Spending Tomorrow’s Money Today
Did you know that “money can time travel”! The next time you open your wallet or check your bank balance, see if you can identify the money that “belongs to the future”. As entrepreneurs and business owners, we can sometimes run into financial challenges as a result of spending tomorrow’s money today. Let me explain with a short story.
A Lesson from Jessica and her business Jessies
Let’s say that an entrepreneur named Jessica owns a restaurant and catering business on Saba called Jessies. The business sells smoothies, salads and sandwiches using natural ingredients sourced locally from the island. The signature salad sold by Jessies is called the Jess Tuna XL priced at $25 per serving excluding 4% VAT. For every Jess Tuna XL served to a customer the business charges $1 in VAT ($25 x 4%). Even though this $1 of VAT is collected today, it is to be paid to the Belastingdienst in 3 months time. In a sense this $1 of VAT is money that “belongs to the future” or which we can otherwise describe as being “tomorrow’s money”.
Now imagine that at the end of the first month, Jessies has served 300 Jess Tuna XL salads. That would mean that the business should have collected $300 in VAT right? Let’s say that for the following two months each, the business also sells 300 of these salads. This means that for all three months combined, Jessies should have collected $900 in VAT ($300 x 3 months) to pay to the Belastingdienst. However there is a plot twist! It turns out that Jessica didn’t save the $900 VAT funds. Instead she unknowingly used this money for other business purchases. As a result, at the end of the three months, Jessica has to rush to get $900 to pay VAT to the Belastingdienst. Quite stressful!
The best way for Jessica and other entrepreneurs to avoid this problem is to move from habitually “spending tomorrow’s money today” to “saving tomorrow’s money today”. If Jessica had saved the $300 VAT on a separate bank account each month, at the end of the three months she would have the full $900 available to pay the Belastingdienst. From Jessica’s story we’ve learnt that if we save tomorrow’s money today, it will be available to spend tomorrow. However, if we spend tomorrow’s money today, we’ll be stressed trying to replace it tomorrow.
Here are 4 tips that can help your business go from spending to saving tomorrow’s money today;
1. Identify Future Bills, Tax and other Payments
The first step is to track and identify the future bills, tax and other payments your business will need to make. Lets keep things simple and let’s stick with the example of tax liabilities. I would advise Jessies to set up a simple cloud based accounting system that can easily track her business sales and tax liabilities. At any time Jessica or her accountant can log into the accounting system and see the amount of VAT tax the business has collected. Although I have focused on VAT tax payments, this same principle applies to payroll tax, bills and other payments.
2. Open a Second Bank Account
It’s easy to spend tomorrow’s money today when it’s mixed up with the business’s daily operating funds (i.e. today’s money). In the story above, Jessica unknowingly spent her business VAT funds because it was in the same bank account as the business’s operating monies. One effective way to solve this problem is for Jessie to open a second bank account. Each month, Jessica can get an overview of the VAT collected by her business (i.e. from her accounting system) and transfer this amount to the second bank account. This allows Jessica and her business to separate it’s tomorrow money from it’s today money.
3. Be a Big Saver, Not Spender
You’ve probably heard the song lyrics “Hey Big Spender” but have you heard the less well known “Hey Big Saver” lyrics? The first is from the famous song “Big Spender” written by Cy Coleman and Dorothy Fields. The second lyric, as far as I’m aware, doesn’t exist in any song! The truth is that spending money has always been seen as more glamorous and sexy than saving money! However, to go from spending to saving tomorrow’s money today requires financial maturity, dedication and consistency. The benefits of doing this can be tremendous! Imagine if Jessica decided to save $5 from every Jess Tuna XL salad sold. Selling 300 salads in a month would lead to savings of $1,500 ($5 x 300). In one month alone, Jessies would have saved enough money to cover its $900 VAT liabilities plus still have an extra $600 leftover!
4. Seek Professional Advice
In conclusion, please bear in mind that the story and tips shared in this article emphasise the value of saving. However in reality the cash flow needs of a business can be quite complex and there could be valid reasons why a business may choose to spend its “tomorrow money” today. However this should always be done with proper cash flow insight and planning. As such my final advice would be to consult a trusted accountant or financial advisor to evaluate the needs of your business and provide you with tailored advice and recommendations.
