The Dangers of Bank Balance Accounting

Jun 2, 2020 | 0 comments

There is an interesting phenomenon that you’ve probably noticed in your business if you’ve been around for long enough. 

It always seems that as soon as you get some extra cash or finally get an outstanding invoice paid, a big expense shows up and there goes your surplus.

It’s okay, virtually every business owner has experienced this kind of scenario, and it’s not the universe conspiring against you to prevent your business from growing.

The problem is it’s the default way we tend to manage the cash in our businesses, something that Mike Michalowicz calls “Bank Balance Accounting”, and it’s the source of a huge amount of anxiety and stress for business owners.

Escaping the Bank Balance Accounting Trap

When your bank account is flush and filled with cash you feel great… for a little while. Then you decide to pay all those bills that have been piling up and suddenly the balance goes to zero and your stress ratchets up a few notches.

On the other side of the equation, when you stare at an empty bank account you probably go into panic/hustle mode. It becomes feast or famine and since you’ve got employees and suppliers that need to get paid you hit the gas and start making calls and chasing new customers. You need money and you need it now! You do whatever you can to buy your business more time.

Why do we do it this way? Partly it’s human nature and the Recency Effect, and partly because we don’t know there’s a better way to do things.

When we have money in the bank, we tend to think we don’t have that many problems so we focus on other business activities, which continues until we realize those problems can’t be ignored anymore and then we go into red alert to raise revenue as quickly as possible. 

The flipping back and forth wreaks havoc on your health and your business. Instead of going from check to check and panic to panic, there is a better way.

Taming The Beast

If you want to get off the roller coaster of emotions that comes with operating your business based on the dollars in your bank account, you need a system that works with human nature, not against it.

This is where Profit First accounting comes in. Profit First is deceptively simple, but it’s very powerful. Instead of working against human nature, Profit First is an accounting method that takes advantage of our natural tendencies and lines up your incentives to ensure a profitable business.

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