In a recent post, I mentioned Mike Michalowicz's book "Profit First" primarily aimed at entrepreneurs, professing the value of running a profitable business to lead a healthy, fulfilling life. The author posits that a business should serve its owner and not the other way around.
As the title suggests, Michalowicz recommends earmarking profit before any expense is made as a tactic to ensure constant profitability, resting his argument on a modified version of Parkinson's Law stating that a business will siphon all available resources if they're not clearly allocated and safeguarded prior to being made available for general expenses.
In traditional accounting, profit is generally accepted as the following formula:
Sales - Expenses = Profits
That means that profit is not deliberately reserved as such, but rather is whatever is left after everything else is paid for, if you're lucky.
In this book, the author flips the formula on its head and defines profit as follows:
Sales - Profit = Expenses
While mathematically, this is the same thing as the first formula, there is a big difference between the two. The latter takes advantage of human psychology (hence the aforementioned Parkinson's law) to make a business profitable from the get-go.
It forces one to learn how to make do with fewer resources and breeds creativity. While on the surface, it may seem like yet another version of the envelope budgeting method that has been a popular budgeting strategy for a long time, it is a bit more complex and is specifically designed for businesses.
If you're looking to have a better grasp of your business' finances and perhaps even looking for ways to get out of the red, this won't fix your problems overnight, but is a very valuable long-term cash flow management system.
I am personally in the process of implementing new strategies and while the results have yet to come, I can say that it transformed the way I look at the corporation's finances and make business accounting a lot less scary than it was even just a short while ago.