HOW MUCH CASH IS MINE?
Ever wonder how much money in the bank account(s) is actually yours? Have you been advancing vendor payments on behalf of your clients? Or have you been using your own personal funds to complete a project or pay for operating expenses?
You may be looking at your bank account(s) and thinking you have a hefty balance and can take a nice bonus or distribution – but wait! A large portion of that cash may be in the form of deposits and earmarked to pay vendors, sales tax, income tax, and firm overhead expenses. Therefore, it’s important to identify how much of the money collected should be set aside for these costs so you can clearly identify the remaining amount for YOU TO KEEP!
Determining the amount of available cash in the bank account can be a daunting task, but is essential for managing a design business and handling project funds.
PROFIT FIRST (developed by Mike Machalowicz)
In this system, each dollar that is deposited into your business is allocated among various bank accounts. These bank accounts represent a business’s cash inflows and outflows. The profit from each deposit is allocated to operating expenses, taxes, owner’s compensation and profit. The vendor and sales tax amounts that are collected are segregated to pay those expenses.
It is important to review items in progress (aka WIP – items that have not yet been invoiced) as well as items that have been invoiced to ensure the appropriate amounts have been deposited to the correct accounts. It is also important to review the percentage the client has paid towards an item to help ensure you are not advancing funds on behalf of your client – after all, you are not a bank.
An example of the bank accounts for a design firm are:
Benefits of Profit First:
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- Allows you to easily identify how much cash is available to the business for designated expenses by glancing at the bank balance(s).
- Helps you ensure the money collected from clients for vendors and sales tax is segregated and available.
- Helps you prevent running out of money to complete the project.
- Helps you prevent funding the project or the operations of the business with personal funds.
- Helps you understand your true profitability.
- Helps you determine when and how much you can pay yourself!!!
Disadvantages of Profit First:
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- Establishing multiple bank accounts can be time-consuming and complex, especially for small businesses with limited administrative resources.
- Requires a little bit of extra time to identify the amounts and transfer the cash among the various accounts.
This system may not be for everyone, and every firm may not need to set up and use all of the accounts in the example, but every designer should be conscious of the balance in each of their accounts. You should be able to easily distinguish between business funds and amounts that have been collected from clients for payment to vendors and sales tax.
Effectively managing your bank account balance is crucial for the success of your design business. By implementing a system like Profit First, you can gain a clearer understanding of your available cash and ensure that client deposits and business funds are properly allocated. This will help you make more informed financial decisions and maintain the financial health of your business.
For more information about the Profit First method, including assistance with account set-up and ongoing management, please contact your Accounting Manager or info@cvwaccountinginc.com.