Who Needs A Cash Management System?
First of all let's get this off the table.
Accounting and Cash Management are not the same thing, nor does having a cash management system in place mean you don't need to keep your books in good order.
Thankfully good accounting software, bookkeepers, and accountants exist. I look at accounting this way; it is necessary for me to maintain legal requirements, such as paying my taxes. It provides records that allow me build a credit history for my business. When I sold one of my businesses, the fact that we kept immaculate records eased the process of valuation and allowed us to prove what the business was worth. Accounting also summarizes business performance into quantifiable measures - sales revenue, profit, expenses, etc.
Well if it does all that, what else could I possibly need?
Here's the main problem with accounting. It wasn't designed for humans, it was designed for rational, number crunching robots (eg. Accountants)
For mere mortals like you and me, accounting fails miserably. For example when you look at your Profit and Loss Statement, and it shows you made, say, $7500 in profit this month, it doesn't always square with the reality of what is in your checking account, right now.
How can that be?
Because you already found a way to spend it, that's how. And that just means you are human.
The reason I love (no, that's not too strong a word) the Profit First cash management system is because it works WITH human behavior, not against it.
By allocating my profit FIRST, in a separate account from my primary checking, it doesn't get caught up in the "backwash" of my (over)spending, which is what we all tend to do too much of.
Remember Parkinson's Law?
"work expands so as to fill the time available for its completion"
In other words, if we are given 30 days to complete a project we will take 30 days. If we are given 7 days to complete the same project, we will figure out how to get it done in those 7 days.
The same thing applies to your finances. If we have $500, we will spend it. If we have $1000, we will figure out how to spend the extra $500, even if we don't really need to.
By putting away my Profit FIRST (that extra $500) I am using behavioral psychology in my favor. Out of sight, out of mind, and no longer in my account to spend.
The same applies to the other core accounts in our cash management system; Owner's Pay and Taxes. The best way to make sure I pay myself and have the money to pay the Taxman is to be putting it away BEFORE I have a chance to spend it on other things. The biggest benefit to this is the peace of mind that comes with earning a regular paycheck and keeping taxes up to date.
Once we have those things taken care of - profit, paying ourselves, and taxes, then and only then do we address our operating expenses. This forces you to think hard about every spending decision. You have to get serious about streamlining processes and systems to produce the same or more quantity and quality of work, with less resources. This is a GOOD thing, because it's going to make you more money.
So who needs a cash management system?
Business owners and entrepreneurs that struggle to understand their basic cash flow, don't want to waste time poring over accounting reports (and/or don't know what they are looking at when they do), and those who lack discipline in their spending. Yeah, that's pretty much everyone, including me.
If you haven't read the book Profit First, you can get the first two chapters for free right here, and get started on your permanently profitable business today.