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accounting and cash flow

Disclaimer: This is not financial or accounting advice. It’s concepts you should talk to your accountant about.

Don’t ignore cashflow (ever)

Teenage entrepreneurs will make $5-$10k or even 50k a month. Then six months later they’re broke, in debt and in trouble.

Why?

They screwed up their cash flow.

You could make 100k in a month and still go broke if you ordered 150k of stock and have no line of credit.

A good way to start is only spend the money you have and know where the money is going:

  • Understand the costs that are going out the door
  • Understand the revenue coming in
  • If the costs going out exceed the revenue coming in, you need to worry understand how long you can sustain that.

People that are good at this:

  • Track every dollar (in and out)
  • Plan for evey expense even if you get nothing on the way in
  • Make reasonable projections on income and never assume

And just because something is ‘growing’ don’t assume it’ll keep growing.

Here is a 15 minute accounting course with the basics

There are three major numbers that matter:

1. Revenue - the money you get in the door:

  • What clients pay you
  • Product sales
  • Subscriptions
  • Any money entering

2. Expenses - the money you are spending:

  • Tools and software
  • Contractors
  • Equipment
  • Taxes (the big one)

3. Profit - is what’s left.

E.g. Revenue - Expenses = Profit

$10,000 - $3,000 = $7,000.

But remember. You STILL NEED to pay tax! So you need to put that aside somewhere.

Here’s where people can mess up:

  • They forget taxes (~30% or more is gone unless they spend it on valid expenses)
  • They take earned income and spend it on their own personal expenses
  • They don't track expenses and get a rude shock later on
  • They spend tomorrows money on bets that dont pay off with hard revenue.

It’s a tough lesson to learn. Even you think you’ve got a great product - you might find selling it is harder than you think.

How you can structure it:

Setup a 4 account structure

1. Income account (Everything flows here first)


All payments land here
Never spend from this
Just a temporary holder

2. Tax account (30% automatically)


Transfer 30% (or whatever your marginal tax rate is) of everything
Never touch this money
It's not yours
Be prepared to pay it to the tax man.

3. Operating account (to make payments from. If it’s a business this could be a credit card)

Tools, software, contractors
Marketing, education
Business costs only
Track everything

4. Profit account (Your actual money)


What's left after taxes and expenses
This is YOUR money
Pay yourself from here
Celebrate responsibly

This is what the flow looks like:


Monday: $1,000 payment arrives → Income Account
Immediately: $300 → Tax Account (automatic)
            $400 → Operating Account (budgeted)
            $300 → Profit Account (yours!)

Cash flow is a real challenge you need to stay on

Cashflow is not how much money you’ve made.

It’s a calculation of when money comes in and goes out.

Here’s what it looks like:

January: Invoice $10k (Net 60 payment terms)
February: Buy $3k equipment (paid immediately)
March: Pay $2k contractors (due now)
March bank: -$5k (still waiting for January payment)
Result: Can't pay rent, business dies

Disaster!!

This is why business is so hard

Rule 1: You want to get paid as quickly as you can

  • 50% deposits minimum
  • Net 14 maximum
  • Penalties for late payment
  • Multiple payment options

Rule 2: You want to pay slow to maximise your cash flow

  • Use full payment terms
  • Credit cards for points
  • Negotiate payment plans
  • Keep cash longer

Rule 3: Then you need to make sure Rule 1 and 2 match

  • Weekly cash flow check
  • Monthly projections
  • Know your runway
  • Plan for problems

It’s probably advisable to have a kitty of funds to cover cashflow - or don’t overcommit. The last thing you want is no cash or ability to pay in real time.

Conclusion

You don't need an accounting degree to master this for simple businesses. What you do need is:

  • A detailed understanding of how these principles work.
  • A system to track what’s going on, and the ability to track it.
  • Discipline to say no to opportunities when the costs outweigh the cash flow.

Don’t assume the revenue is just there.

Start today: Log into your bank. Open a tax savings account. Transfer 30% of your balance.

You just became more financially sophisticated than 90% of adults.

Now go build wealth, not just revenue.