The only silver lining to the 2008 financial recession and the 2020 financial pandemic is that it taught us many lessons about how to best manage our monies and our relationships with financial institutions.
I guess some lessons are worth repeating and the unfortunate failure of the Silicon Valley Bank (SVB) affords us another opportunity for re-education.
Here are a few financial lessons to learn from the SVB failure that you can apply today. If you’d rather talk to me directly, schedule a financial strategy call here.
1. Don’t put all your cash in one bank…especially if you have more than the FDIC insurance covers.
Bank with a large institution (“big bank”) that has an extensive footprint, strong business banking service and great technology allowing you to access your money and deposit money at an array of ATMs or via digital features.
The second bank should be a regional, community or credit union institution with more flexible lending terms, better rates and a personal customer care touch. The one caveat to that is that high interest rates are negatively impacting small and mid sized banks. So don’t put more than $250K in any one institution. FDIC insurance covers up to $250,000 per depositor, per institution and per ownership category. More details on this can be found at fdic.gov
2. Manage your cash flow diligently.
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 account. This way, you can avoid potential shortages. Monitor the timing of when you spend cash with when cash flows into your business.
By using monthly or weekly cash projections, I am able to predict 8-12 weeks out whether or not our clients will potentially run out of cash so we can take actions today to avoid it. I’m having conversations with cash sensitive clients weekly around this topic.
3. Review your balance sheet with an outsourced CFO.
Most small business owners hardly look at this financial statement but I’d say it’s the 2nd most important financial report besides a cash flow. Your business balance sheet shows if your company is solvent which simply means – it has enough assets (e.g.cash in bank, receivables, equipment, property, inventory, investments, etc) to cover liabilities (vendor bills, credit card debt, loans/lines of credit, payroll liabilities, etc).
The most important thing to monitor is if you have enough current assets (assets easily converted to cash in less than a year) to cover current liabilities (bills due in less than a year). Golden rule is the ratio of CA/CL should be greater than 1.0 to show your company is okay. One of the challenges SVB faced is that the value of many of their assets have been significantly declining and were not enough to cover their liabilities (e.g. customer deposits).
4. Stay in constant communication with your money team.
Their expertise and industry knowledge can keep you out of trouble. According to recent articles, one of the things that caused a bank run on SVB is that the community of venture capitals, investment firms that often banked with SVB, had been monitoring the banks funding activity. When they saw that SVB sold major assets at a loss and subsequently tried to raise capital, (something banks don’t regularly do), the investor community got spooked and warned some of their clients to pull their money out of the bank.
In an age where information spreads like wildfire, a great panic arose and small business owners withdrew billions in deposits. A bank run is never a great thing but I’m sure some startups were glad to have financial professionals on their money team to make them aware of issues on the horizon.
What professionals are on your money team that can get you access to information and resources quickly? Your CPA? Your bookkeeper? Your banker? An investor? Hopefully, you will consider FinCore as one of the advisors on your money team providing timely, actionable information, resources and tools.
5. Diversify your customer base such that no single customer or industry represents more than 25% of your revenue.
There are many ways to manage risk in your business and this is one of them. The 25% rule is just a heuristic I use with my clients; it is not a generally accepted accounting/financial principle. But the point is that if a customer representing that much of your revenue were to end the engagement or delay payment, it could affect your ability to meet payroll and cover other debt obligations.
6. Build a revenue generating, profit making business.
Profits should be your main source of cash flow. Don’t depend on lenders, investors and venture capitalists (VCs) to save the day. That funding dries up quickly in weak economic environments like we are currently in. One of the things that exacerbated the collapse of SVB is that VC money started drying up over the past 6-9 months in a high inflation environment. So 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 the bank.
Want to increase profits in your business by an average of 10-20%? I use a 6-step method to make this happen for my clients. Schedule a financial strategy call to learn more.
Tricia Taitt is the CEO and Chief Financial Choreographer of FinCore. She holds an M.B.A from The Fuqua School of Business of Duke University, and a BS in Economics with a Finance concentration from The Wharton School at the University of Pennsylvania. For over 20 years, she’s been a finance professional. Half of the time was spent working on Wall Street while the other half was spent in the trenches side by side with small business owners. As a result of working with FinCore, clients have been able to take control of their numbers and feel more confident in their ability to make decisions, while increasing profits by 10% and building a cash stash to invest in growth. Follow Tricia on LinkedIn and Instagram.