Business Cash Management - Focus CPA

Business Cash Management – Paying the Owner First

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Business Cash Management - Mary Guldan-Lindstrom

Personal financial planning stresses the importance of paying yourself first. Financial experts recommend that a person prepare for the future by putting money away for savings and investment. The rest is available to spend. Let’s take that same logic and apply it to business.

By segregating the expected profit from the operating cash a business can provide a safeguard to catch or prevent overspending. If the operating checking account is running short a conscious decision is made to transfer money from the profit account. This is a safety valve, a way to protect projected profits.

Step 1. Build a workable budget and defined profit margin for your business. Let’s say, a 30% net margin is what we’re aiming at and regular operational overhead is estimated at 60%. This leaves 10% left for directional changes, timing issues, unknowns, rainy days, etc. Having a budget as granular as possible will help clarify issues later. Using the percentages of revenue verses fixed numbers will make this process a whole lot easier.

SALES – DIRECT COSTS – FIXED OVERHEAD = NET MARGIN

Step 2. Every time a sale is deposited break it apart into individual bank accounts. Move 30% into the net margin account and 10% into an operational savings account. The remaining 60% stays in the operational checking account.

Step 3. The bookkeeper or controller has full control over the operational checking and operational savings. However when they move money from operational savings the owner is alerted as to WHY we need to borrow cash from that account. That’s the check-point. “Our receivables are slow to come in, so we need to float payroll, etc.”

Step 4. Anytime the business gets to the point where money is NEEDED to be pulled from the net margin account as a request from the bookkeeper or controller it requires owner authorization and it’s time to revisit the budget. Why did this happen? What went wrong that we ran out of cash in our operating and savings budgets? Re-visit and rework your budget to prevent it from happening again.

Here are reasons why you might need additional cash and rework your percentages:

  • Sales are lower than expected; you will need more to cover overhead.
  • Sales are slow to collect and expenses are due before sales are collected. Review customer terms to speed up cash. Establish line of credit to fund no more than 75% of customer receivables.
  • Overhead is higher than expected. Evaluate your overhead and adjust your expectations or cut spending.
  • Direct costs are higher than expected. Review productivity and pricing. Can you be more efficient? Or do you need to adjust pricing?
  • Reassess your operational savings percentage for reasonableness. Be sure to allow for adequate working capital and establish a cushion to handle timing issues.

Keep in mind taxes. Set aside for taxes based on the current profit into another separate account. Pay income tax estimates based on business profits from this account.

This is a tool, just a tool to manage cash.  This is the simple version and will only work in a profitable business. Every business deserves to be profitable. For a business to survive in our fast paced economic environment it is critical that they continue to invest in technology, research and development and their people.

Mary Guldan-Lindstrom

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