Getting Your Cash Flow Straight

In business, the general practice is Sales minus Expenses equals Profit. In his book, Profit First, Michael Michalowicz flips that notion on its head and instead suggests that Sales minus Profits equals Expenses.

​For example, an employee has a 401(k) deduction at work. If they have it deducted from their paycheck, they don't notice it. But if they say, "I'll put away what's leftover at the end of the month," nothing is ever left over. It's the same idea for business owners. If you say, "I'll put aside money for taxes and pay myself what is leftover at the end of the month," nothing is ever left over. But if you put it aside in the beginning, you don't even notice you have less money to spend.
Profit First presents it as similar to eating healthy:

1. Use small plates

Because we're taught to clear our plates, we eat more when it's a bigger plate. Business side -- use different bank accounts. Set aside money for profit, owner pay, taxes, and operating expenses into separate bank accounts. You spend what is in your operating expense account and nothing else. Not enough money? It's time to cut expenses.

2. Serve sequentially

Eat your vegetables first and you're more likely to finish them while eating less fries. If you save your vegetables for last, you're less likely to eat them. Business side -- whenever you receive client payments, set aside money into the profit, owner pay, and tax accounts in that order. The rest goes into the operating expense account.

3. Remove temptation

Organize your kitchen so the bad stuff isn't in your face. Business side -- move your profit and tax accounts to a separate bank, and do not give yourself online access or a debit card.

4. Enforce a rhythm

Eating at the same time every day helps to reduce temptation. Business side -- get into the habit of paying your bills on the 10th and 25th of each month.