Stories about Software


Businesses Should Have 3 Months of Savings? It’s Not as Simple As You Think

The COVID-19 outbreak has given rise to memes the way you’d expect from the year in its name. Most of them probably die quickly on the vine, but some have shaped up to make their way into my feed over and over.

And of those a lot are poignant and hilarious.  Some on the other hand, induce a lot of facepalm in me when I read them:

  • The Venice canals have magically healed themselves, so maybe there’s a silver lining to this whole thing.
  • Grocery workers should have higher salaries because we’re collectively grateful to them at the moment.
  • The virus severity is a left-wing conspiracy to make Trump look bad (though I think that one seems to be subsiding).

But perhaps nothing brings palm to face harder than this one:

They tell us that families should save at least three months worth of expenses to cover for emergencies, but businesses lay people off and need bailouts after a week.

The relationship between meme and trope is often a tight one.  And this meme walks hand-in-hand with the “corporate fat cats vs honest folks” trope.

Remember this trope, and I’ll return to it to explain why I brought it up a little later.

My wife and I own a small business. It employs 4 salaried full timers and somewhere around 100 contractors who do varying amounts of part time work.

And, counter to the meme, we have banked enough expenses to survive (without layoffs) for three months.  But, if anything, this “of course you should have” attitude actually makes me hate the meme more, and, in this post, I want to explain why.

Painting with a Broad Brush: Not All Businesses are GigantiCorp

I want to elaborate a little about my business in particular, because the story of building this business is going to underscore a number of points I’ll make.

The business, Hit Subscribe, is a bootstrapped company. (Briefly: we’ve never taken investment capital or loans, and instead built the business exclusively on cash from sales.)  My wife and I founded it together, about three years ago, and did all of the work in it, initially.

Over the last three years, we’ve grown steadily, backfilling ourselves with contractor help and, eventually, full time employees. That brings us to the current state, with the worker situation that I’ve mentioned.

Remember the “corporate fat cat” trope? I mentioned that because the skeptics reading this are gearing up to object, “you’re not who I’m talking about — I mean Giganticorp!”

Well, fine, but two things.

  • First, in that case, you should probably qualify exactly who you’re shaming in your meme.
  • And second, the road to war chest doesn’t magically get easier as you grow.

To underscore why that is, I’m going to tell the story of growing the business and the fight to build a war chest.

Business Finances Aren’t Personal Finances

But before I do that, a brief aside and a second objection to this meme: it’s an apples-to-oranges reduction.

Without veering too far into the intellectual cesspool that is modern US politics, let me describe something that annoys me to no end (and knows no specific partisan owner, since rank and file Democrats, Republicans and Libertarians all do it).  I’m talking about when people Joe-the-Plumber macroeconomic finance by likening it to balancing their checkbooks.

It’s not that hard, you stupid politicians. The country can’t spend more money than it earns, just like I can’t buy a lawnmower this year unless I get a raise.

Oh, yeah, good one!  It’s just like that! You know how it is when you want a lawnmower and you’re tempted to adjust the federal interest rate and print currency, but you decide not to because you also might need car repairs.

Well, comparing business finance to personal finance is like that, but on slightly less cartoonish scale.

On the personal side, the goal is simple: financial independence.  For most, this happens at retirement age, when, through a combination of social security and savings, you have enough money to stop working.  So with personal finance, a 3 month runway is utterly compatible with the main goal and sensible besides, to leave you with options and flexibility if bumps happen along the way.

Cash on Hand is Different for Businesses than People

For business, the goal of finance is… not simple. In reductionist fashion, you could say that the goal is simple: earning dividends for shareholders.

But even that falls apart almost immediately with just the question of “would share holders rather have dividend cash now or equity later?”  And besides that, private businesses are owned by actual humans who care about more than just that in complex ways (publicly held ones get a little simpler in motivation).

Let’s zoom in on the idea of cash on hand for a business, though. And let’s consider that as a prelude to the story I’m about to tell of Hit Subscribe — one that often involves both Amanda and I working ourselves to the point of burnout before relenting and hiring help.

With personal finance, cash-on hand has no potential downside vis a vis personal goals. With a business, it does.

Cash just pooling in the business is cash that we’re not using to, say, hire someone or buy some software to make the business more efficient.

Business Finances: More Complex Goals and Tradeoffs

Here’s what it comes down to.

It’s nice to be able to say “we could run payroll for 3 months, even with no revenue.”  But is that “nicer” than, say, hiring a 5th employee because the first 4 are working 50-hour weeks in order to generate enough surplus revenue to build that rainy-day fund?

As a business owner, how do I win with you, oh shamer?

If I don’t make that 5th hire, you’d call me greedy for overworking the employees.  If I do make that hire and some kind of black swan, like, oh, say, a pandemic occurred, you’d be shaming me about spending the business’s money unwisely, and thus needing a “bailout.”

Oh, and by the way, most non-retail businesses favor accrual-based accounting, which books revenue when you bill for services. This means making a lot of business decision on the basis of what companies owe you, as they take up to 60 or even 90 days to pay.  You can make calculated assumptions about “loss” from non-payers, but if your clients fold in response to a black swan event, well, yikes.

