Why business owners eat last, how and why we shouldn’t either
Have you ever noticed when you have a limited amount of something you can always seem to make it stretch? I’m talking about life in general, when you’re down to the last squeeze of toothpaste, the last drop of fuel in the tank. It seems we’re hard wired as humans to make do with what we have.
If you’re anything like me I’m guilty of ‘bank balance accounting’ and running my business in between checking my online banking. Once a day, two to three times a week, it’s a bit of an obsession. You know what I mean, you check your balance and if everything’s looking good you take a breather and maybe pay some bills or get that new coffee machine you’ve had your eye on. On the other hand, if you’re scraping the barrel of the company coffers you start making calls to get those invoices paid, you start chasing up on those outstanding quotes, you pay bills as late as you can. I’m generalising here but the point is that inevitably you pay yourself, you, the business owner stone last.
Business owners eat last. It shouldn’t be that way and it doesn’t have to be if only we could call upon that natural resourcefulness I mentioned. Hmmm.
It takes money to make money is baloney
Have you ever heard the phrase it takes money to make money? Well, I think they’ve got it wrong and it’s absolute baloney. We’ve proven in every other aspect of life that we can make do with what we have yet somehow in business that ability to be so resourceful gets squashed. Thanks to phrases like this made popular.
I hear it, see it and again I’m guilty of it. When the going gets tough and you start to go into mission state critical we’ve all tried to quickly create an offer, diversify or take any scraps of sales you can get. It is most often to the detriment of your long term game, your values and yes, your cash flow. You plough effort (money), time (money) and resources (money) into these vain attempts only diluting the core focus of the business. Which should ultimately be profit. Hence, it actually takes money to make less money if we want to get philosophical about it.
The point is, what if we flipped the traditional model that’s been drummed into us for years and years on it’s head and stopped focussing on more sales, more revenue, more clients, more products, more services first?
We’re taught that sales or revenue minus expenses equals profit. When times are tight we focus on more sales or reducing our expenses. But what if for a change, we focussed on what we wanted, first. Profit. It sounds absurd, go with me and indulge me for a moment.
Making do with what you have
I remember when I was a kid heading off to University to fend for myself for the very first time at 17 years of age (yeah, I was pretty young when I finished high school). My parents gave me a life lesson in budgeting that I’ll never forget and thought it was about time to dust it off. Dad always told me to pay for the roof over your head first, then you pay for necessities. There was a very specific order. Back in those days online banking wasn’t quite a thing and I was encouraged to go draw my monthly budget in cash and put everything into separate pots. Envelopes actually. Side note, Dad also told me when I started my first business to always pay the tax man, it’s the one bill you can’t leave because “borrowing” from the tax man is kind of like piracy. 10 years later I understand his advice ?
I’ll never forget the little coloured envelopes. A red one for rent, a blue one for expenses, a yellow one for food and fuel, a green one for fun etc. I was always told to put 10% aside for a rainy day fund and save 10% no matter what – those were put into an account that was difficult to draw from, a long term saver sort of thing. You get the idea. The funny thing was, just because there was some structure to it I never borrowed or stole from the other envelopes, it just didn’t cross my mind. I always managed to make do with what I had.
How the hell does that relate to business?
I’m getting there. Since being in business and in the last couple years employing a virtual finance director to help me understand the numbers, one of my burning questions has been answered. I sat down with my virtual FD and we were looking at the year end numbers. Lee said I’d made a net profit of £50,000 (or whatever it was at the time). I distinctly remember looking at the bank balance and saying, “oh great, but where the fork is it?” I realised then and there that profit is theoretical. Numbers that can be pushed around on pages. Cash is reality and I really didn’t like it or know how I was going to get to grips with it. How could this be, what was the point?
Working with a finance director (or a virtual finance director otherwise it’s a big chunk out of your company coffers) has helped me to understand the numbers and what they mean for the business. They can give you all the figures and it’s what you do with the information that counts. I decided after one month of a big “surprise” that nearly put my company under financially that I was going to take control. You can too, and here’s one of the resourceful strategies that you can do today. It’s really easy and it will change the game.
Creating envelopes for your business
How badly you want to change going from month to month and eating last will determine what action you take. Here goes…
01. Open a bunch of extra business accounts (envelopes)
Maybe your existing bank will let you have several accounts that you can name. I chose to go with a bank where it took less than 10 minutes to set up the account via an app and provides free banking. (The bank is Starling if you’re interested, but there are others like Tide and Monzo available too).
02. Label your bank accounts (your pots)
VAT. Twice a month I have a Slack reminder that tells me to check what payment receipts I’ve had and without even thinking about it I sweep 20% aside. I’m ready for when that VAT bill comes along and the money is out of sight out of mind, I can’t accidentally spend it. (This was my catalyst for change by the way, I’m not ashamed to admit it but after a long Christmas holiday and a lot of things going on personally I had forgotten about VAT, I can still feel that sting).
At the end of each quarter after VAT returns are submitted, I keep an eye on that balance because obviously there’ll be an excess. This money and a bit of a top up depending on management reports becomes an overall tax account. You know once a year that you’re going have corporation tax to pay… Like Dad says, spending your tax money is not unlike stealing so put that aside every month in anticipation. What’s left over is not a bonus, well it could be. After paying the tax man it’s your money after all.
Current account – use your usual bank account for receipts or it’s a pain to change banking details for customers. If you want to be extra thorough, create an operating expenses account. I can’t believe how many businesses don’t know exactly how much it costs to keep the doors open every month. Have all opex coming out of one account and then you’ll know. My goal is to have six months opex in the bank for that rainy day. If things go haywire I know the doors are open for six months while I figure it out and not rush into mission state critical. It’s scary that most businesses are only about three months away from bankruptcy. That statistic should scare the living daylights out of all of us.
03. Now I haven’t done this yet but I am going to as soon as I’ve finished this blog. I will be opening another business bank current account for profit. Why should us as business owners eat last, we are the ones that have sacrificed, the ones who have lost sleep, missed family events and we take all the risk. We should be looked after first. Instead of asking yourself how much revenue do you want to make, ask yourself how much profit do you want to make? Then look at your bank balance, take that percentage and put it aside. Every month put that profit aside first. Maybe start small until you get into the habit of it.
I promise you one thing my fellow business owners and friends, if you put it aside and it’s out of sight guess what – you’ll make do with what you have. Protect yourself from the “bank balance method”! Your profits will be protected and when you look at that P&L statement, you will have some cash to back that theoretical number up.
It sounds crazy but why do we always focus on what we really want last? And what we all really want is profit. Don’t think that I’m some money crazed monster drawling over money. Profit is important, profit (and cash) are how you create a sustainable business and stop living from hand to mouth. Profit is how you grow. If you’re not fire fighting, you can focus on the right things.
I’ll follow up in a few weeks to let you know how things are going and hope you do the same, we’d love to hear your results.