Latest / The 3Bz Podcast - Building Better Business / EP122 - Profit Does Not Equal Cash: Why You Feel Broke Even When You’re Making Money

Transcript

EP122 - Profit Does Not Equal Cash: Why You Feel Broke Even When You’re Making Money · The 3Bz Podcast - Building Better Business

• 0:01
  Hi there business owner, and welcome to the Three BS Podcast,
• 0:04
  the place where we go beyond the numbers and dive into strategies
• 0:07
  to help you build a Better Business one step at a time.
• 0:11
  I'm your host Stephanie, a multi awarded entrepreneur with over a
• 0:14
  decade of experience in the bookkeeping and currency world.
• 0:17
  If you're a business owner looking to streamline, grow and
• 0:19
  get back the time that you deserve, you're in the right
• 0:21
  place. Tackling real world problems,
• 0:24
  answering tough questions and digging deep into business
• 0:26
  building secrets in just 15 minutes each week.
• 0:30
  So Are you ready to build a Better Business with confidence
• 0:32
  and clarity? Then let's go.
• 0:35
  Hello and welcome back to another episode of the Three BS
• 0:39
  podcast, your go to place for 15 minutes of CPD certified
• 0:43
  motivation, inspiration and education each week.
• 0:48
  As always, I'm your host Stephanie, bookkeeper, business
• 0:51
  strategist and the voice that's going to tell you the truth
• 0:53
  about your numbers. This episode is for the business
• 0:56
  owner who is scratching their head, looking at their profit on
• 0:59
  paper and thinking, why do I still have no money?
• 1:02
  Why am I still utterly broke? If that's you, First of all,
• 1:06
  you're not alone, so please don't feel ashamed.
• 1:08
  And I'm so glad you have found this episode to help you
• 1:11
  understand that there's a reason behind all this and it comes
• 1:14
  down to the simple fact that profit is not the same as cash.
• 1:18
  So let's break that down and help you understand it in more
• 1:21
  detail. Firstly, what is profit?
• 1:24
  So profit is what's left after you take away your income and
• 1:27
  subtract all of your costs. It sounds simple, and on a set
• 1:31
  of accounts it looks like this clean, neat number that tells
• 1:33
  you how well that you're doing. But what the number doesn't show
• 1:37
  you is when you actually get paid.
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  When you pay out for all of your expenses, what's sat in your
• 1:42
  bank account, what's tied up in invoices awaiting payment or
• 1:47
  stocks you've purchased and not yet sold, and what's already
• 1:50
  spoken for. Technically your accounts could
• 1:52
  show a 20,000 LB profit on paper, but you only have £500 in
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  the bank and that's not a failure, that's just a cash flow
• 1:59
  reality that all business owners face.
• 2:01
  Now it may be that your profit is looking good on paper, but
• 2:04
  cash is feeling really tight right now and there could be a
• 2:07
  number of reasons that profit and cash just don't match up for
• 2:10
  you. There could be timing
• 2:12
  differences. So if you've invoiced a client,
• 2:14
  the profit says job done but they haven't paid you yet.
• 2:18
  That profit is theoretical. It's assumed that it's there but
• 2:22
  the cash isn't physically in your bank yet.
• 2:24
  Especially if you're a business owner that gives clients like 30
• 2:27
  days end of month or payment terms.
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  They can pay you after you've invoiced.
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  So unless you are a business owner that either sell and the
• 2:37
  money comes in the minute the order is taken or you provide
• 2:41
  pro forma basis so the the invoice goes out and then you're
• 2:44
  paid, there will be some sort of timing differences in there for
• 2:48
  you. The other thing to think about
• 2:50
  is that VAT, so that and tax bills, money that's sitting in
• 2:55
  your bank account might not be yours.
• 2:57
  HMRC might want it if you're not putting things away, if you
• 3:00
  don't have money put away for things like your VAT, your
• 3:03
  personal income tax, if you're a sole trader, your corporation
• 3:06
  tax if you're a limited company, HMRC are going to want their
• 3:10
  cut. And if you have money in the
• 3:12
  bank right now but haven't saved for that, the minute the VAT
• 3:15
  bill or the tax bill comes in and you pay that bill, you're
• 3:18
  going to feel skin the minute that that bill hits because
• 3:20
  you've not saved for it. And that cash that was sitting
• 3:23
  in the bank suddenly disappears off to the HMRC.
