Your Net Cash Number
In previous articles we look at a profit first and pay yourself first approach.
Now that you are starting to pay yourself first and adopt a profit first approach in your business, you will want to start to track your progress. You also need to plan out your cash flow. This strategy will allow you to take some action later that will fast track you on your path to financial freedom.
WHERE DID ALL MY MONEY GO?
Before we get into this, I want to share with you an experience I had early in my career. When I was training to be a financial planner, and before I started my entrepreneurial journey, I worked under another financial planner.
One day, this planner was introduced to a client by an accountant we worked with. This client (let’s call him Dave) had all the trappings you would associate with success. He had a nice car, dressed well, lived in a nice house, and ran what appeared to be a successful business.
After the initial meeting with Dave, the planner and I sat down and looked at his situation. It was immediately obvious Dave needed help. While on the outside his business and personal life looked successful, as we peeled away the layers and dug deeper, it was clear he was in trouble.
There was debt everywhere. Dave owed money left and right. His car was financed. He had large personal credit card debt. The business had a large overdraft which he never made inroads into.
Worst of all, he was behind in payments to his team, owed the Tax Office money, and had frozen the repayments on his home.
Dave was in real trouble.
He had to make some fairly drastic decisions, and fast. Problem was, he had no idea where his money was going. His business revenue went up and down. And like many business owners, he mixed his personal and business expenses. He transferred money here and there between accounts. He needed to simplify his approach to managing his cash flow.
Maybe this sounds familiar?
We worked with Dave and broke down his cash flow. We planned out business cash and expenses to come from business accounts. We worked out how much he needed to keep the doors open in his business. Then we went through how much he needed to live on personally.
We gave him one simple number to track each month with his personal cash flow.
We gave him a Net Cash Number.
THE NET CASH NUMBER
What is a Net Cash Number? I’m glad you asked! Simply, it’s the difference between what you earn and what you spend. In business we call it profit. When you plan it out over a period of time, we call it a budget. When tracking this for your personal finances, I call this your Net Cash Number.
Let’s take a look at our entrepreneurs Bill and Betty from the previous article and see how this would apply to them. They are paying themselves $1,500 each per week as a salary for their work in the business. Now we work out how much Jim and Barb will receive from their salary after tax.
On a $1,500 salary, they would receive $1,144 per week each after tax. (For this example, let’s not take into account any profit they may be making. As we have considered before, profit from a business asset is income we need to create financial freedom. Right now we are focusing on getting personal cash flow sorted. We will look at how you can use profit from your business asset to create more assets later.)
Here’s what we do next. On a piece of paper, create a table and fill it out as follows:
1 Combining these two salaries would give $2,288 per week. This figure goes at the top of the page.
2 Next, we need personal bank, mortgage and credit card statements for the previous month.
3 We write down everything that they spent their money on under a column of expenses.
4 Total up the expenses column. In Bill and Betty’s case their total living expenses, including home mortgage repayments, was $1,830 per week (remember in the previous article they demonstrated they could save 20%).
5 Take away the living expenses from the net salary figure.
In Jim and Barbara’s case, the calculation would be
$2,288 — $1,830 = $458.
This is the Net Cash Number.
To get really fancy, transfer these figures into a spreadsheet. Put the name of each month along the top. Add in the total income and total expenses and Net Cash Number for each month. You can then total up your Net Cash Number for the year.
Let’s see what happens when Bill and Betty focus on each month. If they have more than $457.60 extra in their bank accounts at the end of each month, they are ahead. If they have less than $457.60 in their account, they have spent too much.
This is so simple and easy to track: the Net Cash Number, if constant, becomes the ‘pay yourself first’ figure to invest or save.
See how it all comes together?
* * * * *
This is exactly what I did for Dave. We worked with the accountant to provide a Net Cash Number for the business, and we then worked out his Net Cash Number for his personal living expenses. This gave him just one number to track for each.
This gave him peace of mind and allowed him to sleep easy at night, and that’s something all of us should be able to enjoy.
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