If your clients panic and don’t pay you, you have to write it off, which means that money simply evaporates from your business’s net worth. If you want a metaphor that translates to this “business finance is like my personal finance” canard, imagine that the bank could just suddenly, randomly swallow your 3 months’ savings and burp guiltily at you.

Oops, sucks to be you. Guess you should have planned for that, eh?

Please keep all of this in mind as I now tell the business’s tale and walk you through the decisions.  Ask yourself as you read, “when would it have been easy to just poof a 3 month war chest into existence?”

Hit Subscribe, The Early Days: All Profit Out and No Reason for Business Savings

The year was 2017, and I’d just wrapped up my last trip in 3 straight years of 100% consulting travel.  I’d banked some runway, (more than 3 months worth) so that we could start a business.  A different kind of business.  One that didn’t involve airport commuting.

That business was Hit Subscribe.

Curious fact about my life: since landing my first job, I’ve never taken any kind of work hiatus. Never laid off, no sabbaticals, no more than 2 weeks ever between my last day at a job and first day at the next (and that, by design, to take a trip).

That summer was the closest thing I’ve ever had to a sabbatical.

In Hit Subscribe’s early days, I wrote blog posts and Amanda edited them, and that was it. We set about ratcheting down our personal expenses and lifestyle while refining the business and our offering. Not all weeks were full workweeks that summer, and having the runway meant peace of mind.

So, did we bank any savings in the business?

Of course not. Why would we? Initial expenses were minimal, and we took out every penny of profit so that we didn’t violate the whole “keep a personal runway” thing.

Side Hustlers and Small Expenses, Still No Reason for Savings

Following perhaps 6 months of what, at the time, I thought of as “semi-retirement,” Amanda and I decided to grow the business.  Why flip from a lifestyle designer business to a more traditional, growth-focused one?

Well, simply put, what we had was a nice job, rather than a true business. If you’re the owner-operator of a business and you pull every dime of profit out, what you have is a job by another name. We wanted to build equity — to separate money from hours of labor.

The steps toward doing this were simple and not particularly ambitious, since I was (and remain) very skeptical of scale:

  • We hired someone on a contract basis to keep our books.
  • Then we started to pay authors other than me to write some of the blog posts.
  • We also paid college students to edit some of the blog posts.
  • And, finally, we invested in some software to help with the strategic end of our offering (and for the books).

Nothing major here, obviously. And our decision about how to spend money remained mostly unaffected.

Each month, we’d figure out the revenue, set aside enough to pay everyone/everything for a month, and take home the rest.

Did the business save any money for a rainy day? Again, no, why would we? All of the contractors were side hustlers, and we were still trying to keep our runway intact.

Bigtime Growth and Burnout, Still No Savings

By spring of 2018, the business had really started to take off. If you’re a longtime follower of this blog, you might remember my digest posts from scenic places.

May of 2018 had us taking lovely photos of Ocean Beach… in the relatively small number of hours in the week we did anything but work. The scenery was idyllic, but we were burning out, often working from the moment of waking until the moment of going to bed.

So we forced a sorta-vacation as we made our way back to Michigan. And, once home, we resolved to change:

  • We brought someone in on a monthly retainer to spend about 4 days per week helping us with account management.
  • Amanda and I made it a first class goal to get completely out of editing and writing posts, respectively.

This worked well.  Amanda freed up to manage internal operations and I freed up to hit the gas on sales, bringing in still more business.

But we’d learned something over the course of a year and a half.  We kept burning out, shutting down new business, and being insanely relieved every time we brought on help.

We were hiring too late.

Looking at Amanda and me as employees of the business, we were overworking ourselves, both to our personal detriment and that of the business.  We were personally exhausted and the business was delaying or turning away customers.

Was the business saving at this point?  A little, for a while. Amanda and I had finally gotten personal income to where we wanted it, but not in a sustainable way. The business was badly overworking its only employees, Amanda and me, and they needed help.

Salaried Hires, Time to Save

So, we flipped the script.  We’d always kept expenses to a minimum by handling work spikes ourselves.

But we decided that growth prospects were such that we could reasonably hire.  So we did. In the fall of 2018, we hired the person who’d been working for us 4 days per week, and also hired the person who’d been keeping the books as a full time employee.

This turned out to be a great business decision and a big relief for Amanda and me as employees/people.  But it also meant we had obligations that we’d never previously had.

So, we needed the help badly, could justify hires based on revenue projections, and thought it a good calculated risk. But to make sure that it was a stable situation, we went out and secured a personally-backed business line of credit.

The upshot: we could cover payrolls with debt for months if need be. But if we had to go that route, Amanda and I would be going into personal debt to cover payrolls.

We took that risk because we believed in the business and because we believed that even a startup owes employees what stability it can provide.

Did the business have savings at this point? Nope. The opposite — just a yawning chasm of potential debt.

Growth, Business Savings, Personal Austerity

Having a line of credit wasn’t our only plan for a rainy day with the business. Concomitant with that and with making new hires, we began to let retained earnings pool in the business — not take out all of the profit.

