Episode 319: Cash flow or profit?
Ever wondered why being profitable doesn't guarantee financial stability? In this episode, Fiona talks about the crucial distinction between cash flow and profit, highlighting the need for small business owners to actively track their finances. Tune in!
Topics discussed in this episode:
Introduction
Tracking cash flow and profit
Setting up a system for monitoring cash flow
Creating a cash flow forecast
Understanding the impact of cash flow on day-to-day operations
Introducing the Profit First Model
Managing expenses based on profit allocation
Balancing cash flow and profit to alleviate financial stress
Seeking professional guidance from accountants or financial planners
Conclusion
Get in touch with My Daily Business Coach
Resources and Recommendations mentioned in this episode:
Welcome to episode 319 of the My Daily Business podcast. Today it is a quick tip episode and this particular tip is crucial. If you want your business to be sustainable long-term. If you want to be in business and not be stressed out all the time, this is an absolute must to get clear on and could potentially save you tens of thousands of dollars. Before we get stuck into that, I want to acknowledge the traditional owners and custodians of this beautiful land on which I record and teach and work with people and that is the Wurrung and Wurundjeri people of the Kulin nation. And I pay my respect to their elders, past, and present and acknowledge that sovereignty has never been ceded. Let's get into today's quick tip episode.
We are talking all things money and today I'm going to talk about two elements of your financials that you should be tracking on the regular and two elements that I think people confuse from time to time. What are these? These are cash flow and profit. Before you switch up and you're like, My accountant looks after that. You need to be aware of these in your mind and have a process in place for checking these on a regular. Now, it depends. You may be using Xero, QuickBooks or a good old Excel Sheet, whatever it is, you need to have a system in place that you are aware of your cash flow before there's a problem that you're aware of it and can plan for when things are going to be a little tighter and not be surprised and shocked by that.
Also to understand that profit is usually something that is looked at retrospectively whilst cash flow can be looked at retrospectively, but it's also more likely looking at future forecasting. It's cash flow that is going to help you not feel stressed on the day-to-day. It is profit that is going to help you feel like you can scale this business and build it long-term. Both of the things are equally important and I think what happens is that people think they've got a profitable business and yet then they're still stressed about money and they're figuring out like, why am I stressed? I had this much profit last year and it looks like I'm going to make the same this year, but they're not looking at their cash flow. What is the difference? Also caveat, I'm not a financial advisor, I'm not a CFO, and I am not an accountant.
But I will put it in there and this is all general advice. What I want to say is that I have worked with people, this is my eighth year running this business and I've worked one-on-one with hundreds and thousands of people through workshops and speaking gigs and all the other things. I've seen hundreds of people buy our Money Mapping Course, and if you're interested in that, you can find it at mydailybusiness.com/shop. But I have worked with people, and I have seen so many profit-loss statements from all types of businesses. I'm seeing people's makeshift revenue trackers. I'm seeing all these fancy schmancy ones that they've got financial advisors to do. I see it across the board. I have seen a breadth of all of this. What I am seeing is that there's a common theme where people are feeling very stressed by money, but they are not forecasting their cash flow.
They're not looking at their cash flow on the regular and the regular. For me, I look at it weekly, but it depends on what's coming and going weekly, and I have figures in there that are in a colour which means they are not locked in. But it allows me to see what's potentially coming in. I also have figures in there that are locked in. It depends on what type of business you run, but I would be saying it should be at least monthly, if not twice a month. It depends on how often your expenses are changing, what you are bringing into the business, and what you're putting out. But if you want to be looking at it on the regular, even if you hire somebody who's looking at this, you should also still be looking at it.
It is your business, it is your money and it is your concern. As we are moving into, and some people reading in different countries may well feel like they're already there, a recession and a time when we are seeing massive interest rate increases, rental issues, problems with the housing market, and so on. I don't want to add to the stress and overwhelm that people are feeling, but that is out. That is out there in the marketplace. We are hearing all of these stories. It is more important than ever to be across your cash flow and your profit and your expected profit. What do these things mean? Cash flow is the cash that flows in and out of the business regularly. Your money is coming in, your money is going out, your money's coming in, your money's going out, and you've got a little bit more coming in that is going out.
This is what you want to be tracking. And then your profit is the money that is left after all of your expenses and everything else at the end of your tax year or the end of the quarter, or what the frequency is that you're looking at that. The other part with this is when I'm talking about what I've just said, profit is what's left at the end, I'm talking about this standard way that most people and most accountants will look at your financials. There is another way called Profit First, which a lot of people will be aware of. If you've listened to this podcast or if you've worked with me, it's a great book that came out by Mike Michalowicz and I don't know exactly when it came out, but it's been around for a while.
You can also find accountants that have been trained through that model called Profit First Professionals. You can Google that. You can Google Profit First Professionals in your particular area of the world. I know they have Profit First Professionals Australia. Profit First model is different to your sales less expenses equals profit, it is your sales less profit equals expenses. It flips it on its head. You can decide what profit you want to take in from the business, and how much you want to pay yourself. Whatever's left is how much you have to spend on expenses. The majority of people will still use the old school model of this amount of sales came in, this amount of money went on expenses, and then this is what's left as profit. Just firstly get clear that cash flow and profit are two separate things that you want to be tracking.
