It is important to stay balanced. Know what money is coming in and when; know what money is going out and when.
Cash reserves enable us to handle the lag times between buying inventories, our points of sale and actually getting paid. It smooths out the financial ups and downs; without controlling it we will always be on a financial and emotional roller coaster.
Many small businesses are seasonal in nature and are notorious for gathering a majority of their receipts during a small portion of the year. For example, following the 80/20 rule, a real estate company may produce 75% of its revenue in just the active four months of a typical “spring” market. Yet payment for the overhead of dues, advertising, rent, phones, etc are necessary every month of the year.
Jim Rohn describes it best with his Ant Philosophy: Think summer in winter and winter in summer; it’s called realistically planning ahead.
When we become a borrower, often we will lose the profitability of our enterprise, unless we borrow for something that grows more in value than the cost of borrowing the money. Being in excessive debt is like holding our breath underwater: “How long can we do it?”