Money is not good or bad. It's just a tool we can use to help us achieve our goals. With that said, we can use it for both good and bad.
Today's tip is based on a comment I got from a business consultant with the SBDC. One of the areas that he sees as an opportunity for growth for business owners is in the area of understanding how to manage their profits better.
The reason we are in business is to make a profit, but profit is just a theory. We can be making a profit but if we can not turn it into cash quick enough, we can go bankrupt. As a business owner, how can you manage your profits better? In order to build your profits in your business, you should have 3 different bank accounts. Why? When you have all your money in just one account it's harder to manage.
Our first instinct when we see our bank accounts growing is to spend it. So let's take a look at the 3 different accounts you should have.
One is your operational account, the 2nd is your taxation bank account and your 3rd bank account is your PROFIT account.
Let us imagine that you already know that at the end of the year approximately x percent is going to be paid in tax. You know that of your total sales, approximately "X" amount gets paid in tax.
So each week or each month, you should be putting aside that amount into your tax bank account so it comes out of your main account into your tax account.
Let us also imagine that you know that "x" percent or "y" percent should be profitable at the end of the year. Again, you should have a separate bank account for that and you should pull the money out on a weekly basis, or the less preferable would be a monthly basis so that money goes straight into the profit account for your business. Think of your profit account as another bill. You can always add more if you have a great month.
By doing this, you pay your bills out of the operational account, your taxes out of the taxes account, and the profit sits in the profit account to go to you for distribution when you create your profitability at the end of the year.
Make sure you set up all three accounts and do not just have one bank account. If you only have one operational account, what ends up happening is that when tax time comes around, you don't have any money to pay your taxes. Also, when profit distribution time comes around, there aren't any profits because you spent everything because you lose track of profits if it is all sitting in that operational account.
Also another benefit of having less cash in your operation to pay your bills it forces you to pay more attention to your accounts receivable and make sure your clients are paying you on time.
Your profit account should be used for your distributions and used for bonuses for your employees. It can be used to invest back into the company. Some clients use the money from their profit account to pay the salary of a new employee for the first couple of months before they start earning their keep.
Let me know what you think of this idea... Remember work smarter not harder.
If this tip resonates with you, book a free strategy session and see how business coaching can help you take your business to the next level faster than you could on your own.
Learn how a business coach can help you manage your profits better
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