36. Simple Cash Flow System For Small Business
Simple Cash Flow System For Small Business
Are you a small business owner who struggles with cash flow?
Many small business owners make decisions based on how much money is in the bank. Not on their financial reports. This will lead to cash flow problems, always.
Here are the basics of a simple system that is explained in the book Profit First. It will give you greater control and discipline over your money.
Cash Flow Warning Signs
Hi, it's Scott from Beyond the Numbers, and today I just want to talk to small business owners, just coming up with a simple cash flow system, to help your business, and especially comes tax time whether it's your GST or to pay your income tax at the end of the year. When working with small businesses, that's a warning sign that a business has a cash flow problem, that they're struggling to pay their BAS or to pay their income tax, and they're not getting a surprise at the end of the year.
Cash Flow Sytem
So a really good book that I recommend, who talks about this from a counter-perspective, so you probably prefer it than the way that I explained it. It's Profit First, by Mike Michalowicz. There's also some really good podcasts to listen to as well.
So the way that this system works, is really just goes back to like the old envelope system that we had, well if you're old, like me but you get your money and then you put a little bit in for groceries, you put a bit in for your fuel, and that sort of stuff, and that's really bringing small businesses back to that, and just having a simple system so that they're putting money aside. In this day and age with banks it's so easy to have so many different accounts open.
So in this system for every time you are, not every time you receive money, maybe once a fortnight, once you get your sales in, you then split that up and then put that into different accounts. So Warren Buffet says, I read a paraphrase here, it's better to save and then spend, not save after you spend, and this is what this system does.
So you workout how much, let's say you get a hundred dollars in, and were gonna use the same percent. So then you workout how much you need to split over these different things. So in my business, I'm gonna put say 10 percent in for profit, and then I workout my tax, and my super, so including your GST and that sort of stuff, and that is roughly around, I think it's around 35 percent, that I need to put aside, my expenses, I put, 20 percent aside, so then I put 35 percent is my wages, and so I split those up into those different categories, so when I come to the end of the year, and when it comes to super at the end of the quarter, I have the money set aside.
My business being is very low capital, so I don't, I don't use much capitol. If you're a business that has inventory and stuff, you're going to have different percentages. So to always recommend, your goal might be 10 percent for your profit, but if you're not 10 percent at the moment, you might want to start at one percent, so putting one percent aside.
One of the things that I learned very early on in my career as an accountant, is that it's not how much money that you got coming in, it's how much that you actually save. One of my first jobs was doing tax returns, and people would come in and sometimes people would be earning 200,000 dollars a year, which was a lot of money back in the 90's, you could've bought a couple of houses in town at that point in time for 200 grand, and they would have no savings, no investments, nothing, where someone else would come in with 30,000, and they would have quite a lot of money in savings and stuff, and that's because they're saving were they're at.
So as you grow, and you continue saving that same percentage you're going to build up more of your savings, so it's all about developing a habit. So your expenses might be, actually 70 percent, because your greatest profit might be at 50 percent, so you're gonna need more, and then your wages, might be at say 20 percent, and your tax and super at 10 percent, or what do we got.
Let's change this to five percent, and then you want to put five percent, or four percent, sorry I should've worked these figures out, you want to do four percent for your capitol, so that you're covering enough to buy, machinery, or cars, or all that sort of stuff, and so each fortnight you're putting this amount of money into different accounts, and then you're not touching, especially the tax and the profit, you're not touching that until it's absolutely necessary, and so with the profit you might take a percentage out every quarter or every six months and that's your bonus, and that's your reward for what you're doing.
But I've seen this work in businesses where the people have, struggled, and had problems paying their tax, but switching over to this system, it gives them a lot more peace of mind, and they don't mind going to an accountant. So that's all for this week and I hope this helped you have a simple cash flow system.