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“Money Goes Away”

By Shane Bender

When I was a teenager, we had a dry erase board in our kitchen that we would put funny quotes. Do you remember the quotes on Saturday Night Live from Jack Handey in the 1990s?  They were written in a profound way but were very obvious. We would try to write quotes like this. One time my older brother who was probably 16 years old simply put “Money goes away”.  He had noticed that even when you seem to have a lot of money it can disappear without much thought. You are left with wondering what happened.

Do you find yourself managing your business by looking at your bank account?  When cash gets low, do you get nervous and start cutting everything? Do you go through your contacts and emails to find lost billings?  Do you start calling clients for past due payments?  Does low cash ruin your weekend?

Now, on the other hand, you could be complacent when you have enough cash. There are many reasons for a high or low cash balance in the bank, which makes this a dangerous way to manage your business.

Why is this dangerous? I will give you a few examples.

Cash Problem #1

  • Your profit is really good for the year and you are excited about the future of your business. The problem is that you seem to have much less cash than the Income Statement in Quickbooks indicates. But, your profit is high so you continue to spend and hire. You have to borrow more from your line of credit to survive.
    • Most likely there is something happening on the Balance Sheet. The first place to look is Distributions. Many owners will take distributions which aren’t typically reported on the Income Statement. You have to account your draws from this business. Another area might be Property & Equipment. Generally Accepted Accounting Principles (GAAP) reports this on your Balance Sheet. Other areas might be Inventory and Accounts Receivable.

Cash Problem #2

  • You had the best year ever for your business. You decide to use your extra cash to pay yourself more in distributions and buy more equipment. Your tax CPA does your taxes and it shows that you owe more than ever but you didn’t set aside this cash. Your CPA says you are in the highest tax bracket because you made the most money ever. Now, you have to take on debt to pay your tax bill.
    • Paying more in taxes typically does mean you had a good year but you have to set this money aside. Consider setting aside up to 40% of your operating profit for tax in a separate bank account.

 Cash Problem #3

  • You billed your new client in advance for future work. You purchased equipment and materials for the project and hired contract labor. The project went longer than expected and you paid more for labor than estimated. You used some of this money to pay for operating expenses to keep your business going. Suddenly you need to purchase a major item for the project but you don’t have to cash to do so. You have to borrow money to complete the project and provide the service you told the client you would deliver.
    • Billing in Advance is a great idea but it can make your cash balance look better than it really is. You could set up a separate bank account for these types of expenses. At least make sure the cash for materials, labor, and product for this project is set aside. Using a separate bank account is an easy way to easily see where you are. Understand your true cost and markup the project accordingly. Put padding for any potential cost overruns.

 Cash Problem #4

  • You have been very busy that you have not been consistently billing your clients. Therefore, you go back for the last 3 months and bill your clients but find that some of them are not paying because it has been too long. You don’t have time to call and collect old invoices. Months go by and now it has been over 6 months since you have provided the work. You don’t have any leverage and feel you either have to write it off, send it to collections, or maybe go to small claims court. Who has time for that?
    • One of the easiest ways to prevent most of this is consistent billing and collections. Bill your customers on regular basis and they are more likely to approve the invoice. Also, it is easier to collect smaller amounts. Collections are easier when you follow up consistently. Who gets paid first?  The customer that contacts their clients on a consistent basis. 

Cash Profit

You did not go into business to lose money. You want to be profitable and grow. It is important to put some of this money back into your business but there is nothing wrong with taking distributions. In the book “Profit First”, Mike Michalowicz suggests taking all revenue and putting a percentage into a profit account at another bank entirely. You need to have profits to help you grow and be sustainable.

Cash balances can be misleading so separating bank accounts between profit, tax, operating expenses, payroll, and revenue can be helpful.

Next time we will discuss the final step in taking control of your business finances. If you missed the first 3 steps, check the below articles.

Step 1 – Develop a Positive Financial Mindset

Step 2 – Implement a Revenue Plan

Step 3 – Spend Wisely