Setting Up Your Consulting Practice

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Financial

Topic: Calculating Your Cash Cushion

Having a cash cushion of six to 12 months is ideal before going out on your own as an independent consulting. It may take time to develop a book of business, and you want to avoid taking on projects that aren’t a good fit just because you need the cash.

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As you’re setting up your firm, it’s important that you know what is your cash cushion and how much runway you have in terms of time. I would recommend that you come into the independent consulting world when you have at least six months of runway in terms of savings available. The way to go about figuring this out is, of course, pretty simple.

Figure out, number one, what is your monthly cash burn. If you have no income coming in, what’s your monthly expenses in terms of rent or mortgage, in terms of food, other living expenses, transportation, et cetera. Figure out what that number is and, by the way, do everything you can too to minimize it.

Number two is look at what assets you have available to you and then just divide so you can understand how many months you have. So, I recommend at least six months, 12 months would be even better. You don’t want to be in a position where you are forced to take a project opportunity that isn’t a great fit for you. I’ve been in that position a couple of times and it’s not great for professional development. If you’re forced to take one of those kinds of situations, you may, number one, not do your best work. Not create the best impression and it’s an opportunity cost because, when something else that is more appropriate comes along, now you’re not available for it.

So, figure out your cash cushion, figure out how many months you have to go where you could go without needing to bring in any revenue, and then tack onto that, you’ve got to also tack on to that period payment terms. So, for example, if you start working on a project on January 1st and work through January 31st. If you’re invoicing monthly and on net 30 payment terms, you’re going to send that invoice on February 1st, and you’re not going to get paid until 30 days later to about March 3rd. So that work that you started on January 1st, you’re not going to get paid until about two months later. So keep that in mind when you’re doing your cash cushion calculation.