Accountants and bookkeepers serving small businesses know how critical effective cash management is to a business’s survival. Many of our clients fall into one of two camps: They either adhere to the philosophy of “you have to spend money to make money” to the point where they run out of money, or they are so afraid to spend money they starve their businesses for resources.
Both scenarios can lead to business failure.
We want our clients to not only survive, but also to thrive. Unfortunately, many of our clients are hesitant to embrace the tools we’ve historically used to help them manage their cash flow. And it’s no wonder: Cash flow statements are backwards-looking and can be difficult for a layperson to understand. Cash flow projections require constant updates to keep them current and meaningful. Even automated cash management systems don’t offer true “real time” reporting, leading to confusion and frustration for our clients.
There is, however, one tool our clients consistently use without prompting from us (and often even in spite of us begging them not to use it to run their businesses). This tool is easy for them to access and understand, and it stays updated in real time with no intervention from the business owner or their financial professional.
That tool is their online banking portal.
A story
I remember the conversation well: My employer at the time wanted to make a large inventory purchase. I advised against it. She checked her bank account balance. “I have $15,000,” she said. “Why are you telling me I can’t place this order?”
“You can’t make spending decisions based on your bank account balance,” I said, trying not to let my frustration show. “Your account balance doesn’t show you that $15,000 is already spoken for and then some.” I pulled up her cash flow projection and showed her that - even after factoring in upcoming sales for the week - outstanding payments, payroll, and her sales tax payment would more than use up that $15,000.
She nodded. Later that day, I got a call. “Sales are better than projected today,” she said. “I placed that order.”
We were tapping the business’s line of credit by the end of the week.
A few years later, I had started my bookkeeping business. My former employer was now my client. I convinced her to try the Profit First system in her business. After a few bumps at the outset, my employer-turned-client said, “I never really understood the cash flow projections you showed me. It was all so theoretical. But this? I always know how much money I have to spend on inventory. I haven’t had to tap the line of credit in months. I’m actually paying myself.”
I wish I could say she also expressed remorse at not listening to my guidance all along. She didn’t. She did, however, tell me exactly why Profit First was working for her when nothing else had.
Leveraging clients’ habits
My employer-turned-client had the same habit many of our clients have: She made spending decisions based on her bank account balance. Why? Because she understood her bank account balance. She never had to wonder if the numbers were up-to-date because the bank updated her balance in real time. And her bank account balance was always just a tap away on her iPhone...she didn’t have to consult software (or her bookkeeper) to see what she could spend.
This is the beauty of the Profit First cash management system. For our clients, it’s a game changer. But what is the impact of Profit First on those of us who have to help our clients manage the system? Doesn’t it make our jobs more difficult? Next time, we’ll take a look at some of the common objections accountants and bookkeepers have to Profit First...and how to overcome the potential pitfalls of the system.