Cash Management for Small Businesses

Small businesses live and die by their cash management practices.

I’ve run my own business since 2012 and seen the inside of +100 small businesses. Time and time again I see it and feel it … you gotta be smart with $ or else you’ll run yourself into the ground.

As my good friend Brian Lofrumento says, most businesses fail not because people give up but because they run out of money.

Running out of money is a preventable problem.

Smart cash management is the solution.



I first wrote about intentional cash management in Get a Grip on Your Time and Money (Podcast Bonuses). Since then I’ve learned a few more tricks.

Remember my Money Tripper approach to cash management?

Version 1.0 – First list expenses/outflows in priority order, then track money as it comes in … my fancy spreadsheet would show how deep down the list of expenses you actually had cash on hand to cover. The approach forces prioritization of expenses and reveals how much (or how little) of those can be afforded in the present moment. A huge cash management hangup for a lot of businesses is spending money that’s not yet in hand. “Oh, we can pay for this once Project X comes in, and then after Dave pays us, we’ll be in a real good spot.” Then Project X doesn’t come in, and Dave goes out of business and you never collect. So your money is already spent, but the $ you planned to receive to cover it never came in. #Hosed.

Version 2.0 – Same concept, but a fixed % of every dollar of revenue that came in was stripped away and dedicated to saving up for taxes and saving up to make a donation to my church. So whenever I got $100, instead thinking the business had $100 to spend, my Money Tripper 2.0 took out a percentage for taxes and tithing, leaving more like $75 for the business to apply toward expected expenses.

Version 3.0 – What I’m sharing today.

Introducing … Profit First.

The Profit First approach to cash management for small business:


I’m so glad friends in YNAB Fans said something about entrepreneur and author Mike Michalowicz so that I could find Mike’s Profit First cash management method and the YNAB for Small Business group.


Cash Management for small business - the Profit First approach

Go ahead and get a copy of Mike’s book and lean on this summary:

(FYI there are add-on variations for contractors, e-commerce, micro gyms, dentists and tradies.)


[1] We are taught that profit comes LAST.

revenue – expenses = profit

First, you make money.

Then, you cover expenses.

And what’s left?

… that’s profit.

Our inherited/default psychology runs our businesses in this order.

[2] Things expand to the space allotted to them: Parkinson’s Law.

Small business owners make decisions on the fly.

We open our banking apps, look at $ in the bank or available credit on a card, and decide ON THAT whether to make a purchase.

We see it … we spend it.

[3] Expenses expand to all visible dollars, consuming 100% of revenue. There is no profit. đź’¸


Put [1] and [2] together and this is the outcome.

Cash management that sucks.

What if we flipped the profit order and used Parkinson’s Law to our advantage?

You can, and it will RADICALLY improve your cash management to keep expenses in check, grow your business and produce profits you actually realize and enjoy.

Enter … PROFIT FIRST.

[1 revised] Profit comes FIRST.

revenue – profit = expenses

First, you make money.

Then, you set some aside for profit.

And what’s left?

… that’s money available for expenses.

[2 revised] Things still expand to the space allotted to them, but we draw boundaries to how far they can go.


The crux of the Profit First method is to open at least 5 separate bank accounts (more later on why you might do more than 5):

  1. Income
  2. Profit
  3. Owner’s Comp (OComp)
  4. Taxes
  5. Operating Expenses (OPEX)

Deposit all revenue into Income: deposit checks there, have Stripe and Square deposit funds there, etc.

Once or twice a month, EMPTY the Income account into the other accounts.

How much will you put in each account? Chapter 4 lays out a process for determining that. The amounts will change each time as they are not fixed $ amounts, but percentages. Each of the 4 accounts (#2-5) have their own Target Allocation Percentage (TAP).

Every business is different, and Chapter 4 has an exercise to help you land on your TAPs.

The book has this table of benchmark TAPs by Real Revenue Range.

