Our case study about how Adrienne used the principles of Mike Michalowicz’s book, Profit First, really showed how cashflow is king. By following the recommendations of the book, Adrienne transformed her cashflow and made it through COVID. If you are wondering how to improve yours and not quite sure you have the time to read the book, here is my review of Profit First.
The essence of the book comes down to 4 profit-management principles:
1. Allocate buckets of money
Create 5 operational accounts for your business and keep your main income account as the portal through which your funds arrive. The other 4 accounts each serve a separate purpose in your business, each holding a “bucket” of cash for its sole purpose. These 5 accounts are for Income, Profit, Owner’s Pay, Tax, and Operating Expenses. Never pay out of your main income account if you want to get your finances in the black. By dividing your income in predetermined percentages across these 5 accounts, you’re increasing your accountability for your expenditure.
2. Sequentialise your spending
Those “buckets” must be filled first from your income account. Only then can you pay your expenses from the amount that is in your operating expenses account. What if there’s not enough? Does this mean not paying bills? Absolutely not. It means trimming the fat off of the expenses you are unable to afford. It means you can now find ways to increase your revenue next month to afford those expenses before you can keep them on board and without compromising your business’ profitability.
3. Get a system in place
The most effective system sees you observing controlled recurring payment rhythms. Settle your amounts payable and expenses one the same day, twice a month (the 10th and the 25th). A payment rhythm is essential for the well-being of your business. Avoid the temptation to wait until you have money piled up in the account before you release it. This gives you greater control over your cash and makes it easier to manage your expenses.
4. Keep your tax and profit accounts out of reach
They always tell dieters: If you don’t buy it, you can’t eat it. It’s the same with your profit and your tax accounts. Make them difficult to access to prevent the temptation to dip into them. The tax money belongs to the government. The “profit” money is your business’s well-being. In the same way that you wouldn’t put a smiley face sticker over your car’s “check-engine” light when it turns on, you shouldn’t ignore the warning signs when your business’ finances communicate a problem. By borrowing from your profit account (or even worse – your tax account), you’re ignoring the clear message your business is sending you – it can’t support all of your expenses and stay profitable. This makes it difficult for you to grow your business because you’re disconnected from the source of the issue. By maintaining your profit, you can work on ways to run your business more effectively.
Realising you deserve abundance in your business is a powerful mindset change. Once you accept that the trusted systems and processes out there can truly revolutionise life as you know it, even in your SME, making the change becomes easy and it becomes your ultimate power move in business. Profit First is a great read and thoughtful approach to managing cashflow.
If you would like specific advice tailored to your business and circumstances, Accounting Heart offers affordable service packages where you can work with Sonia one-on-one to help you get with your business. Book your FREE Discovery Call to find out more.
Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and / or other advice as may be appropriate having regard to their particular circumstances.