How much Cash Should I Leave in my Company?    Rule of 72?

  • Extra or too much cash sitting in the company is a risky venture as it makes the company more exposed to lawsuits.
  • Sitting on cash can be an expensive luxury because it has an opportunity cost.  More importantly, it takes away the pressure of running an efficient operations.
  • Having high (relative to your company) cash levels as a permanent feature should cause you to question why isn’t the money being put to good use?
  • My experience has shown me that excess cash creates a more relaxed attitude and sloppy habits, including poor A/R collections, bad spending patterns and less pressure on management to perform.
Investing Ideas: Don't put all your eggs in one basket
  • Having all “your eggs in one basket” is also not good from an investment perspective.  Many contractors sometimes become so focused on their business and not use their business to create cash, which can be transferred to a holding company and create more wealth outside of the business.
  • By taking out cash and investing the money elsewhere, you can use the “Rule of 72” to see how your money can grow quickly.  The Rule of 72 is a quick method to show how fast your initial investment can double.  The rule number (e.g. 72) is divided by the interest percentage per period to obtain the approximately number of periods (usually years) required for doubling.  For an example, if you were to invest $100 with compounding interest rate of 8% per annum, the rule of 72 gives 72/8 = 9 years required for the investment to be worth $200.
Rule of 72 Formula | Calculator (With Excel Template)
  • Leaving the $100 in the company in a savings account is not a wise choice, unless you are in a growth mode and reinvesting the cash into good capital expenditures that will drive more profit to the bottom line, or you are predicting a downturn in your business and planning ahead.
  • Extra cash sometimes gives owners the temptation of pursuing “bright shiny objects/ideas” and doesn’t follow their strategic plan or positively impact the bottom line.
  • Knowing how much cash to leave in the business at any given point is hard to determine, since everyone’s company may have a different sales cycle, different creditor requirements, or different personal goals.
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For more information regarding the Rule of 72 or cash in your business, contact Southbrook Accounting.