Your Once-Weekly Calculation:
Now it’s number-crunching time: Choose an hour each week—ideally on the same day/time—to sit down and deduct your liabilities and overhead costs from your bank balance. Use this sample spreadsheet Merlitti made up, plugging your own numbers in next to the examples, and have your bookkeeper or CPA help the first time around, if needed. A note about loans/lines of credit: If the principal balance is due within six months, deduct the full amount. Otherwise, just deduct the interest for this month.
A few initial tips:
+ Calculating your vendor liabilities can be a sticky spot. If you’re using Ivy, an open purchase-order report (in the Reports section) would be a good way to see what you still owe. If the number seems crazy-high, make sure your database is up-to-date (i.e. if you proposed items that a client decided not to order, be sure to make those inactive or pull them out).
+ To figure out your sales-tax liability, you can again use the Reports section with in Ivy, use Quickbooks, or ask your CPA.
+ For overhead costs, divide your annual numbers by twelve to determine your “monthly nut,” or how much you need in the bank each month to cover them.
Next, add your accounts receivable: This is money you have coming down the pipeline—money owed to you by clients that you have not yet received. You should monitor this balance at least twice a month.
Once you add your accounts receivable amount, the number you see represents how much money is actually yours. While this is simply a snapshot in time, since the numbers are constantly in flux, doing this weekly will give you a good sense of how much money is yours to spend—instead of the false comfort of seeing $200,000 in the bank and thinking you’re flush with cash.
Don’t panic if your number is negative! “It doesn’t mean you’re going out of business—a negative number is often why clients hire me,” Merlitti says says. Now that you’re seeing the numbers clearly, you can find ways to adjust them. If needed, speak with an accountant to help you come up with a plan.
And don’t forget about income tax. This is a personal expense to always have on your radar when thinking about how much money you have free to spend. “You’re in an industry that requires sitting down with someone who really understands your business and figuring out what you will need to pay in six months, three months or next month,” Merlitti notes.
Still hesitant to dive into that balance sheet? Don’t worry, “understanding all of this may seem difficult at first, but you need to go through the exercise of doing it to know how much money in your bank account is yours,” Merlitti says.