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  • Jeannie Doherty

Are you running your business on the bank account?

Let's have a look at a subject that I'm really, really passionate about, and that is around numbers mastery. So, we're going to look at improving your EDUCATION around numbers mastery, because it is absolutely one of the rules of the game for business SUCCESS.


I've said it before and I'll say it again: successful business owners know their numbers. So today, let me help you know more about your numbers, in terms of the bank account versus the profit and loss.

Checking the business health by looking at the profit and loss

Let's begin by talking about whether you are looking at the bank account to judge how your business is performing – because if you are, then you're in really, really good company.


So, are you running your business on the bank account?


This is a really key question and an important phrase. I'm imagining you as a business owner, and if you are kind of nodding your head right now and saying, well, yeah, I look at the bank account and I see it as an indication of how the business is doing, how the business is performing, then your answer to that question is, yes, I am a business owner who is running my business on the bank account. Let's just kind of leave it there, and we'll keep going.


Now, I want to point you towards an eBook that I created called The 7 Deadly Cash Flow Sins, which is also accompanied by a podcast. It's a really quick read and how-to guide where I also talk about running your business on the bank account. Remember, this is about teaching you the rules of the game, and it's also about challenging your thinking.


From inception, for me, the Better in Business has always been about teaching you the rules of the game so that you can think the right way, so that you can act the right way. And if you believe that your bank balance gives you an indication of how your business is performing, this read is about redirecting you from that belief, which is incorrect, towards the correct information. A quick rinse and repeat on business value rates –

up to 80% of business owners are actually running their business on the bank account, and, up to 80% of business owners are also FAILING within their first five years in business.

(Hopefully, you can see the link on those percentages.)


And so to help you understand why you should NOT run your business on the bank account, and why you should run your business on a beautiful simple set of FINANCIAL REPORTS that come out of your bookkeeping and accounting software (which, I recommend you have someone actually sit down and help you with – cue, a strategic bookkeeper)...


Your financial reports tell you how your business is performing

in terms of PROFIT and CASH, not your bank account.


And to explain that a little bit more, I'm going to tell you a story and then just break up the detail. So the detail around this is that, the money that sits in your bank account, it doesn't take into account lots of different things. Let's say you're just a GST-registered service-based business and you've got some staff. The money that flows into your bank account generally is from the INCOME-PRODUCING ACTIVITIES.


So from that, you've got a whole lot of OBLIGATIONS that are going to become due at some point in the future, which is the primary reason your bank balance, which is constantly changing, is no indication of your business' performance – because a business' performance is profit and cash. And beyond that, it's prosperity – because I hope we don't just work to work, I hope we work to live.


So, those obligations. They can be short term, medium term, and long term.


What would short term obligations be? Well, that would be to pay your staff, and to pay your bills. So just little short term things. So a little bit longer term will be when your superannuation becomes due, when you've got to pay your GST bill, when you've got to pay out the PAYG withholding tax from your payroll, when you've got to pay your income tax bill, or when you've got to declare and pay your own superannuation. That is a few of the things.


What about when you've got to make loan repayments?


This is where we see business owners get into trouble. These short, medium, and long-term obligations, they are not front of mind. So business owners, a lot of the time unfortunately, they start out in business and of course they're thinking, I should just focus on REVENUE. And that's important. They go out, they get the leads, they turn those leads into sales, and they're billing their customers. Maybe they're even collecting the money from their customers. That one's great. And the money starts to drop into the bank account and they can use that money to live on.


Business is that simple, right? No, unfortunately not.


So we've got that part of the journey, and the money's dropping into the bank and they're living on the money, and that's great. Time starts to pass and they have promised themselves that they'll get that bookkeeping stuff up to date but now, they're already scratching their head and thinking, I've got a bit of a gut feel that leaving that bookkeeping is not such a good idea.


We might not know everything, but we might get a headache or we might get a pain in our tummy. A bit of the same starts to happen to this business.


What'll happen is, suddenly the accountant mentioned something or they realise, oh, we haven't lodged our GST returns, that's something we have to do. Then they go about their first one and they realise, they don't have the money to pay that. And then they're like, hang on a sec, how did that catch us off guard?


We have money in the bank. I've been making sales. Money's been coming in.

I've been able to put food on the table. How come I don't have that money to pay that bill?


And then they quickly switch to, I'll just work some more and I'll get some more income, and then I'll be able to pay that off.