Amanda and I spent a lot of time divesting ourselves of personal expenses: paying things off, reducing our footprint, and generally going much more minimal. But, even in spite of this concerted effort, we dug into our personal runway in order to leave cash in the business.

We put a cap on our personal take-home with the goal of leaving a lot of money in the business.  We wanted to build a rainy-day war chest that didn’t involve personal debt. But we also wanted to strike a balance between enough business savings for a rainy day and investing in help, software, and other things to make people’s lives better at work.

We’ve done that, as best I can tell. Work life balance has been good for the people we’ve hired. And here we are, staring into the pandemic abyss, and we’ll be able to weather a storm for a while, first on business savings, if need be, but then on personal debt, if need be.

Does the business have savings? Yes, we’ve created that situation by forgoing a lot of personal income, drawing down on personal savings, opening ourselves up to personal debt, and moving to a less expensive lifestyle.

A Recap: Anatomy of Creating Business Savings in a Bootsrapped Business

So, let me summarize all of that.  How did a bootstrapped business go from a owners-as-sole-employees with no rational motivation to save to established business with employees and rainy day savings?

  • Ratcheting down personal expenses and hard-capping personal income from the business.
  • Drawing on personal savings, at times.
  • Personally backing a line of credit to provide stability.
  • Working ourselves to exhaustion, at times, rather than make additional hires, so that we could err on the side of stability when not in a clear position to hire.

That’s the blood, sweat, and tears that we poured in, over the course of several years, to be able to create the situation that this meme blithely calls table stakes for running a good business.

Look, I can make a budget, give up Starbucks, and set aside 20% of my take-home for 6 months, which is obviously the exact same thing as a small business owner using a combination of potential debt, leverage, and personal expense to set aside enough money to pay full time employees not to work for months.

And that, in a nutshell, is why this meme pisses me off, even though our business lands on the right side of it.

But let me say this.

I recognize that owning a business implies an amount of wealth and privilege.  I recognize that it was a “lucrative consulting practice,” that allowed me this runway. And I recognize that working my fingers to the bone from an ocean-side condo in Ocean Beach isn’t the same thing as doing it working 2 retail jobs.

Business Owners Mostly Aren’t Super Villains

I’m not looking for pity because I work hard or could potentially incur debt, from an admittedly fortunate position.

Rather, I’m looking to clarify what it is to be a small business owner. It’s not mustache twisting and caviar.

Instead, it’s making a lot of hard, risky decisions in good faith, hoping to maintain an incredibly delicate balance between sustainable income for yourself, stability and long-term health of the business, and work-life balance and well being of the people you’re fortunate enough to hire and work with.

You do the best you can with limited information, adapting on the fly, and hoping you get it right.  You agonize over those decision points as you go, and you agonize over how they’ll affect not just you, but everyone.  I’m spending my Saturday monitoring news about the upcoming stimulus to make sure that I can react as quickly as possible to what comes, so that I can maximize the business’s stability.

As a business owner, you don’t just “put aside money.”  That’s not a thing.

Every “saved” dollar could have been spent — spent on a better health plan, on a client onsite that will secure business through bad times, or, oops, on a new hire that you unfortunately made a week before the markets crashed.

Next time you reach for the retweet button on some pseudo-populist nonsense about how businesses “should save” money, I’d ask you to consider the complexity and nuance that I did my best to explain in 3K words.  I’m fortunate to own a business, sure, but I’m also heavily leveraged in the business, and stressed out by these events not just for myself and my finances, but for a lot of other people besides.

In a time of uncertainty, fortune cookie wisdom that casts “big businesses” as the bad guy is easy and comforting. But I think that you’ll be disappointed to learn that there are far fewer super villains out there than there are humans just doing their best, even if not always succeeding.

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4 years ago

Thanks for the post. As a non-business owner, I simply hadn’t thought through some of these issues.

Erik Dietrich
Erik Dietrich
4 years ago
Reply to  Jay

Thanks for the kind words. And what you’re saying is what I was hoping for in writing the post. Kind of a “hey, this is a little more nuanced and complicated than you might think if you hadn’t been exposed to the situation before.”

Tim M
Tim M
4 years ago

>>As a business owner, you don’t just “put aside money.” That’s not a thing.

Apple now has $207.06 billion in cash on hand, up slightly from last quarter

Erik Dietrich
Erik Dietrich
4 years ago
Reply to  Tim M

I’m not sure I understand what you’re getting at. Are you citing Apple’s “cash on hand” as a counter-argument to the idea that businesses don’t just “set aside money” the way people do in personal financed with fixed wages? If so, you should try to find an article about Apple’s cash _reserves_ rather than cash on hand. (And, BTW,, I’m not saying that no business has set aside cash reserves. Indeed our business has done exactly that. What I’m saying is that it’s not the same as someone just “putting aside money” in their personal financial situation, where putting aside… Read more »

4 years ago
Reply to  Tim M

And of course Apple has been criticized a lot for this by shareholders, holding a lot of cash that could be invested or handed over to the shareholders.