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It’s that time of year again – you have met with your accountant, you have officially closed your books on last year, you have paid your taxes, you are well into the second quarter and now you are asking yourself….where has all the money gone? This is a commonly asked question in business.
As a business owner, you may have even had this experience every year. Your accountant gave you a hearty congratulations for having a profitable year. But you are puzzled. If it was such a profitable year then why isn’t there more money in the bank?
There are several reasons why you can have a profitable business but still have no cash. It would take more than a few minutes to explain it 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 separate business bank account for PROFIT. Calculate how much you need to break even in the business and how much profit you would like to make every week or month. Your task now is to start depositing that amount of profit into the account each week or month.
If this seems unreasonable or difficult, you are not alone in your thinking. 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 customer’s needs but are not looking after themselves or their financial needs. By using a profit account it sets up the discipline of banking profit. After the profit is banked 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 will be, at your next meeting with your accountant you can confidently know where your profit has gone.
YOUR CHALLENGE THIS WEEK: Calculate the break-even for your business, plan the profit you want to make, and set up an account to bank your profit.