It's Not How Much Money You Make, It's About How Much Money You Keep.
You might have heard this quote from Robert Kiyosaki before, and it probably makes sense to you on a surface level, but have you ever taken the time to really think about it?
No matter how big or small your business is, you need positive cashflow to sustain it, and you need to manage your cash flow in order to grow it!
Sometimes business owners can get so caught up in building their brand, serving their clients or coming up with the next big launch that they neglect to actively manage their cash flow. It’s not about hoarding cash, rather it’s about saving it so you can use it to your advantage as and when you need it. If you are anxious about the cash in your business, you can take simple steps to set a routine that will help you turn your business cash flow around.
Get tracking
The first habit you need to start is monitoring your cash flow using accurate bookkeeping records. It’s so important to track your income and expenses so you know what is coming in and what is going out on a regular basis. You want to maximize your cash flow as much as possible so you don’t get stuck in an emergency situation without funds to help you get through it. You also want this information available so you can start to forecast how much cash you need flowing through your business each month to sustain and grow it.
Start Reviewing
You should have a good idea of what cash you are expecting in each month and notice times when this might be lower than normal. (If not, this is something we can help with, so reach out!) On the income side, you should look at things like:
Invoicing - is your invoicing up to date and are invoices raised in a timely manner? There’s no point in waiting until the last day of the month to send all your invoices, when you could have clients paying you throughout the month!
Payment methods - have you made it as easy as possible for clients to pay you? I always suggest adding multiple payments options to your invoices, Stripe or direct bank transfer usually work for most people.
Your payment terms - If you offer a credit period, is it too long?
Bad payers - which of your clients always pay late? Should you try to improve the relationship to improve payment times?
What can you do to bring in additional income if you are experiencing a lean month? Can you reach out to existing clients to see if they are interested in additional services? Can you encourage your business besties to refer you to their network? Can you create a mini offer that will generate new cashflow? All of these types of activities are short term fixes, but they give you a sense of what is possible in the leaner months!
The next thing to review is your overhead costs. I give tips on how to do a deep dive into your costs on Instagram but I always encourage the use of automations and technology where you can. Doing so will help you to save time and money in your business activities. You can also review your spending to see what costs can be stopped or swopped. Small changes around costs can have a quick impact on your cash position.
Cash Management System
With that said, the idea behind Robert Kiyosaki’s quote is that we can all make money, but it’s the smart business owner that keeps it. Whether that’s in the form of cash reserves, investments, or owners compensation. You work hard for your money so why let it slip out of your hands so easily? You’ve got to keep a good grip on where it’s going so you can make the best decisions for your business and achieve your financial goals.
So how do you do this? By creating a cash management system that suits you and your business. What this system looks like will be different for each business, but the idea is that you need to prioritise where your cash goes before you are tempted to spend it!
I like the action of creating ‘pots’ for your cash, essentially additional bank accounts for different purposes. If you are using a system like this, you want to set percentage allocations that will be moved from your main account to other accounts set for specific activities, usually taxes, owners compensation, profit or drip.
For example, a sole trader (not vat registered) makes €5,000 on average each month. They have an average tax rate of 25% (you can get this from your accountant), overhead expenses are normally €1,000 a month and they wish to draw 40% as owners compensation and take the rest of profit. Using these allocations, they would have 4 bank accounts- main bank account, taxes account, owners comp account and a profit account. Once a month, they would allocate their €5,000 in cash as follows:
Main Account: €1,000 (left for expenses)
Tax Account: €1,250
Owner Comp Account: €2,000
Profit Account: €750
The idea is to build up your profit account over the year and at strategic points in the year, review it to see if you want to use it for an investment in the business, additional owners bonus, or as a rainy day fund. You may want to use it for something else entirely!
Another example is a seasonable business that might want to create a Drip account. This is an account set up specifically to hold cash for longer periods of time so it can be released back into your main account in leaner months. For example, if your business is a membership site and you only open memberships once a year. You will have all of your income and cash generated in a very short period of time, let’s say January. However, for the rest of the year, you need to provide content and services to your members so you have normal overheads expenses in your business. If you leave all of your membership income in your main account, you may be tempted to use it for things you have not budgeted for, leaving you short of cash to cover your expenses towards the end of the year. The drip accounts allow you to compensate for that.
So in this example, we’ll assume the same allocations as above, but we’ll have €30,000 of income in January, which is 6 months of income. In January, the allocations will be:
Main Account: €1,000 (left for expenses)
Tax Account: €1,250
Owner Comp Account: €2,000
Profit Account: €750
Drip Account: €25,000
Each month then between Feb and June, a transfer of €5,000 from the Drip account to the Main account will take place and the allocations will happen as in example 1 above. This ensures that the business has continuous steady cash flow and the business owner is not tempted to spend on expenses as if they had a cash windfall in January.
Habits
While having a system like the one above might seem overly complicated to some business owners, establishing the habit of separating out your cashflow like this can make a serious difference to the longevity of your business. Most business that fail, do so because of a lack of cash. If you are using this method, you will have cash set aside for low income months, you will have your tax liability fully provided for before you’ve even done your return and you will be able to take a consistent payment for yourself from your business each month.
As an accountant, I think about business finances in a certain way, and that is the prescribed method for calculating profit and tax liabilities. However, the average entrepreneur doesn’t think like that!
They base most of their financial decisions on what’s in the bank. That balance tells them how healthy or profitable their business is. But that doesn’t take into account future liabilities or unforeseen events. This is where the money pots come in. It suits the mindset of an entrepreneur rather than the accountant! It establishes structures around how you manage the cash in your business. And if you are serious about growing and scaling your business, you need a cash management system! If you can’t manage €3,000 a month in income, why would you be able to manage €10,000 in income? If you don’t set the foundations for your cash management system, the same problems with scarcity will continue as your business grows.
The point is, you need to form the habit and start somewhere, otherwise you will never get to the point where you are regularly taking a salary from your business, while generating a regular profit. Can you imagine how amazing it would feel to know you have a regular salary coming from your business to maintain your lifestyle, all the while knowing your taxes and expenses are fully covered, and you have cash in the bank for a rainy business day? That feeling alone is worth putting the effort in now to create your own system!
If you would like to hear more about how we help clients create their own cash management system, or work towards a goal of paying themselves on a regular basis, reach out to info@accelerateaccountingsolutions.com or DM me on Instagram.