My Money Day
Every business owner should know how to read their numbers to make informed, data-backed decisions in their business, regardless of its size. It’s that simple. Once you realize that this is absolutely essential for your business to grow, you need to find a way to get to this place without feeling overwhelmed. The key to this? Understanding what numbers are important for your business and finding ways to plug any gaps in your knowledge around your business finances. Being an entrepreneur means you are guaranteed that there will be unexpected plot twists and turns in your business, why not be prepared as best you can for them? You need to learn how to manage your finances effectively.
“An investment in knowledge pays the best interest.”
-Benjamin Franklin
The Essential 5 Need To Know Numbers
While every business is different, and you will want to tailor the metrics that you are measuring for your business, there are 5 essential need to know numbers that fit for most businesses. For each of these, you should know what your budgeted total is going into the month and then what your actual total was at the end of the month. The key is to stay as close as possible to the parameters of the business budget you (should have!) set at the beginning of the year. If you don’t have a budget in place, don’t panic! Set one up for the remainder of the year, there’s plenty of benefit to creating a mid year budget to keep you on track in your business.
Monthly Sales
Monthly expenses/overheads
Monthly Profit margin
Break Even point
Personal Pay
If you start tracking these numbers alone, you will start to get a better grasp on what’s going on in your business. You’ll start to use the numbers to question things and take action when you have the answers. A quick example of this is Best Business Ltd in the month of June:
Sales budget €7,000
Average monthly overheads €3,200
Personal pay taken by the owner €3,000
Tax Allocation €200
Using this information the company’s breakeven point in terms of cash is €6,400. Knowing this, the owners can use this to inform their actions during the month. Perhaps sales are well below the budgeted amount and there is a risk that the break even point cannot be met. Some business owners might be tempted to adjust their personal pay, but this is not the answer. Firstly, efforts should be put into generating new sales. What existing products or services do we have that can be promoted to generate new sales? What short term offerings can we produce to bring up front cash into the business? The next thing to consider is the monthly overheads. Is there anything there that can be stopped, swapped or postponed? Thinking like this and changing how things are done in the business, is a more appropriate action than looking at cutting personal pay or the tax allocation. Both of these measures should be the last resort as they risk the long term sustainability of the business.
So once you are aware of the numbers you should be monitoring, what’s next?
My Money Day
Each month in my calendar, I have a standing booking called my Money Day. I block out a half day to cover everything I’m about to chat about in one sitting. I always do this on a Friday, when I have nothing else in my calendar. I usually go somewhere away from my home office, so that I’ve a change of scenery and a fresh perspective because after reviewing the numbers, I like to plan the coming month.
This might seem like something you would dread, but trust me, once you commit to it, you will look forward to this day. At the end of the day, you will feel confident that you know where your business stands and you will have direction on where it’s going.
The numbers will not only tell you how your business performance, how your efforts worked out, but they will also show you what's not working and where you energy should flow for the following month. I use this day as a guide for my coming month: to review, plan out my options for the following month and then set my goals accordingly. I also use this day to pay myself, which is the best part!
So what do I do? I have a checklist in Asana so that this process runs as smoothly as possible.
1) Categorise income and expenses
The first thing I do is make sure all of my sales invoices for the month are raised in Xero, my accounting software. If I was using an excel system, I would log all of the invoices I raised that month into my income tracker. I like to see my income broken down into different streams so that I can quickly see which of my services is performing the best. After this, I send any payment reminders for invoices that are outstanding.
Next I categorise all of my expenses, using receipts and bills that I’ve received throughout the month. Xero makes it easy as copies of my receipts etc will already be in the system. If I was using excel software, I would log all expenses on my expense tracker.
Next I download my bank statements and check each transaction to make sure it is either on my income list or expense list. The most common thing that is likely missing is bank fees. I’ll add anything like this to my expense list then. From here, I’ll then pay any suppliers or expenses that are not on autopay. As I’m using an accounting software, I’ll then reconcile my accounts.
