Business

Why Your Business Can Be Profitable and Still Feel Cash-Tight

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Why Your Business Can Be Profitable and Still Feel Cash-Tight

A client came to us this year with a P&L that looked pretty much the way she wanted it to look. Revenue was up. Expenses were in line. The business was profitable.

And she still felt like she was holding her breath through the last week of every month.

The numbers said the business was doing well, but her bank account made it feel like something was off. That tension is more common than you might think.

It does not necessarily mean the financial statements are wrong. It usually means profit and cash are answering two different questions, and looking at one without the other can leave you with an incomplete picture.

Profit and Cash Tell You Different Things

Your Profit & Loss Statement helps you understand what the business earned and spent over a period of time. That matters because profitability tells us something important about the financial performance of the business.

But it does not automatically tell you how much cash is available today. Cash answers a different question: What money is actually available to the business right now?

Those numbers do not always move at the same time. You may have completed work but still be waiting to collect the invoice. You may be paying down debt. You may have money sitting in your account that needs to be reserved for taxes. Or you may have taken an owner distribution that reduced cash without showing up as an operating expense on your P&L.

So when a business owner says, “My reports say we’re profitable, but it doesn’t feel like it,” we don’t automatically assume something is wrong. We start looking at the rest of the story.

So Where Did the Cash Go?

There are a few places we often look first when profit looks healthy but cash still feels uncomfortable.

Money that has not been collected yet. You can do the work and send the invoice without having the cash in your bank account yet. If customers are taking 30, 45 or 60 days to pay, there can be a real gap between when the business earns revenue and when the money is actually available to use. That gap matters when payroll is Friday.

Debt payments. Paying down debt absolutely uses cash, but the principal portion of a loan payment does not appear on your P&L the same way an ordinary operating expense does. That means you can look at a profitable month without immediately seeing how much cash went toward reducing debt.

Taxes. This is another place where the bank balance can be misleading. Money sitting in the account is not automatically money available to spend. If part of that balance will eventually need to go toward taxes, the business has less usable cash than the account balance might suggest.

What you’re paying yourself. We want business owners to get paid. That matters. But as the business grows, the question becomes more nuanced than, “Did we make a profit?”

We also need to ask, “What does the business need to keep operating comfortably after we account for taxes, debt, reserves and the commitments coming next?” That is why owner pay cannot be viewed in isolation from the rest of the financial picture.

This Is Where the Reports Start Talking to Each Other

One of the biggest shifts we want business owners to make is to stop expecting one report to answer every financial question.

Your P&L tells you something. Your Balance Sheet tells you something else. Your cash position adds another layer, and so do accounts receivable, debt, reserves and the commitments you know are coming.

The goal is not to turn you into an accountant. The goal is to help you understand enough about your numbers that when a business decision comes up, you are not relying only on your bank balance and your gut.

Because the real questions usually sound more like:

  • Can we afford to hire?
  • Can I increase what I’m paying myself?
  • Can we make this investment without creating a cash problem three months from now?
  • Revenue is growing. Are we actually getting financially stronger?
  • Can the business afford this next move?

Those are the conversations your financial information should help you have.

If Cash Feels Tighter Than It Should, Start Here

Pull your accounts receivable and ask a few basic questions. How much money is currently owed to your business? How long has it been outstanding? And how much of the revenue you are looking at on your reports has actually made its way into your bank account?

It is a simple place to start, but sometimes that number explains a lot. From there, you can look at the other pieces: debt payments, taxes, owner distributions, reserves and what the business needs over the next several weeks and months.

The question is not simply, “Are we profitable?” It is, “What are these numbers telling us when we look at them together?”

Clean Books Are the Beginning

We care about clean books. We care about accurate financial statements. But those are the foundation.

The real value comes when you can use that information to understand what is happening in your business, what may be coming next and what your numbers can support. That is the difference between receiving financial reports and having financial information you can actually use.

And that is the kind of conversation we want to keep having with business owners.

Each month at the Financial Empowerment Roundtable, we take one part of running the financial side of a business and talk through it in a practical, judgment-free way.

Join the Financial Empowerment Roundtable

From Bookkeeping to CFO Services: Navigating the Financial Needs of a Growing Business

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From Bookkeeping to CFO Services

When a business is growing rapidly, it’s an exciting and challenging time. New locations, increased revenue, and a larger team can bring a sense of accomplishment and potential for even greater success. However, with rapid expansion comes the need for more sophisticated financial management. This is where many business owners, like our client Kimberly, find themselves at a crossroads.

