It is not surprising that the mismanagement of capital is the leading reason why most small businesses fail. Why should you know how to manage more money than you have ever seen when you weren’t taught to manage the money that you had before starting your business?
Although we are doing well today with our business finances, that was not always the case. It wasn’t’ until I read “Profit First” by Mike Michalowicz. To say that I learned valuable lessons is an understatement. Below are just a few takeaways from “Profit First”. Please read that book!
At a minimum, I recommend that you have at least four (4) separate bank accounts for your business. Here they are in no particular order:
1) Checking Account or an “Operations” account. This is the account that you’ll use to receive income and payout expenses, hence “Operations”. That sounds simple enough and you may be thinking, “why would I need any other accounts”? Keep reading…
2) Savings Account. I got it, nothing groundbreaking here. You’d be surprised at how many businesses have no funds in reserve. We have a savings account for our “rainy day fund” and another savings account to hold the rental deposits of our tenants.
3) Credit Card. Yes, your business definitely needs its own credit card for a few reasons. No matter what business you are in, you are going to be spending money each week, each month, each year. Why not use a credit card to get kickbacks like flier miles or free hotel stays. You are going to spend the money anyway on supplies, systems, logistics, etc. We have not paid for a flight for the last five years!
4) Line of Credit (LOC). You need access to capital at all times. In our business, we could potentially get a phone call at any moment where a seller may need $20,000 in the next two weeks to get out from under a mortgage and a property. It would be a shame to lose an asset worth $150,000 because we did not have the 20k that the seller needed. If you are wondering what I’m talking about, check our video on YouTube about buying homes “Subject-To”. The point of our business is to keep our money working. We do not hold large sums of capital. Therefore, when an opportunity presents itself, we can use the bank’s money by pulling from our LOC.
5) Profit Account. Finally, we’ll talk about the most important account. This is a checking account that you’ll set up and create rules that automatically send funds to this account. No matter how much money you have coming in and leaving, you are only as good as the profit that you create. Cash is king. Many businesses use this equation: Income-Expenses=Profit. That is the wrong way to look at your profit. Try this method: Income-Profit=Expenses. That may look weird but as Mike talks about in his book, you must allocate funds for profit first!
There you have it! There is much more information in “Profit First” that will really set you and your business up for success. You have the knowledge, no go and make it happen!