PRE-EMPTIVE MONEY MANAGEMENT
What is Pre-Emptive money management and how can it help your business manage your cash better?
Running a small business is all about understanding and managing your numbers, whether you do it subconsciously or consciously doesn’t matter, it’s critical.
When it comes to budgeting, managing your money and building your savings or wealth the key is to know what you are going to do with your money before you get it. Your savings will grow the fastest if you make a plan and you put savings aside first, then you are free to spend what’s left over and you know the budget you need to stick to.
In business and in small business in particular the same rules apply and only a few operators take the steps to pre-emptively manage their money.
We all need to do bookkeeping or accounting in some fashion, whether it be a full package or an excel spreadsheet. However, managing the books is an administrative task that is all about making sure you report the right numbers to the right people. Apart from knowing where your business stands it doesn’t add any income to your business and is typically seen as a cost and an annoyance. Bookkeeping and accounting are important functions but they are done after the fact and they don’t have much to do with pre-emptive money management.
Let’s say that you are planning to make a profit of 10% in your business on top of your income, how do you make that happen? You could do what most people do and work a little bit harder, stay back a little bit longer and ultimately push yourself to the limit. It is an unfortunate fact that the more we earn, the more we spend and despite all your extra hard work you finish the year in the same position you started.
The alternative is to implement pre-emptive money management. This means that you keep the same goal, aka 10% profit, but you take steps to put that profit aside as soon as you get paid. For this to work the money has to be put aside first and foremost and it needs to be put somewhere out of reach. The result of using pre-emptive money management is twofold.
- Firstly, you are achieving your goal every single day and you can watch on with confidence as you hit your targets.
- Secondly, without your 10% profit in the bank account you will be forced to run on a tighter budget and ultimately minimise wasting money on non-essentials.
The idea is to create a plan or a goal for your perfect cash flow scenario and use pre-emptive money management to make it become a reality.
Here are the three steps you need to implement pre-emptive money management effectively.
Step 1 – Create the plan: Whatever plan you come up with you will most likely need to tweak it, so don’t get caught up on making it perfect just get it done. Be realistic and break your plan into sections and give each section a percentage. As an example you may allocate 10% for profit, 70% for your operating costs (rent, wages, insurance, cost of goods sold etc) and 20% for your obligations such as tax and super.
Step 2 – Implement the plan: The first thing to put in place is somewhere you can put the money you aren’t using right now, such as profit and obligations. Then get started moving the money to where it needs to be. You should be left with just your operating money to be used on paying all the expenses required to keep the business going.
Step 3 – Revisit the plan: People change, plans change and your goals will undoubtedly change too. So regularly revisit your plan to make sure you have the right numbers and the breakup is working well for you. Keep in mind the numbers will be different for every business depending on where you are at and you need to find the right balance for you.
At Solo & Smart we have developed a system to automate pre-emptive money management. In our experience people perform the best when they have a system in place to ensure consistency and accountability. Our goal is to empower success for individuals through a simple and structured approach to business. To learn more about how our system works follow the link above.