Cash Flow Management HackJul 12, 2021
I don’t know about you, but I’m a sucker for buffet restaurants. When food is plentiful and in abundance, I take ‘all you can eat’ a bit too literally.
You stack your gigantic plate with food and shove it down like it’s your last meal. Although your belly is full to the point that it hurts to breathe - you can’t help but pick at your plate. The result is the all too familiar feeling of sickness and regret.
So why do we do it?
Turns out it’s a cognitive weakness. Our brains are bound by our genetic legacy to our hunter-gatherer ancestors, who, uncertain of their next meal, instinctively ate as much as possible, and whenever possible!
The more food that’s readily available to us, the more we eat. It’s hardwired in our DNA.
This behavioral flaw actually applies to other areas in our life, including our finances.
Have you been in a position where you see a bunch of cash that has magically appeared in your bank account? Perhaps it was the payment of a large customer account, or even your first round of investment from a VC? What’s your first reaction? Yew!! You’re cashed up! You feel good, you feel wealthy. You feel the need to spend it - quickly.
As humans, we have a natural tendency to spend money as we see it. This can get us into a lot of trouble financially when we burn cash on unnecessary things—even spending money that doesn’t belong to us!
The key to managing your cash flow is to separate your cash into multiple bank accounts - the equivalent of eating off smaller plates of food.
In your business you should have at least 3 bank accounts setup:
One for your transactions - day to day running of your business and working capital
One for your taxes - for taxes like GST and PAYG
One for your profit and surplus cash - for surplus cash you have
At the end of each month, generate a report in your accounting system to understand the tax provision and surplus cash you must put aside and transfer those values to your bank accounts.
They key is to only keep enough money in your transactions account for the day-to day running of your business. Budgeting your cashflow for things like taxes save you a ton of stress come tax filing time.
If you can’t resist temptation to spend your sweet cash—remove it completely.
Get a free module from the Financial Management for Founders course.
Get a taste for what you're in for with the 'No-BS' Guide to Financial Statements module.