Just because you have a profitable business does not take away the idea that you are not going to ever be stressed by money. With cash flow, you have got to be looking regularly at how much money is coming in and how much money is going out. There is a very basic way to have a look at this. If you don't have this already set up in some platform that you're looking at, you can set it up yourself using good old Google Drive or an Excel Sheet. What you want to do is at the top, put in the months, January, February, March, or whenever you're starting this, or if you're starting this in the new financial year here in Australia, which is days away if you're reading in real-time, then you could put July, August, September.
You put in the 12 months at the top in the first column, let's say you start July or January on column C or B, whatever you like. In the first column, you're going to have your revenue streams. For us, we have one-on-one coaching, and group coaching because we run two groups of group coaching. I'll have group coaching, one group coaching two because they start and end at different times of the year. I don't want to necessarily just be putting in one bulk amount, I want to see what the different groups are bringing in. Then I'll have one-on-one coaching strategy, clients, online courses, templates, speaking gigs, the book, and the second book. We have that laid out. If you imagine you're looking at the sheet on the first column, you've got all your revenue streams and then the following columns are the months you are going to input what money is coming in for each of those months.
You can input that further along. It doesn't have to be right now, you may know that you've already invoiced it for certain things. If you're a retail store, you may be putting in an estimation of sales or you could just be putting in, maybe you're a retail store that also sells wholesale products of your brand items. You can be putting those things in, but the aim is to be putting that stuff in to see how much cash is coming into the business. Then underneath that, using the same method in the first column, you're going to have all your expenses and then you're going to have all the months laid out. In the expenses, you want to list out every single expense, especially things that trip people up, like subscriptions to different platforms that we forget and we think, it's certainly $19 a month, it all adds up.
You want to put in all of that. For us, we'll have Yricka’s salary, who's my assistant, we'll have the podcast costs, Canva, Asana, all the things we pay for Zoom, and Calendly. And with certain platforms, I pay an annual fee so I know when that annual fee comes out. That also has to go in, it's not enough to just amortize it across the months unless you're paying monthly. If I know that that actual cash that has to pay for my Zoom recording license for the year is coming out in December, there's no point in putting a certain amount each month unless I'm putting that amount away somewhere because I'm only going to have that injection of cash taken out to my bank account in December. You're putting in all of the expenses and when they come out, if they're a monthly expense, cool, you can put them in every single month.
If they come out as an annual fee, mark that in. You can see, in December, I've got a lot of annual fees coming out, I'm going to have to be aware of that and manage my cash flow accordingly. That's the first thing. You want to have a look at your cash flow, look at the top, all the money coming in. Then at the bottom, all the money goes out. What you want to do is make sure that the variance isn't negative. If it is, do you think about how am I going to manage that? It may be that you're getting things brought earlier invoices or other things the payment needs to come across. It could be that you're going into an overdraft or you're going into some or other loan capacity.
I would preface against don't tuck out a loan unless you have to because it can lead to another loan to pay that loan off and suddenly you're in a whole lot of debt. If you can manage it, this is the whole point to manage your cash flow and to see how much money is coming in, how much money is going out, and then what is left over. From what is left over, you also want to think about things like putting money off your superannuation or putting more off hex debts or other things that you've got going on so that you can pay things down slowly and not constantly have this burden or it could be a tax bill, it could be anything else. If you've got a little bit left over outside of what you want to keep in the kitty as profit, then you can be putting that off something else.
Or maybe you're choosing a charity or a cause that you want to donate to. But the big thing is to be clear about what amount of money is coming in and what amount of money is going out. Your profit is quite different. Your profit is how much money in total is left and you can still be looking at your profit monthly. But you need to know what expenses have come out to be able to calculate profit. A lot of the time people will talk to me about, we've been 30% up from last year, or we've been 20% up, or we're going to hit 10% profit or we're going to hit 50% profit, or whatever it is. That's usually thinking about it on an annual basis or even a quarterly basis rather than looking at it month to month.
Whatever way you do it, I hope that today's podcast has just inspired you if possible, maybe it scared you into looking at your cash flow, having some way to check your cash flow, what is coming in, what is going out every single month, and looking at that in a future forecast way, looking at it like, December, I know I'm going to have a bit of a buffer, if I wanted to get that new stuff done for branding or I wanted to spend a little bit of money on a photo shoot, that's when I should do it, because that is when that expense can be in the business without making us feel that we are super tight on cash or we are strapped or we can't pay somebody when we need to pay our suppliers or our employees or pay yourself.
It's important no matter where and which way you do it, to look at setting up a cash flow analysis of cash flow forecast for yourself. Again, it can be very basic just in Excel. You can also find a bunch of templates online or you can work with your accountant or your financial planner to come up with a system that's going to work for you. You can also have a look at what is available through any accountancy software that you might be using. The other thing is to look at your profit and to be aware that just because you're profitable does not mean that you're not going to be stressed if your cash flow is tight or you don't have enough. It's those months when people will be very stressed and start questioning a whole bunch of other things in their business.
Whereas if they just future forecast and looked at the forecast going forward and looked at how much money is going to come in, I know I need to tighten my belt and maybe not do that thing until next month or next quarter when we've got a little bit more of buffer sitting in there. I know that is a little longer than our usual 10-minute quick tip episodes, but I hope it is given you food for thought. That is it for today. If you wanted to go through this in text format, you can find that over at mydailybusiness.com/podcast/319. Again, if you want to check out our money mapping course, you can find that mydailybusiness.com/shop or mydailybusiness.com/courses. Thank you so much for reading.
