What do you think about this "Cashflow" system?

[stvn_rich]

I've been reading a very interesting book called "Profit First" by Mike Michalowicz, and I thought why not share my notes and my ideas with you guys?! I'd love to hear your opinion on these principles / systems.

Ever heard of Perkinson's law ?
Parkinson's Law is usually expressed as “Work expands so as to fill the time available for its completion.”

According to the Parkinson’s Law, we consume what we see in our bank account...

This obviously leads us to some cashflow issues, taxes money missing, and a lot of bad surprises...


Most of us (entrepreneurs) don’t have the time to read the different accounting statements necessary to manage the financial aspect of their business.
Theoretically we should review and correlate your Income Statement, Balance Sheet and Cash Flow Statement monthly (or more frequently), but meh... it's really boring and it comes with a lot of stress sometimes...

So here's the issue: By avoiding doing this, we automatically resort to what's called “bank balance accounting,” where we check our bank balance every day and make financial decisions based upon what we see... Here's where it gets tricky!


That's why the book that I'm talking about gets VERY handful:
Profit First encourages the entrepreneur to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly.

The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. It is simple, logical and clear. Unfortunately, it’s a lie.

The formula, while logically accurate, does not account for human behavior. In the GAAP formula profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. But as we all know the profit is rarely there and the business continues on its check to check survival...

Here's the NEW Formula we should work with is:
Sales – Expenses = Profit
Sales – Profit = Expenses​

Basically, we to flip the formula to Sales – Profit = Expenses.

I know... Logically the math is the same, but from the standpoint of the entrepreneur’s behavior it is radically different.
With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.

To implement this idea to our businesses / systems we should prepare many different accounts in different local banks.
Read the steps below:

Of course we can tweak and optimize it for the Affiliate game, but it's pretty much the same for every business.
I love the fact that it can all be automated, and once you check at one of your bank accounts you'll know if that's YOUR profit or the government money


If anyone's looking for the book, you can find the PDF on Google!

 

[T J Tutor]

Most of us (entrepreneurs) don’t have the time to read the different accounting statements necessary to manage the financial aspect of their business.

I think the truth is many "do not make the time" to get this done! It is crucial, and as a business oriented individual in my early life, I can tell you anyone with a business acumen will make the time to get this done!

Most of us (entrepreneurs) don’t have the time to read the different accounting statements necessary to manage the financial aspect of their business.

True entrepreneurs know factually that this may be the most important aspect of their businesses. To state "most of them" is a double edge sword. The truth is that the entrepreneurs that fail don't make the time. The ones that succeed learn to embrace it and make it one the most important imperatives in their business life!

The formulas you propose are bulls**t.

 

[stvn_rich]

I think the truth is many "do not make the time" to get this done! It is crucial, and as a business oriented individual in my early life, I can tell you anyone with a business acumen will make the time to get this done!



True entrepreneurs know factually that this may be the most important aspect of their businesses. To state "most of them" is a double edge sword. The truth is that the entrepreneurs that fail don't make the time. The ones that succeed learn to embrace it and make it one the most important imperatives in their business life!

The formulas you propose are bulls**t.

Interesting!!!
Can you elaborate more on why does this formula seems like BS to you?

 

[Graybeard]

Gray's rule of 65
If it will work at 65% of the projected do it

The only reason you keep money in separate locations is to assure your funds will never be frozen for some reason notwithstanding an indictment or a RICO action --then all bets are off The other exception is if you need to be multinational for tax purposes.

As far as time goes: I don't get paid by the hour and try to extend my work. I have time goals that have to be flexible.

 

[T J Tutor]

why does this formula seems like BS to you?

First of all, you misidentify so much in your claims and statements. For example GAAP. The four basic constraints associated with GAAP include objectivity, materiality, consistency and prudence, but nowhere in our declarations is this represented. instead you distort and misrepresent GAAP.

Secondly, GAAP are a common set of accounting rules and standards that dictate how financial statements are prepared. Public companies, nonprofit organizations, and government entities are required to prepare financial statements in accordance with GAAP. All you do is try and convince the reader that the required accounting practices for lawfully and practically managing a company, or business, is all about managing cash flow and using multiple accounts for all the wrong reasons.

My profs at Wharton would first choke, then cry, then start laughing at your claims and misguided attempt at incorrectly defining things like GAAP, and in addition, misleading the reader to thinking that your claims are the correct view and practice for properly using accounting systems based on bank accounts.

It is information like this that sets those new to business on a very slippery and incorrect business management path. The management of the data from ones business, including the cash flow, must always be done with the general ledger and it's subsequent reports which will include the P&L, AR, AP, A&L, etc., etc., known as the chart of accounts. All a part of the GL which is the only standard used in business around the globe so that no matter what country you may be in the numbers can be crunched, reported, and read. It is a universal structure.

 

[stvn_rich]

First of all, you misidentify so much in your claims and statements. For example GAAP. The four basic constraints associated with GAAP include objectivity, materiality, consistency and prudence, but nowhere in our declarations is this represented. instead you distort and misrepresent GAAP.

Secondly, GAAP are a common set of accounting rules and standards that dictate how financial statements are prepared. Public companies, nonprofit organizations, and government entities are required to prepare financial statements in accordance with GAAP. All you do is try and convince the reader that the required accounting practices for lawfully and practically managing a company, or business, is all about managing cash flow and using multiple accounts for all the wrong reasons.

My profs at Wharton would first choke, then cry, then start laughing at your claims and misguided attempt at incorrectly defining things like GAAP, and in addition, misleading the reader to thinking that your claims are the correct view and practice for properly using accounting systems based on bank accounts.

It is information like this that sets those new to business on a very slippery and incorrect business management path. The management of the data from ones business, including the cash flow, must always be done with the general ledger and it's subsequent reports which will include the P&L, AR, AP, A&L, etc., etc., known as the chart of accounts. All a part of the GL which is the only standard used in business around the globe so that no matter what country you may be in the numbers can be crunched, reported, and read. It is a universal structure.

I don't think you really got the point of the book. It's not something that will replace GAAP or to be used by accountants.
It's a "mindset" hack that will allow people that hate the accounting part of their business (not our job to do anyway) by an easier system that will help us get a better view at what we really have, owe or use.

It's something that we add but GAAP is still super important and should be done both ways by us.