Unfortunately, sometimes, when I intervene, what happens is I might have up to two years of bookkeeping to get up to date. We're actually catch up and rectification specialists, and so we get that done pretty fast. But also, very quickly, we're able to see that a business owner might have a hundred thousand dollars or more in forward obligations that they just did not realise they were going to have.


And then to add insult to injury, what can happen is I might look at the trading history of that business, like the INCOME TRENDS and the gross profit trends and the net PROFIT TRENDS, and quickly calculate that it would take far too long for this business to ever be able to trade out of the kind of debt that they're in...


So then, they have this massive debt that they have to do something with. They'll either get a loan to pay it down, or they are going to face some kind of insolvency or bankruptcy. As I mentioned in a separate blog, I do have an amazing buddy that can help with situations like this. If you feel like you might be suffering a bit of debt and distress, just please do not hesitate to have a conversation with De Jonge Read.


But I digress little bit – now, I want to talk to you about how to AVOID that from happening, and also what to do if you think that you're in that situation. So, if you have been running the business on the bank account and you think now is the time to stop that, what I would recommend you do is have a conversation with us. Sure, read The 7 Deadly Cash Flow Sins and listen to podcasts and all that jazz, but, I really believe the simplest and the easiest action you can take is a quick conversation with me, so we can chew the fat and I can give you insights.


Remember, courage and fear exist together and not separately. Even if our conversation just ends up with me directing you to de Jonge Read, well, then it's going to be a great step in that direction.


So now let's talk about how to AVOID running your business on the bank account in the first place, and that is to have up-to-date, accurate accounting records and then to be able to understand how to look at the profit and loss and take into account things that aren't on the profit and loss. We won't go into that too much because, guess what?


You do not have to be a bookkeeper or an accountant to be a SUCCESSFUL entrepreneur, but sometimes you have to hire one.


And, it doesn't cost you a fortune! If you engage around strategic bookkeeping, you'll make more than you spend, and you can find out how exactly on this podcast I made.


So again, you absolutely need to look at your net profit, take a bottom up approach. Your net profit is the final line on your profit and loss, and it's the profit in the business before tax and drawings. But, the other piece of the puzzle is your owner drawings – because they do not appear on profit and loss. But like I said, don't get weighed down in this stuff because it probably is day one of a 365-day journey. You can always reach out and say to me, "Jeanie, all of that was confusing. Can you just help me or explain it to me?"


Step one is up-to-date accurate accounting records, step two is using them, and step three is making sure that your CASH FLOW is as positive as possible – and The 7 Deadly Cash Flow Sins book is a really great how-to guide for that direction. Now, with up-to-date, accurate accounting records, I mean up-to-date, all the time, weekly. Then rather than look at your bank balance, you want to be looking at the net profit on your profit and loss, then you're going to be looking at your drawings to make sure you haven't exceeded drawing out of the business more than your net profit.


And then number three, you're going to make sure cash flow is good, because if there's a gap in your cashflow, if you are paying money out before money comes in, who's going to fund it? You have to fund it. And a profitable business can actually go broke because of a lack of cash flow. All this is getting quite complicated, but it actually speaks to one of the reasons why I'm such a passionate advocate for you sitting down with a strategic bookkeeper monthly, because,


it is your responsibility as a business owner to become across this stuff enough, and to surround yourself with team that can support you,


– and that can just be a great bookkeeper and a great strategic bookkeeper that helps you that tiny little bit, making a massive, massive difference.


I definitely want to drive home the message that you don't have to be an amazing bookkeeper and accountant to get this stuff in order, but you do have to take responsibility. You don't necessarily need to spend a long time on this stuff. This is about working smarter rather than harder. And so to wrap this up, the key takeaway here is, if you have been running your business on the bank account, you have to understand that it is not the thing to do and that you need to make a change, and that you'll allow me to redirect you.


Your business performance gleaned from a set of financials, from up-to-date, accurate accounting records, not from your bank account. And if you continue to run your business on the bank account, you are setting yourself up for some pain. And so action, just having conversation with us would be a great start. If you have been finishing work each day and thinking, "I promised myself I would get the books up to date and I haven't, and I really don't want to do it because I'm tired and it's the end of the day", well, of course you're tired! And of course you don't want to do it – that's normal! So just consider the value of a strategic bookkeeper, and self-assess just how much they can do for your business.

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