06 Feb An Introduction to Bank Balance Accounting (And Why It Matters to Your Cash Flow)
Last week, we introduced the concepts of Profit First—a whole new formula for handling your small business’ accounting. A quick recap: The generally accepted accounting practice is SALES – EXPENSES = PROFITS. This might seem like it checks out, mathematically, but the problem is human nature. If you view profits as “leftovers,” you likely won’t have any; everything you bring in, you’ll find a way to spend.
Profit First flips the formula on its head: SALES – PROFITS = EXPENSES. In other words, you set aside some savings (profits) from each deposit, and then you adapt your spending to whatever’s left.
Among its many virtues, Profit First takes advantage of human nature—and in this post, that’s what we’re going to look at in greater detail.
Understanding Bank Balance Accounting
Frankly, a lot of business owners just don’t have time to read through all the different accounting statements they generate each month. Certainly, you could review and correlate your balance sheet, your cash flow statement, and your income statement, setting some time aside for these documents monthly or even weekly—but doing so takes time and commitment that a lot of entrepreneurs just can’t afford.
What this means is that many business owners do what’s called bank balance accounting. Simply put, they check their bank balance every day and see how much money they’ve got—and make their financial decisions accordingly.
Now, it’s easy to understand how this is ultimately unwise, if you’re also doing those generally accepted accounting practices. You’ll look at your bank balance and determine how much spending you can do, but may not feel as confident or as committed to setting aside profits.
But with Profit First, you can actually use bank balance accounting to your advantage. Here’s how: You set aside your profits first—and from there, you keep checking your bank balance as usual, and make spending decisions accordingly. The only difference is that you’ll have already set aside your profits, and your spending will change accordingly.
Profit First Works with You
To a large extent, then, Profit First allows you to maintain your existing financial habits—something that many entrepreneurs and business owners love! But even as you continue your bank balance accounting practices, you can also be sure that you’re actively growing your business, putting money in the bank with each and every deposit.
That’s the beauty of Profit First: It’s a simple paradigm shift, yet it can transform any business from a cash-eating monster into a money-making machine. And we’d love to show you how. At Contractor in Charge, we are Certified Profit First Professionals. Contact us today to learn about how we can coach you through these important financial disciplines!