Cashflow allocation is one of the critical tasks that CEOs face, and it can make or break a company. It is, therefore, essential to implement methods that simplify the process and ensure that it is done correctly. Fortunately, Mike Michalowicz's book Profit First provides a unique approach that can revolutionize cashflow allocation for your business. Specifically, the book compares cashflow allocation to toothpaste application techniques. In this blog post, we will explore this comparison, its benefits, and how you can apply it to your company.
Toothpaste application and cashflow allocation are more similar than you may think. Just like toothpaste, there are various types of cashflows and different ways to allocate them. For instance, Profit First suggests multiple accounts to allocate different cashflows, such as the Profit account, Owners Pay account, Taxes Account and Operating Expenses account. Understanding the different accounts and which cashflows should be channelled into them is paramount to managing your company's finances effectively. Similarly, we apply toothpaste differently for different purposes, such as fresh breath, clean teeth, or whitening. Understanding the best toothpaste for the purpose and the best way to apply it is essential for optimal results. One of the main benefits of adopting the Cashflow Allocation technique is that it simplifies cash management. Rather than juggling numerous requirements, this approach streamlines cash allocation into five accounts, thereby reducing complexity and improving visibility. Additionally, the method ensures that you always have enough money to cover all of your accounts, as each account has a specific purpose. Michalowicz’ refers to it as the "envelope method," and it acts as a failsafe to manage your cash effectively, reducing confusion and financial stress along the way. Another vital aspect of cash management is prioritisation. People who apply toothpaste effectively know that spreading toothpaste evenly requires prioritising specific areas first before moving to the rest. Similarly, maximising your cash allocation requires prioritising specific accounts first before allocating the rest. For instance, prioritise the Profit account before moving on to other accounts to ensure profitability. This prioritisation ensures that you always have enough money for your most crucial activities before spending the rest of your cash on lower priorities. Another key element of this approach is removing temptation. As simple as it sounds, sometimes, removing temptations can significantly improve your cashflow allocation. For instance, if you have the habit of spending your profits entirely, creating separate accounts for the profit, the owner's salaries, and operating expenses can prevent you from dipping into your profits and straining your cash flow. Like toothpaste, removing temptations is critical for effective application of cash allocation. Conclusion: In conclusion, adopting Mike Michalowicz's Cashflow Allocation technique is a smart move for any CEO looking to improve their cash management. The approach simplifies cash allocation, prioritises expenses and removes temptation. The toothpaste analogy applicable to this approach emphasises the importance of understanding the different types of cashflows. So, go ahead, adopt this approach in your business, and enjoy the benefits that come with optimal cashflow allocation. Another big takeaway for me is using the toothpaste analogy for pure cash management. Think about having a full tube of Toothpaste vs having an empty one – remember how creative you can be getting every last drop out of the tube when the supply is low. We should adopt this frugal methodology even when dealing with a full tube.
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