A practical guide to growing and increasing the value of your business.

In golf, failure is usually attributed to LOFT, lack of freakin’ talent.

In business, failure is always attributed to LOFC, lack of freakin’ cash.

Cash is king — the lifeblood of a business. Without cash you cannot operate your own business.

Question #1 –
How much cash do I need?

Answer: Two to three times you think you need.

If you are just starting your own business, you need enough to cover at least six month’s operating expenses. This amount should fund costs such as payroll, rent, utilities, plus other operating expenses and lunch money.

In addition, you need cash to cover your “working capital” needs. Simply defined, working capital equals accounts receivable plus inventory less accounts payable.

Accounts receivable come from selling stuff to your customers who don’t want to pay you for as long as they can get away with it. You set the terms and they try to stretch them. For example: your terms are pay in the 30 days and they try to pay you in 90. So, to be on the safe side, figure 60 days or two months of sales.

You will need inventory on hand to service your customers. Normally, they want the product or service yesterday. How much cash you need depends on how much inventory you need to service and how far you can go without paying your suppliers, normally referred to as accounts payable.

There was a successful Broadway play called Other People’s Money. There is also an excellent little book called Buy Low – Sell High; Collect Early – Pay Late. Both dealt with the principle of leverage.

For cash management needed for working capital, the trick is to generate negative hole time.

Hole time equals the number of days’ sales it takes you to collect your receivables (DSR) plus the number of days’ purchases you need on hand for inventory (DSI) minus the number of days it takes you to pay your suppliers (DPP).

Formula: DSR + DSI – DPP = HOLE TIME

Example: 60 + 15 — 60 = +15

Target: 30 + 10 — 60 = –20

You can see, if you manage your working capital cash correctly and hit a negative hole time, your suppliers are providing you with a positive cash for working capital – i.e. they are helping you finance your business – interest free.

Pay attention to hole time management and you will sleep better at night. Other than getting orders, this is one of the main areas of your business focus. Think about it, if you can do this successfully, the only cash you will need to run your business is your payroll.

Question #2 –
Where do you get money?

For starters – your own, your spouse (be careful), your relatives, friends. Normally these funds come in the form of loans with some type of debt service plan for principal and interest.

Credit cards?

Sell stuff?

The second tier as we covered in the “hole time” concept – from your suppliers.

Next comes investors – they typically want a piece of the action and an exit strategy.

Then comes lenders – i.e. banks – they usually want all the collateral, your home, dog, and first born and generally won’t lend you money when you need it.

The lesson is: Cash is king. Treat it like gold. Become a Silas Marner, a cash mizer about about cash. Pay attention to every penny you spend.

Of course, the ultimate cash generator should be from your profits and to do this you must sell your stuff for more than it costs you.


Rule #1 – Cash is king.

Rule #2 – refer to Rule #1 every day.