Skip to main content

Putting Horse Before the Carriage: Profit First, Cashflow Next

As an SME owner, I've had the enriching experience of steering my companies through many difficult times. Few are so hard to overcome as the classical cashflow bottlenecks. You know you will have it available in 2 weeks, when that one client will pay, but there is payroll to process tomorrow.
Managing those bottlenecks, as an entrepreneur, your main goal of running an enterprise, to make a profit, remains a secondary aftermath, never actually knowing how the year would close.
Often, the balance-sheet refers to a profit, but there isn't an actual cash-balance to pay it out to the entrepreneur.

I have seen this happen in my SMEs over a decade of operations, before a simple idea occurred, of "putting the horse in front of the cart", in other words, putting profit before cashflow. We have since started to book a certain percentage of our revenue into a dedicated bank account (which we call our "diet account"), as soon as customer payments flow in, and forget about it. Which percentage of put-away you transfer to the diet-account depends on your expectation of profit as an entrepreneur, sector-specific benchmarks, your intuition of operating your business etc. Pick a reasonable percentage.

An important hack is to make sure that the diet-account does not have access by online banking or mobile-banking, isn't accessible to your accountant, and as much as possible concealed from your chattered accountant doing monthly tax filings. You will be protecting your profit for the daily operative cash requirements better this way!

I have been practicing this simple, almost household-sophistication, method for 4 months in one of my companies as of date of publication, and am already seeing accessible profits accrue.

There are of course 2 sub-challenges yet to overcome.
  1. Make sure that the balance-sheet also shows more or less similar figures.
  2. Sustain the practice over 1-2-3 years, to actually prove the merit of this procedure.
At some point, this profit-centered method has an inevitable impact on the operations of the SME, forcing it's managers to ensure a positive cashflow co-existing with guaranteed profits.