How Much Cash Do I Need? – Zig Zag Principle #36

September 7th, 2011 by Rich Christiansen

 I define profitability as having enough money to cover “the nut” and having a buffer that will allow me to move on to the next zag.  Everyone has different needs, or “nuts,” so profitability will be different for each person or each business.  I am covering the nut in my personal life when I have enough money to pay all my expenses, such as housing, utilities, recreation, food, clothing, education needs, health insurance, and a little more to take care of those unexpected extras that always crop up.

  If a family makes a budget and keeps track of how much it costs to live each month, then that is the family’s monthly nut.  In business, the nut would include the building, utilities, the cost of doing business, payroll for any employees, and any other expenses it takes to run the business, including paying yourself.  (If you forget that, you’ll destroy the nut in your personal life.)  Any amount over these expenses is profit. You need to carefully calculate what it’s going to cost you to get to profitability.  This can’t be a number you guess at. It needs to be a firm number and one you write down.  Here is some help in coming up with that number.

Figure your nut

(what number do you have to make per month to hit profitability)

 

Gross Revenue 

$_______________ 

Minus Expenses:

_______________     $__________

_______________     $__________

_______________     $__________

_______________     $__________

           Total Expenses

Equals Net Income

$_(____________)  

$________________


Components of Zig Number 1 

 Because your first zig is so important, I want to dissect its components and look at each one individually:

  •   Financial Number – Zig number 1 is a financial number.  You have to have a financial target number specifying how much you want to bring in. Refer back to the nut you determined in the last section.
  •   Allocation of Time – How much time are you going to dedicate to getting to cash?  How long will you give yourself to achieve this financial target?  I will typically dedicate 65 percent of my resources toward getting to profitability, 30 percent toward zag number 2, and 5 percent toward zig number 3.  And, as I look ahead, I never plan beyond 3 zig zags.
  •   Duration of Time – How long are you willing to run at this pace?  Anyone can sprint for a block or two.  But what reserves do you have if you end up needing to run a marathon?
  •   Financial Target – What is your target for the profit you want to make? How and why is this different from the financial number above?  After you have covered the nut, what is your goal for how much profit you want to make?
  •   Financial Resources – How much in the way of financial resources are you willing to invest? How do you want to allocate your financial resources?  In the early days of entrepreneurship, I used to be more willing to mortgage my house or use my emergency buffer to help fund my businesses.  Now I have a policy that I absolutely will not mortgage my house or dip into my safety net.  We will talk more about this in chapter 7 when we talk about guardrails.
  •   Relationship Capital – We have already talked about relationship capital in Chapter 1.  Think carefully about how much relationship capital you want to use when driving to profitability.  One of the reasons I choose not to sell to my close family and friends is because I am not willing to expend all my relationship capital in one fell swoop.  It is important in the early stages of your business not to drain your whole relationship bank account.  Selectively choose a few key individuals who can help you, but carefully define and limit how much relationship capital you’re willing to spend.  Then make sure you give those people a “thank you” and put something back into their relationship bank account.  Gratitude goes a long way with relationship capital.
  •   Give Yourself Permission to be Miserable – I’ll be honest; this is not an easy stage. Sometimes, in getting to cash, I have to do a lot of things I really don’t like doing.  I have to do the books, answer the phone calls, and open the mail.  I do it all!  I can do it; I just don’t like to do it.  So I give myself permission to be miserable and endure—but only for so long.

Resource List

 To help you quantify your responses to these questions, here’s a worksheet that will help you see in black and white the road you’re considering heading down. Use the results from you Value Equation to help populate this worksheet.


1.  How much money do you have to put toward this project?

     $_____________________

2.  How much time each week are you able or willing to dedicate to this project?

     ______________________ hours

3.  How long of a time frame do you have to work with?

     ______________________ months/years

4.  Emotionally, how long can you give yourself to accomplish this goal?

     ______________________ months/years

5.  How much pain (emotional, financial, relationship, time) are you willing to endure?

     _________________________________________________________________

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