You might have had the following experience as a business owner: You went 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, then why isn’t there more money in the bank? Why are the bills still unpaid, you still struggle to pay wages each week, and wouldn’t it be great to buy a new car?
Sum that up for 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 longer post than this one to explain, but, generally, cash gets tied up in your debtors’ accounts and inventory, and poor expenditure cash management–including your drawings from the business–can easily erode the cash stockpile.
A great way to ensure that you have profit in the bank at the end of the month (or year) is to open an actual 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. After you know that number, your task is to start depositing that amount of profit into the account each week (or month if that works better for your cash flow).
Most business owners are not in the habit of banking profit from their business. And most people work much harder to pay their bills than to pay themselves a profit. They might work all hours of the day and go to extraordinary lengths to attend to their customers’ needs but do little to look after themselves or their families’ financial needs. Using a profit account sets up a weekly discipline of banking profit. After you bank the profit for the week, then it is time to pay the bills.
Initially, you should only bank a portion of your profit and gradually build it up. The main thing is to pay yourself first.
And the best bit: At your next accountant meeting, you can confidently know where your profit has gone.
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