 The Conversation with Kimberly: A Case Study

Recently, Kimberly, a long-term client of ours, reached out with a common scenario: her business, which had grown from two to five locations in just two years, was considering bringing bookkeeping in-house. While this might seem like a cost-saving measure, it’s essential to understand the complexities involved and the potential pitfalls of this approach.

Kimberly’s plan to have a team member take over bookkeeping responsibilities is well-intentioned, but it raises a critical question: does this individual have the necessary skills and experience to manage the intricate financial needs of a growing business? Bookkeeping isn’t just about recording transactions; it’s about maintaining accuracy and compliance, which becomes increasingly complex as a business expands.

 The Distinction Between Bookkeeping, Controller, and CFO Services

To help Kimberly and other business owners like her, let’s clarify the distinction between basic bookkeeping, controller services, and the role of a Chief Financial Officer (CFO):

Bookkeeping:

This role focuses on the accurate recording of financial transactions. Bookkeepers maintain the general ledger, track accounts payable and receivable, and ensure that day-to-day financial data is accurate and up-to-date. It’s essential for basic financial organization but doesn’t provide in-depth financial analysis or strategic planning.

Controller Services:

A controller goes beyond bookkeeping by analyzing financial data to provide actionable insights. Controllers help business owners understand their financial health, create budgets and forecasts, and manage financial risks. They offer more detailed financial oversight and are key in developing strategies for growth, optimizing costs, and ensuring compliance.

CFO Services:

A CFO provides high-level financial strategy and leadership. They are responsible for financial planning, risk management, and guiding the company towards its long-term financial goals. CFOs work closely with the business owner and executive team to align financial strategy with the company’s overall vision, often dealing with investment decisions, financial reporting to stakeholders, and long-term capital management.

 The Hidden Costs of Cutting Corners

One of the most significant risks Kimberly faces is the misconception that bringing bookkeeping in-house will save money. While it might reduce some immediate costs, the potential for long-term financial loss is substantial. Here’s why:

  1.  Lack of Expertise: Without the guidance of a seasoned financial professional, it’s easy to miss critical financial signals. This oversight can lead to costly mistakes, such as incorrect tax filings, missed financial opportunities, or even compliance issues.
  2.  Inefficient Financial Management: A bookkeeper may not have the skills to analyze financial data comprehensively. This lack of analysis can result in poor decision-making, such as overextending resources in a new location without proper financial planning.
  3.  Missed Growth Opportunities: A controller or CFO helps identify and capitalize on growth opportunities. They can advise on the best times to expand, invest, or even cut back to ensure the business’s long-term stability and growth.

 The Value of a Collaborative Financial Team

At Mitchell Consulting, we believe in empowering business owners by providing the expertise they need to succeed. Our approach is to work collaboratively with in-house bookkeepers, enhancing their work with strategic oversight and guidance. This partnership ensures that all financial aspects of the business are managed efficiently and effectively.

For Kimberly, and business owners in similar situations, our comprehensive financial services, including bookkeeping, controller, and CFO services, offer a roadmap for navigating the complexities of growth. By leveraging our expertise, businesses can avoid the pitfalls of DIY financial management and instead focus on sustainable growth and long-term success.

Conclusion: Invest in Your Financial Future

As a business owner, it’s tempting to look at cost-cutting measures, like bringing bookkeeping in-house, as a quick win. However, the true cost of not having professional financial oversight can far outweigh the savings. By partnering with a financial professional, you gain access to insights and strategies that not only protect your business but also drive its growth.

 At Mitchell Consulting, we’re committed to supporting your success with expert advice and actionable insights. Whether you need basic bookkeeping, detailed financial analysis, or strategic financial leadership, we offer tailored solutions to fit your needs. If you’re facing similar challenges or want to discuss how we can support your business, don’t hesitate to reach out. We’re here to help you navigate the complexities of your growing business and achieve the financial freedom you aspire to.

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Building a Better Foundation for Your Business

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Building your business on a strong foundation from the beginning saves so much time and energy as you grow. I help my clients start building a better foundation using several simple habits and principles. Here are a few of my favorites:

Cast your vision. As adults, we don’t spend enough time dreaming about our futures. Creating a vision for your business helps you develop the future you’re trying to create. Most business owners I work with are afraid to clearly state what they really want for their business down the line. Your vision statement should be so clear that it leaves no room for fear!

