Profit, Cash, and Your Own Pay

Most owners run the business from the bank balance. They open the app in the morning, see a number, and the day is good or bad according to it. I understand why. The balance is real, it is current, and it is the only financial figure the business produces without anyone having to build anything. It is also almost useless for making decisions, because it tells you where you are and nothing about where you are going, and every decision an owner makes is about where the business is going.

A twelve-month model gives you three things the balance cannot. The first is profit by month: what the decisions you are making now do to the bottom line through next year, not as a hope but as arithmetic. Put a hire in the model and you can see the month the cost lands and the month the extra revenue pays for it, if it does. Put a price rise in and you can see what it adds, and what it costs if two clients leave because of it. The balance will tell you about these things eventually, long after the decision could have been changed.

The second is cash, and specifically its timing. The model shows you when the year gets tight and when it eases. It shows you that March is fine and May is not, because two large invoices fall in April and the tax is due in May. It shows you the quarter in which the price rise actually reaches the account, which is never the quarter you announce it. An owner who can see this in November can arrange her year around it. An owner who cannot finds out in May.

The third is your own pay, and this is the column I want to dwell on, because it is the one most owners have never written down. Not what you took out last year, which was whatever was left, but what the business can afford to pay you, and when, once the decision you are weighing is in. It is a number. It can be calculated. And the fact that it so rarely is tells you how far down the list the owner has put herself.

The response is to make the three columns the way you look at the business, and to retire the bank balance to its proper place, which is a check on the model rather than a substitute for it.

For profit, decide the one or two decisions you are carrying into next year and run each through the model as a separate version. The hire, in or out. The price rise, at five percent or ten. The new offer, launched in February or September. Each version gives you a profit line, and the comparison tells you what the decision is worth in pounds rather than in anxiety. This is what a model is for. It is a way of making the decision on paper before you make it with your life.

For cash, find the lowest point in the year and name the month. Then ask what you would do about it now, with four months' notice, rather than in the week it arrives. Invoice earlier. Shift a payment. Agree a facility with the bank while the balance is healthy and the conversation is easy. The low point does not go away because you can see it, but it stops being an emergency and becomes a date in the diary.

For your own pay, put a proper figure in the fixed costs and see whether the business can carry it. If it can, pay yourself on the same day each month like everyone else and stop treating your income as the residual. If it cannot, you have learnt that the business model needs to change before the business can be said to work, and that is worth knowing in November rather than in the fifth year of hoping. Tomorrow I want to go deeper into the second column, because the month it gets tight is where businesses that are profitable on paper actually fail.

Continue reading: The Month It Gets Tight →

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