Sometimes as business owners, we tell ourselves, "If I can just get a couple more clients, everything will work itself out." But then we get those couple more clients and guess what happens? We still do not have enough cash to cover payroll and bills. We are always waiting for clients to pay us. Or, worse than that, we are on hourly billing, and we do not have enough capacity to get to the work to bill it. The work sits there until we get to it and no cash is coming in from it. We take off work and nothing gets billed out. Sound familiar?
Do these questions or similar questions apply to your business? If so, keep reading.
- If I take myself out of client work, what happens to the cash flow?
- Do I still have enough cash to still meet my business and personal needs?
- Do I have enough cash to finance my next hire or equipment purchase?
- Do I have enough cash to work on business development?
- Do I get paid whatever is left over in the business?
- Do I get paid for all the hats that I am wearing in my business?
- Are my employees making more money than I am, especially when I break down the number of hours I work vs. what I get paid?
- Am I afraid to fire clients because of cash flow?
- Am I working all the DANG time?
- If I lose this client, am I in big trouble?
We advise our clients that they need to be taking a reasonable salary, but are you?
I know I was not in the first couple of years. I was stressed about payroll and working a ridiculous number of hours. At one point, I was not even getting paid. That is when I implemented a cash management system in my business. After implementing a cash management system, I noticed that my business was screaming at me that my expenses were too high. It was also screaming at me that my pricing for my clients was way too low.
Implementing a cash management system in my business six years ago helped my business. To sum it up in a nutshell, I created several bank accounts - operating, income, profit, owners compensation, tax bank accounts as well as a couple of reserve accounts. Then, I allocated a percentage of my income based on a profit assessment to allocate to the bank accounts.
You can also have other accounts for specific reasons. For example, if you are needing to hire a new team member but you are afraid of the risk, open a bank account and start allocating a percentage to the new hire account that will be for that new hire for their payroll, etc. This way it will prove to you that you can afford it and can have the first couple of months' wages sitting in the bank account. This gives you an account with a reserve if you have fluctuations in income. Same with computer equipment and all the other stuff that is needed when expanding a team.
Have you ever had an annual renewal come up and you do not have the cash? That is when separate bank accounts work as well. You put a small percentage into this account and save for your annual expenses. This works with professional liability insurance, dues, subscriptions, etc. This way you do not have to come up with it all at once. You have the money set aside for it.
Income taxes are a pain for any business owner. But when you allocate a percentage of income twice each month, they are no longer a pain. You are saving for them all year long. Your business is generally what causes you to have to pay into the IRS; so, shouldn’t your business pay your income taxes as well? I have not found any business owner who doesn't face this pain point, and our industry is no exception. If you have a profit, you are generally going to owe taxes. Many do not allocate for it and struggle when it is due. Then, it takes them months to recover from it in terms of cash flow.
And when you are struggling with it, do you then start taking on more non-ideal clients? I know I did.
So, I hear all the time, there are many accountants, bookkeepers and tax professionals that do not like all of these different bank accounts. I challenge you to think differently. When transitioning my business from my mother’s business as I discussed in “Why I Had to Fire My Mother,” I knew I had to change my client base and raise prices. I knew this was going to be very challenging to do financially. I have heard so many others in our industry say the exact same thing. How do you fire clients and still cover expenses? I used this cash flow management method to do so.
As we brought on new clients, we would put money in another bank account. This was a “Firing Clients” bank account. If we did extra projects for a client such as a large payroll implementation, we would put that money in that bank account. This way we were putting money away and slowly getting rid of our non-ideal clients and non-ideal services.
I did the same thing when transitioning out of taxes. As I put money aside, I would slowly start terminating 1040 clients. I would terminate clients based on if we had monthly work with them. Having this account gave me the confidence to terminate clients as I needed. If we increased prices on clients, I would also move a percentage of that money into that bank account.
“That would be a pain to reconcile all those extra accounts!” I hear this response a lot when I talk about this, BUT it only takes 15 minutes for all these accounts to be reconciled since there are minimum transactions in them. Isn’t the transparency into your own cash worth the 15 minutes spent? We are just like our clients; we use our bank balances to make decisions for our firm. I know I do not look at my books as much as I do bank balances. That is just human nature. Now that I have implemented this cash management system, we make transfers twice a month based on our allocations figured from the profit assessment conducted on our finances.
As we were firing clients after implementing the cash flow management, I was still getting paid a regular salary and growing my team. When you have all cash in one or two bank accounts it makes it difficult to stay on course. If you only have so much money in the operating account, it tells you what you can and cannot spend. This has helped me make large business decisions in my firm.
I challenge you to change the way you think about multiple bank accounts and implement them in your own firm. Even though it may sound like a lot of work, it really isn’t. Yes, opening the bank accounts is a pain, but after that, it is two transfers a month based on your own percentages. Also, find a bank that will not charge fees for opening multiple bank accounts. They are out there. This was one of the most impactful things that helped me transition out of non-ideal clients and services.
The thing is - if you do not change one thing you will just keep doing the same things over and over.