Do you have a cashflow problem?
There are various reasons why businesses can’t afford to pay their owners. Ultimately the problem is cashflow, but here are a few common issues I come across:
1. Bank Balance Accounting
Accounting reports can be so complicated and are not really designed for entrepreneurs to use for making informed business decisions. They are basically for accountants to accurately count up what tax we owe to the government.
In theory, we should be using our profit and loss reports, balance sheets and completing bank reconciliations before we make financial decisions in our business.
But that is far too complicated for most business owners. Usually we DON’T have financial degrees to be able to do all of that.
So instead, business owners are using what I call “bank balance accounting”. They open up their business bank account and make a financial decision off that one number in their bank account.
First of all, it’s simply not enough information, it’s only one data point and we need more.
There are so many things people don’t think about, when they look at that number and try to remember everything else that needs to be taken into account within that figure off the top of their head.
- How much will be needed for tax?
- What are my long term obligations?
- Is there more money coming in soon?
- Will that money have to last for a low season?
There is so much to consider with that number that we see in the bank balance.
Because of Parkinson’s Law, when we do see that number, we use our human instincts and see that total available resource (the bank balance) and therefore, what we see, we use.
However, Profit First is a cashflow system that actually takes advantage of our human desire to use that available resource, by having separate accounts for our various business obligations and leave you with a safe amount of money that you can to spend, sitting right there in your account to decide with.
2. Uneven Income Across Months
Using the profit first method of assigning money to bank accounts with percentages doesn’t necessarily fix all of our problems. Because the system is based on percentages it will still go up and down depending on your income.
When you are earning a lot of income in one month, your percentages for that month will be high and (Parkinson’s law again) we are tempted to spend all the money available to us in that month again.
The problem then being in another month if your income is low, the percentages for that month will result in reduced income, and possibly not being able to cover all your expenses for that month.
Therefore, creating a buffer helps to even out the rises and dips, giving a more regular balance across the months.
3. Unrealistic or Underestimated Sales Goals
Your lack of cashflow may very well simply come down to needing more sales. Then the question actually becomes: “How many sales do you actually need?”
Many entrepreneurs are not able to answer this question and that’s understandable, as it can be complicated to find the answer.
We need to make sure we look at our long term needs, tax obligations, personal finances, business expenses, the time we have available, our efficiency, whether our current packages can provide the income that we need in the time we have (including over holiday periods) to create the income we desire.
The answer to this question is exactly WHY I have created a FREE 5-day Training Series for you.
We will be going through the considerations and strategy you need, in perfect timing to create a plan for the new year and achieve that consistent income.
Come and join the live round and we can work through it together.