As we March to the end of Q1, the unfortunate failure of the Silicon Valley Bank (SVB) last week affords us another opportunity to highlight a few financial lessons to learn that you can apply today.
1. Don’t put all your cash in one bank…especially if you have more than 250K liquid. FDIC insurance only covers up to $250,000 per depositor, per banking institution. Pick a second bank. I suggest a regional, community or credit union. They offer more flexible lending terms, better rates and a personal customer relationship. Don’t put more than $250K in any one institution and be strategic with your banking relationships.
2. Manage your cash flow carefully. Understand your monthly payables and receivables so you know how much cash you burn through on a monthly basis and how many months of cash you have stashed in the bank accounts. Monitor the timing of when you spend cash with when cash flows into your business. You should be able to predict 8-12 weeks out whether you will run out of cash so you can take actions to avoid it. (Talk to a client about accelerated payments).
3. Review your balance sheet with your CPA or an outsourced CFO. Most small business owners hardly look at this financial statement, but it’s the 2nd most important financial report besides a cash flow. Your business balance sheet shows if your company is solvent with enough assets to cover your liabilities (vendor bills, credit card debt, loans/lines of credit, payroll liabilities, etc.)
4. Diversify your customer base. No customer should represent more than 25% of your revenue. When you have a customer representing too much of your revenue and the engagement end’s suddenly or there’s a delay with payment, it could significantly affect your cash flow and ability to pay your obligations.
5. Check your revenue model. Profits should be your main source of cash flow. Don’t depend on lenders, grants or investors to save your business. That funding dries up quickly in weak economic. Many of the startups (that aren’t often profitable) needed to take out a lot of cash and draw down on their lines of credit to survive. That put huge pressure on Silicon Valley Bank, which contributed heavily to the collapse of the bank.
Make sure you go inside the bank to do business. You want to make sure someone knows you, and that they are aware of your business, so if something happens, you have an advocate.
As fiduciaries and business owners it is our responsibility to have strong financial systems to ride out the storms and protect our clients and business from manageable risk.
Contributing Author – Melinda Emerson,