If they want to survive in business, every entrepreneur needs to have an understanding of cash flow management.
True, it’s probably one of those areas of business management that aren’t the most exciting, and it’s definitely an area that can cause much stress. So let’s avoid that if we can.
However, having some financial awareness and intelligence around cash flow can be crucial to your business success. If you’re not sure how money moves into and out of your business, how can you begin to make changes to run a permanently profitable business?
In this article, we’re going to dive into all areas of cash flow management for small business to help you make more informed financial decisions.
What is Cash Flow for Small Business?
Cash flow is the movement of money as comes into your business and then goes out over a specified period of time.
When you have a clear picture of how money moves in and out of your accounts, you can see just how financially healthy your business is.
Businesses want to have money on hand when you need it. You don’t want to be scrimping and saving to pay off an unexpectedly large bill when it comes into your business.
Maybe you experience positive cash flow – where all the money you bring into your business is greater than the money that is leaving your business. Or you may experience negative cash flow, which is the opposite – where your expenses are greater than your income. This could spell trouble.
How you manage your cash flow will help you head towards the positive and avoid the negative.
How do Small Businesses Manage Cash Flow?
When you’ve put in place well-thought out processes, managing your cash flow becomes easy and seamless.
There’s no reason why you can’t go about your business knowing that money is flowing into and out of your business without you needing to manage it.
And more importantly there’s no reason for you to not have enough liquid cash to cover all your expenses.
All it takes is finding a way to manage your cash flow that works with your natural behaviour, not against it. This is why the Profit First money management methodology works so well for small businesses.
Profit First and Cash Flow Management for Small Business
Profit First is a world-renowned money management methodology developed by Mike Michalowicz. Mike coins Profit First as a way for business owners to transform their business from a cash-eating monster to a money-making machine.
And it’s the perfect way to describe how the Profit First system works to help make any business permanently profitable.
Your business can become a money-making machine when you follow the four main Profit First principles that guide the methodology. Let’s look at them in more detail.
You begin by making some changes to how you look at money. Start by flipping the usual formula of Sales – Expenses = Profit on its head to place more importance on profit.
It then looks like Sales – Profit = Expenses, so that profit becomes the focus and paying ourselves first becomes our priority.
From there you’re going to create multiple bank accounts for the following areas in your business:
- Profit – Savings or Transactional account
- Owner’s pay – Savings or Transactional account
- Revenue – Savings or Transactional account
- Operating Expenses (OpEx) – Transactional account
- Materials and subcontractors (if applicable) – Transactional account
- Tax/GST – Savings or Transactional account
You’re also going to open some of these accounts with a different financial institution making it harder for you to access (or even see) your funds accumulating.
Then it’s about establishing a rhythm. You don’t want to fall into the trap of managing your cash flow too infrequently. Rather than wait to pay bills when cash is available, you allocate the money when it comes in so that it is available when the bill arrives.
Profit First is a proactive approach to managing your cash flow within your business. And Profit First Professionals are perfectly placed to support you to successfully implement the methodology.
What are Profit First Professionals (PFP)?
Profit First Professionals are certified in the methodology and are required to undertake (and pass) specific training to be recognised as a PFP. It’s not set and forget, there’s ongoing training and a yearly review.
Certified PFPs are also the only bookkeepers, accountants, or coaches that are officially able to implement Profit First within businesses.
To demonstrate their thorough understanding of the methodology, and as part of their certification, PFPs are required to successfully implement Profit First within their own and another business.
You can rest assured that when you engage a PFP they already have the skills and knowledge to help grow your business towards permanent profitability.
Take Control of Your Cash Flow Today
There’s no time like the present to gain control back in your business.
As certified Profit First Professionals, Tracy from Nourish Your Numbers can assess your business for profitability and help you implement the money management methodology within your business.
We start with a free Getting to Know Your Business call.