Do you want to ensure you make Profit First work in uncertain times? With all that’s going on in the world right now, managing cashflow can seem more difficult and priorities about this put to the side.
First the bushfires, now coronavirus
First we had the bushfires and now coronavirus, with the mind-boggling impact on business and daily life. If your business has been adversely affected, you may have used up all the funds in your Profit and Reserve accounts, revenue may not be coming in and there may less certainty about the future, creating tension and anxiety.
This situation is tough
There’s no doubt that this situation and the corona period is as tough as it gets for business probably since World War II. That is a long time! This means that many businesses that have traded solidly and been well managed now face financial risks they would never have contemplated. In this environment, they risk making mistakes that are made by poorly managed businesses that lead to insolvency. To mitigate these risks, I suggest the following three steps to make Profit First work.
3 Steps to make Profit First work in uncertain times
Stick to core principles for tax and super
Many business owners will be tempted not to put funds aside for GST, tax and super. The problem is that you will have to pay these regardless. The ATO may be going easy on businesses now but at some point they will want payment. Not putting funds aside is creating an inevitable cashflow problem and significant risk down the track. Make sure you maintain transfers for these items, so that you minimise risk and ensure that once corona is over, you aren’t struggling to repay ATO and super debt.
Be more ruthless about expenses and be prepared to spend more time ‘in’ rather than ‘on’ your business.
If your business had grown pre-corona, you may have gradually increased expenses on items you liked but didn’t necessarily really need and you may have started focussing on working ‘on’ rather than ‘in’ your business.
Where revenue has come down, the niceties of these expenses and the time to focus on growth may be on hold for a little while. Annoying as it may be, it may be time to strip back expenses and do the work you were doing a while ago. Corona won’t last forever and there will be time to resume a growth strategy and spending more time working on your business, but now may be the time to conserve as much cash as possible.
Review Profit First allocations weekly
Profit First has a weekly or fortnightly allocation process that can be based on set percentages or amounts that are repeated over time. In times of uncertainty and increased variability of revenue, these allocations may need to be reviewed each week. Doing this will ensure that you stay on top of cashflow more easily, keep a closer eye on things and make allocations that serve your business better. In one week you may allocate more to profit, whilst in others this amount may come down. You may want to consider a Profit First ‘hybrid model’ that I wrote about here to make Profit First work for you.
Your next steps with a how to make Profit First work checklist
As Mike says in the book, managing cashflow is about habit. Whilst we are distracted by the enormity of the challenge facing us, it can be very easy to get out of habits that serve us. To help stay on track, here’s a simple checklist you can refer to each week that asks a few questions about the issues discussed above. Go through this checklist and ask the following questions;
| Review point | Yes/No |
| Am I actively managing a Profit account by either making payments to it or ensuring it’s not over-used as a reserve account? | |
| Am I paying the payg withholding tax on wages and super with every payrun? | |
| Am I putting aside a percentage of sales for GST each week/fortnight? | |
| Am I putting aside a percentage of sales for company tax/personal tax instalments each week/fortnight? | |
| Are there expenses that I can reduce, such as monthly subscriptions that I don’t really need? | |
| Can I save labour costs for the next 2 – 3 months by working in the business and without causing long term harm once corona restrictions have eased? | |
| Am I reviewing cashflow each week and ensuring allocations to different accounts are appropriate and changed where necessary? |
If you’ve answered yes, you are in good shape to come out the other side and make Profit First work in uncertain times. If not, then you have an opportunity for improvement that will help your business sustain itself. If you can make a commitment to managing cashflow proactively with a Profit First approach and follow the principles above, at the very least you will avoid heightened financial risk and be better placed to continue once corona restrictions have eased.
Want assistance with your business and Profit First?
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