Profit First System for Cash Flow Management in Business. Entrepreneur MBA Podcast 3.42
Summary: In today’s podcast episode, Rocky Lalvani from Profit Comes First and Stephen Halasnik from Financing solutions discuss how businesses can use the profit-first system to generate and maintain cash flow. These solutions are helping business owners maximize efficiency, overcome barriers, and prioritize profit.
The profit-first system
The profit-first system involves uses four separate bank accounts to generate profit: the profit account, account for owners pay, the tax account, and the operating expenses account. Some business owners may benefit from setting up additional accounts that are tailored specifically to their line of business. Business owners should manage each account equally to ensure that the business has enough money to function successfully. Profit first systems create pools of money that businesses can use for unforeseen expenses.
The profit-first system prioritizes cash flow generation to grow and scale business operations. Cash flow is sustained by utilizing resources more efficiently rather than adding additional resources. Using the profit first system allows small businesses to overcome high initial costs and fund the start-up period of the business. When profit generation is built into the culture of the business, business owners can better analyze their financial status. Profit first systems give business owners a realistic sense of how much the business can grow without losing profit.
Maximize efficiency with profit first
A major component of the profit-first system involves reducing waste for your business. Identifying sources of waste allows businesses to cut costs and maximize operational efficiency. Cutting costs increase profits made by the business without increasing productivity. Maximizing efficiency reduces the stress associated with accepting new business ventures and reconstructing business models.
Maximizing efficiency is promoted by allocation human resources appropriately. Businesses should have team members that are qualified and willing to manage specific functions of the business. Effective teams are able to notice valuable changes and communicate them among team members. Human resources, systems, and processes can be used to generate value, and when done with a profit-first mindset, helps maximize operational efficiency.
Budgeting using the profit first system
Business owners should check their income statement and balance sheet at least once every month. The balance sheet shows the money that the business has made over a period of time. Checking the balance sheet is essential for business owners to adequately gauge the business’s financial security. Business owners must be able to figure out a way to grow their assets and retain earnings appropriately. It is important for business owners to spend less and save more. For example, a business with 10 percent profit margins that spends one hundred thousand dollars on new resources should be making at least a million dollars in revenue.
Business owners benefit from documenting KPIs or key performance indicators based on business operations. Profit margins and accounts receivable turnover are examples of performance indicators business owners should recognize. Business owners also benefit from developing sustainable collection practices. Businesses should restructure their business model in a way that gets them paid upfront, even if it means taking in less money. Accounts receivable should be evaluated frequently and structured to encourage quick payoffs.
About Rocky Lalvani from Profit Comes First
Rocky Lalvani serves as Chief Profitability Adviser for business owners. He teaches them how to ensure they get paid and make profit a priority! As a certified Profit First Professional, he implements Mike Michalowicz’s Profit First System. We change the accounting formula of Sales – Expenses = Profit to Sales – Profit = Expenses. This ensures Profit comes first! (PS. It’s not about money at all costs, people come before money!)
About Financing Solutions Small Business Line of Credit
Financing Solutions small business financing product is a great alternative to a traditional bank line of credit because it costs nothing to set up, nothing until used, and when used, is inexpensive. The credit line requires no collateral and no personal guarantees.
Please feel free to fill out the no-obligation, 2-minute business line of credit application here. The time to set up a credit line is when you don’t need it so that it is ready to be used, just in case.
Note: Financing Solutions donates 10% of its profits to various nonprofit charities.