Managing Cash In Portfolio

[Bryan Hancock]

I was wondering if folks could describe how they manage the cash they keep on their PFS.  My general approach over the years has been to keep about 10% of my long-term liabilities in cash, but as my portfolio grows I find myself becoming more risk averse.  A lot of this is driven by wishing to strengthen relationships with small regional lenders for increases in our line of credit, etc.  

What ratios, mechanisms, or philosophy drives your cash allocation decisions?  How have you found this has fared for you in the various economic cycles?  What have you learned to do differently as a result of your experience?

[Roy N.]

@Bryan Hancock

Traditionally, in my businesses, I've tried to maintain 20% of the long-term debt, or 4-6 months payroll, as liquid capital - cash & further credit facilities (LoC).  Naturally, this would ebb-and-flow depending on what we were doing - in the early startup days, we would be as low as 3-5% (or 2-months payroll) on occasion. 

Anytime we find ourselves with >20% cash-on-hand we will pay-down longterm debt if there is no near-term better use for the cash ... provided there is long-term debt.  These days we tend to redeploy retained earnings as investment into our real estate business (the goal is to become our own bank).

The real estate business - at least ours - does not throw of cash flow like the custom software business.  This was to be expected due to the higher capital costs in the world of atoms.  Here we try to maintain 10 - 15% of our long-term debt as liquidity, but have relied on the support of the other software company during expansion.

We are actually finding that as we grow (more properties) we do not need to maintain the "6-months reserves" per property as we did in the beginning, as most things can be handled through a combination of cash-flow and a reasonable portfolio reserve. As our portfolio LTV has come down (presently 57%), we have pre-arranged LoC facilities and reduced the amount of cash-on-hand.