A common issue that many Profit First Professionals see in businesses is that business owners are struggling to pay wages and often sacrificing their own wage or going into debt to cover the gap.
The culprit of this problem? Poor cash flow management.
What normally happens is an influx of sales over a period, so more staff are hired and other expenses required to manage the influx. Then, there’s an unexpected lull in sales and suddenly there’s no cash available to pay the workers hired. From here, it’s a spiral down into a messy financial situation.
But there is a way out!
Here’s our 3 step process to managing your cash flow better so that you never have to worry about paying staff again!
Step 1: Review your expenses regularly
This is a monthly or quarterly task that should be a mandatory part of running your business.
As we know every little bit counts, and lots of little things quickly add up!
This simple activity shines a light on where all the money is going and what is dragging down your profitability.
Run an expenses report in your accounting software to show you what you’ve been spending money on. Highlight each expense recorded as follows:
- Must Keep / Required Spend
- Would like to keep / Ideal Spend
- Need to get rid of / Stop Spend
Then take action on these results until you can bring your expenses back under control so that they are not surpassing the money coming in. If you’re following the Profit First approach to money management you want your expenses to align with your allocated percentages.
This exercise may also highlight that you’ve hired too many staff, too many of the wrong type of staff, or too many staff for too many hours. Use this time to adjust your staffing to bring your spending back into a sustainable zone.
Get our Free Expense Review Worksheet to get you started.
The next step in managing your cash flow better so that you can page wages without stress is…
Step 2: Assess Your Pricing
When pricing for products or services is set based on:
- A random guess,
- Competitor pricing, or
- Immediate expenses incurred related to the creation of the product/service only (not the full expenses incurred to your business)…
It doesn’t take long for cash flow problems to show up in a business. And this greatly affects whether you’ll have enough cash to float your business operations and paying wages.
Setting your prices involves a number of key pieces of data including:
- Supplier costs
- Cost to create
- Cost to deliver
- Overheads to create, deliver and manage including things like payment processing fees
- Tax
- Profit Margin
When you price your products and services for profit, you know with confidence that every sale you make is turning a profit in your business. Combining pricing for profitability with expense culling creates a clear path to get your business back in the black.
Step 3: Use Profit First
While steps 1 and 2 above are great ways to get more money staying in your business rather than flowing straight back out again, this step is crucial to getting your business cash flow management back in the black permanently!
If you’re struggling to pay wages because of poor cash flow management, the key to turning it around is Profit First.
It’s not an app, or a system, or a set and forget type deal… It’s a methodology. A habit. An easy to manage your money so that you move forward in business – and have enough cash to pay your staff every single week.
If you haven’t heard of Profit First, feel free to buy the book from our store or check out our blogs on how the methodology works.
Profit First can help you turn your business from “cash-sucking monster into a money-making machine”, to quote the creator Mike Michalowicz.
The Profit First method helps put business owners back in control of their finances. It helps them get out of debt, manage their money better, enables smarter business decisions, and even ensures that the business owner gets paid as well as the staff.
In Summary
If you’re consistently struggling to find enough money to pay your staff or cover your expenses, you can’t ignore your finances.
Sticking your head in the sand and praying for the money to come magically really doesn’t help get your staff paid.
Not paying yourself or going into debt to cover staff wages really doesn’t move your business forward, nor is it a sustainable plan.
So if you’re struggling to pay wages, it’s time to review your money and your money habits.
Step 1 – Review your pricing. Is it profitable?
Step 2 – Review your expenses. What can be culled?
Step 3 – Implement Profit First so that you can manage your money better for the long-term, improve cash flow management, pay wages and yourself!
Get your business back in the black with Profit First
The Profit First method works for so many different business models, and any stage of business. To get your business prepared for implementing Profit First, including a review of your pricing profitability and expenses audit, download our free guide to Preparing Your Business For Profit First.
For 1:1 assistance and implementation of Profit First in your business, connect with a Profit First Professional near you.