• 3:25
  Another reason why profit might look good on paper but cash
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  feels really tight right now is that you have loan repayments or
• 3:32
  asset purchases. So if you bought a laptop or you
• 3:37
  paid down a loan, those don't hit your profit, but they really
• 3:41
  damage your bank balance. Drawings and dividends are
• 3:44
  another one. So if you're a sole traded
• 3:46
  business, drawings is what we call money that you take out of
• 3:48
  the business because the business is just an extension of
• 3:51
  yourself. Dividends are money that you
• 3:53
  take out of your limited company after your profit.
• 3:55
  So if you're taking money out of your business via one of these
• 3:57
  methods, even if it's completely just meant, OK, it will affect
• 4:01
  the way that your accounts are and it will not necessarily
• 4:04
  affect your profit line as such, but it will affect the cash
• 4:07
  that's sitting in your bank until you go through that year
• 4:10
  end with your accountant. And then finally, maybe there's
• 4:13
  stock or equipment that you've paid for upfront, but haven't
• 4:15
  earned from them yet. Again, if you've bought stocks
• 4:18
  that you haven't yet sold on and you're sitting with that stock
• 4:21
  or you've bought equipment that you haven't used in a, in a
• 4:24
  service yet, the cash has gone, but your profit margin hasn't
• 4:29
  changed for now. So when you do sell that product
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  or start to use that equipment in in the provision of your
• 4:35
  services, you then start to get the cash and that builds the
• 4:38
  cash back up even though you've not got it in the bank right
• 4:41
  now. And your profit might not really
• 4:43
  change until you start bringing that money in.
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  So what to do about it? If things are feeling a bit
• 4:47
  tight right now, Please know you're not alone.
• 4:49
  For one, and this is just part of having a business and where
• 4:53
  it's important to get clear on your numbers and understand your
• 4:56
  finances and make sure you know where your cash flow is and
• 5:00
  where it's heading and your projections going forward.
• 5:03
  You shouldn't be flying blind, you should have a clear
• 5:06
  understanding and if you don't understand this then go and find
• 5:09
  a bookkeeper or an accountant that will help you understand
• 5:12
  this term. At ABCSUK we offer power hours
• 5:15
  for those that don't want a full time finance department.
• 5:18
  It is important to make sure you are clear on where your cash is,
• 5:22
  where you're going and the difference between profit and
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  cash. Firstly, you need to track your
• 5:28
  cash flow and track that separately from your profit.
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  Have a simple cash flow tracker. If you don't currently have one,
• 5:34
  speak to a bookkeeper or accountant, it can help you
• 5:37
  create one. The software that you can plug
• 5:39
  into your accountancy software now that will bring it out for
• 5:41
  you too. At ABCSUK, we can help you get
• 5:44
  with a spreadsheet and put those systems and policies and
• 5:47
  templates in place for you to then implement them yourself
• 5:50
  going forward. Simple cash flow tracker will
• 5:53
  show what's coming in, what's going out and where there's any
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  sort of dips and troughs in your cash flow.
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  So where cash might be slightly tighter or where profit will be
• 6:03
  different and what's leftover. It's important to track it
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  weekly if possible. Monthly as a very, very minimum,
• 6:11
  but weekly is best because things change so fast in
• 6:13
  business. We're all trying to build these
• 6:15
  businesses. Things change all the time.
• 6:17
  We do this for our clients and it changes everything because
• 6:20
  they know where they are. And when we get together in our
• 6:23
  monthly or quarterly meetings, then we can go through what we
• 6:27
  what we thought were going to happen, what actually did
• 6:29
  happen, and then plan ahead for the next month or quarter.
• 6:32
  Also, if you haven't already, and I know I sound like a broken
• 6:35
  record when I say this, but split out your bank accounts,
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  Have one for your taxes and if you have more than one tax, have
• 6:41
  separate tax pots to have a VAT pot and a income tax or
• 6:45
  corporation tax. Part 1 for operating costs, one
• 6:48
  for profit and one for your salary or drawings.
• 6:51
  I know it sounds like a complete faff, but it makes you feel less
• 6:54
  panicked and less stressed when you log onto your banking app
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  and you'll see what you actually have to play with in the
• 7:00
  business. Knowing what's yours and what's
• 7:03
  not is really important too. So you could be looking at 12
• 7:05
  grand in your bank right now, but 4 grand of that could be
• 7:08
  VAT, 3 grand of that could be corporation tax.
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  So you don't really have 12 grand, do you?