Cash Management for Small Business - Target Allocation Percentage benchmark from the book Profit First

[3 revised] Expenses expand to just visible dollars in OPEX, a smaller % of revenue. There IS profit.


Yes, this is like the Envelope Budgeting Approach applied to small business.

If you are running a business that doesn’t have a full-time bookkeeper, accountant and controller who can fill you in daily, then you need a cash management approach like this.



The best banks for Profit First

OK, so now that you’re onboard with this small business cash management approach … how on earth do you implement it??

If you are running a microbusiness, chances are GREAT that traditional big banks (Chase, Wells Fargo, US Bank, BoA) are not going to work for you. They have significant account minimums that would tie up precious working capital or monthly fees that eat away at your profit.

So what do you do?

Here are my favorite banks for small businesses that also make it easy to follow the cash management practices of Profit First:

[1] Brex

zomg. Love Brex.

Based in my home state of Utah.

Super clean interface.

Free ACH transfers – makes it mad easy to pay vendors.

No minimums.

No standing monthly fees.

FREE to open up to SEVEN accounts under one business … perfect for Profit First!

Each account has its own account number, so you can send and receive directly into these accounts if needed.

MAD easy to add as many cards as you need to give to contractors, employees, while also limiting their spending limits.

Can create virtual “vendor cards” in 5 seconds online. If that one card gets compromised, you can shut it down without having to reset card info for alllll your other vendors.

For US businesses only.

Use my link and get $250 after signing up.


[2] Novo

Novo is also part of the wave of new, online-first banks.

Also a very clean app, great features, and the option to create “Reserves” (up to 5 per account) for following the Profit First method.

Includes a tool to send and process invoices for free!

Bank with Novo


[3] Small Business Bank

“YOUR HOMETOWN BANK. WHEREVER YOU LIVE.”

I’ve been with SBB since 2013!

While Brex and Novo are more like startups with designers and developers making a slicker banking experience, SBB are first and foremost small business bankers. So their website and app are a bit clunky, but when you need to interact with a person who knows what’s up and is ready to offer premium service, they CANNOT be beat!

Similar to Novo and Brex, SBB has no minimums and no regular fees.

Service is and always has been amazing.

They allow up to four accounts (two checking, two savings) per business … and you can register more than one business under your individual log in. (Brex and Novo allow just one business per log in, so if you have multiple entities, you’d use a different email/login for each entity.)

www.smallbusinessbank.com




“You said earlier ‘at least’ 5 accounts … why?”

Thanks for the reminder.

If you run a product sales or resource-heavy business … it would also be smart to open (at least) two more accounts “on top” of the 5 noted above.

These would be:

  1. Gross Revenue
  2. Cost of Goods/Services Sold (COGS/COS)
  3. Income, aka Real Revenue
  4. Profit
  5. OComp
  6. Tax
  7. OPEX

COGS/COS would be … the price of inventory you buy to sell. The cost of raw materials used to make a product to sell. The cost of a temporary subcontractor to fulfill a project.

Managing your money this way will ensure you always have working capital.


Remember, there are industry-specific suggestions for additional accounts and Profit First adaptions in these these extension books. Profit First, for …

Regardless of what industry you’re in …

Starting TODAY, strive to have 3 months of working capital on hand. Then shoot for 6 months. Setting and accomplishing that goal will require significant changes to how you’ve been managing cash up to this point.


Adding Gross Revenue + COGS accounts also makes it SUPER easy to calculate gross profit margin (GPM), while the rest of the system makes it easier to calculate net profit margin (NPM). What’s the difference?

Business Success Rules of Thumb: 50% GPM and 10% NPM (see page 53).

In simple English this means:

  • If you sell something, you better sell it for DOUBLE what it cost you to make it (50%). You will spend at least 40% of the rest of what you brought in paying yourself, your staff, taxes, accounting, marketing, rent, etc.
  • If, after paying for ALL expenses (including your wages if you work in the business), your business doesn’t have at least 10 cents left over from every dollar brought in (10%), you might as well give up the business and work for someone else. The risk, in this case, is not worth the reward (profit). You’ll be better off putting your effort and money into another investment with prospects of better returns, or possibly running your work thru a nonprofit corporation with a public-serving mission instead.

