A frequent question from new Profit First users is just where to pull the money from when there is not enough in your Operating Expense account.
The answer is basic to how Profit First makes your business successful.
You do not pull money from any of your other accounts! You find a way to reduce expenses and use money from the next operating cycle for whatever purpose.
Profit First, Budgeting, and Cash Flow Management
An old saying dating back to Medieval England refers to“robbing Peter to pay Paul.” The saying basically means to pay off one debt by incurring another. This is too often the problem in a small business. The owner is not controlling costs but rather borrowing or “stealing” from his profits to make payments. The answer to this problem is not to rob Peter (the profit account) to pay Paul (routine expenses). The answer is to improve budgeting and cash flow, make the hard choices to get a handle on finances, and start making and keeping a profit.
Ensuring a Profit and Eliminating Unnecessary Expenses
Profit First works when you follow the path. The path starts with putting money aside in separate savings accounts where it is inconvenient to transfer money. This sets up what is at least an intellectual barrier to spending that money until the right purpose arrives (like paying taxes with money from the tax account). It also makes it easier and more intuitive to see where your money is and for what purpose it is intended. The Profit First method requires that a small business owner sets up the system by creating multiple bank accounts and learning the system from Profit First Professionals. The ideal scenario is not that the business owner is tempted to raid his profit account to pay current bills. The ideal scenario is that the business owner takes a long hard look at his business,improves budgeting and gets a handle on cash flow.
Businesses have debts and expenses. They also have money coming in. The key to dealing with bills to pay and debts to pay off is to effectively manage cash flow. When you start with Profit First you learn a new way of doing business, dealing with cash flow, and setting meaningful and effective budgets. Along the way, this includes countering the tendency for the hours spent on a job to expand until all time is used up and for expenses to continue to increase until all of your assets are eaten up. When you learn about Profit First you will learn about Parkinson’s Law and how to avoid its effects on your business.
So, the answer to where you pull money from to pay bills is, pull it from the operating account as cash comes in and continue to use the discipline of Profit First to heal your business and make it profitable!
If you still have questions or are interested in implementing Profit First in your business schedule a meeting with a Certified Profit First Professional today!