I have yet to meet a business owner who desires less cash. Instead, company CEO’s want good, positive, cash flow, solid cash reserves, and growing cash balances. There are many ways to increase cash flow and reserves but I want to tell you one surefire way for growing businesses to significantly grow its cash reserves. My dad taught me many years ago a financial principle that has stayed with me, has always worked, and always increases cash. He taught me that as income increases throughout the years be diligent to maintain or only slightly increase living standards. The resulting gap, if income increases rapidly, will result in a dramatic increase in cash reserves. If income happens to then decrease in the future, there will be two positive results.
- Adequate cash reserves will be on hand to ride out any rough times.
- Current expenses will probably still be in line with income to maintain the current standard of living.
This principle sounds simple, but too many companies that are growing and cash positive, correspondingly increase expenses as income grows. Then, when tough times hit and income decreases, there are no cash reserves. Be careful!