Quite often I'm asked to help our clients implement the Profit First method for their ecommerce business. As we search further into the assessment, we come to find what our clients often require help with is planning their daily and weekly cash flow.Profit First is a wonderful cash management method. But it isn't the right tool for figuring out when bills are due and what funds are needed to pay.
If you find yourself in a cash crisis, it typically means you should be implementing a 13 - week rolling cash flow plan.
We will delve into the different cash flow methods below.
Profit First: The Great Long-Term Strategy
The Profit First method uses specific bank accounts for different uses. This ensures that you have allocated the right amount of cash for your Inventory, Owner Pay, Profit, Taxes, and Operating Expenses. Organizing your bank accounts by the following buckets will help you to best understand the relationship between these essential expense accounts.
The method also gives you a reward. As the owner, you're rewarded with a share of the profit and as the employee with Owner Pay. You will keep the business operating efficiently and frugally by continuing efforts to increase the Profit Account and pushing down on the Operating Expense.
When you set this system in place, you can watch over your bank account balances and evaluate your business's health.
Cash Flow Planning Timeline(s)
There is no one set time increment that cash flow planning can work in.
Most of the time, I notice clients will look at the cash estimations on a monthly basis. Some see this as efficient on an overall “budgeting” approach because it projects your expected income and expenses for the next 3 - 6 months. Yet, it does require you to use a cash flow software program or some manipulating in a spreadsheet.
But it is effective in giving you an early notice if your company will face a cash flow deficit in the future, and gives you ample time to prepare for this challenge.
However, at the end of the day, this strategy still comes up second when compared to the Profit First method. Unlike the Profit First method, the strategy above doesn’t build as solid a structure for funding the important investments (aka your inventory, owner pay, and profit). Not only that, but the other strategy also requires an attentive effort, rather than simply checking up on your balances.
Cash Flow: Planning on a 13-week Rolling Basis
Planning your cash flow for a 13-week basis is an ideal method because it will match your expenses and income on a daily/weekly basis.
Some of our ecommerce clients are in a cash crunch. Planning their cash flow on a weekly basis puts us in an easy position to monitor the expected income and expenditures.
When we determine the individual transactions, we see the issues of timing how much we’re receiving compared to how much we’re spending. This view also shows us which expense is a favorable investment and what expense is not. It gives us visibility into the future, so we can prepare for any negative cash positions. With this approach, we can keep our cash positive!
Ready for Profit First
Use the 13-week rolling cash flow strategy to get a handle on the cash shortage over 3 - 6 months. After, you are now ready to set the Profit First method into action.
It’s key to remember all facets (the good and the bad) of your cash flow. Once you grasp this understanding, implement the Profit First method to help manage it, future cash shortages will be extinguished. You have a more profitable way to run your ecommerce business.
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!