Elaine Pofeldt is the author of The Million-Dollar, One-Person Business.
Allen Walton has built a fast-growing business around keeping his customers calm. No, he’s not a yoga teacher or the inventor of the next Headspace. Allen, 30, is the high-energy founder of Spy Guy, an online store based in the Dallas area that sells spy cameras.
Once an $11-an-hour retail clerk in another spy camera store, Allen tapped into what he learned about spy equipment to create his own business. And in 2017, Spy Guy reached $1.8 million in revenue—and turned a profit.
Now that he’s responsible for making payroll, Allen has kept a keen eye on cash flow. He needs to make sure he has enough money to cover inventory and pay his team. Fortunately, Allen says, “I’ve never really had any issues with managing cash flow.”
That makes him somewhat unusual. For 42 percent of small businesses, cash flow was a top concern for 2018.
The average small business has tucked away just 27 days’ worth of cash as a cushion—and many have even less. And these companies don’t have a lot of money to run out of after they’ve paid their overhead. In fact, the median daily bank balance is just $12,100.
So what’s Allen’s secret to bucking the trend? “I attribute a huge amount of my lack of cash flow issues in the last two years specifically to Profit First accounting,” he says, referring to the system described by Mike Michalowicz in his book by the same name. “It was absolutely mind-bending to me and should probably be required reading for business owners always having trouble with cash flow.”
We chatted with Allen to understand what he’s doing to make sure his company doesn’t burn through cash as it grows—and how you can follow the same steps.
|Wait, does this story apply to me?
If your business is growing and the money is rolling in, you may not think cash flow is a potential problem. Think again. Running out of cash is a common reason people go out of business—especially if they’re just starting out and don’t have much access to credit.
Trick #1: Defog your glasses and find some bookkeeping help.
It’s hard to stay on top of cash flow if you keep sloppy books. And let’s face it—many entrepreneurs do, unless they have bookkeeping or accounting training. Even if you are meticulous, it’s easy to fall behind or spend time on bookkeeping that you should be investing in bigger-picture tasks, like bringing on clients.
Allen avoided this problem by hiring a bookkeeper as a contractor. “I was paying to get my time and energy back,” he says.
First, it’s important to know the difference between a bookkeeper and an accountant. A bookkeeper helps record your company’s financial information, while an accountant analyzes that data. Allen recommends hiring a contract bookkeeper because that will make it easier to work with an accountant.
To find a bookkeeper that works for you, first ask them for references. Then, hone in on these questions while chatting with those references:
- Is their work accurate? Knowing where your business stands financially on a monthly basis will be crucial to your success.
- Do they complete their books on time each month? A bookkeeper who is always behind schedule—a common problem—is going to create headaches for you when tax time approaches. That’s because you won’t be able to provide your accountant with needed documents, such as a current profit and loss statement.
Can’t afford to hire someone to do your books? There are many bookkeeping firms that will be happy to unburden you. Ask around among business owners in your industry for a referral. Or look for one on an established platform, such as Upwork or Freelancer.
Trick #2: Lock up your checkbook.
In the past six months, Allen has spent a lot of money. He worked with a design and development company to redo the company’s website, as well as a branding and graphics contractor to rethink Spy Guy’s image, position, and identity.
All told, he estimates he spent just over $50,000 for the rebrand and website. He invested another $15,000 for a new domain. He also has a video editor on retainer as the site builds out its video marketing.
To pull it all off, “I did have to think about cash flow a lot over the last half year,” says Allen. One tactic that helped him maintain his money reserves was making milestone payments to each vendor, instead of paying for each project in one swoop.
“Fortunately, both of them broke the total bill into three payments so it was easy to plan out,” says Allen.
How can you do the same thing? First, understand these two, often-confused terms.
- Milestone payments: This is when your payment plan is tied to achievements, which are outlined in the contract. So if you hire architects, they would be paid when they submitted the plan to the city or received the permit.
- Progress payments: These are made when a percentage of your project is completed, and they’re not connected to hitting any milestones. If you have a six-month project, progress payments could be broken down into six payments, each made at the end of the month.
Each type of payment above is progressive, meaning that you don’t have to pony up money for the entire project all at once. For Allen, here’s what that looked like for his website project:
- Payment #1: This was for the road map, which charted out what the site would look like and all the steps needed to get there.
- Payment #2: This was for designing the site and approving everything.
- Payment #3: This was for coding the site and troubleshooting any issues.
Consider negotiating either milestone or progress payments to help you conserve more cash, just like Allen.
Trick #3: Put profit first.
Allen was able to cover the cost of his redesign and rebranding without going into hock by tapping his profit account. Each year, he allocates three percent of revenue to this account.
As a member of eCommerceFuel, a community for entrepreneurs who are bringing in six- and seven-figure revenue, Allen learned about Profit First accounting on a conference call the group hosted with Mike. (For a brief overview of how it works, see Mike’s one-sheet guide.)
As Mike explained his recommendation to limit spending to what is left over when the profit is in place, says Allen, “I really took to it.” He soon started working with an accountant trained in Profit First accounting.
In Profit First accounting, Mike puts forth a system in which business owners switch their mindset from thinking about profit as sales minus expenses and instead take the approach that sales minus profit = expenses. They take a predetermined percentage of profit from each sale first and set aside only the remainder for expenses.
- Old mindset: Profit = Sales -Expenses
- New mindset: Sales – Profit = Expenses
So if you own a furniture store and just sold a recliner, you would take out a certain percentage—say 60 percent—and tuck that away into a separate account. Then you could use the 40 percent that’s left over to pay for your expenses.
What Allen loved about the Profit First system was how Mike prioritized setting aside the profits of a business before spending any money. It’s a similar approach to making sure you put aside your retirement savings before spending money on a splurge at the mall or a vacation—you know you’ve paid yourself first.
To make sure he found an accountant who was simpatico with this approach, he soon started working with an accountant trained in Profit First accounting, to whom he was referred by Mike’s company. “It’s been awesome ever since,” says Allen.
By maintaining his profit account religiously, Allen has not only been able to make payroll without cash flow problems but is hiring two content marketers to build out his blog and other resources. “I had a specific bank account I was funneling a percentage of top-line revenue into to pay for all this stuff,” he says.
With his cash flow humming, Allen is now able to focus on his next goal without the anxieties about running out of cash or missing payroll that keep many entrepreneurs awake at night.
“Getting to $1 million wasn’t difficult,” he says. “Going from $1 million to $5 million is significantly harder.” Then again, with the right systems in place to manage his cash flow, he’s already gotten one of the trickiest parts under control.