As humans, we have a natural tendency to spend money as we see it.
It’s a cognitive weakness, hardwired into our DNA from our hunter-gatherer ancestors.
In this article, we’ll share a simple tactic that overrides our instincts and helps us to effectively manage our cash flow.
Have you ever been in a position where you see a bunch of cash that has magically appeared in your bank account? Perhaps it was a payment from a large customer account, or even your first round of investment from a VC.
What was your first reaction? Did you feel wealthy, thinking “Yew! I’m cashed up!” and have a desire to spend it immediately?
This impulse can get us into a lot of trouble financially when we burn cash on unnecessary things – even spending money that doesn’t belong to us.
It’s like going to a buffet.
When food is plentiful and abundant, we can take “all you can eat” a bit too literally, stacking our plates with food and shoving it down like it’s our last meal. Our bellies might be full to the point that it hurts to breathe, but we can’t help but pick at our plate and eat more – which only results in that all-too familiar feeling of sickness and regret.
So why do we do it?
Turns out it’s a cognitive weakness. Our brains are bound by our genetic legacy to our hunter-gatherer ancestors, who, uncertain of their next meal, instinctively ate as much as possible (and whenever possible).
The more food that’s readily available to us, the more we eat. It’s hardwired into our DNA.
Don’t worry, this food analogy is going somewhere.
This is a behavioural flow that actually applies to other areas in our lives – including our finances.
The key to managing your cash flow is to separate your cash into multiple bank accounts (the equivalent of eating off smaller plates of food).
The Cash Flow Management Hack
A lot of business owners don’t engage with their numbers in the way that they should, and it’s probably because their accounts are not set up correctly.
In your business, you should have at least three bank accounts set up:
- One for your transactions – that’s the day-to-day running of your business, and working capital.
- One for your taxes – for taxes, like GST and PAYG.
- One for your profit and surplus cash – to hold all the surplus cash you have.
At the end of each month, generate a report in your accounting system to understand the tax provision and surplus cash you must put aside – and transfer those values to your bank accounts.
The key is to only keep enough money in your transactions account for the day-to-day running of your business. Let’s repeat that. Only keep enough money in your transactions account for the day-to-day running of your business.
By managing your cash flow this way, you will also save yourself a lot of stress at tax filing time.
Of course, if your bank accounts are depleted and you don’t have enough cash to pay the deposit for your next stock order, there might be other reasons why your business is eating cash.
Remember – if you can’t resist temptation to spend your sweet cash, remove that temptation completely.