• 7:13
  It's important to know what is actually yours and what can be
• 7:16
  spent in the business, what can be withdrawn and paid to
• 7:18
  yourself as a business owner and what should really be kept for
• 7:23
  those taxes to make things nice and easy when those bills land
• 7:26
  on your in your inbox. Here is the bit that nobody
• 7:30
  really talks about. And when the numbers don't feel
• 7:33
  right to you, you start to doubt yourself as a business owner.
• 7:36
  If you're a person that's managing your household
• 7:38
  finances, it can also feel that way too.
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  And that's when you start to think you're bad with money.
• 7:43
  You start to panic, or you bury your head in the sand and just
• 7:46
  ignore it all together. But this is not a character flaw
• 7:49
  and I don't want you to blame yourself.
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  It is simply a mismatch between what you're shown, which is your
• 7:54
  profit on the screen and what you feel, and that's the cash in
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  the hand. It's the emotional side of this
• 8:00
  that really, really triggers you and can make it a lot easier for
• 8:04
  you or a lot harder. That's why at ABCSUK, we don't
• 8:07
  just give you your accounts at year end.
• 8:08
  We don't just give you your monthly management accounts.
• 8:11
  We give you insight. We help you make decisions based
• 8:13
  on what's really happening within your business.
• 8:17
  So if you take anything from this episode and you've been
• 8:19
  blaming yourself and not having enough, maybe it's not you.
• 8:23
  Maybe it's the info being presented to you that you need
• 8:25
  to understand more clearly. So here's a simple checklist of
• 8:30
  what to do if your profit and your cash just aren't matching
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  up. One, get a basic cash flow
• 8:35
  forecast in place. If you don't have a template, DM
• 8:39
  us the Word template and we'll send you the one we use of our
• 8:41
  clients in the practice at ABCS UK #2.
• 8:45
  Open those extra bank accounts today if you can, don't leave it
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  till tomorrow. If you bank with someone like
• 8:50
  Monzo or Starling, you can open pots so you don't actually need
• 8:54
  extra bank accounts and extra cards and the admin that comes
• 8:56
  with that. Open pots and you can also set
• 8:58
  up automatic transfers to help with those savings for your
• 9:01
  taxes #3 ask your bookkeeper to walk you through your numbers.
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  You should not be left confused after a meeting with your
• 9:09
  bookkeeper or accountant. They should help you understand
• 9:12
  the numbers and know what those numbers actually mean relative
• 9:16
  to your business and your business goals.
• 9:19
  Four, start separating cash available from profit reported
• 9:23
  and keeping those two separate as you track them.
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  And five, if you're still guessing month to month, book a
• 9:29
  strategy session with ABCSUK and we can help you get things
• 9:32
  straight. And going forward, having a
• 9:34
  policy and a system in place to make sure you're never squeezed
• 9:37
  for cash flow again. Remember that profit looks
• 9:40
  backwards. Cash tells you what you can
• 9:42
  actually use, and you need both to make good, informed decisions
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  in your business. Next time someone says you made
• 9:48
  50K this year and you feel the urge to scream into a cushion
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  because your overdraft tells you otherwise?
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  Now you'll know why and you'll know what to do about it.
• 9:57
  If you want help sorting this in your own business, do head to
• 9:59
  ABCSU k.com drop us a message on socials.
• 10:02
  This is exactly what we do every single day for clients, both
• 10:05
  personally and business related. And trust me when I say we've
• 10:09
  seen it all. If you found this useful, please
• 10:12
  do hit follow, leave a review, rate US five stars, or forward
• 10:16
  this episode to a business owner or anyone who's fed up of
• 10:19
  guessing their cash because their profit says they have
• 10:21
  money, but there's just nothing there in the bank account.
• 10:24
  You deserve better than crossed fingers and spreadsheet dread.
• 10:27
  And I'm here to help you build a Better Business in 15 minutes
• 10:31
  every week. This has been the Three BS
• 10:33
  podcast. Thank you so much for listening
• 10:35
  and I'll see you next week for the next one.
• 10:37
  Bye. And that brings us to the end of
• 10:40
  another episode of the Three BS Podcast.
• 10:43
  I hope you found it useful and that you're walking away with
• 10:45
  some motivation, inspiration or education to help you build a
• 10:49
  Better Business. Don't forget to subscribe, leave
• 10:52
  a review and of course, connect with us on social media for more
• 10:54
  insights, tips and behind the scenes content.
• 10:57
  Your next step in building a Better Business is just a click
• 10:59
  away. I can't wait to connect with you
• 11:01
  and I'll see you on the next episode.
• 11:03
  Bye.