As we launch into the second half of 2021, hopefully your organization has begun to find a new framework for moving forward. Some of the changes which caused pivots in the way we conducted business in 2020 will remain and still others will return to their previously executed way of being conducted. With 6 months of transactions under our belt, we can now take the time to evaluate what is working better and what may need our attention to pivot again to improve, innovate or just tweak to make it better.
Each year in business has it challenges. 2020 simply had an increased number of challenges which were placed upon all of us in a compacted timeframe. Through various channels of support both externally via government stimulus efforts such as the PPP loan/grant program as well as internal restructuring initiatives, business survived and in more than a few instances thrived. Unfortunately, some organizations were not so fortunate. This should raise all our attention to making sure your business is structured to navigate future challenging times.
One place to start is to begin to build a “Reserve” fund or call it what every you like. This financial reserve is set a side and not touched unless absolutely necessary. This fund is crafted by placing money from cashflow into a designated banking account on a recurring basis to accumulate a reserve of a minimum of 3 months of fully burdened expenses. This would then allow your business to weather an economic challenge while readjusting your business structure to accommodate the impact. In 2020 the government came to the rescue with various programs but as leaders we cannot count on that happening each and every time the marketplace takes a dip or dive.
It is simple to get started. Have the person who manages your financial accounts in your accounting system and financial institutions create new accounts. Each and every cycle of time, for example each Friday or during a reconcilation period, move a defined amount of money by percentage into this reserve account. In a “Profit First” model which has been discussed in other newsletters and video Guide Posts, the objective is to take this money by percentage from the gross income level and not the remaining cashflow portion of the finances. This way the money gets placed in the reserve account early and often and you learn to operate your business on the remaining amount of money. If you are interested in more concepts around this approach, search “Profit First” in your web search engine and look for Mike Michalowicz book on the subject matter.
It will take some time to accumulate 3 months of reserves but if you never start it will never accumulate.
This same model of allocation of percentages from income/revenue can also work for increasing the profit of the business, setting money aside for capital purchases and many other types of money allocations specific to your business or industry. The concept causes a business to operate differently. It causes different decision making to take place. Rather than spending it moves to a mind set of profit and savings and running the business on what remains rather than living off the end profit if anything is left over at the end of the expenses.
Although JKL Associates is not in the business of being accountants, or finance, we believe in this method of enhancing the financial value of the business and practice these techniques in our business.
Looking to get your organization into a place of strong financial reserves? Give JKL Associates a call and let’s start a conversation – FL- 407-984-7246 – MI 313-527-7945