2) Review Results
Once I'm sure I have everything in my accounting system, I’ll look at the results. How were sales compared to budget? Did we overspend on overheads? What costs were unforeseen? How are our profit margins compared to the budget/last month/last year? These sorts of questions will always throw up something new, and that’s the point! Each time you do this exercise, you will build on your financial knowledge and see new ways to use your information. Maybe this month, you had an annual subscription charge that renewed without you releasing. You will be sure to cancel this after seeing that, which will benefit the business in the future. Or perhaps your overall profit margins decreased this month and you look into it, that new offer you launched is actually costing you more than you thought. Does it need to be changed or stopped altogether?
3) Pay Myself
The very next thing I do is pay myself. This might seem odd to some people, when we haven’t put aside cash for taxes or future months, but I’ve been following this practice for long enough now that I know what my business can manage. So, as my reward for my hard work and effort at the end of the month, I take my salary, just as I would receive if I was an employee elsewhere.
4) Cash Flow Plan and sales goal
My favourite part of the day is cash planning. This is usually where most business owners will stop, but this is the crucial step to ensuring your business is around longer than a few years! This is the sort of activity that will help you level up your business, grow your financial knowledge and help you plan for leaner months.
So I’ll look at my existing bank balance, take account of what sales I’m expecting for the coming month (using my budget as a guide) and take note of my average monthly expenses, including my personal pay. I’ll also consider what ad hoc expenses might be coming up and what amount I want to set aside for taxes. I want to know “Do I have enough?” Once this is done, I’ll use the information to build out my sales goal for the coming month. If there is a gap in my cash plan, then I know I need to bring in more sales and I’ll break that down- perhaps that’s offering additional Clarity call sessions, or completing an extra set of company accounts.
5) Cash Allocation
Next it’s time to allocate the cash in my business current account. There are many ways to do this and you will need to find what works best for you, but I always advise my clients to use 3 business accounts and 1 personal account.
Business current account- for all income coming into the business and outgoing expenses
Business tax account- for all VAT, PAYE, income tax or corporation tax liabilities
Business savings account- for profits in the business- think of this as your protection to future proof your business
Your personal current account- for your personal pay/owners pay
Over time, I work with my clients to determine the percentages of what should go into these accounts each month. The idea is that by using percentages, you are still moving towards your business goal to create a more sustainable profitable business, whilst paying yourself consistently, but the method allows for changes in your monthly business income.
Here’s how it works in practice. Let’s say Best Business Ltd had worked with me to determine that their allocation percentages were as follows:
Sales budget (100%)
Monthly overheads (45%)
Personal pay taken by the owner (45%)
Tax Allocation (5%)
Profit Allocation (5%)
This means that each month, of the cash that has come into their business bank account, 45% will stay where it is for the coming months expenses, 45% of it will be transferred for personal pay to the owner, 5% will be transferred to the business tax account and 5% will be transferred to the business profit account.
This simple method of physically transferring the funds to other accounts has the benefit of taking the temptation of dipping into tax funds/profits away. We all know the phrase “out of sight out of mind”. How often have you had cash in the bank that you should have kept as profit, but instead you used that to purchase a new piece of equipment or course that you could have done without that month?
This is the goal to get to, something to work towards in your business and move closer to each month. Most of my clients don’t start out like this. We implement this system with low percentages for the first three months and adjust each quarter as the business owners see the benefits of how it is working. Imagine getting to tax return time and you have the full balance available to settle your account early? That feels good!
For me I follow the exact same practices, with different percentages, because my business can be cyclical. We have two very busy times of the year, and I know the business needs that cash to buffer out those months when we are quieter.
At the end of the day, I want my business and my client’s businesses to really provide them with the life that they deserve. Most of us get into business so that our businesses can support the life we truly want, we do not want to get off track with that goal!
Numbers give you freedom. That might sound dramatic, but understanding your numbers will help bring more money into your business and help you keep hold of it. And money means choice in this modern world. Something like having a cash plan and using a money day to keep on top of it, means that I feel more content in knowing where my business stands and where it is going. It helps me plan for the future, both personally and in my business. I’m passionate about trying to help other business owners feel the same way about their numbers, so they can price for profit, build out their cash reserves to future proof their business and use all of that to create the life they really want.
If you would like help with this area of your business, or anything mentioned in this blog post, please reach out to book a clarity call so we can chat further and see how you can get the right support for your business.