Your business needs to setup a weekly transfer from your checking account to a savings account of an amount large enough that you’ll be able to pay entirely for 1 payroll out of your savings within 12 months. In other words, if your average payroll is $15,000 then you need to save $288.46 per week. If you could save double that and build up your savings in 6 months then even better.
There’s nothing deep or thought-provoking about this blog. You need to do this for 2 simple reasons:
- To cover you if cashflow is slow.
- To save money.
Number 1 is straightforward. This just helps you sleep better. If your billing system crashes or a large client fails to pay on time or an employee runs off with a big deposit, it’s good to have a backup plan to cover payroll.
The second, saving money, might be less obvious but you’ll save money in a LOT of ways by having money. Think of it this way, in every small town I’ve ever been in, the nicest building is always the bank. If there wasn’t money in lending money this would not be the case. So instead of lining your local banker’s pockets, line your own by having a stash of cash for capital investments. Here are a few examples of how:
- Take every pre-payment discount you can from your vendors. As a matter of fact, call your vendors who don’t offer pay-early discounts and ask for them. At my business of less than $1 million in annual revenue, these pre-pay discounts added up to over $300/month in savings! That’s $3,600 per year! That’s a big deal for a small business.
- Pay cash for vehicles. Sure everyone says they offer 0% financing these days but they also say OR take $4500 off the sticker price. And with a check in hand, I’m betting you can take even more then that off the price. Again, $4500 is a significant savings for most small businesses.
- Pay down debt. After you’ve built up that 1 payroll of savings to keep liquid, apply the rest of those savings transfers directly against any outstanding loans. On a $100,000 15 year loan at 6.5% you’re paying over $57,000 in interest! By paying just an extra $300/month on that $100,000 note you’ll pay off the loan almost 5.5 years early.
- Buyout other shareholders – If you’re not the sole owner, you can always have the company buy back outstanding shares. To do that you’ll need money. And once you do that, you can convert your business to an LLC filing as an S-corp and save yourself potentially $10’s of thousands in payroll taxes.
Don’t forget – Spending and saving are habits! If you don’t save any money when you’re making $2,000 per month you won’t save any money when you’re making $20,000/month.
To your financial success, Bryan