I’d like to take a moment to talk about Kanye West.
In general, I find Kanye to be a bit more jester than genius. More foolish than intellectual. To illustrate my point, in his 2007 hit, “Can’t Tell Me Nothing”, he states, “If I had a billion dollars, I’d spend it all in a day.” In his defense, rap music isn’t really a welcoming space where you can create poetry about saving money and sticking to a budget. It’s more likely you’ll hear lyrics about making wads of cash money and then unceremoniously blowing through it. And while we can all agree this method of financial management is reckless, many of us think about money as if we were rap stars.
Hear me out.
Like many small business owners, you probably think about your finances in terms of: money in, money out. You’re either in the red or in the black. This may be true on an annual scale of measurement, but this type of black and white (or red, as it were) thinking also leaves very little room for establishing cash flow in your business AND in your brain.
For example, in a product-oriented business, you will often need to buy supplies / resources / products months or even years before you actually profit on what you’re selling. If you’re stuck in thinking just money in - money out, you’re going to look at this initial purchase as profit that you can not earn (to cover the expense) for potentially several months, if not years. This is why understanding and establishing cash flow is crucial because it allows you both the mental and financial space for allocating the flow of resources in and out of your business. Break free from your Kanye tendencies with these tips to start thinking about cash consistently as opposed to the feast and famine financial habits you’re currently rapping.
Let’s start with some math.
1. Use a free cash flow calculator to get an understanding of your unique business flow. (Don’t have a cash flow calculator? Send me an email HERE and I’ll send you one for free.) If this is something you’ve already done, you may have examples that you can utilize.
Think about all your current and upcoming expenses (for example: more product, a tech upgrade, repairs and maintenance etc), consider time of month or even time of year where there is an uptick in product or resources needed, and determine your current cash flow with all these outliers in mind.
When you recognize money in and money out patterns, you’ll properly save or spend during these times with cash on hand. It will also keep you afloat when something breaks or when you need to use cash for leveraging a future investment to improve your business.
Once you’ve established an understanding of your unique business flow, develop a system that makes you feel safe but also allows you to stretch if necessary.
How will you create financial security in your business? For example, some use a profit-first strategy, or moving money into different bank accounts based on cash flow categories in your business. Others are more comfortable keeping it super simple. They know they can’t let their accounts get below a certain amount. This is called a cash based accrual system. Every month, these individuals look at how much money they’ve made and determine their next month's budget based around cash-at-bank. It’s up to you to decide what system is best for you, but make sure you are realistic about where your money is going so you can properly prepare for any last minute or future needs.
In order to truly ‘ball on a budget’ (I have been patiently waiting throughout this blog to casually use that phrase, so you’re welcome) and find success, you have to continuously fine-tune your cash flow.
Be very real with yourself about the two steps above before you start to do this. The bottom line is that cash flow is an analysis tool. It helps you understand and make better financial decisions for your business.
Unlike profit and loss (which is a very static metric that show you whether your business made more or spent more), cash flow is an analysis for real time success.
If you can’t figure out the cash in the bank you have and the outgoing expenses you make every month, you’ll always be reactive instead of strategic.
Once you have a general understanding, you can work to improve or outsource to an expert such as an inventory specialist, bookkeeper or CPA who knows how to help you fine tune further.
I will say, Kanye is right about money being power. Once you get your money right, you’ll be in charge of how you spend it. Not the other way around.
...And that’s a wrap.