While we’re on it … Mike’s advice is, “When in doubt, open an account!”


There is no end to the number of accounts you can open that will help improve your cash management strategy by clearly tucking $ away for specific purposes.



Was this helpful?

Let me know which new cash management habit you’ll adopt first.


Comment below, and definitely drop a link to your business so we can check it out and celebrate your success.

To your success … and profits đź’°

By |2022-01-03T11:14:54-07:00November 22nd, 2021|Marketing|0 Comments

Get a Grip on Your Time and Money (Podcast Bonuses)

Welcome friends and listeners of my time and money episodes on The Wantrepreneur to Entrepreneur Podcast!

Brian is a good friend . . .

Time and Money - Podcast bonuses - Nat Harward and Brian Lofrumento

. . .  but enough of that.

Here are the FREE spreadsheets and tools I talked about.

Make copies and use them to help you create and adopt systems for getting a grip on your time and money.

▶ Ep 171: Time

▶ Ep 173: Money

JUMP TO:


[1] Tracking time

Use the Time Tracker for 3-6 months to establish your baseline for how much work you get done in a month.

After clicking the link to access (below) . . .

Log into Google Docs

Go to File >> Make a copy… (if you try to make a copy when not logged in, it won’t work)

Add your name to the file name

Choose the folder in your Google Drive for where to keep it

Check “Copy comments”

Press “OK”

==> Click Here to access the Time Tracker

Or find a time-tracking app that works for you.

I use Hours TogglTrack.


[2] Forecasting time

After using Time Tracker for 3-6 months to establish your baseline for how much work you get done in a month, have a go at the Time Forecaster.

Same as above, open the file and make yourself a copy

Go to File >> Make a copy…

Add your name to the file name

Choose the folder in your Google Drive for where to keep it

Check “Copy comments”

Press “OK”

Once you have your copy set up, click the down arrow on the “MONTHLY TEMPLATE” tab at the bottom, and select “Duplicate”

Then click the down arrow on the duplicate tab, and click “Rename…”

Change the name to something like “MAR 2018” or “APR18” or “18.05” … and then repeat the process until you have at least 6 months’ of tabs to work with.

==> Click Here to access the Time Forecaster

If you find a slick time forecasting app, tell me about it!

Just leave a comment below and include the name and/or a link.


[3] Tracking revenue

You want to know which people (clients) or items (products) are making you the most money! And … on what kind of schedule. Do this with the Revenue Tracker.

Same process as above to copy and make your own!

The Revenue Tracker complements the Money Tripper (below) with a little more detail on where exactly money is coming from. The Money Tripper is simply for tracking money once it lands. The Revenue Tracker will allow for better sorting and insights on revenue.

SIDEBAR: Yes. Eventually you want to upgrade from measuring just revenue to measuring profitability and margins so you can do the things that make you the most money, even after expenses. If you’re a service provider, straight revenue is a good start and then take that number and divide by hours tracked against it in your Time Tracker to see your real hourly rate by project/client/type of project.

==> Click Here to access the Revenue Tracker

Invoicing systems for getting paid faster (and easier) … hello Bonsai!

I’ve gotten checks in the mail (slow, paper isn’t super secure).

I’ve been paid by PayPal (30 cents + 2.9%).

I’ve been paid by credit card (30 cents + 2.9% or more).

And now my preference is bank transfers/ACH (just $5!).

I use Bonsai, a super awesome platform with several tools for freelancers:

  • proposals
  • contracts
  • invoicing
  • expense tracking
  • and more

Time and Money - get paid faster with Bonsai!

40,000 freelancers around the world use it. I recommend you check it out. Use this link to sign up and get a FREE month.

