Profit vs. Cash: Unveiling the True Financial Picture
Delve into discussions on profit, cash flow, and the emotional drive behind financial goals in business. Discover the challenges faced by entrepreneurs in managing cash flow, the importance of consistent profitability, and the role of a knowledgeable team member in understanding financial numbers. Gain insights into planning for financial stability, building a purpose-driven approach to growth, and the impact of external factors like the unexpected. Tune in to explore how businesses can navigate the complex financial landscape and achieve long-term success.
The Bucketlist Accountant: Because financial freedom shouldn't mean sacrificing your wildest dreams.
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Transcript
They've, in a lot of cases their first inclination is to say, well, I can't have made that much money. I can't have made that much profit because I don't have that money in the bank. , so then it becomes an exercise of, of getting them to understand the difference between profit and cash and the, and the link between the two.
It can be, at times, a very difficult decision. conversation. But you know, you can be very, you can be extremely profitable and have no money in the bank.
[: [:Then you'll be showing a profit. But because you haven't got that money in, because they haven't paid, you don't actually have that money in the bank account. Um, that then creates issues, because that, that creates a massive flaw in effect, because if, If you're not getting paid, potentially your ability to pay your suppliers becomes affected.
Uh, and it just creates this, this wave of, of stress and uncertainty.
[: [:So, one of the important Elements and that you have to build into your business is a robust System that that will allow you to chase that money from your customers regularly And effectively.
[: [:So you, you, you're wearing two hats focused at the same person. Um, and I think one of the things that I've seen work the best is the sooner that a business, small business can,, Move that money collection away to somebody else, the much easier it becomes.
[: [: [:Um, and what was interesting about that process was in hindsight, that if I had in place the system that I have in place now with someone independent looking after it, then I wouldn't have found myself in that situation where they owed me as much as they did. They might've still owed me a little bit, but it wouldn't, it would have been a fraction of what they ultimately did owe me.
And I know I had another client, you know, this was again a little, a little while ago that was in a situation where the business wasn't going as well. They were appealing to me emotionally to let the invoice slide, um, having an independent person in there enabled them to put a payment system in place.
It means they paid it off over, I think it was like 18 months which was totally fine because I'd have rather had that money coming in than not have it at all. Yes. , and having that independent person definitely paid for themselves.
[:They can have a different conversation than what you can have with them, , in relation. And in a lot of cases it becomes less emotional. Look, you as the business owner chasing money from a client. It becomes emotional because it's your money. You want it, you've done the work. , so it adds an extra element of angst into the conversation, I think.
If you can employ someone or engage someone to do that for you, it just becomes part of their job. They'll, they'll, less emotional and can be more rational in coming up with solutions with the customer to get the payments.
[:How important is it to always be profitable at any given point in time? Because many businesses Take some time to be profitable.
[:You know, many. One, generally, if you can be consistently profitable, then your cash flow will become more consistent. , so you iron out any of those peaks and troughs that you might have from a cash flow perspective. Down the track, a prospective purchaser of your business will look more favourably.
If you've got consistent and good profits consistent from a personal perspective it creates less stress on you and your family because you know, you're not worrying about what you have to do to get more profit the getting more profit just becomes a decision of choice rather than necessity. Um, so it just makes the whole process and the whole journey much more, much more enjoyable.
[:You know, things happen in the world as we experienced with COVID and, and businesses completely change the way they're operating. And even though they've been established for a number of years, they can find themselves in a situation where effectively they are like a startup and having to, you know, get into profitability can take some time.
So it is something that you need to carefully manage though, isn't it? It to make sure that it's, you're on that right trajectory and that you know what you're investing in is going to ultimately make
[: [:Do you borrow the money? Is it, is it actually a benefit? from, from, you know, your own personal savings, for example, versus borrowing it from an institution. Those things have to be taken into consideration as well, don't they?
[:So it's all the borrowing money from a bank that you'll have to pay back at some stage for, for a purpose that's not. It's about, sustaining your business, uh, or you, you start to make a drain on your personal expenditure. But I think that then also comes back to your knowledge and understanding of where you're spending your money and how you're spending your money.
Um, and, and making sure that you're making those decisions where you are profitable. That you are building like a business. Almost a war chest of, of, of funds that you can call on if needed. Um, that, that doesn't, that affects you less than if you haven't tried to think about worst case scenarios.
[:Because profitability and the bucket list, um, do have a relationship, don't they? Because, um, you may, you know, the obvious is to, I just want the business to be more and more profitable all the time. You know, I'm, I'm making 100, 000 next year. I want it to be 250, 000 and so on and so on. Um, having a bucket list keeps that in, you know, it gives you some perspective, doesn't it?
As to what, you know, whether it's profitable or not. Whether more is the right thing or whether it can be a bit of a compromise or whether indeed it needs to be even more than what you thought.
[:But I think where that becomes more achievable is, is if you understand. from the business owner's perspective, why they want to become more profitable. Like if your goal is to make 500, 000 profit, if you don't have a purpose behind why you want to make that 500, 000 profit, chances are you probably won't achieve it.
If you, if you build a purpose behind the 500, 000 profit, then, then you create that, you create an emotion around the 500, 000 that you wouldn't have Otherwise, that then allows you to make better decisions because you know why you're making decisions. You know why you're targeting the 500, 000. It might be you want to buy a brand new house.
You know, it might be that you want to help your kids through uni or you want to, whatever the case may be, if you can create that emotional link to the growth. It becomes more achievable, or not more, yeah, more likely to be achieved.
[:When it comes to profit, and it comes to cash flow, and it comes to all of these other things that we hear about various terminologies, EBITDA, and etc, etc, that you hear, uh, accountants talking about all the time, how important is it for a business owner to really understand some of those things, versus having someone like yourself that can actually just bring that in for them, because, you know, You know, it's there is this kind of push that you need to understand all these things But there are plenty of people out there who just can't get their head around those concepts And i'm sure you i'm sure you have plenty of those people on your client list, uh that fall into that category
[:And it's a it's a very interesting question. I think from a general concept, I think if a client can get a I mean, I don't I don't think they need a detailed understanding You Of of the numbers and and a detailed understanding of what everything means profit loss and balance sheet kind of thing I think they need to have a uh, an overall understanding But if they're working with someone, um that that does understand the numbers then then it becomes more It it does it becomes more a case of the movement and and the achievement that the business owner gets from the numbers improving the numbers.
So they don't need to understand what 500, 000 profit necessarily means. They need to understand what hitting 500, 000 profit does for them. So it could be whatever it is for them that they want. I don't, and this is probably contradictory to what a lot of people will say, but I think, It's less about them knowing the ins and outs of the numbers and more about them understanding what the numbers will achieve for them.
And that's it. I think they're two different understandings.
[:And not everyone is, uh, has an accountant in chief.
[:Um, but it doesn't necessarily have to be the business owner, but they do need someone working for them on their team, on their side that understands the numbers.
[:Um, but it's, it is about having someone as part of your team. And I think that's, that's an important point that just perhaps to finish up on is that there's a difference between sending your accounts out three, four, five times a year, whatever it is, uh, for someone to blindly kind of do versus having someone that is part of your team.
And that's what, you know, the bucket list is all about and, uh, as well, isn't it?
[:
