Why Do You Even Need A Cash Handling System?!?
If I’m being honest, the first time you ever heard the term “cash handling system”, your first question probably wasn’t WHY you need one. It was probably more like “what is that?!”.
Or, if you have followed me for any length of time, it may have been closer to, “Do you mean Profit First?”
Or even, “Are you serious, Connie? Have you not heard of COVID?!”
After several conversations with friends, colleagues, and clients this month all around this topic, I’ve realized it is far too easy to jump straight to the HOW and the DOING of a cash handling system. But when you actually take the time to examine what one is, it’s the WHY of having one that will keep you moving forward with it. Especially as our economy recovers and finds new ways of doing business, both during COVID and beyond.
And for all my high achievers out there, I promise, in this blog post I will give you a way to quick-start the implementation of your very own cash handling system.
For now, breathe, and let’s explore...
Why is a cash handling system even important?
That is a very good question. Let’s start with a little backstory.
Back in 2014, I was introduced to the basic concept of a cash handling system, thanks to the book, Profit First by Mike Michalowicz.
That said, it wasn’t really a brand-new, earth-shattering concept to me like it can be for some business owners. Back in 1986, being recently married and being responsible for a household budget for the first time, I used a method known as the “envelope system”. That system worked for several years. Then, money became a little easier, a little more fluid (and yes I was introduced to the power of credit and the resulting debt) and the idea of being intentional about money stopped being a priority for years (possibly decades).
In 2014, Mike’s book, and the message, resonated with me and it was the AH HA moment I needed.
In that moment, what I really needed was a lifeline. I had been growing my business for six years, had over $50k in debt, and hadn’t paid myself during the majority of that time. I was drowning.
I give the system outlined in the book credit for saving my business. More importantly, it gave me a nudge in a direction I never expected. Over the next three years, a deeper exploration of myself and through the work I did with my clients, the process changed (mostly because I was a rebel and couldn’t follow all the rules).
That big WHY, from 1986 to 2014 to now, is still the same:
To know where my money is going
To be intentional about where my money is going
To ensure I have enough cash to cover personal and business expenses, and to fund my Big Kahuna dreams
Even with over 30 years working with numbers, that does not mean I’ve always had a healthy relationship with money.
The majority of our understanding of how money works and how to use it comes from what we heard or experienced from the people who raised us. Our parents and grandparents absorbed their understanding from our great-grandparent lineage, and so on. Not to mention what was going on in our communities, the state and country we lived in, and society in general influenced what we absorbed back then — and continues to influence us today.
All of that to say, many of us have only a very basic understanding of the mechanics of how money works. We learned from our “employee mindset” family to live paycheck-to-paycheck. We learned that we “couldn’t afford that”, “money doesn’t grow on trees”, and it is “hard to make money”.
Then we took that knowledge and used it to fund and open a business.
It’s no wonder so many entrepreneurs start with a cash-eating monster instead of a profitable business right out of the gate!! It’s not your fault that no one taught you how to implement a cash handling system that meets the needs of you and your business.
According to this article from 2/28/20, 45% of businesses fail in the first five years (some articles say 50%). That information hasn’t changed much from 1990 and of course was before our recent pandemic with COVID-19, which has resulted in forced closures. Mostcommon reason? Finance hurdles, and not enough working capital. For entrepreneurs, that all comes back to cash in the bank and how well it flows or how much hustle is required if or when the account balance is low, zero, or overdrawn.
All of that to point out, something you know but didn’t want to admit to, we crafted businesses that run paycheck-to-paycheck, or in business terms, sale-to-sale.
When a business is getting started, I’ve noticed that for many entrepreneurs their focus is not on money. It’s on service and how to find clients. Sure, money still is very important, and keeps many owners up at night with concern and stress, but it still ends up taking a back seat. Often getting limited attention and more than not, more hustle finding revenue than planning. This results in debt-heavy businesses and owners using their businesses more like ATMs than sustainable businesses that support their families, their team, and the community they live in.
Money is the foundation for all sustainable businesses.
If entrepreneurs had a superpower, it would be Money. Money amplifies the impact entrepreneurs want to make in the world.
While many of us have mastered how to sell and grow, we never learned to understand why profitability mattered. We learned how to collect Money, but we never learned how to keep it, control it, or how to passively grow it.
Focusing only on selling and growing, even to the extent of thinking that once a business reaches 6 or 7-figures in sales, only then will you have a successful business - we again missed the mark on creating a sustainable business. Or at least I did.
Remember, the main Money lesson we learned growing up was paycheck-to-paycheck. So as we were busy selling and growing to 6 or 7-figures, our expenses grew. If we weren’t paying attention they would even exceed the revenue, hence creating debt.
That paycheck-to-paycheck mentality we learned set us up to fail more times than win. As soon as there is excess cash, we create reasons to spend it. Sometimes from the lack mentality of “I deserve that”. Sometimes simply because expenses and investments were “put off” during start-up or growth. Sending the business back into hustle, panic, and lack.
Don’t get me wrong, growing the business is important, but it’s only half of the equation!
So what’s the other half?
It’s what I call the more important half.
Planning for, saving, and keeping profit in the business AKA... the cash handling system!
When entrepreneurs ignore profitability, every business, no matter how big, no matter how successful, can, and will crumble.
I know, you’re probably thinking, “That’s great Connie, but what really is profit?”
We all know the stories, heck we have probably BEEN the story:
Entrepreneurs sit down with their tax pro expecting amazing news, maybe even a refund. Tax pro says excitedly, the business has profit and you owe tax. When the entrepreneur asks the tax pro, so if there was profit where is it? The tax pro indicates, well you already used it but it doesn’t mean you don’t also owe the tax.
Knowing this after the cash is spent is why the business continues to stay in the paycheck-to-paycheck mindset.
Does this saying ring a bell?
Revenue is vanity
Profit is sanity
Cash is KING
As entrepreneurs it is our JOB to maximize profit, regardless of the size of our business. Maximize profit means you automatically increase the cash reserves of your business.
BUT Connie, excess cash means I owe more tax.
Get ready to put on your big kid pants, because YES you will owe tax. That is what a sustainable, profitable business does. 😉 It also means you have reserves and cash flow to now make an impact!
Remember, if all we do is chase down more and more revenue, our paycheck-to-paycheck brains will spend it all. When we pause and focus on creating profit, we will find new ways to streamline and grow our businesses in a sustainable way.
Here’s a different WHY question I’d like you to ponder.
Why do you want to grow your business?
(Hint - What do you want to do with Money?)
For most of the entrepreneurs I work with, it’s because they have an outstanding Big Kahuna Dream they want to create that involves making an impact on the world and creating lasting change.
Bigger Impact = More Money = Better Profitability
And all of this REQUIRES a Cash Handling System
We are not Spock
Our ultimate goal is to free ourselves from that paycheck-to-paycheck scenario that creates panic AND that will work with our natural human nature, not against it.
Those wacky creatures in the accounting industry use something called Generally Accepted Accounting Principles (aka GAAP) to do things like bookkeeping, prepare financial statements, and file tax returns.
Unfortunately, GAAP works against normal human nature. It is why business owners ignore their accounting and tax planning. While GAAP will calculate a taxable profit, it does not address or adequately show an entrepreneur, in real time, what the business profit is, which is that Cash is King.
How can we get off that roller coaster?
We need a System Designed for Humans that:
Instantly tell us the truth about the health of our business
Tells us what we can actually spend and what needs to be reserved
Doesn’t require us to change but automatically works with our natural behaviors
We are not Spock. Following all the perfect black/white accounting instructions calculates profit that is for tax purposes only. It does not reflect the accurate health of our business. Staying within the confines of the accounting box - using only the Income Statement, Balance Sheet, and maybe a cash flow statement - does not give us enough information to be fluid, to grow, or to make decisions based on our intuition.
You are more like Captain Kirk - right?
We need a cash handling system that is designed for our Spock-specific brain and our inner rebel-Captain Kirk. A successful business needs both.
In times of stress, our human nature is to revert to established habits. The definition of entrepreneurship is constant stress, then that paycheck-to-paycheck habit we have been trying to avoid, we will consistently come back to it whether or not we want to. We need a system that fits within your natural human behavior.
Profitable sustainable businesses are able to make a bigger impact on the world and community.
Profit means businesses hold onto and keep more money as reserves.
Businesses that keep more money require a cash handling system so we don’t let our natural human nature simply spend it all.
THAT is the ultimate big WHY behind the importance of a cash handling system.
Mentor Moment: If your internal dialogue kicks up any negative thoughts around Money, take the time to examine them. These are your roadblocks and will deter your cash handling system process. Today Money is the vehicle we use to pay for services, buy goods, AND contribute to the lives of others. It used to be vegetables, cows, and baked goods. Money is a little easier to carry and use. There is no good or bad with Money, only the subconscious beliefs someone else taught us about their beliefs about money - which remember, were passed down from generation to generation and influenced by what was going on in your communities and country. Examine the thought and ask yourself, is this a true statement for me today?
"Money is neither good nor bad. It simply amplifies what is in the heart of the one who controls it."
~ John Avanzini
There is a whole philosophy around a cash handling system that I will share in a future post, and yes, at the core of the system I have crafted is the Profit First system. For today though, if a cash handling system is a new concept, first you have to test it out.
Here is my challenge to you: try the quick action steps I’m about to outline for you. It doesn’t take a lot of time or effort. Keep doing the process for 90 days. After that time, connect with me and I’ll give you the next steps. I promise there is a reward for those that do the challenge.
You see, magic will actually happen when you do the challenge. You’ll prove to yourself that YES saving profit is easy and that the basics of the cash handling system can work. The process will build up your wealth confidence muscle and there is power in building a reserve, no matter how small that is. Plus you’ll be retraining your mind from “spend it all” and release into the knowing that yes, Money has your back.
Connie’s Quick Action Steps to Implement a Basic Cash Handling System
Set-up Profit account - All you need is a basic savings account at your regular bank. No checks needed. Look for an account with no fee.
Give it a Job Title - Rename the account EVERYWHERE: in your accounting tool, online with the bank, on the bank statement. Make sure wherever you look you KNOW that the intentional purpose of this account is to save your Profit.
Transfer 1% of all revenue received - Work with your existing habits here. When do you acknowledge the money you receive? Is it daily? Weekly? Monthly? Whenever you make deposits or receive payments or update your accounting, make the transfer. You want to transfer funds as close to when you receive it as possible - otherwise your human nature will be to spend it.
Leave it there, and simply let the magic happen. This is not your Plan B. There is no borrowing. Just leave it alone.
Work the system for a minimum of 90 days. Contact me for next steps and your reward.
Perhaps you read the book by Mike Michalowicz but never got to the implementation stage, or didn’t finish the book. No problem. This challenge will be perfect. You’ll get all the wins and a reward at the end simply by taking the action steps above for 90 days.
Are you ready for the challenge?
If you have any questions or are ready to find out what’s next here is the link to schedule a 30-minute call. Look for a future post where I’ll share more detailed information on the what and how of a cash handling system!