Where has the money gone?
Where has the money gone?
You may have had this experience as a business owner. You have dutifully been to the accountant to review last year’s financials and she gives you a hearty congratulations for having a profitable year. But you are puzzled. If it was such a profitable year than why isn’t there more money in the bank? Why is it that there are still unpaid bills, it’s still a struggle to make payroll each week and it seems there is no chance to buy that new car you have had your eye on for some time now.
This is a commonly asked question by business owners. Where has the money gone?
There are several reasons why you can have a profitable business but still have no cash. It would take a column longer than this one to explain all of the reasons, however generally cash will get tied up in your debtors and inventory and can easily be eroded through poor cash management in expenditures – including your drawings from the business.
A great way to ensure that you have profit “in the bank” at the end of the month (or year) is to actually open a profit bank account. I am sure your banking institution would be glad to help you out there. Set a goal for how much how much profit you would like to make in a year or month, which ever makes more sense for your business. You’ll likely need to run a break-even calculation first (I can help you do that if you’re not sure how, or look online for a calculator). Set a goal for how much profit you’d like to make over and above your breakeven. Your task now is to start depositing that amount of profit into the account each week. Its better to do it weekly if you can, but it really depends on the cash flow for your type of business. If monthly is better, then do that, but no less frequently than that.
Why Would I Do This
Creating a separate profit account and making regular deposits to it is what any good money expert will call “pay yourself first”. It’s important that it is a separate account, not the one you use to pay the business expenses. Most business owners are not in the habit of banking profit from their business. They will work all hours of the day and go to extraordinary lengths to attend to their customers needs but are not doing anything about looking after themselves or sometimes their families financial needs. By using a profit account it sets up a weekly discipline of banking profit. Once the profit is in the bank for the week then it is time to pay the bills. And most people will work much harder to pay their bills than they will to pay themselves profit.
Initially you should only bank a proportion of your profit and gradually build it up. The main thing is to pay yourself first.
And the best part.
At your next meeting with your accountant, you can confidently know where your profit has gone.
Not enough money to open a profit account yet? Sign up for my free seminar on the 5 Ways to Amazing Profits, this Friday.