I have a confession to make – though I am a big fan of ‘The Great British Bake Off’, I am actually a terrible baker. It does not suit my slightly rebellious personality – the strict measuring and weighing, having processes in the correct order, oven temperature spot on… my culinary style is a bit more free form!
And I think cash management can be a bit like that for creative entrepreneurs.
So often I find that my small business owner clients don’t differentiate between their pay and their profit.
Their accountants will use the principle of
Sales – Expenses = Profit
But profit is often seen as a ‘happy accident’ – something we all hope to have some of at the end of the year, if we are lucky. There is no strategy.
How often do we take any money that is left after the bills are paid, as our own pay??
What do I mean by this? So all your sales revenue lands in the bank, and you pay all your bills. Whatever is left, you just dip into for your own personal needs. Often all from the same account?
(This is even worse, as it is co mingling business and personal money, and co mingling pay and profit!)
I show my clients a simple system which looks like this –
Sales – Profit – Tax – Pay/salary for you = Expenses
At first sight this seems counter intuitive, but look closer – by setting aside some profit (even if it is only a very modest amount) it is assured! Your business is profitable – feels good doesn’t it? Woo hoo! Money is then put aside for tax (no more stress and panic when the HMRC bill arrives) before taking a fixed, regular amount for your own salary.
Whatever is left has to cover the remaining expenses of the business. And if that is not enough money…. then your business is telling you in no uncertain terms, action must be taken.
It is not a painful or difficult process to uncover this truth, and to take the action needed to get your business on the Path to Profit and an investment of a few hundred pounds now will reap dividends for years to come.
(Sadly, I am unable to help with baking advice) 😊