Where has the money gone?
You may have had this experience as a business owner. You have been along to the accountant to review last year’s financials and they give you a hearty congratulations for having a profitable year. But you are puzzled. If it was such a profitable year than why isn’t there more money in the bank? Why is it that the bills are still unpaid, it is still a struggle to pay wages each week and wouldn’t it be great to buy a new car.
This is a commonly asked question in business. Where has the money gone?
There are several reasons why you can have a profitable business but still have no cash. It would take a column longer than this one 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 profit bank account. I am sure your banking institution would be glad to help you out there. Calculate how much profit you would like to make every week. Your task now is to start depositing that amount of profit into the account each week (or month if that works better for your cashflow).
Why Would I Do This?
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 customers’ needs but are not doing anything about looking after themselves or their families financial needs. By using a profit account it sets up a weekly discipline of banking profit. Once 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 bit.
At your next accountants meeting you can confidently know where your profit has gone.