If your business is product-based or high-frequency in transactions, then you need an e-commerce solution. But if you’re billing monthly, bi-weekly or taking deposits and final project fees for high-ticket items and professional services, this is a great option.


[4] Managing cashflow

Use the Money Tripper to manage cashflow and stop spending money you don’t have or wondering whether you “really can” afford something.

Follow the same instructions above to make a copy for yourself of my Money TripperAfter.

Be sure to check “Copy comments” so you keep the instructions on how to use the sheet!

==> Click Here to access the Money Tripper

A more advanced tool is YNAB (You Need a Budget).

YNAB is designed primarily for personal budgeting, but you can have one budget for business and another for yourself. Just link your business accounts with your Business Budget and your personal accounts with your Personal Budget.

YNAB is built on the same principles the Money Tripper is built on:

  • spend only dollars you actually have and
  • every time you get a dollar, give it a job. Which, naturally is followed by
  • spend dollars only on the job you assigned them to.

Get a free month when you sign up for YNAB with my link.

PS If you haven’t done so already, open separate bank account(s) for your business.

It makes bookkeeping, taxes, and all that so much easier. You just don’t want to waste time muddling through personal expenses to find those that count as business expenses. I use Small Business Bank — no fees, no minimum balance requirements, they have an app for mobile check deposit and of course you get a debit card with your business checking account. To get started, that’s all you need.


Get a grip on your time and money!

Time is the ONE resource you can NEVER get back once you’ve spent it.

And you’ll succeed faster when the way you spend and invest money matches your priorities.

It’s easy for time and money to become “the tails that wag the dog.” But you’re the dog. You’re the boss. Be the boss. Take control.

I’ve shared these tools because they are the methods I followed to take control at a time of my life and business when I had it backwards … when I had lost all the freedom I wanted when I struck out on my own, and had become a prisoner to the business I had made for myself. But as I MADE IT, I could UNMAKE it. And REMAKE it. Which I did. And so have hundreds of entrepreneurs the world over.

So give yourself some grace in whatever has happened up to this point, and try these on (one at a time!) to start the process of remaking your business for the better.

Good luck!

Nat Harward

P.S. I’m here. Leave a comment below or send me a note and I’ll be touch.

By |2021-12-22T14:15:17-07:00February 23rd, 2018|Marketing|1 Comment

I Have a Degree in Being Self Employed (4-Year Biz Anniversary)

When I took my first job out of college I never thought I’d be self employed before I turned fifty.

At this so-called “integrated communications” agency, I was put on 3 client accounts and 1 internal project. As my “senior” (I’m an arrogant snob, get ready) account colleagues walked me through the grunt work I’d take off their plates, they all said the same thing at the end of their “training”:

“So you’ll do this for about a year . . .”

A YEAR?!

I of course didn’t say this out loud. But this is what I screamed in my head and from my gut in about .07 seconds:

I didn’t go to college, study comms in a consistently ranked top-5 program, be the comms VP of a 60-person team with a 5-figure annual budget, intern with the university’s spokesman for a year on getting coverage in top trade publications and national outlets … to land HERE doing something I, on my now FIRST day, could train a high schooler from down the street to do in 15 minutes!! You’re gonna PAY me to do that?

OH … AND … we’re gonna BILL our clients, HOW MUCH, for me to do THAT? And you want ME, with all my skills, to be THE ONE doing it … for a YEAR?!!!

You. Gotta. Be. Kidding.

Someone pinch me. Plzzzz.

This can’t be happening.

It was so so so hard to humbly listen to anything my new colleagues said.

As I saw it then, who cares if they had been at the company for a year, or two? None of them studied comms in college, let alone a top-ranked program. None of them had jobs or legit experience in comms before starting, which I did. And ANYONE who thought it worthwhile to spend a year doing this mindless crap must not have two cells between their ears to rub together and therefore isn’t intelligent enough for my attention.

WOW.

Yeah I just wrote all that. That was 6 years ago and the visceral-ness is still there. I warned you … my intellectual arrogance and snobbery game were strong.

