6 Cash Flow STEP SIX: Fuel Tanks Flashcards
What is the main goal of managing cash flow in a small business?
To ensure financial control and avoid running out of money
Managing cash flow allows for timely payments of bills, taxes, and reinvestment into the business.
What metaphor is used to describe managing cash flow?
Fuel tanks of an airplane
Just as an airplane needs fuel to operate, a business needs cash flow to function.
What are the five checking accounts proposed for managing small business finances?
- Operating Account
- Personal Account
- Business Profit Account
- Tax Account
- Investment Holding Account
These accounts work together to create a comprehensive financial management system.
What is the purpose of the Operating Account?
To manage all money flowing in and out of the business
This account is used for paying bills and receiving business revenue.
How often should the Personal Account receive a transfer from the Operating Account?
Bimonthly or monthly
This transfer constitutes the owner’s fixed salary.
What should the Business Profit Account be used for?
To store excess money that does not need to be reinvested in the business
This account serves as a rainy-day fund.
What is the function of the Tax Account?
To set aside money for tax payments
This account ensures that the business can always cover its tax liabilities.
What is the Investment Holding Account used for?
To hold money for making outside investments
This account can be used for various investments, such as real estate or stocks.
True or False: The author believes in taking a fixed percentage of profit out of the business each month.
False
The author prefers to take profit out sporadically based on surplus cash in the Operating Account.
What is meant by establishing a high-water mark for the Operating Account?
Setting a minimum balance to cover potential expenses
This helps ensure that the business can handle unexpected financial hits.
What happens to excess funds above the high-water mark in the Operating Account?
They are split between the Business Profit Account and the Tax Account
This process helps maintain financial balance and preparedness.
Fill in the blank: The Small Business Cash Flow Made Simple Playbook helps business owners manage their finances without having to _______.
sweat the finances
The system simplifies financial management for those who prefer making money over managing it.
What did the author realize about their previous money management system after listening to Mike Michalowicz’s book?
That they were not completely wrong in their approach
The author found validation and improvement in their cash flow management practices.
What is the benefit of paying oneself a fixed salary from the Operating Account?
It provides mental clarity on personal vs. business finances
This helps avoid confusion and promotes better financial management.
Why is it important for a business owner to separate personal and business finances?
To avoid blurring the lines between personal and business expenses
This separation aids in accurate financial tracking and tax reporting.
What is one potential risk of having too much money in the Operating Account?
The temptation to spend it
Excess funds can lead to unnecessary expenditures rather than being allocated for growth or savings.
What increases by $12.5K in the Business Profit Account?
$12.5K
This reflects the growth in business profits.
What should you establish for your Business Profit Account?
A high-water mark
This is a target balance to maintain for financial stability.
How much should the Business Profit Account’s high-water mark be compared to the Operating Account?
About six times
This ensures a substantial rainy-day fund.
What is the purpose of the Business Profit Account?
To provide peace of mind and act as a rainy-day fund
This fund allows for financial flexibility during crises.
What should you do with excess money in your Tax Account?
Transfer it to your Business Profit Account
This can alleviate financial stress on Tax Day.
What happens when you need to move money back from Business Profit?
You can also move the same amount back from Taxes
This is because that money is no longer taxable income.
What should you do when your Business Profit Account exceeds its high-water mark?
Move the excess money into your Investment Holding Account
This encourages investment rather than unnecessary spending.
What can you use money from your Investment Holding Account for?
Build a home, fund retirement accounts, purchase life insurance, invest
This account supports both personal and philanthropic goals.