Set goals. Once you have a clear vision, you can make it tangible by breaking it down into bite-sized steps. These are your goals. Assign these to each quarter and then break those down even further for weekly action steps. Track what you’re doing to make sure you’re progressing toward your vision each week.

Schedule CFO days. As a business owner, you aren’t just the CEO of your business, you are also the Chief Financial Officer, or CFO. It’s important to set time aside regularly to stay on top of the finances of your business, even if you have someone helping you. You can use the financial data you collect during this time to make better decisions for your business.

Price your services for profit. Pricing is such a struggle for many business owners I talk to. Usually when a business owner feels they are not making enough money or they are having cash flow issues their issues actually stem from their pricing. You may be under-charging for your services if you don’t understand all the costs of actually delivering the service to your client, if you don’t understand the value your client places on the service, or if you are comparing yourself to others and undervaluing your own skills and experience.

These are just a few principles for a better business foundation. I love working with entrepreneurs to develop these and create a solid foundation that easily allows for growth. 

We talk about all of these things and more in my coaching programs, but right now I’m offering a mini-course on Pricing for Profit. For just $27, you can learn better pricing strategies, how to implement them, how to up-level your pricing without affecting your current clients, and more! Sign up now before the offer expires!

Refocusing for a Successful End of Year

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This month’s blog focuses on Refocusing for a Successful End of Year.  This is the perfect time to evaluate your services, offers, and what you may need to pivot.  It is also the time to revisit your 3rd and 4th quarter goals.

Can you remember the goals you set for 2020? Was 2020 going to be the year you made things happen in your business? We all started the year planning on having extraordinary results. Let’s face it – 2020 is not looking like we thought! We’ve all faced challenges we didn’t foresee, whether it was in your personal life or your business.

On this Facebook Live, I talked about my plan to achieve extraordinary results in 2020, and due to the global pandemic and all the challenges it’s brought, what your New Normal may look like. As business owners, we’ve had to face the fact that things have changed. And we have to look at how those changes can or will affect our business.

So what do you do when things change in your business? The first thing to do is accept the change and adapt to it. Ask yourself “what am I doing right now so I can continue to make income from my business?” Maybe you’ve had to pivot your business to be more online vs in-person. Maybe you’ve had to learn to use Zoom or Google Hangouts on a weekly or daily basis.

Secondly, you need to be flexible. What are you already doing that you can adapt to the new marketplace that may be available to you? Are there new services you can offer? Or do your current services need to be pared down? If you’ve been furloughed from a job, realize that you do have skills that are transferable to someone else.  You can actually create your own stream of income. You don’t have to wait for an employer to call you back; you have skills to offer. Now may be the time to get clear on what skills you have and how you can turn that passion into profit. 

Then you need to be tracking your money! How much money do you have in the bank? How much do you need to continue running your business? How much do you need until you navigate the new marketplace you may be in? Look at your expenses. Are you paying for things you aren’t using or no longer need? Subscriptions, software platforms, etc.? Tracking your money will help you determine whether to increase your income or reduce your expenses.

For most businesses, the 2nd half of the year (quarters 3 & 4) is the time most revenue is generated. As we come to the end of the summer, let’s focus on what we can do during the final quarters to make those extraordinary results a reality! Start by getting clear on what that extraordinary result looks like to you.

For some this year, simply remaining in business may be extraordinary.  For others it may be maybe maintaining a current client rooster. Or maybe it’s a monetary goal. Maybe your extraordinary result is to earn more income this year than you did in 2019. Whatever that looks like to you, be sure to be clear about what it is and what it looks like. Start looking at the activities you do.  Are they income-generating activities? Are they busy work that keeps you distracted from your goal? Are you letting your email inbox dictate your day or your schedule? Are you setting aside dedicated time each day/week for marketing your business? 

To help you with this, I’ve created a free download, 5 Reasons Why Your Money Isn’t Adding Up.  These 5 reasons will help you discover why your money isn’t adding up, what’s happening in your business, and things you can control and continue your business and end 2020 making a profit.

If you need help setting your goals and working towards them, join our Facebook group, The Empowered Lady Boss. We help support you in building a better business in the areas of growth mindset, business strategy and money management, so that you can have consistent income and a profitable business. We help female entrepreneurs who are service providers, coaches, consultants who feel overwhelmed with all the things that need to be done in order to grow their business.

When you’re ready to take your business from sporadic and inconsistent to consistent and profitable … then Begin With Profit is for you!