Case Study: Cashflow Management

Adrienne owns a small architecture firm and spent the 2018-19 Christmas break reading Mike Michalowicz’s book, Profit First. She was so excited by the read and wanted to implement it in her business straight away. I was a little sceptical as being an accountant I know that being in business is about cashflow first. Curious, I decided to have a read. I wasn’t long into the book before I realised it’s about a methodology to manage cashflow. I settled in and enjoyed the read.

I was so impressed by the book I agreed with Adrienne I would help to implement the methodology in her business. Here is what happened:

The set-up

1. Adrienne set-up six bank accounts:

Income account – existing business transaction account where all invoices issued to clients will be paid.

Expenses account – new bank account from which all payments to suppliers and employee wages will be paid. Any direct debit payments from her new income account (existing transaction account) were transferred to this account.

Taxes & super – new bank account from which all payments to the ATO and employee super will be made.

Profit account – new bank account with funds exclusively set aside for taking by her as a bonus, with tax already deducted and allocated to the taxes account.

Innovation account – new bank account for expenditure that is not in the usual course of business and carries risk in terms of return, for example a new marketing initiative or software purchase.

Vault account – new bank account to accumulate rainy day money, ideally working towards a balance that is enough to cover 3 months of operating expenses.

2. We calculated the percentages that were to be transferred from her income account to the other five accounts.

Management

Adrienne runs her payroll and pays her bills fortnightly. So every fortnight to coincide with this, she transfers the actual amounts of PAYG withholding and super calculated in her payroll, in addition to the agreed percentages, to the relevant bank accounts.

Every six months she revisits her percentages to see if there’s an opportunity to decrease the percentage going to the expenses account and increase the percentages to the others.

Adrienne uses Xero, so can see at a glance, the balance of her bank accounts and has a very clear picture as to how much is available to pay bills, taxes and Super and to see how her holiday fund in her profit account is tracking. (You can read our blog on how to make the most of Xero here.)

The Results

For the first 5 months (starting in January) Adrienne used the Profit First methodology and she did not encounter any cash shortages in her accounts. In June, she had a number of annual expenses, workers comp and PI insurance, professional association fees and software subscriptions. This was a big drain on the balance in her expenses account and by the end of June she was down to her last $500 in this account, while her other accounts had healthy balances of:

Tax & super: $25,000

Profit account: $10,000

Innovation account: $2,500

Vault account: $2,500

Using Profit First, any potential cash shortfall was identified months in advance of any actual cash shortfall. Adrienne wanted to stay true to the Profit First methodology, knowing if she dipped into her tax and super account she would have a shortfall in funds to pay her BAS due in August. If she dipped into her profit account it would mean she would have to compromise on a trip she had booked to Japan in August and dipping into her innovation account would mean she could not upgrade her website. Adrienne’s vault account was for emergencies only and she didn’t think paying the day to day expenses of her business qualified her for dipping into this account. Instead she focused on:

• Collecting outstanding invoices for work done

• Building her pipeline of billable work for July, prioritising jobs that could be quickly completed with clients that would pay within terms

• Managing expenses by not committing to any new expenditure for the month and reviewing subscriptions and other expenses that could be cut

• Holding any bills for payment, that were reasonable to do so

Adrienne made it through June and the subsequent months, until April 2020, seamlessly using Profit First to manage cashflow. In March 2020, her client’s put a stop on all work and her pipeline of future work dried up. Cash was tight, very tight. Expenses were met for March from the expenses account as normal, but it was empty by the end of March as was the income account. Cashflow boost had been announced (for which the business qualified), but payments weren’t due to be received until early May. Adrienne had to meet the $1,500 minimum JobKeeper payments for herself and her 2 employees plus pay any other essential business expenditure. Deciding not to dip into her vault account back in June 2019 turned out to be a very good decision, she had the funds to meet her commitments (just). With the payment of JobKeeper in May also came more confidence among her clients and work started trickling in again and Adrienne started to rebuild the momentum of her business. Today, cash receipts are almost back to pre-covid levels and the business has started to recover. Without her vault account, there would have been sleepless nights.

If you would like specific advice tailored to your business and circumstances, Accounting Heart offers affordable service packages where you can work with Sonia one-on-one to help you get your business where you want it to be. Book your FREE Discovery Call to find out more.

Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and / or other advice as may be appropriate having regard to their particular circumstances.