Where has the money gone?
You may have had this experience as a contractor and a business owner. You have been along to the accountant to review last year’s financials and they give you a hearty congratulations for having a profitable year. But wait a second… If it was such a profitable year than why isn’t there more money in the bank? Why is it that the bills are still unpaid, it is still a struggle to pay wages each week, and wouldn’t it be great to buy that new piece of test equipment you need for the next project.
This is a commonly asked question in business. Where has the money gone?
There are several reasons why you can have a profitable business but still have no cash. It would take an article much longer and more focused on the issue than this one to explain it well. Having said that, generally cash will get tied up in your debtors and inventory, and can easily be eroded through poor cash management in expenditures – including your drawings from the business.
A great way to ensure that you have profit “in the bank” at the end of the month (or year) is to actually open a profit bank account. It’s a quick process, and can even be done online with some banks. Its only for you to pay into, not your customers, so you don’t need to worry about the hassles of advising your customers of any changes. Once the account is open, calculate how much profit you would like to make every week. Your task now is to start depositing that amount of profit into the new ‘Profit’ account each week (or month if that works better for your cash flow).
Why Would I Do This
Many contractors and business owners are not in the habit of banking profit from their business. They will work all hours of the day and go to extraordinary lengths to attend to their customers needs but are not doing anything about looking after themselves or their families financial needs. By using a profit account it sets up a weekly discipline of banking profit. Once the profit is banked for the week then it is time to pay the bills. And most people will work much harder to pay their bills than they will to pay themselves profit. It’s a very small change in the way of doing this, but it creates a big psychological change, which then creates better financial results.
Initially you should only bank a proportion of your profit and gradually build it up. The main thing is to pay yourself first.
Come June this year, at your next accountants meeting, you can confidently know where your profit has gone.