Cash Flow: Why you pay yourself first.

Last week I talked about “Cash Flow – Why timing is important!”  If you missed that post, you can review it HERE.  This week’s post is “Cash Flow: Why you pay yourself first.” It may seem obvious that you need to manage your cash, but you would be amazed at how many small business owners don’t have a cash management plan.  Paying yourself first is an important part of a good cash management plan.  Learn more in this week’s blog.

As a small business owner, managing your cash is critical to your success.  You need to know what cash is coming in and what you are going to do with that money when you get it.  But there is more to managing your cash than just deciding where the next check is going. That is one reason that you need to pay yourself first.

What does it mean to pay yourself first?  Do you just take your cash receipts and transfer them into your personal account as soon as you receive them?  No, that is not what I am talking about. Paying yourself first involves knowing what you should have left at the end of the month in projected cash and setting that aside so that you have control of those funds before you pay anything else. This is done with a business savings account that gets the money out of your operating account before you spend it all.

You can’t make good financial decisions without good information.  Your financial decisions need to be based on both what your cash needs are now and what your cash needs are going to be in the future. The information that you need includes what payments you need to make, what cash you expect to come in and what reserves you have to help you cover any deficits.

That is where paying yourself first comes in.  If you just send your cash out as soon as it comes in, you will run into a situation where you don’t have enough money to cover a payment that you need to make.  By paying yourself first, you generate your reserve as an intentional act rather than as an afterthought if you have any cash left.  (You never will.)

Paying yourself first is part of a good cash management system.  But it is only a component, not the whole system.  You need to keep good records.  You need to prepare an operating budget and a cash flow budget.  You need to take time to formally review all these documents so that you can see how you are doing and make adjustments to how you are operating so that you can maintain your profitability.  I will be covering these topics in my free upcoming online Cash Flow Workshop.  You can sign up for that HERE. 

Another reason that you need to pay yourself first is so you have the money to invest in your business to expand or replace equipment when you need to.  Remember that financing your equipment purchases increases the actual price you pay for that equipment.  (See my post “Who does debt benefit?”) 

Borrowing to invest in your business does more harm than good.  Even when interest rates are low, by borrowing you end up giving the lender a stake in your business to ensure they get paid back timely.  This means that whenever they want or need private information regarding your business, you spend precious time appeasing them when you could be working on your business instead.

You have in effect made them a business partner, but not in a good way.  They have ownership rights in what you purchased (you have to give that to them to get the loan).  But in most circumstances, the primary things that you get from them are money and repayment pressure.  They are not there to help you operate your business.  They are there to make money on you.  Paying yourself first and having good cash management practices will help keep lenders out of the picture.

Part of being in control of your business is having the money you need to run it when you need it.  Once you start using good cash management procedures, with the needed budgets to support them, you will be able to make good decisions with your cash. Remember to pay yourself first, it is that IMPORTANT!

 To learn more about cash flow and budgeting, sign up for my upcoming free online Cash Flow Workshop HERE.  I will email you when the next workshop is scheduled to begin as well as sending you a link to each new weekly post in the Budgeting Essentials Blog!

If you know someone this post will help, please share it with them!  Then scroll down to the comments section and leave me a comment on this post.  If you aren’t already a subscriber, sign up to receive notification emails and information on other promotions!  I will be teaching my Cash Flow Workshop soon, sign up so you don’t miss it!

God Bless your week!