A 5-step Cash Management
Step 1. Determine how much you need to cover operating expenses for a normal month. Look at your income statement for each month of the year. You can see what you’re averaging per month in operating expenses.
Step 2. Determine how much you owe for inventory. If you’re tracking accounts payable on your books, you can find that number on your balance sheet. If you’re paying by credit cards, you can look at the monthly statements and determine what is attributable to inventory.
Also, calculate what inventory expenses you will have in the next month or so. The complete approach to Profit First is to have a separate bank account and separate credit cards designated solely for inventory and inventory-related items, such as fulfillment and shipping. This makes it easy to separate inventory or cost of goods sold from your operating costs.
Step 3. As you generate sales, leave enough cash in your normal checking account for projected operating expenses and inventory costs. Move any amount above these expenses to your savings account. If you are receiving Amazon payouts every other week, consider using the first payout for the month for operating and inventory costs. Then move your second payout to savings.
Step 4. Don’t touch the savings account until after the first of the year. Once the dust settles, think about the best use of those funds. Early in the new year, check in with your accountant. Have you set aside enough funds for taxes? Obtain an estimate of taxes and designate funds for that purpose.
Next, consider the goals for your business in the coming year. Will you launch new products? Will the new tariffs erode your margins, requiring a cash cushion for operating expenses until you can adjust? After you have determined your goals and the costs to achieve them, designate funds for those initiatives.
Step 5. Reward yourself! In a true Profit First scenario, you would take a percentage of profit as a “reward” from every payout. In the absence of the Profit First approach, the year-end strategy I’ve described here is a way to prepare for a successful new year. But when you complete step 4, set aside some funds to spend as you wish.