Louw Barnardt is co-founder of Outsourced CFO and a SAICA Top-35-Under-35 chartered accountant. He’s also a member of the global Entrepreneurs’ Organization (EO) network. During his meeting with 80 business owners at EO Accelerator Cape Town, many expressed their struggle to manage their cash flow.
Louw shares an approach to managing your cash flow resources in a clever, well-planned way that can ultimately help you get ahead and turn more profit into cash. “The profit-first methodology is really about making sure founders and business owners get something out of the many, many hours of intense work they pour into their businesses,” says Louw. “It can be a great incentive for business growth. It reminds business owners of the value of their business and motivates them to double down on their efforts to make it a success.”
Maybe on day one, that’s 1%. For the sake of this example, let’s say it’s 10%. That means you need to be making 10% profit after tax in order to be at a point where you’re happy with your return on investment.
As money comes in, put 10% of it (after tax) into a separate bank account. You might do this every two weeks or however frequently it works for you, over the period of one quarter.
By the end of the quarter, those biweekly payments into your separate bank account will have built up. If you have no debt and no investments you want to make in the business, you can pay that amount straight out as dividends to business owners.
If you have debt, put a decent amount of money aside towards paying it off before paying dividends.
If your business has no rainy-day fund, start building one before paying dividends. You want to aim to save three to six months’ worth of business expenses, to use in case of an emergency, like a Covid situation, or just to get you through when times are really tough. Being resilient and debt-free means all dividends can flow directly to the owners of your business.
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