Yup, I’m still talking about cash flow over here. I’ve said it a million times, what you focus on expands, and our cash flow is no different. Today I’m quickly explaining perhaps the most important metric on your cash flow forecast (that I know you’re totally using now, RIGHT?).
Months of cash on hand. Cash reserve.
In other words, if not another dollar were to enter your bank account starting today, how long could you operate without going into the red? I’ll show you exactly how to figure this out.
First, take your annual expense budget, divided by 12. For example, if your annual expenses are $1M, your monthly expenses would be $83,333. This is your monthly burn rate, or how much you spend, on average, each month.
Then, take your bank balance (literally, the amount of money sitting in the bank right now) and divide by your monthly burn rate above. For example, if you have $100,000 in the bank right now and your burn rate is $83,333, you have 1.2 months of expenses on hand.
Not sure if this is good or bad?
Our goal in building a reserve is to have 3-6 months of operating expenses in the bank to support the organization in times of shortfall or emergency. In the example above, our monthly expenses were $83,333, so a 3-6 month reserve should be $250-500k.
This number may sound downright terrifying, and I agree, it’s a BIG goal especially for an organization that coasts into payroll every two weeks on fumes. But we’re not going to get there in a month or even two months. This is a long-term process that will lead to long-term sustainability.
Because you’re a purpose-driven leader who’s ready to change the world, I know you’re in it for the long haul and you value sustainability. I encourage you this week to start building your 3-6 month cash reserve by setting up a separate bank account for this extra special cash.
By shifting your mindset around cash and building a strong foundation of sustainability, you will no longer let a low balance paralyze you in fear or a high balance cause you to invest in ALL THE THINGS. With this new cash reserve + mindset, you will never run out of cash again.
That sounds pretty darn good, right?