Think back to when you first started your small business. Whether it was five months ago or five years, I bet your decision to start your own business came from your love of the creative work, not the desire to manage a small business or cash-flow strategies.
People with a passion for the work they do don’t always have the business acumen that is needed to run a successful, profitable, and in-it-for-the-long-haul business. And that can cause some serious stress.
Even those who are successful and profitable might feel creeping anxiety about what they don’t know, over whether they can afford to grow, or what might happen during the next slow season.
Small Business Cash-Flow Strategies
Fear not! With these five profit-focused cash-flow strategies, you can get a handle on your business’ money without having to learn accounting.
1. Give every dollar a job.
Start by knowing exactly how you’re currently spending your money.
What are your monthly overhead expenses? How much do you need to spend on the average project you offer or the items you sell? How much do you want to pay yourself, not just to survive but to put some aside for vacation, retirement, and emergencies?
2. Give every dollar a home.
Now that you know how you want to use your money, separate your funds so you can easily see how much you have just by checking your bank balance.
Then, open up separate bank accounts (and, yes, most banks will do this if you ask) for each of the different money “jobs” — that is, their purpose and reason for being.
You should have at least five different bank accounts:
- Income account to gather all your client payments
- Profit savings account for growth and to reward you for being the business owner
- Tax savings account for the quarterly estimated and year-end tax bills
- Owner’s pay account for the work that you do in your business
- Operating expense account for all your day-to-day overhead
Also, consider if you need any other special-purpose accounts; for example, to save up for new equipment or set aside job expenses, so those funds don’t commingle with operating expenses. Or if you know you have a slow season where your small business spends more than it earns, set aside money in a seasonal savings account to be better prepared the next season.
Make sure to find a bank that doesn’t charge a minimum balance or monthly fee for the separate bank accounts you need.
3. Take your profit first.
By being intentional about the sequencing and taking your profit money first, then setting aside tax and owner’s pay, you automatically create a budget for your operating expenses. Then, if there isn’t enough money in your account, you’ll realize you can’t afford it.
How much should you put in each account? I’m glad you asked! Most business owners try to transfer a set dollar amount, only to find that sometimes they can’t manage it. It’s better to figure out what percentage of your income goes to operating expenses and allocate based on that amount.
If you’ve never been profitable or are unsure of what to designate as profit, start by putting 1% of your income into the profit account. Talk to your tax accountant about how much (and how often) you pay in taxes, and set aside that percent in your tax account. If you aren’t sure, start with 15% of your income.
Quarterly, plan to take out half of what is in your profit account and celebrate with that money! Just like shareholders in a big business, you should get a financial reward for your investment in your business.
(Note: If you have debt, you can use most of this distribution to make an extra debt-blaster payment, but be sure you save a little something to do something nice for yourself.)
4. Remove temptation.
Since we’re using our bank balances to check and see whether we’re on track or not, it can be very tempting to see the money growing in your savings account and want to use it.
Resist the temptation! You might want to set up both your profit and tax savings at a bank that’s separate from the one with your other day-to-day business accounts. And don’t download the app or sign up for online banking at the profit and tax savings accounts bank. Make it hard to check how much is in the account. Out of sight, out of mind!
5. Find a rhythm.
Make regular “money dates” with yourself.
Pour some chamomile tea or your favorite beverage, and sit down to allocate the money that has collected in your income account, update your bookkeeping software, bill clients, pay vendors, etc. Ideally, an hour or two a week should be all that is needed and will keep this work from piling up. Get a business buddy, if needed, to hold you accountable to make sure this work gets done.
Lastly, stick with it! Remember, a journey of a thousand miles begins with a single step.
Profit First Cash-Flow Strategies
These cash-flow strategies are from the book Profit First by Mike Michalowicz. If you’re interested in learning more about how using the Profit First cash-management approach can help your small business find sustainable profitability, download the first two chapters.
Ready to reframe your thoughts on money? Get our Money Mindset Guide.