I've noticed in during riding in other peoples cars that some always have their gas tank above 3/4 full while others are consistently driving around with the gauge a needle width above "empty."  The choice is, of course, personal and depends upon whether the person belives that they will find a gas station when they need one or whether they want to ensure they have an adequate reserve to travel a long distance if needed. 

It's occured to me that the same philosophical differences apply to entrepreneurs when it comes to cash, inventory, and sales reserves in their businesses.  I've met business owners who like to have a month's payroll in reserve, inventory to offset any shipping delays, and carry a backlog of sales.  Similarly, I've met ones who fret on Wednesday how to cover Friday's payroll, have to special order many items for customers, and want to deliver today on yesterday's sales.

Who is right and who is wrong?  Both!  How you run your business depends a lot upon your emotional and philosophical makeup.  At the end of the day you will operate at whatever level your comfort zone is in, but it is worth looking at the advantages and disadvantages of each style.

If you run your business "lean" with low inventory and a minimum of employees you will be protected in a business downturn from carrying excess payroll or having inventory that you have to mark down to or below cost in order to move.  However, if  business increases, you risk losing sales to competitors who have inventory on hand when customers are unwilling to wait for your order to arrive.  You may also be overwhelmed with customers that the current staffing level can't handle and have some of them walk out on you.  We've all been in a fast food restaurant along the highway that was adequately staffed for the hour of the day when a bus pulled in and the servers were overwhelmed by the number of people.  Wait times increased, personal service decreased, and in some cases tempers flared.  That analogy is an example of what can happen over a longer timeframe if the number of customers grows faster than your ability to hire and train staff to serve them.

Sales backlogs also relate to staffing, and sometimes capital equipment (machines, trucks, etc.).  If you are equipped and staffed to perform a certain number of jobs a week (think service industry), then sales in excess of that will have to wait until the following week.  If sales, equipment and staffing finally balance out you will be doing this week the jobs you sold last week or a few weeks ago.  If customers are willing to wait, having a backlog gives you time to react to a sudden sales slump (or a sudden sales surge).  Your backlog has to be in line with industry standards though or customers will ultimately switch to the competition if the wait is significantly shorter.

What about cash?  Isn't it always good to have a lot of it on hand?  Well... maybe.  The answer depends on where the cash is coming from and what it is costing you.  If your business is generating enough cash flow to keep a month's payroll and/or expenses on hand the answer is different than if you are ordering less inventory or foregoing advertising to retain cash.  Worse, if you are borrowing money at 15 or 18 or 24 percent in order to have cash on hand your overall costs are increasing.  In that instance you would be better off just having a line of credit you could use when needed rather than take a cash advance or an equity line on your home to have cash in the bank.

So what we have here is a "Glass half-full or half-empty" type of argument.  There is no one correct answer for everybody, you need to balance your philosophy, comfort level and business needs to find the right mix.  Where do you stand?