It relates to Parkinson’s Law. C. Northcote Parkinson was an economist with the British Naval Army in the 1950s. He developed the law of induced demand — Parkinson’s Law. In layman’s terms, it says,”We use what we get.” It applies to all kinds of resources: personnel, money, and time.
We use what we get.
That’s why merchants require a cash strategy today. In this post, I will outline a five-step procedure to compute your year-long cash requirements, manage incoming money, and reward yourself.
We use what we get.
5-step Cash Management
Step 1. Determine how much you have to cover operating expenses for a month. Look at your income statement for each month of the year. You may see what you are averaging per month in operating expenses.
Step 2. Determine how much you owe for stock . If you are monitoring accounts payable on your books, you’ll find that number in your balance sheet. If you are paying by credit cards, then you may consider the monthly statements and ascertain what is attributable to stock.
Also, calculate what stock expenses you’ll have in another month or so. The complete approach to Gain First is to have another bank account and different credit cards designated solely for stock and inventory-related pieces, such as fulfillment and shipping. This makes it easy to separate stock or cost of goods sold from your operating costs.
Step 3. As you generate earnings, leave enough money in your regular checking account for projected operating expenses and inventory costs. Transfer any amount above these expenses to your savings account. If you’re getting Amazon payouts every other week, then think about using the initial payout for the month for inventory and operating costs. Then move your next payout to savings.
Step 4. Do not touch the savings account until after the first of the year. When the dust settles, consider the best use of these funds. Early in the year, check in with your accountant. Have you set aside enough funds for taxation? Obtain an estimate of taxation and designate funds for this purpose.
Then think about the goals for your company in the upcoming year. Are you going to launch new products? Will the new tariffs erode your margins, requiring a cash cushion for operating expenses until you are able to adjust? After you’ve determined your goals and the costs to reach them, designate funds for those initiatives.
Step 5. Reward yourself! In a genuine Profit First scenario, you’d take a percentage of profit as a”reward” from each payout. In the absence of the Gain First approach, the year-end strategy I have described here is a way to get ready for a prosperous new year. However, when you complete step 4, set aside some funds to invest as you desire.