When your operating expense account runs short, it signals your business is out of balance. Stop new spending immediately, contact vendors to negotiate payment timing, then cut costs or raise prices. Dipping into profits masks the real problem and should be your last resort.
All right, in Profit First, what happens if I don't have enough money in my operating expense account to pay all my expenses? Where do I take it from?
So that happens, it happens a lot. If you can't pay your bills, is first and foremost your business speaking to you? You can't pay your bills, you can't afford your bills, and that means we need to adjust things. There's only two things you can adjust, by the way, is you can cut costs or you can increase margin. Sell more things at a higher price point. Now, in the immediate circumstance where you can't pay your bills, the actions to take are as follows. Stop incurring more expenses at the same rate. So, you know, can you cut some subscriptions or whatever, but you have to immediately look at that. Secondly is we want to see if we can afford time. Call those vendors and say, listen, I'm going to be a little late on the bill. Communicate proactively, but actively. Here's what not to do. Don't take from your profit account right away and try to cover the bill. Now you're starting to play a shell game in covering things. You can't pay those bills, there's something fundamentally wrong. And it's a little bit painful to call vendors and tell them you're not going to pay them on time and so forth, but start making those adjustments, we'll right-size the business. Then there may be a circumstance where you do have to take from the profit account to cover expenses because you have that responsibility. But unless you make those adjustments first, don't touch that profit account. That's a last-ditch effort.
