Buckle in, it’s a sprint episode of Two-Brain Radio. In less than eight minutes, Chris Cooper is going to tell you why hoarding money in your business is a mistake. He’ll also tell you what to do with that cash to improve your life. Here’s Coop.
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Hey guys, it’s Chris Cooper here. And today we’re going to talk about how much money you should leave in your business’s bank account. There’s a lot of myths out there, and really nobody has ever stood up and said, this is exactly the amount. Today, we’re going to talk about what that amount should be, why that amount is specific to gym owners and what you should do with the money instead. So the first thing is that most people assume they should keep two to three months’ worth of expenses in their business checking account.
And I used to think this way too. And then I attended this great seminar years ago. I can’t even remember who the speaker was. They were calling it a health and wealth seminar, and it was basically money management for fitness pros. And the lesson was that you don’t need to have two months’ worth of expenses in your checking account. There’s a couple of reasons why that’s wasteful. First off. If the money is sitting there, you’re way more likely to spend it. So you need to get it away from your fingers, or at least like put it someplace where it’s not easy to access. The second thing is that while the money is sitting in your checking account or whatever, it’s not generating any kind of return. So while you might have a loan that’s charging you between five and 18% interest, your money is sitting there completely inactive, getting you a 0% return. Putting it somewhere else where it could get you a small return will counteract some of that loan debt, or maybe you just pay off your expenses.
So let’s start with the reason why most people want to keep two to three months worth of expenses in their checking account. First of all, it’s a safety blanket. It’s a parachute. It’s like, OK, that is there. And if things go really, really wrong, if there’s a catastrophe all of a sudden, I will have money to throw into the gap and kind of bridge over the shortfall. The problem is that that’s way too much money. And the reason is that your business will never just go to zero overnight, even with COVID, when a lot of gyms had to shut their physical location, we all saw that it was easy to pivot to online. And even the gyms that didn’t do well online long term, in the initial first couple of months, they were able to pivot. The other thing too, is that gyms that were in lockdown areas where the lockdown lasted longer,
They actually were able to hold clients longer online. Places like Florida, it was tougher to keep clients engaged online, but the gyms got reopened again in two to three months. Canada, where gyms got closed for like 12 out of the last 14 months, the retention rate for online was actually higher. So the lesson here is that as a gym owner, your revenue will never go to zero. Your business might go into a decline, but you’ll never lose the whole thing at once. So you don’t need two months expenses just sitting in your checking account.
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What you do need is two months’ expenses maybe set aside, and two months is the absolute limit. Do not sit on more than two months. What you need is really like one month’s worth of expenses, and you need to have the cash or access to credit, to cover one month’s expenses, maybe two. Cash? Yes. If you’ve got the cash, OK, you know, you can throw money in the hole to bridge your way across, but if you’ve also got access to credit, like you’ve got an overdraft or a line of credit, or even credit cards, you can survive for a couple months while you fix your business.
Now I know you’re supposed to bootstrap and I know you’re never supposed to go in debt. That’s hogwash. What you should do is just have that security blanket without hoarding cash, putting it out of the market, putting it somewhere where it’s not making you any money. What should you do with it? It’s up to you. But there are a lot of different cashflow accounts where you can invest that money, get some kind of return, even if it’s like 1% and have access to it within 72 hours. If you think about it, things will never go so wrong so fast that you need to pull out two months’ worth of expenses within 72 hours, right? Like you’re not going to go bankrupt at midnight tonight, and then suddenly fix the problem by throwing money at it tomorrow morning. So if you’ve got your cash in a money market account or something like that, where you can withdraw within 72 hours, then it’s the same thing as keeping it in your checking account.
But you’ve got the added bonus that there is a small barrier to getting it, which means you won’t spend it. If you’ve got 30 grand sitting in your checking account, you’re likely to spend it on needless little things. It’s very, very hard to have discipline when you’ve got a big plate of cookies sitting in front of you. So this month we started tracking how much money people are holding in their checking accounts in Two-Brain. And the reason was that we were seeing these gyms that were super profitable and that profit didn’t correlate to owner’s pay or net owner benefit. The gym owners just weren’t giving themselves a raise as the gym was doing better. So where was that money going? Well, mostly they were spending it, but a lot of them were saying like, no, we’re just holding this money. We need a safety blanket.
We need a parachute. We’re trying to cover six months expenses in my gym. And these are just personal security issues. They’re not like logical accounting tactics. They’re not financial plans. It’s just your personal insecurity. So what fixed the problem for me, and by the way, my monthly payroll is well over $300,000. Monthly. What fixed the problem for me was the understanding that I didn’t need access to cash. I needed access to cash or credit. Number two, that my business wouldn’t completely go to zero overnight, that there might be a slow trickle down, but I would see it coming and I would fix the problem before it got out of hand. And number three, that if I put my money into a money market account or somewhere else, I could withdraw it within 72 hours. And I would never need it faster than that.
So if you’re hoarding money, if you’ve got more than two months’ expenses saved up in your checking account, invest that somewhere, pay yourself, get it out of there. Second. Address why you’re doing that. If you believe that it’s a financial strategy, you need to talk to a financial strategist. Obviously, you know, you could benefit from some coaching there. If though it’s a security thing, then you need to examine why you feel this insecure about your business. Do you not understand your value? Do you not believe in the value that you’re delivering? Do you feel susceptible to competition? But that’s a different matter, right? And hoarding money will not fix that problem. Hoarding money is a sign that there’s something going wrong and it could be an entrepreneurial confidence problem. It could be a misunderstanding of your finances. But when you identify that problem, you identify a massive opportunity to improve your net worth, your leadership, your entrepreneurial confidence, and ultimately your success. Hope it helps.
Thanks for listening to Two-Brain Radio. If you aren’t in the Gym Owners United group on Facebook, this is my personal invitation to join. It’s the only public Facebook group that I participate in. And I’m there all the time with tips, tactics, and free resources. I’d love to network with you and help you grow your business. Join Gym Owners United on Facebook.