Many businesses find that they have months when lots of cash comes in and others where the well is bone dry. Well how you manage your cash when it comes in can be an easy solution to this dilemma but it takes motivation to start and discipline to maintain.
The basic steps are:
Produce a 12-month budget ideally on a spreadsheet. This budget will consist of a sales forecast and an expenditure forecast.
You can base the SALES forecast on last year’s monthly results to identify trends, seasonal or otherwise.
Do a similar exercise with EXPENDITURE.
If this is your first year in business you have to give it your best guess and each year thereafter you can tweak the numbers based on experience.
The Profit First Principle
Build your budget using the Profit First Principle Usually we think of
SALES - EXPENSES = PROFIT
With this method we think of SALES - PROFIT = EXPENSES
This involves taking out your profit first before spending on overhead and your drawings/salary. This way you always make a profit from day one of using this method.
“When you base decisions on your best revenue month, you will run out of cash—quickly.”
Mike Michalowicz, Profit First: A Simple System To Transform Any Business From A Cash-Eating Monster To A Money-Making Machine
Ideal Cash Allocation for a healthy business that can see you through thick and thin
Set up five different sub business bank accounts if you bear to, if not try at least three to set aside cash for Taxes, Overheads/Operating Expenses and Profit.
For each deposit take out direct costs (like materials to ensure that you are achieving a gross profit). If you are VAT registered and transfer the VAT collected from your sales to the tax account this leaves REAL REVENUE that can go towards overheads.
Then ideally allocate funds as follows:
What makes a healthy business?
5% to the profit account
50% salary into your personal bank account - check your (PSI) Personal Survival Income =gure that you need to pay your personal bills and to take the occasional vacation
30% into the operating expenses account, pay business bills from this account
15% into the tax account to avoid penalties
If you are new in business you can build your budget based on this form day one. If it doesn’t fit keep cutting expenses until it does.
By putting aside these amounts whatever is left in the operating account is what you have to spend on the business, be frugal and try to get this to 30%. This can help you make decisions like shall I get a larger studio or office, does it keep me within the 30% no, then I am not ready.
You should have 5% in a profit account, which will fuctuate with the deposits this can help with lean months, buying equipment or just accumulating an emergency fund.
When you find that you have a surplus bring this over to the next month if there is a loss.
You have to be very disciplined and there are Profit First Hubs that can keep you accountable.
At the very least don’t spend all your money if you have a good month set aside some to cover slow periods.
Our aim is to make finance fun, if the money side of your business is driving you nuts, consider if you want a consultation on Finance Fun-De-Mentals