Are you having cash flow issues? Do you come up short of cash when you reorder inventory?
It’s human nature to look at our bank balance and make a judgement about our financial health. When you use a single checking account for all your business expenses, the funds you are counting on to replenish your inventory are mingled with all other business operating expenses.
Operating your business with one bank account makes it hard to estimate the amount of money available for purchasing replenishment Inventory. When you look at your bank account balance, you must remember that the number you see is not just your inventory budget but for all operating, payroll, tax, and miscellaneous expenses.
Doing math gymnastics can get you to the right final result, but make it easy on yourself and get an immediate clear picture by simply opening a separate bank account for Inventory. Opening an account for Inventory is a Profit First Method that makes Bank Balance Accounting work for you.
The Profit First process is to take your payout and allocate a percentage of the deposit into separate bank accounts designated for specific uses. Assigning separate bank accounts for specific expenses works with our behaviors around money and resources. This behavior is based on an economic principle called Parkinson’s Law, which states that we expand our consumption to use the available resources. My grandfather used to say, “You’ve got money burning a hole in your pocket!”
Profit First Method
The Profit First Method recommends you have multiple accounts designated for Profit, Owner Pay, Taxes and Operating Expenses. Because Inventory is such a large use of cash, we recommend an account for this purpose. Each account gives you a real-time view of how much money you have for the designated purpose. You only spend the money in that account for the expenses associated with that account. For example, the money in the Inventory account is only earmarked to be spent on Inventory.
When you see a large balance in your single checking account, it is tempting to spend because of Parkinson’s Law. Separating your money into separate accounts allows you to quickly evaluate the funds needed against the funds that are available for that purpose. Understanding of the purpose of the funds help you cool that cash that is burning a hole in your pocket.