Allocation Accounting: What is it?

Simply: the secret to managing cash flow in a business.

When a business takes every dollar that comes in and assigns it a job, amazing things start to happen.  There are so many ways to do this, but that is not what this blog is about.  What we get asked most is how to establish this in a business.  So here we go:

  1. Decide on the goals of the business > Yes, just like all the other areas of your business; there needs to be a destination here too.  Some of the things to think about: 
  2. What are my revenue goals for ten years from now?  Five years?  Next year?  Next quarter?
  3. How much do I want to be making from my business?
  4. Have the savings goals of my business been met?  What should those goals be?
  5. Which of these should come first?  What comes after that?
  6. Calculate fixed costs and variable costs > fixed costs are the ones you pay monthly that don’t change or change very little.  Variable costs come at various times, are usually not planned and vary in amount.  HINT: this is where the muscle of a plan works wonders!
  7. Establish an emergency fund > the general recommendation is that the business should have 3-6 months of expenses in savings.  Remember the last step?  Take that number and 3x or 6x it and that’s what you are working towards saving.
  8. Invest in your business > most business owners have a beautiful vision of where they want their business to be – maybe multiple locations throughout the country, maybe a small bustling shop – either way, it’s the steps to get there that are crucial to keep in sight as well.  Having dollars just to invest in the next step in the growth of your business is the how.
  9. Get rid of debt > we get it, debt has its pros – especially in business. As with anything else, it is best in moderation.  Obviously, the net worth of your business should remain positive (at the very least), however the recommendation is to keep the debt to income ratio in the thirties or lower on the conservative end.
  10. Maximize operational efficiency > review your operations quarterly to minimize duplication of effort, cost or worse, production.  That are the process improvement ideas your team has?  What new technology (ChatGPT) could you integrate into your business to help with efficiency?  What expenses can be reduced?
  11. A word on payroll > people worth their salt work for companies that value them.  Period.  If you want to be a great company to work for, investing in employee benefits and other programs is so important.  Don’t underestimate the value of good employees.  Be an employer they want to work for!
  12. Marketing and Pipeline Management > brand awareness and growth is something worth investing in, find the ideal strategy or coach and stick it out.  Know what works and work it!  Make sure funds are going into growing your business!
  13. General Upkeep > Not only do the reports need to be reviewed, the percentages, the buckets you choose and current activities and balance need to be updated and tracked.  That’s just the internal aspects; one needs to look outside the business as well: what’s the newest trend in your industry?  What are the customer preferences that have shifted?  

Spend some time figuring out how you want the money in your business to work.  There’s no one answer.  However, make every dollar work.  Just like with time, if you don’t find a use for it, someone else will!

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