January 17, 2023 4 min read

Managing Cash in Your Business

Cash is like the oxygen for your body, without it you die.

There's a saying you be unprofitable 3 times but you can only run out of money once.

At Coffee Hit we had implemented Open Book Management and reduced overheads costs greatly for 2 years, the business was profitable around 14% net profit. But we had no cash. Where was all this profit id often ask? Then to just make matters worse HMRC would want me to make a 5 figure payout to them for the profit I made! But I couldn't see the profit in the bank!

We were living week to week, any big invoices would cause great stress and anxiety, VAT payments were dreaded and Corporation Tax was a nightmare.

I knew I wasn't managing cash, in fact, I sucked at it. 

I then read a book called Profit First by Michael Michalowicz. I instantly recognised it's straight forward no nonsense approach to cash that I can understand and implement into my business.

This book has changed my life, both in a business sense but also personally. If cash is a real problem in your business then I really suggest you read this book.

As your business grows you add overheads. It's natural. Then if sales stall or fall then we find it hard to cut overhead, we feel like its a failure, and admission of failure. So we take on debt, overdrafts, bank loans, credit cards.

Mike explains that traditional accounting has the following formula: Sales - Costs = Profit. As you can see Profit is last, its what's left over. What is suggested in the book as we should see the formula as Sales - Profit = Costs.

A reasonable profit should be taken out of sales, then what's left over is what we can spend on Overheads. 

Heres what we did based on the book.

We set up 7 bank accounts. 

All Income

  1. VAT
  2. Goods
  3. Profit
  4. Owners Pay
  5. Corp Tax
  6. OpEx (Operating Expenses/Overhead)

You need to calculate the revenue in your business for the last 12 months, then calculate what you paid suppliers in the same period and also VAT. What's left is called Real Revenue. Work out what you paid in profit (not pay/wages), what you paid yourself, what you set aside for tax (Corp or Income) and what you paid in Operating Expenses. Then we work as a % the above based on Real Revenue. We also work out the % of All Income we are spending on Goods and VAT.

So in the beginning, it might look like:


Then we make small changes, increasing allocation to Profit and Tax.

We allocate payment from All Income to the bank accounts every 10th and 25th of each month. Moving the cash based on our current %'s. So Your first allocation will look like this.

Now we focus hard on reducing our spending on stock and reducing overheads spend.

So what are we aiming for? Below are some %'s you should be slowly aiming for, adjusting every 3 months towards these targets.

So let's look at the target %s. We've gone from saving zero profit to now were saving £1563 every 2 weeks. Our own pay has gone from £438 to £1302 every 2 weeks. We have saved enough and put aside to cover our Corp Tax/Income Tax, also our VAT is now covered every quarter. On top of this we have a quarterly budget we can spend on Goods. Everything is in control and bills are now covered. What a relief!


Now if you have debt in the business as I did, covered by a title deed on my house. You need to get rid of that debt.

So what I did was sent 95% of the Profit allocation towards debt repayment. This is on top of any monthly debt payments we were obliged to make. 5% is a reward for the owner. It's like the carrot that keeps you going. It's not much and you may only get a coffee out of it but its a great feeling knowing this has come from the profit you have set aside. Then once the debt is paid off, you can go back to sending all the Profit to the Profit account. This is then paid to the owners of the business every 3 months.

Reading back this post its not the clearest one ive done! But managing cash is so important in both business and life. If you feel ive sparked an interest in the method we use then I urge you to buy the book Profit First

It really does work, it controls your spending, it makes you spend less on stock and overheads and forces you to put cash away for Profit.

In Coffee Hit, 9 months after starting Profit First we paid off all our debt and had reached our target %'s. I had allocated 2 years to reach this target, we did it in 9 months! 

If you have questions don't hesitate to ask.