ers thanks for lis­ten­ing. If you want to get the YouTube ver­sion, just search the growth whis­per­ers on YouTube. Brad and I both have awe­some and infor­ma­tive newslet­ters that we put a lot of ener­gy into if you want to read them. Brad’s you can get at evo­lu­tion part​ners​.com​.au You can also con­tact him there. And for myself and our firm, Lawrence and co​.com for our newslet­ter or just get a hold of us if you want some help. Alright, have a won­der­ful week. Cash is king. Have a great one.