Resist Temptation: Don’t Borrow from Accounts to Cover Inventory
The other day, an ecommerce seller reached out to me with a question about the implementation of the Profit First method they learned from my book. They wanted to know my thoughts on borrowing funds from their Sales Tax or Profit Account to purchase inventory in preparation for Q4. They noticed that this would be cheaper since the money is idly standing by in their bank account. Also, it is available without cost as opposed to using their line of credit which will cost them interest.
I know this sounds very tempting! However, the problems aren’t as straightforward as they initially appear. As a matter of fact, they hint at potential issues with implementing the Profit First method in business.
The Sales Tax Account
The number one rule of the Sales Tax Account, when viewed under the Profit First lens, is clear:
This is not your money.
It is money that resides with the government. You just help them collect it. If you do accept that money to help keep your business up, then you are using the government’s money, and the bill will come due by them. It’s bad practice. It shows your business requires a handout in order to perform at the desired level.
There is one caveat to the Sales Tax Account Rule.
If you’ve been previously using a percentage to designate sales tax, the account may not have the true amount you need to pay for the taxes. This means it’s time to “true-up”.
Start by running reports for sales tax due in states where you file. This can be pulled from Amazon or similar services like TaxJar. Compare the amount in your bank account to what you owe. If your account balance is higher than what you owe, the excess funds can be allocated to use elsewhere. Evaluate your percentage and reduce it to be more in line with what you owe.
Borrow from Accounts to Recover Inventory
This can be a more convoluted piece of the puzzle.
First of all, you should never be borrowing from the Profit Account. If your business is in need of funds, then perhaps you set the allocation to the Profit Account too high initially. Preferably, you would want to set aside funds for what selling cycle you experience. Yet, if you come to that point in the cycle with too little funds, it shows you weren’t as prepared as you should’ve been.
A way to combat this is to put extra funds in a different account labeled new product or expansion plan. This will make certain that the funds are marked for their intended purposes.
Don’t be discouraged if you notice your profit account dipping. You are figuring out what is needed and how to expand your business. Mind what your profit assessment is showing you and refocus on your business’s profit.
Are you in need of more gross profit? Is your pricing correct? What are you spending too much on: Supplies? Shipping? In OPEX?
Profit First gives you clarity in what direction your cash flows which allows you to focus up and steer in the right direction.
Trust the Process
It’s simple to look over the complexities such as inventory and income seasonality, especially when you are first implementing the Profit First method in your business.
My readers often tell me that they use benchmark percentages from Day 1 of their installation that Mike Michalowicz used in the original Profit First.
Throughout the seasons, they find the numbers aren’t quite right. But, there’s no reason to scrap the process just yet! Slow down and focus up on the overall process until you can get a true hold on the flow of cash in your business.
Interested in Profit First?
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you! Contact bookskeep today to learn more about ecommerce bookkeeping.