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Why You Need a Cash Strategy Year Round

Most businesses have ebbs and tides; cycles of highs and lows when it comes to sales. These cycles can be especially tricky for ecommerce sellers; planning for inventory, budgeting for operating expenses, and finding a way to survive the lean times until the next bounty comes in. It’s a lot of work, isn’t it? And stressful! That’s why it’s important to have a solid cash strategy year-round.

There are three elements to managing cash during the upswing of sales so that you’re ready for the slow times. It’s important first to understand why a cash strategy is important during these times.

If you’re a follower of Profit First, Mike Michalowicz or my blogs, then you’ve likely heard about Parkinson’s Law—the law of induced demand. It was first developed in the 1950s by C. Northcote Parkinson, an economist with the British Naval Army. Basically, this behavioral law says that “we use what we got.” It applies to all types of resources, including personnel, money, and time. His study determined that as there were more people available to do the work, it took more people to get the work done. In Profit First, our favorite analogy is toothpaste. If you have a brand-new tube of toothpaste, you don’t think much about how much you use each day. But when you’re close to the end of the tube, you stretch out this resource by just using a dab each day. Doesn’t that sound familiar? Parkinson’s Law is one of the primary tenants of the Profit First cash flow management approach.

Applying Parkinson’s Law to your cash, there are certain times of the year, most often 4th quarter, when you hope to find yourself with more cash than normal. If that cash sits in your bank account, you will always find ways to spend it. You may decide you need some new equipment, or it’s time to launch a new product or go on a cruise. Whatever it is, you manage to justify spending the cash on hand. This is why I always encourage clients not to wait until 4th quarter or the next high tide to come up with a spur-of-the-moment, last-ditch effort to adjust and manage your cash. Set your strategy into play right now.

Step One

Determine how much you need in order to cover operating expenses for a normal month. I recommend looking at the year-to-date P&L printed by month for the current year. You can quickly see what you’re averaging per month in operating expenses.

Step Two

Calculate how much you owe for inventory. You can find that number easily on your balance sheet, or on your credit card accounts that you use for inventory purchases. Also decide on inventory expenses you will have in the next month or so. The Profit First method recommends having a separate bank account and credit cards solely for inventory or inventory-related items, such as fulfillment and shipping. Keeping these separate from your operating expenses make it easy to  track inventory or Cost of Goods Sold.

Step Three

Each time you receive a payout, keep the projected operating expenses and the anticipated inventory costs in your regular checking account. Move any funds above this amount to your savings account. If you receive payouts biweekly, as most sellers do, I recommend you set aside the funds in the first payout of the month, then your second payout can be moved to savings. Knowing that your expenses are covered for the month is a wonderful feeling!

Step Four

Leave the savings account alone until after the first of the year, when the seasonal rush is over and things settle down a bit. Then you can think about the best use of those funds. Ask your accountant for an estimate of taxes and designate funds solely for that purpose. Next, think about your goals and anticipated expenses in the coming year. Do they include launching a new product, or paying on sales tax? Maybe taking a vacation. Once you determine your goals and expenses, you will need to designate the appropriate amount of funds to accomplish those initiatives.

Step Five

Treat yourself! The Profit First scenario has you taking a percentage of profits from each payout. Even if you’re not diving full throttle into Profit First right now, this strategy will help to set yourself up for success for the remainder of the current year, and each coming year as well. One of the foremost Profit First elements is to reward your positive behaviors around your money. So as you work through the above steps, be sure to set aside some funds to treat yourself for your good habits.

Being a business owner is often challenging. It should be rewarding as well. You and your family deserve to benefit from your efforts and not always be last on the list. Making a few changes with your cash management now and your business will soon be serving you, as it should be!


Check out our blog How To Keep Track of Cash Flow for Inventory!



Post Author Cyndi Thomason


Cyndi Thomason is founder and president of bookskeep, a U.S.-based accounting, bookkeeping, and advisory firm for ecommerce sellers worldwide. She has a passion for data analysis and process development. She uses that passion to educate her clients and help them structure their businesses to maximize profits.

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