In fact, I’m certain I came across this very ecard or something close to it, printed it off, and taped it on the wall behind my desk.

Snarkiness of the Self Employed

Within a few days, it mysteriously disappeared.

If you hang this at your desk at your corporate gig . . . my money is that you’re destined to join the mighty ranks of the self employed just like me.

I bring all this up to point out WHAT I REALIZED from my then “for a year at a time”-oriented colleagues:

I was used to living life by semesters . . . ie, in 4-month cycles. And I had NO plans to change that.

In 4-month cycles, I learned:

  • a good chunk of Newtonian physics
  • partial differential calculus
  • to name every bone, bone segment, organ, muscle, muscle segment etc. in the body
  • the chemistry of how DNA replicates and the physical science of exactly why DNA is an oblong double helix
  • how to plan, draft and launch PR campaigns
  • the major points of a dozen political philosophers
  • to identify dozens of works of art, literature, opera
  • that Mary Shelley’s Frankenstein is nothing like what we’ve turned it into
  • you know … every class I took in college

I LOVE learning. Have always sought out and taken the fast track.

AND NOW . . .

A YEAR to do what I’ve conceptually mastered in the 15 minutes you took to explain it to me?

I had NO idea what I was getting into, and this was one of my ruder awakenings to #AgencyLife in New York City.

I committed at the moment to NOT let this “adult” “grownup” view of living by years take over my pattern of mastery/growth/rebirth in semesters or 4-month cycles.

NO WAY was I going to slow down my life just because people around me start talking in terms of years.

No. Way.

# # #

One year later, the writing on the wall was strong.

And a year after that, I was let go.

On July 17, 2012 I was what I call “friendly fired”: given 30-days’ notice.

I first talked publicly about getting fired on The Brave Entrepreneur (ep. 18), and my Quora answer on how I emotionally/mentally/physically dealt with getting fired has been viewed nearly 18,000 times.

# # #

There’s a corollary to the 4-month semester cycle, and it lasts around 4 years, or sometimes as little as 2.

These are like degrees:

Middle school + junior high

High school

College

etc.

So this month, September 2016, when I crossed 4-years being self employed . . .

And Linkedin reminded everyone of that . . .

And I got dozens of ‘likes’ and canned notes . . .

(which I sincerely appreciate, btw, and consider this post, my friends, my return note to all of you) . . .

I had a moment:

I’ve employed myself FT twice as long as my agency tenure (two years) and for as long as I was in college.

I therefore have “a degree” in being self employed.

I have a degree in providing for myself, as my own boss.

I have a degree in how to make and earn money without an employer.

I don’t have a masters of business administration, but I DO have rudimentary mastery (at least) of ALL aspects of administering a business:

  • I do my own bookkeeping
  • I write and review my own contracts
  • I set my own strategy
  • I do my own business development
  • I close the deals
  • I collect payments
  • I send the invoices
  • I do the work
  • I run quality control
  • I’m my own “account manager” “customer success manager” “client happiness specialist” and so on
  • I’m my own HR department
  • I’ve hired/released/completed/fired 20+ contractors
  • I’m my own marketing department
  • I’ve closed deals and finished projects for 50+ businesses

Anyone who is an entrepreneur/business owner knows what I’m talking about.

The ‘being self employed’ ride has been INSANE but I’m grateful to have put myself through an incredible learning experience, in which I’ve laid a foundation for a life I am excited to live at this very moment and am eager to continue building upon.

Here’s a recap of my entrepreneur coursework that led to my Self Employed Degree:

For simplicity and to make general themes more obvious, I limited myself to three “classes” per semester when really, as in college, it was more like 6-7 at a time.

Undergrad

Freshman Year

Fall 2012 (Sep-Dec)

Reality Check 100: Oh crap, am I really doing this?

Desperation 101: Consult for free

Desperation 102: Also interview for FT jobs in a lateral industry

Winter 2013 (Jan-Apr)

Client Satisfaction 101: my first legit client (CMC)

Networking 101: night events, shows, conferences, masterminds, etc.

