How Much Cash Should I have In The Bank?

"How much cash should I have in my bank account?”

“Are my cash reserves too low?"

I get these questions often.

I created this sketch. I also made a video about it here.

I call it The Cash-on-Hand Quadrant™ 

It is NOT perfect (especially for $1M+ sized businesses). But, don't write it off. I have seen this be accurate time and time again.

On the X-axis is cash.

The goal is to have one month of revenue as cash in the bank.

I take the average monthly revenue from the past three months. Anything above this threshold is distributable cash. That money goes to owners/management. Some ask me why I use revenue instead of expenses. It is simpler. Most business owners know last month's revenue. Fewer know their expenses. Also, questions about debt payments start to swirl if we use expenses.

If you have fewer than two weeks' worth of cash on hand, your financial situation is critical.

On the Y-axis is annual revenue growth.

If you more than double your business's revenue each year, you're in growth mode. Anything more than 50% growth is HIGH.

STAGE 1: 911 Status

If you grow the business by less than 50% YOY and have less than 2 weeks of cash... you are in 911 status. This is very dangerous. The business is not growing. You have no money. Price increases are usually required. Even this will be difficult. You don't have tons of leads pouring in.

STAGE 2: Cash Crunch

If you grow the business by more than 50% YOY and have less than 2 weeks of cash... you are in a cash crunch. This situation causes significant financial stress. But, you are growing very fast! This is roller coaster. Usually, I hear the phrase, "I am investing the profits back into the business"

STAGE 3: Risk Averse (Profit Mode)

If you grow the business by less than 50% YOY and have more than 2 weeks of cash... you are in Profit Mode. Cash reserves cross one month of revenue often. You are able to distribute cash to owners and management. Don't take the label of "risk adverse" as a bad thing. This is where most profitable businesses stay. They are not growing super fast. They stack cash.

STAGE 4: Scale

If you grow the business by more than 50% YOY and have more than 2 weeks of cash... you are in perfect position to scale. Scale happens when you have plenty of cash and you have systems in place to grow fast. This is why having a loan allows you to scale faster. Add more cash to a business that has great advertising and sales... and watch it grow!

Where are you on the Cash-on-Hand Quadrant™  ?