Using Profit First to manage business finances is a game changer. You'll not likely find a Chartered Accountant that will admit to money struggles, however as a start-up business, I had the same cash flow struggles as any new business does. Paying everyone else more than myself, seemed logical. It meant we could pay all the bills and taxes, and I had the funds at home to 'bankroll’ the business. What I didn't see was the damage to my mindset and confidence AND my P & L in Xero didn't show me the real story about how business was tracking. When it comes to growth, cashflow is a finicky thing and if you don't have a system to manage it, things can go downhill rapidly.
The kiwi way of, ‘I'm not taking a full (or any) wage until the business is more profitable’ or ‘I need to invest those funds back into my growing business’ are not good cash flow strategies!
Taking cash profits and working towards paying yourself a market salary for what you do is the whole point of being in business. When I discovered Profit First, the first job was to set up these 5 bank accounts and start separating the revenue out as it came in each week. This creates smaller 'pots’ of cash available for each payment type, providing clarity and forcing resourcefulness into my cash flow.
Set up these bank accounts as your first step to managing your cash flow.
Revenue Account – This is your main account for all revenue to be deposited and serves as your holding account before transferring out to your other ‘working’ accounts.
Profit Account – This account receives the first % of your revenue and is distributed to the owner every quarter! It is your reward for taking the risk of owning the business.
Owners Pay Account – This account receives a % of your revenue and is used to pay yourself … properly, just like you would if you worked for someone else!
Tax Account – A % of your revenue needs to be put aside for tax. It’s unavoidable, especially if you want a profitable business! Having money in this account hugely reduces uncertainty and stress!
Opex – Your operating expenses are paid from this account. If you don’t have enough in it to pay your bills, then you’re spending too much….and we need to talk! 😊
Your second step is to transfer 1% of your revenue each week (or month) to your profit account. You will quickly notice that you don't actually miss this 1% of cash!
Next steps? Want to learn more? You can either contact us to for a bit (or a lot) of handholding as you set up Profit First OR buy the book 'Profit First’ by Mike Michalowitcz for a DIY approach.
