I have been discussing with a large number of clients recently about the return they generate from their business for themselves and every one of them said they would like to improve this based on the effort they put into running their business.
We all know that running your own business has its challenges but I try and remind my clients to think about why they went into business in the first place and if that motivation is still there. I have discovered that clients have different motivational factors be it to spend more time with your family and loved ones, have the freedom to make your own decisions without being answerable to a boss, you get a sense of satisfaction of building your business and providing jobs to people or just simply brilliant at want you do and want to scale it up.
So why do so many businesses quickly lose sight of the reason why they started out in business?
My aim when I’m talking to clients is to get that fire back in their belly and if they are being financially rewarded for their efforts then they can’t wait to get up in the morning and start working on their business then I know they are true entrepreneurs and are likely to follow my advice to get them to the next level in their business.
I have found that the fastest, healthiest growth comes from businesses that prioritise profit. The Profit First philosophy turns the well known accounting formula on its head and instead of having Sales-Expenses=Profit (I could write chapter and verse why this is not fit for purpose), I get clients to commit to the new formula of Sales-Profit=Expenses. I get clients to apply four principles and today I'm only concentrating on the first one which is...USE SMALL PLATES, so when money comes into your normal bank account it simply acts as a serving tray for all the other bank accounts. You then periodically disperse all the money from your current account into different accounts in predetermined percentages.
Each of these accounts has a different objective: one is for PROFIT, one for OWNER PAY, another for TAXES and another for OPERATING EXPENSES. Opening all these accounts can be quite daunting to start with so to get the ball rolling I get clients to open one account, being the PROFIT account, and transfer 1% of any income you deposit into your current account. You should not miss the 1% and should be able to run your business as normal. The beauty of doing this is that something magical will happen and you will start proving the system to your yourself. You obviously will not get rich overnight but you will get a wealth of confidence and the secret is to keep with this small step for a while. If I can get you to change your mindset then you are in a great position for greater success.
As all businesses that I work with use their bank accounts as a measure of how well the business is doing as they log into their bank accounts, make notes of their balances and then based upon what they see make decisions on how to proceed. When our balance is low we make cash collections calls and sell hard. When it is high we invest in equipment and expansion or take more money for yourself. Bank balance accounting sort of works but more often that not there is never enough money left to pay yourself, which is why the Profit First method works. Profit First is designed so that you can continue doing bank balance accounting so you can log into your bank accounts, see what your balance is and make decisions accordingly. As you have multiple bank accounts when you log in you know exactly the purpose that money is meant to serve.
I have explained to my clients that once you have opened your bank accounts and started thinking slightly differently about your money then we can move onto the practicalities of running this system and fine tuning it to meet their specific needs. We then start thinking about how often we move money between the nominated bank accounts, what do we do with the money in the PROFIT bank account, how do we remove the temptation to “dip” into nominated accounts and what happens when we do not have enough money in our OPERATING EXPENSES bank account to pay the bills. I will cover these in future blogs but for now just maybe opening one new bank account is a step in the right direction and you will be on the road to financial freedom.
Written by Lee Manning
lee.manning@raffingers.co.uk
0203 146 1604
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