Business Admin 100: bank account, domain, invoices, contracts, etc.

Summer 2013 (May-Aug)

Experiments in Marketing 210: “I Do Gamification”

Business Expansion 150: Second client, yay! Third client, yay! Fourth client, yay!

Skill Development 180: Email + CRM with Mailchimp, Infusionsoft

Sophomore Year

Fall 2013 (Sep-Dec)

Investment 201: sponsor a conference

Investment 202: business coach

Struggle 101: second-guess my selection for a business coach

Winter 2014 (Jan-Apr)

Mega Excitement 240: biggest client renews with massive budget expansion!

Scaling 210: subcontractors, subcontractors, subcontractors

Shiny Objects 100: bunch of random side projects I feel I can do because of all this main-gig income sustaining me

Life context: sleep and energy management at all-time low, begin Ironman training

Summer 2014 (May-Aug)

Life context: Ironman training in full swing

Skill Development 225: managing website projects

Struggle 300: what did I get myself into with all these subcontractors?

Struggle 480: biggest client pulls the project plug early

Junior Year

Fall 2014 (Sep-Dec)

Life context: I’m an Ironman

Consequences 300: planned income for rest of year is gone

Business Reflections 312: I didn’t start a business to spend all my time managing subcontractors . . . and, somehow, I want to bring triathlon in business

Experimentation 206: build and launch an online course (initial success promptly fizzles)

Winter 2015 (Jan-Apr)

Life context: live the winter in LA, decide to move out of NYC

Rebirth 285: marketing advisor (help a lot of business owners a little bit, do no implementation) + endurance coach

Launch 286: group program where I advise small biz owners on marketing AND coach them in endurance training

Skill Development 325: coaching, teaching, lesson plans

Summer 2015 (May-Aug)

Life context: pack up and leave NYC

Business Reflections 412: the people I count as the greatest successes, in business and sports, pick something and embrace the routine grind . . . repetition, repetition, repetition

Business Reflections 413: my business lifestyle (lots of ups and down, lots of travel) doesn’t align with life priorities, and there’s little room for repetition, meaningful practice and mastering a craft

Business Reflections 485: survey course, hmmmmmmmmmmmm

Senior Year

Fall 2015 (Sep-Dec)

Life context: temporarily, under-the-radar move to Utah

Drastic Measures 420: cut ties, fire clients, don’t renew my group coaching program

Embracing Your Craft 421: work as deeply as possible (on marketing) with as few clients as possible

Business Reflections 460: if “being a great marketer” is more important than being an entrepreneur, maybe a full-time role is a good idea? Open the door to FT job search

Winter 2016 (Jan-Apr)

Life context: move permanently to Utah … buy a car, get my license, etc.

Job Search 300: say no at the 1-inch line for a role when asked to negotiate one of my from-the-outset non-negotiables; from another, get a “want you on the team, but can’t bring you on until maybe around end of the year . . .”

Skill Development 410: build my first website from scratch, in Squarespace

Struggle 210: I’ve been entertaining FT work options, it hasn’t panned out, now I need more clients . . .

Summer 2016 (May-Aug)

Business Revelations 482: Holy smokes, I can make websites on my own without a developer or designer

Rebirth 386: Full-Stack Marketer . . . strategy + traffic + content + website + CRM + automation

Business Expansions 402: website project, website project, website project, more websites than I can deliver on deadline, begin time tracking and creating administrative controls and processes

And now on to . . .

Grad School

1st year

Fall 2016 (Sep-Dec)

Business Admin 505: tracking time, cash-flow control systems, time and resource allocation

Elevation 512: rate hikes, packaged services with (smartly priced, profitable) fixed project fees

Demand Generation 560: systematically booking work 6+ months ahead of time

The rest? Stay tuned.

By |2021-01-15T15:37:23-07:00September 16th, 2016|General Life, Marketing|0 Comments