The famous economist Milton Friedman once once made this observation. This article is all about understanding how to make your business system function more effectively from a cash management point of view.
There is no way we can make a pencil. Why? Well silly, think of all the skills needed between wood working, making the eraser, the lead, paint, lettering, the metal part holding the eraser. So you see, even though a lead pencil is a rather simple instrument, we can’t make one on our own. We need all the materials and equipment to do it.
Your business is no different.
When looking at it from the 30,000 foot view, it might look like a simple (and hopefully effective) system designed to generate a paycheck for your work, and a profit for you as an owner.
But you are not capable of doing everything needed to do this. You need an entire business system that includes materials, technology, services, and people. When all this comes together in a harmonious way, then the magic happens.
Given that there are so many parts to this system, it can feel overwhelming to manage or improve something so complex. So let’s make this more simple for you, ok?
In this article we will focus on the cash management function of your business.
Do you ever have a challenge making sure you have the right amount of cash, in the right place, at the right time?
Yea, I know. That can be a big challenge ensuring that you have enough cash to take care of yourself (owner compensation), employees, materials and supplies, and operating expenses. Oh right, then there are those stinking taxes, too.
So how can you get that cash monkey off your back?
Thought you’d never ask!! You can use our Profit First Cash Management System (PFCMS).
When we implement this system for our clients, we start by doing some cash payout analysis. Why? Well, because we need to understand how and when you’re spending your money. After that, we come up with an allocation formula so you can channel your cash into specific buckets. That way it will be there when you need it.
What buckets? Ok, I’ll tell ya…
- Revenue Bucket – All your revenue from sales will land here
- Profit Bucket – This is where you’ll park your business profit
- Owners Pay Bucket – This is where you will put your owner compensation
- Tax Bucket – Here is where you’ll store up your income tax
- Operating Expense (OPEX) Bucket – This is where you’ll accumulate funds to pay for your regular monthly expenses
We create a formula to allocate money from the Revenue Bucket into the other 4 buckets. This allocation can happen weekly or semi-monthly as required. Now when it comes time to actually disburse funds, the funds will already be there.
What do you think?
A number of our clients are using this system. We use it ourselves in our business. We use it for both tactical cash management, and for executing strategic plans.
In our next article we will show you how we execute strategic plans using our PFCMS!!
