Opening up a Profit Bank Account
Where has the money gone?
You may have had this experience as a business owner. Many, if not all of us have. You’ve just been to your accountant to review last year’s financials and they give you firm handshake, a high-five and a big congratulation for having a profitable year. Ok maybe not the high five, but you get what I mean.
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 some 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 equipment you need, without having to stuff around with banks and getting finance?
This is a commonly asked question in SME businesses. Where has the money gone? The P&L looks good, but where’s the cash, baby!
There are several reasons why you can have a profitable business but still have no cash. To put it as simply as possible, generally cash will get tied up in your debtors and inventory, and especially the buying of assets (that takes cash, but doesn’t come off your profit on your P&L. All of this 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 most banks these days.
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. Not your wage, the business profit – so that’s after all your expenses and wages. Yes, even after your own wage if you’re an owner/operator! 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 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, and even staffs needs, but are not doing anything about looking after themselves or their families financial needs. Yes they might draw a wage, but didn’t you start a business to make more than just a wage?
By using a profit account it sets up a weekly discipline of banking profit, in actual cash money. Once the profit is banked into the profit bank account 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 things, but it creates a big psychological change, and some pressure, which then creates better financial results. Pressure makes Diamonds as they say!
Initially you should only bank a proportion of your profit and gradually build it up to banking it all. The main thing is to pay yourselfa profit first, then pay everyone else (employees wages, your own wages, and of course supplier invoices).
Come to End of Financial Year time, at your next accountants meeting, you can confidently know where your profit has gone – and it’ll be sitting there ready to either withdraw, or reinvest.