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YOUR MONEY
Planning For Profit
Opening
a profits account is a simple yet effective cash flow management
tool.
If you are like many small business owners you find that
some years are profitable and others are profitless. Have
you been able to determine the reason for the disparity
between profit and loss? Maybe you can credit the ebb and
flow of year-end profits to an obvious predicament such
as losing valuable customers, an inability to cultivate
new clientele or serving a market that is struggling itself.
But, void of a predicament, the likely conclusion is the
fact that you simply don’t know where the money went.
This type of problem is a financial planning issue that
can be remedied with a cash flow management solution.
Maintaining adequate cash flow is one
of the shared characteristics among well-run companies.
In addition to adequate cash flow, well-run companies also
set certain benchmarks and ratios that they strive to achieve
or maintain. Generating accurate and timely accounting reports,
and setting and managing tight budgets enables these businesses
to plan for having profits come year-end and increases their
ability to produce them on an annual basis.
The
profit tactic
One novel technique I have found that is very powerful
for small business owners is actually budgeting for profit
by starting a profits account that is funded monthly.
Let’s say you and your financial planner have analyzed
your company finances and your year-end profit and loss
history. Some years were profitable and others were profitless.
But on average the good years showed a profit of around
$120,000 after paying all expenses including your salary.
So, you decide to plan on making $120,000 in profits during
the coming year.
Fund the profit account
regularly
Here’s my profit tactic: Open a new, separate business
money market account for your profits account. Write a check
for $10,000 ($120,000 in profits divided by 12 months) at
the start of the month. Don’t wait until the end of
the month. Deposit the check in your company’s new
profits account. Now, if you find you have to dip into your
profits account to pay bills you immediately know you have
a cash flow management issue that needs to be resolved and
that you may be in jeopardy of achieving the desired profits
for the year.
I have noticed that small business owners using this tactic
often struggle in the first few months not to make withdrawals
from the money market profits account, but later on they
get better at managing their cash flow. As time goes on,
many find themselves even increasing the amount set-aside
annually in their profits account. This is just an expansion
of the golden rule of business you have heard before: Pay
yourself first. Here, we are applying it to your business.
For some businesses, making 12 equal amount deposits into
a money market profits account is not realistic because
of the particular ebb and flow of expenditures and income
they may experience. One such example is a clothing retailer
who may have costly biannual inventory expenditures for
fall/winter and spring/summer merchandise. For a situation
such as this, I would help the business owner work out a
tailored plan based on fluctuations. She might write a bigger
profits account check a month or two after the big expense,
and write a smaller check (but always at least a token amount)
for the month of the big expense. So, two months each year
the clothing retailer would write herself below average
profit checks, two months she’d write above average
profit checks, and eight months she’d write average
monthly amount profit checks.
As I observed, the key to making sure that planning for
profits pays off for a small business often lies in the
owner’s ability to become an expert in cash flow management.
In my next column, we’ll look at steps you can take
to begin to master the cash flow at your business.
Guy McPhail, CPA, CFP®,
is president of Zdenek Financial Planning, LLC.
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