What an amazing feeling to end a year with a great cash reserve, only to end the next in cash hell. You start the year off right—strategy meetings, forecasts, a full pipeline—it’s all going really well. It’s going so well you start to justify spending cash on a new office, new furniture, more employees. And why not, after all the work that’s streaming in? You’re growing faster than you ever have!

Well, there’s something many executive teams mix up when they have a lack of financial acumen on their team. They lose sight that revenue is not profit, and profit is not cash. Mixing them up is a common mistake.

Does your business have proper cash reserve management strategies in place, or are you spending cash on unnecessary expenditures?

Why Cash Reserve Management Is Crucial

Revenue can become a disease that can debilitate your brain by making you think your company has cash when it doesn’t. Learn from two great examples:

Be careful about spending

I had been working with one company for four years before they finally hired their first CFO. Unfortunately, they did not identify what they really needed in a CFO and hired someone who had helped them with a few projects the year prior. They didn’t really interview for the position; they just hired based on simplicity.

cash reserve management

Since this person had helped them with projects in the past, the CEO assumed this person would make a good CFO. I was not enamored with their selection. The CEO selected this person because they came in at the right price and accepted the part time position.

Prior to hiring the CFO, the company had seen growth of 50% a year. They were strategically thinking about their big moves, making great progress with building and maintaining their culture, and meeting their goals through focused meetings.

One of the first things the new CFO did shortly after arriving was complain about how much the company was spending on their strategic meetings. The new CFO didn’t understand the value of the strategic meetings and did not correlate their current success to the strategic meetings. The CEO then decided the company needed to become more task orientated—a strength of the CFO.

About three months later, the year was winding down, and the cash was flowing, or so they thought. The CFO looked at all the cash and wanted a share. So, the CFO convinced the CEO they should give bonuses to all the executives. The CFO had done the legwork prior to talking to the CEO, selling all the other executives on the bonus idea first. All of the team supported taking a huge chunk of the cash as a year-end bonus.

Shortly before the bonuses were paid, I warned the CEO that draining their cash reserve was not a good idea. They were heading into a tight cash quarter, meaning they should implement cash reserve management strategies as much as they could. However, as a coach, I can only caution my clients; the decisions are theirs to make.

The bonuses were paid, draining almost all the cash reserve. Sales tightened the first quarter of the new year, and they missed their projections The company did not have cash to invest in changes they needed to make for lead generation and sales execution. Cash became an issue in three months, and within six months, the CEO was worried whether they could stay in business. If the CEO had acted differently, they could have held some of their cash as their sales started to slip and would have had the funds to kick off a new marketing initiative.

Work with people you can trust

This second example is similar to the first, but this time, it was the new partner who shifted the focus. They convinced the CEO to quit doing strategy meetings and to be more tactical. The new partner viewed strategy as a waste of time, and with large sales rolling in, it would be best to focus on getting the work done.

The new partner needed some cash to get out of personal debt, and the CEO was sold on the idea they could recoup the investment made to start the company. I give the new partner a lot of credit, using the CEO to recoup the initial investment in the company to give a bonus so the new partner could pay their personal debts. Unfortunately, the short-sighted selfishness cost a few people their jobs.

Strategize to Preserve Your Cash

By sharing these two stories, my intention is that you avoid making the same mistakes. Don’t miscalculate the importance of cash reserve you may need in the future. Be cautious and think twice before draining your reserves.

Put in place cash reserve management tactics if you want to grow. However, preserving cash doesn’t mean you should stop doing what gave you the cash. Having the right people with strategic focus and leading great execution are key factors that go hand in hand with strong cash flow. Leaders who invest in strategy and balance with execution are more effective. As a great mentor of mine once told me, “Don’t trip over dollars to save dimes.”

Cash reserve management strategies

Running out of money is one of the biggest reasons companies go out of business. End this by being smart about how you spend (or don’t spend) your cash.

Try these cash reserve management strategies to protect your business’s cash:

  • Determine your break-even point and make that your goal.
  • Maintain a cash reserve to protect yourself from shortfalls. If you have cash set aside, you can better manage low-cash seasons.
  • Only spend money on essential items. Minimize your spending on unnecessary things to protect your reserve.
  • Hire a trusted and experienced CFO. Do some research before hiring someone to handle your business’s cash. Make sure this person is knowledgeable, experienced, and responsible.

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