In the 30 odd years that I have been advising businesses, I have always wondered why business owners struggle to understand the correlation between the profit the company has generated and the cash it has at the bank. I have lost count of the number of times a client has said to me, “I have to pay tax on the profit, but where is all the money because it’s not in my bank account?”. As an accountant this is music to my ears. I often then get all technical and show the client the Balance Sheet and where the cash has gone, trying to explain in lay man terms the difference between profit and cash. The client then looks at me even more confused and, at that point, they normally give up and ask me how I can reduce their tax bill.
I have always wondered why no one has been able to put together a simple dashboard that a non-financial person can understand, showing how profitable the business is, where the cash has gone, where the business needs help and what the next 12 months looks like from a cash point of view.
Well up to now it has been difficult to obtain this information. The bookkeeping has not been up-to-date, and by the time the accounts have been prepared they are meaningless. However, cloud bookkeeping packages, like Xero, have enabled us to process information real time and to generate forecasts, literally within seconds. Although, despite this, many clients still come to me and say "that’s great, but all you are doing is confirming what I already know - that I haven't paid myself a full wage since starting the business and I’m working longer hours than I have ever worked."
This is where in the past I have struggled. They never teach you about profit improvement when doing your professional exams, and it’s only when you have dealt with hundreds of businesses that you can start spotting common problems and solutions. Indeed, there are a number of books that can help on profit improvement and "how to work on your business, rather than it it", but not one advises practically on how you can get paid from your business.
Well, I think I might have discovered the wholly grail. I was recommended a book by Leigh Ashton, called Profit First, written by Mike Michalowicz. Leigh said that this was the best business book she had read. I was intrigued... I'm now half way through the book and its a revelation. I believe the book provides the missing piece of the jigsaw to really help my clients understand how to control the cash in their business, grow their business whilst being profitable and, above all else, start reaping the benefits for themselves.
I was so impressed that I contacted Profit First in the US where they already have 128 Profit First professionals helping businesses instantly transform from a cash eating monster to a profitable cash cow. They have taken a behavourial approach to accounting and flipped the traditional formula: 'sales minus expenses = profit' to 'sales minus profit = expenses', so profit is taken first and then the business owner will only spend what remains on expenses. The system doesn’t try and 'fix' the business owner, it’s a system designed to work with the owner.
Once I have digested the rest of the book I will be able to share the secrets in my next blog and some quick wins that I’m sure will change the way you run your business and help you take your Profit First.