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While difficult today, consider a post-pandemic rainy-day strategy

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Sam Waltz

Sam Waltz
Publisher Emeritus

By Sam Waltz

Lessons are abundant from the pandemic for entrepreneurs and small business owners.

But the first one, the most fundamental one, it seems to me is the one that most could have learned in the cradle, from Depression-raised parents, or grandparents.

Frankly, for many of us, it became an 11th Commandment, one that didn’t need an MBA:

“Put something back for a rainy day.”

Or, as we used to say on the Illinois sharecropper’s farm where I was raised, “you don’t eat your seed corn!”

In my own strategic business advisory practice that I set up in 1993, after I took an early out from the DuPont Company, I’ve counseled government, higher education and big companies. I’ve also worked with community-based non-profits and small businesses.

My first counsel to the latter, smaller organizations and family-owned businesses, always is similar.

“Build a capital reserve. Fund your own ‘working capital’.”

I’m not trained as a finance professional, but I’ve worked with, and around, finance professionals and capital issues for decades. Just for the “working capital” portion, it’s intuitive for most businesses that about 10% of their annual revenues is “money on the street,” at any given point. For many businesses, if not most, that represents the year’s “net profitability,” its free cash flow.

I encourage the organizations’ leaders to think in terms of a two-bucket strategy.

Bucket #1 is “the Rainy-Day Reserve,” for when it all goes wrong, which Murphy’s Law tells us it will. That bucket should contain a balance equal to about three months of overhead or operating costs.

Bucket #2 is “the Investment Reserve” really is your own pre-funded Line of Credit,  the destiny-creating bucket that gives you the means to invest when the need occurs or the opportunity arises, whether it’s the “front end”  down payment in an M&A scenario or a cap-ex implosion that requires replacement.

Goal for that, I counsel, is also about three months of operating costs, at least as an aspirational benchmark. In effect, you “fund” your own Line of Credit, and, after you draw it down, you then replenish it back to your target level, without the need to impact your Rainy-Day Reserve.

For a $1 million revenue self-employment sized small business, Bucket #1 means putting back $250,000, as does Bucket #2, for an optimal reserve of $500,000. If it’s a $10 million revenue business, the standard increases nearly 10x then, at least to the $2.5 million range to $4 million to $5 million.

Turn to your accounting professionals and / or personal family wealth managers as to whether you should carry that liquidity on your business’ balance sheet or in your personal accounts. It’s a personal decision, and circumstances vary. But that’s the financial “oxygen” for your business.

Yeah, no problem, you can have a great relationship with your banker, your commercial lender, and she or he has told you just how much you have available in a Line of Credit. Get it. Get that Line of Credit approved now. But recognize, as thousands of businesses learned during the Pandemic-driven downturn, that Line of Credit can “go away” in a heartbeat.

Bottom line is that it increases your entrepreneurial discretion, your freedom, even within your own home.

Recently, I’d shown an early-stage entrepreneur a way to leverage a $1 million small-business purchase to accelerate his growth into a new tech business segment. He is very entrepreneurial, with a great professional track record. Momma is not, however, and she’s pregnant with the first young one on the way. With the business launched, and without the time for him to have built the capital reserves, her reluctance to put the equity in the family home at risk all of a sudden meant her husband had little or no discretion in acquiring a business that could have accelerated their family wealth-building.

That’s the “opportunity cost.”

But, even at its more basic, it means not having to pay the steep capital costs of factoring your accounts receivable or jumping through hoops for your lender when the house is on fire.

(None of this is a criticism of lenders. I’m generally a big fan of our area commercial lenders, and their representatives with whom I interact regularly. Rather, this really is about being proactive and aspirational in your business’ own capital management, which bankers prefer and admire.)

Some other suggestions:

  • If you have high COGS, > 50% of the product’s price is in its Cost of Goods Sold (COGS), invoice and ideally receive a front-end retainer or deposit payment.
  • Shorten your terms, even for your creditworthy customers. It’s not unusual today to see 20-day terms, even 15-day terms.
  • If you’re buying on behalf of your customers or clients, don’t capitalize their purchases yourself. Rather, have them direct billed and find some way to mark up via your own fees.
  • Have your Small Business General Counsel (SBGC) attorney review all your contracts, including vendor, sales and employment, to make certain that they’ve been reviewed with an eye to managing your own risk.
  • Finally, as businesses are learning in the Commonwealth of Pennsylvania where Gov. Wolf is threatening to revoke business licenses for family-owned small business entrepreneurs who disobey his reopening fiats, review your business insurance(s) coverage.


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