A common issue business owners face is cash flow—it can be difficult to keep track of where it’s all meant to go! Traditional accounting will tell you that in order to keep track of your business’s cash, you’re supposed to follow the predetermined accounting rules of X, Y, and Z. The problem with these rules is that they leave little room to make the process more efficient or easy for those who are not accountants. 

What if I told you that with some training and work, you could know exactly where your cash is going, eliminating the need for complicated financial reports altogether (because let’s be real, you don’t want to look at those anyways).

Straying Away From GAAP

When it comes to deciding if you can make a purchase, traditional accounting takes a very complicated route to get you an answer. You’re supposed to head on over to your accounting software, read your profit & loss statement, balance sheet, and statement of cash flow reports to get your operating cash ratio. Who has the time—or any interest at all—for that? This process is complicated, difficult to understand, and not particularly accessible at a moment’s notice. 

So understandably, business owners will sometimes skip all those steps and just head to their account, quickly check the balance, and make their purchases. Sounds like a pretty straightforward way to avoid all of the hoopla, no? 

But wait! 

What if some of that balance was meant to go towards upcoming bills or paying salaries? You’re hooped if you’ve already spent that money, and it might be time to head to the bank for another loan. 

In order to get an in-depth handle on your cash flow, you have to stray from convention just a little. The GAAP (generally accepted accounting principle) takes your sales for the month, subtracts your expenses, and what you have left over is your profit. This methodology is where things can slip through the cracks, though, like upcoming payments and your own compensation.

Cash Flow Management the Profit First Way 

When you flip the formula to the Profit First method, Sales – Profit = Expenses, you can keep a healthy inventory and make a far more informed decision when your next purchase comes up! 

As I like to say, managing your money the Profit First way channels your existing behaviour so you can keep doing what you do, and how you like to do it. 

With all this in mind, here are some tips to managing your cash flow the Profit First way: 

  • Challenge “we’ve always done it this way” thinking. If you’re not a financial expert (no judgement here!), don’t waste your precious time and energy trying to understand and replicate the traditional and complicated process accountants use. Chances are it will frustrate you more than help, and there are other ways to manage your cash flow! 
  • Get to know your financial situation month-to-month. Are there some months where your expenses are higher? Has your payroll expense increased because you’ve taken on a new employee? How much of your profit goes toward supplies for your business? Get familiar with your money’s nonnegotiable designations to the point where you can almost divide profit in your head. 
  • Make sure you’re paying yourself! I cannot stress this enough. Running a business is gruelling work (believe me, I know), and you deserve to be compensated for your hours and energy. When you’re doing the mental math of where the money goes, make sure one destination is your own pocket!
    • I can promise you, I’m taking my own advice on this one. To ensure I’m getting paid first, and to avoid bothering clients each month for payments, I utilize the Rotessa Payment Solution. The program is an authorized PAD system that pulls money from my client’s accounts and deposits it directly into my business’s accounts. This third party company streamlines the process of getting me paid—first!
  • Leverage your bank account balance. Try Profit First’s foundational step of allocating money into different accounts after each sale to go towards your expenses. When I was getting started with the Profit First method, I used it for my family’s finances. At the time, I would physically withdraw cash from the ATM and allocate it into labelled jars: eating out, groceries, clothes, savings, etc. That way, when we wanted to eat out and there was only $27.58 in the jar, we knew we were hitting a drive-thru that time around. What you have in each account is what you have to spend on each expense. End of story. 

Be Prepared for Financial Surprises

If you have a thorough understanding of where every dollar and cent goes from each sale, you can be cool, calm, and collected about your finances. Say goodbye to being pressured to make decisions without all of the information. 

As a certified Profit First business coach, I can help you get to know your finances and even help you manage those financial surprises better. When you know what you have to spend, it gets pretty easy to make up your mind about a purchase. I offer business coaching and bookkeeping services, so if you’d like to get your business’s finances in tip-top shape, reach out. I’d love to hear from you and see how I can help make your finances seem a little less overwhelming!