Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

You may have read recently that Apple Inc. now has more cash on hand than the U.S. government. I'm not sure if that says more about Apple or the U.S. government but, either way, it got me thinking about how much cash a business should keep at the ready.

Here are my rules of thumb:

Three months' expenses: rainy day fund

Story continues below advertisement

When the second plane hit the twin towers on Sept. 11, 2001, I was in a prospect's boardroom pitching him on becoming a customer of our research company.

As the gravity of the situation unfolded, I excused myself and walked back to my office where my employees were waiting to see if we were going to evacuate the building for fear of a similar attack in Toronto.

A few days after the initial shock and sadness of that day, we started to realize what a profound impact 9/11 would have on our business. At the time, 80 per cent of our revenue came from customers in the United States – many of whom, including American Express, British Airways and Citibank, were headquartered in New York.

The only communication we had with our New York-based customers in September of that year were calls and e-mails of condolences.

We started to gently initiate commercial conversations with U.S.-based customers in October but, for many, the wounds were still too raw to discuss business.

By November, the entire economy was stuck in neutral and, while some of our customers were getting back to business, many had slashed their budgets and were cancelling projects to which they had committed back in August.

Our company went from generating excess cash to sucking it up quickly. Our incoming cash went to almost zero while our expenses continued to chug along. At that point, I was grateful to have built up a three-month cushion of rainy-day money.

Story continues below advertisement

If you're thinking of building an emergency fund for your company, consider keeping the money in cash or reasonably liquid investments. Putting your excess funds into the stock market for a couple of extra points of return may seem tempting until you that the world events that cause you to need the emergency fund are often the same disasters that trigger a selloff in the stock market.

After 9/11, the New York Stock Exchange remained closed until Sept. 17. On the first day of trading after the attacks, the Dow Jones dropped 7 per cent, at the time, the largest single-day drop in history, and, by the end of the week, it was down by 14 per cent.

The lesson: Keep your emergency fund out of the market.

Four to six months of expenses: Sleep like a baby

Running a business can be one of the most intense, stressful ways to make a living. To take the edge off, build up an extra cash cushion to act largely as a security blanket.

With four to six months of cash on hand, you know you can absorb the loss of a key customer or the failure of a new location or product and still pick yourself up and move on.

Story continues below advertisement

I think the greatest benefit to a healthy cash cushion is that it gives you the confidence to stick to your business model. If you're running short of cash, it's too tempting to give in when a customer wants a special customization or one-on-one consulting advice or some other distraction that undermines your business model.

Six-plus months of expenses: A gambling fund

In Exploiting Chaos, Jeremy Gutsche, the Toronto-based founder of Trend Hunter, describes the mechanism that the BBC uses to bankroll oddball projects.

The BBC sets aside a small amount of money to "gamble" on wacky ideas that don't fit its typical format. That's how The Office, one of the most successful shows in the history of the BBC, was funded.

If you have six-plus months of expenses, you know you can deal with an immediate crisis, absorb the loss of a key customer or a big mistake and also gamble a few bucks to test some wild ideas – one of which actually might work.

Special to The Globe and Mail

Story continues below advertisement

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. You can download a free chapter of his new book, Built to Sell: Creating a Business That Can Thrive Without You.

Join The Globe's Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies