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Show Notes

Has this ever happened to you?

You’ve gone to your accountant at the end of the financial year or to do your tax return. Your Accountant is all happy and jolly and says “Well done. You made a profit this year. This is awesome”. They show you your Profit for the year on their computer screen and you start getting excited. You think wow, that is an amazing amount to make as a profit. What am I going to do with all that money?

So of course you you ask, “Where is that money? How do I take that profit out?”

They give you a look and you feel like you’ve asked a silly question and then they tell you, “Oh, that money is not really there. It’s already gone. It’s not cash in the bank, it’s the accounting profit so it doesn’t translate to that amount being in your bank account.”

So how is it possible to be running an on-paper profitable business but not have money in the bank? In this podcast episode I’ll explain how and why this happens and more importantly, what you can start doing today to ensure that you are banking cash profits on every invoice that comes into your business.

In this episode I mention free resources; head to my website here to get started > www.laurajohagan.com/resources

Looking for help to transform your business into the thriving, profitable business you know it could be? Book a Discovery Call with Laura here

Connect with Laura
Website: www.laurajohagan.com
Email: hello@laurajohagan.com
Instagram: @laurajohagan


Episode Transcript

Hello, and welcome back to another episode of Prosper and Profit. I’m excited to be here and ready to dive into a juicy topic today that I think so many business owners can either put their hand up and laugh that they’ve had this experience, or, resonate with the experience and are currently in it. 

So today we’re going to talk about why you can make a profit, but have no money in the bank. And I’m going to start by telling a bit of a story that many, many business owners have either told me themselves, or I’ve set out aloud to them and they’ve chuckled with a knowing look having had this experience. 

So they’ve gone to their accountant at the end of the financial year or whatever it is they’re doing their tax return. They’re getting everything sorted for the year and their accountant tells them like, “Hey, well done. You made a profit this year. This is awesome”. They’ll show you the profit and loss statement or they’ll show you your tax return. They’ll show you your Xero screen up on their computer screen and show you some really impressive number, like $25,000 or $50,000, depending on the size of your business, $150,000. It doesn’t matter, but they show you a number that you’re like, wow. That’s awesome. I made that amount of profit. That is so cool. 

And then you ask, okay, that’s awesome. Like, where is that money? How do I take that profit out? And they give you a look. You feel like you’ve asked a silly question and they tell you, “Oh, that money is not really there. It’s already gone. It’s not cash in the bank. It’s it’s the profit. But it doesn’t translate to that amount being in your bank account.”

And we’re all like, how can that be possible? It just doesn’t make sense. But what we’re going to do today is talk about why this happens. Some of you are going to be aware and understand why this happens and some people are like, it is so foreign and hard for me to wrap my brain around the fact that I can make a profit and not have money in the bank. Let’s dive in because what I want to do is help you understand why this happens and then how to go about fixing it. So not only does your accountant circle an amazing number at the bottom of your profit and loss at the end of next year. But you’ve also got a cash profit in the bank available to you. 

So let’s start from the top. 

Why, why does this happen? How can I have a profit on my profit and loss statement and I’ve got to pay tax on that. How can that be there? And yet I don’t have the money in the bank. 

Generally profit from an accounting and tax perspective, all the money that comes into the business is the revenue. The money that is spent in the business is expenses. We take expenses off of revenue and, profit is then referred to as the bottom line. So let’s say just to keep it really simple, I had $100,000 of revenue. I had $80,000 of expenses. Therefore my profit would be, revenue minus expenses, which leaves me with $20,000 of profit. Okay. That makes a lot of sense. Why isn’t there $20,000 in the bank account? Right. 

So there’s a whole bunch of transactions that happen in your business. Sometimes their cash transactions, sometimes they’re not, that impact your bank balance and have a different way of being reported on those financial statements. There is a balance sheet now most of you I know are going to be like, “ah, Laura, I don’t want to talk about balance sheets.” Let’s just keep it simple in your business. There is a balance sheet, which is where you show what assets you have, what liabilities you owe and in the simplest form, it kind of shows that. Then you’ve got the profit and loss, which is more of the performance statement. So let’s explore why a profit and loss can show I have a profit and I don’t have the money in the bank. Right.

There’s an example when you buy assets. Right. If you were to buy a car, let’s say you go out and see clients on site. Maybe you’ve got some sort of mobile service in your business and so your business requires a car. You then purchase the car and what’s funny is that doesn’t go through your profit and loss, but that takes money out of your bank account. Generally speaking, I’m not going to go into like what’s allowable as a tax deduction, but generally speaking, if you bought a $40,000 car that doesn’t go through as an income or an expense on that profit and loss. It’s actually written up as an asset on the balance sheet. So you would pull $40,000 of cash out of the business. Let’s say you’re paying with cash, we’re not going to complicate things by adding in debt right now, and so $40,000 of cash comes out of the bank account. That’s basically transferred into a new type of asset, which is a car, which goes on the balance sheet. So you could withdraw all of that cash out of the bank and it hasn’t gone through the profit and loss. 

So you can see really quickly, I hope that example highlights it for you, but please come onto my Instagram @laurajohagan and send me a DM. If you’re like, hey, we need this spelled out more, then, let me know, because I think I could do a separate training sometime with visual things to explain this. But basically, what we’re seeing happen there is we can take money out of the bank account and use the cash that doesn’t go through our profit and loss statement. So that’s how we can use cash that’s in the business and that didn’t go through our profit and loss. That car was not treated as an expense in the instance where we purchased it. So the $40,000 that we used doesn’t show up anywhere.

So there’s these things that you can see that distort the reality of what’s happening in your business. This is generally teaching some of the concepts and it’s going to show us why the way that I work with my clients and the way that I want to talk to you about how to think about managing your business is going to serve you so much better. I know this is super technical. But I think it’s really important to understand. And my job here is to empower you. And so I know, and I trust that you can start taking in some of this, you might take in one thing from this podcast today and come back and listen to it again, but over time, you’re going to take in so much. What we’re seeing in that example that I’ve showed there is that there are a bunch of, adjustments is the best way I think to think about it, to the numbers that your accountant presents to you, the don’t reflect cash movements in your business.

Our accountants will do all of these things to help us get the best tax position and show us this number doesn’t really translate to the truth of how cash moved through your business in that year. Right. It’s a reflection of, maybe I purchased an asset in another year. Maybe I took out a loan in another year and I’m paying down the principal, again, that doesn’t go through your profit and loss. So there’s all of these things that you are paying for in cash that may not go through your profit and loss and distorts, then that overall result. Now, that’s not to say that, that statement and that information that the accountant gives you isn’t useful. I think it’s important to start looking at it and thinking about and understanding what’s actually happening here. Right? But what I want us to understand, why does this happen? Why is there a profit reported over here and no money over here or maybe the reverse is true. My business said I’ve made no profit, but there’s actually a whole bunch of cash in the bank. It’s because cash transactions are not a clear reflection of what goes through those financial statements. So some go in some go elsewhere. It can mean there’s all of these transactions that go through that aren’t a match for how money is being managed in our business.

So I hope that at least starts to give you an idea about why this happens and why I use a savvy cashflow system with my clients to help them manage cashflow because ultimately what we actually want, is for you to have cash profit in the bank at the end of the year. I want you saying amazing, I made a profit last year on the books and there’s cash in the bank for me to use for profit. That’s the ultimate goal.

So we’ve started to think about why it happens. So what happens is the way cash moves through the business is not always a direct reflection of what happens in those statements that your accountants put together for you for tax time. So, what this means is when we think about, well, how can I make sure there is a cash profit in the bank and that my business is cash flow profitable because in the end, that’s the thing that truly matters to you as a business owner, who cares if at the end of your financial statement, it said you made all of this profit, but there’s no money in the bank to reflected that gives you no personal benefit. So, what we want to start thinking about is how can I ensure that there is cash in the bank that is my cash profit. This is why I love Profit First, the system that I’ve been introducing you to, and thinking about cash flow management. Because what we want to do is actually manage the cash in the business and how that moves through the business and make sure that we are setting aside a cash profit on every invoice, every week that money comes into your business and we’re setting aside a portion of that as cash profit so that can come back to you as a reward.

So the key takeaway here is the accounting, profit and what your accountant puts together for the end of the year for tax time and those statements that they show you, and that you probably need to sign off at the end of the year, are different to how cash moves through the business. There are a lot of expenses that go through your business that are a match on the statements. So you’ll scan through your financial statement in Xero or on your profit and loss and you’ll see, oh, there’s the subscriptions I paid and yes, they were a transaction that went through out of my bank account. So you’ll say that there is a component of them that do match, but then there’s this component of things that won’t. For example if I bought this big piece of equipment and that isn’t there, or I did my, shop fit out. Right? If you fit out your clinic or your spa or an office, that doesn’t go through on your profit and loss. If you purchased a car all of these things. 

What you need to understand is that, how cashflow moves and what’s reported on those statements, aren’t always exactly the same and that can start to be a shift in your mindset in terms of why cashflow and managing a cash profit is so important. 

So how can I ensure that there’s cash profit in the bank? Basically, you need to set up a system that puts profit aside first and you run the business off what’s left over. Right. We’re going to talk in a future episode about Parkinson’s law and how we cannot help, but use the resources that are in front of us. So it’s so important that we set aside cash profits separate and first, before we start spending and managing the business. t

The way that we do this in Profit First, and I’ll record a future episode, we’re just building out so many foundations, we have to put things together in a way where it’s not always sequential. So we’re going to come back and talk about the five core bank accounts you need for Profit First, so what I want to start thinking about is the way to ensure that I have cash profit in the bank is to open a bank account for profit and set money aside there on a regular basis. When you check out Profit First and again, we’ll talk about that in, in the future, but the whole premise is about managing cash flows, setting aside profit first, then running your business more efficiently as a result. There’s a whole bunch of things that sit behind that, but at its highest level, that’s what it is.

The invitation today, if you were due to do nothing but this one thing, would be to open a separate bank account for profit and on a very regular basis, maybe at the end of each month or each week when you pay yourself, whatever that rhythm looks like for you. Set aside 1% of what came into the business that week, that month into the profit account. Then at the end of the year, you will have 1% profit. So if you made $100,000 in the year you would have set aside $1,000. If you made $500,000, you would have set aside $5,000. Now, I know that sounds small but it’s the start of creating habit change and you can dial that up once you get used to doing 1%, it’s easy to bump it up to two, up to five, up to seven, right? It’s so much easier to start small and increase than to start at seven and have a problem. So that’s one of the ways that you can today start ensuring that there’s cash profit in the bank at the end of the year. Open a separate bank account for that. And create a system for yourself where you regularly set money aside for that.

If that’s something you want to explore more deeply than that is definitely something I can help you with and I can help you look at how to ensure that your profit is increasing and, how much to spend on paying yourself, how much to spend on your expenses. That can be broken out into marketing, to staffing all the key components of your business. That’s something I can help you set up in your business, tailor to your business. Create that rhythm for yourself. Then together, we can work on the projects that are going to improve profitability. So you can incrementally move that percentage up from, if you start at 1% through to 5%, 10% whatever that number looks like in your business.

So, what do you need to do to do that? The first thing that we’ve spoken about there is opening up that separate bank account and putting a process in place for yourself to set money aside there. It’s really comes back to that concept of paying yourself first. What we’re doing is paying profit first. We’re ensuring the business is profitable and we’re taking that out straight out before we run down the bank account, because that’s what unintentionally happens, when we manage our business. Most people could probably find 1% and run their business off 99% of what they’re doing right now.

The second thing is the mindset shift, right? You have to decide, that it is time to do things differently and you do want to prioritise profit. That can be a big shift for a lot of people because, we’ll dive into money stories and money mindset in future episodes, but that can be a thing where people haven’t given themselves permission or haven’t fully gotten on board with the decision that it’s time for my business to be profitable and it’s time for me to make that a priority. So that mindset shift is another piece that you can do. Today could be the day that you decide, I want to run a more profitable business and I’m ready to do something different to change that, right?

It’s not going to come from doing things the way they’ve always done them and creating the result you’ve already had. It’s going to require you to make a decision and do something differently. Just like if I decided, hey, I want to run a marathon. I could decide mentally I’m going to run a marathon but I know that I have to go and do certain things. I have to put my runners on, hit the road, get running and come up with a training plan, all of the pieces. Right. The decision comes and then it’s followed by action. So you could decide that today and take your first action step. Whether it’s reach out to me and book a discovery call, whether it’s opening a profit account, whether it’s buying the book Profit First, whether it’s hitting up my website and checking out some of the free resources, right. But you could decide and start that journey today. 

When you do make that decision, the thing that you’ll start needing to think about is that it comes down to running your business more efficiently. If you are running your business now and not making a profit or you’re running your business now and you want to increase profit, Then you’re going to have to find ways to run your business more efficiently. Right. Whether that’s looking at staffing, whether that’s looking at current expenses, whether it’s looking at the way you’re doing things with processes. There’s so many pieces to look at around how to run your business more efficiently and part of that may be reducing costs and overheads and things like that. But it may also be looking at maximising the assets that you currently have utilising the space, utilising capacity, utilising your staff, making sure everything is maximised and efficient so that you’re getting the best return on the assets you already have in place in your business. I’m classifying your staff as assets. They’re incredible assets that work for you. In your business.

So you could be thinking about that. What does it look like to run my business more efficiently if I’m prioritizing profit and I want to set aside 1% and then 3% and then maybe 5% profit? What can I do to run my business more efficiently so that my business doesn’t need to gobble that up? So to speak. Right. The other side of the coin too, is increasing revenue. I’m not an advocate for just going and selling for the sake of selling if it’s not profitable. So you want to make sure that you’re adding in profitable revenue, right? That could be something like deleting services that aren’t profitable and selling more service lines that are profitable, right. It might be a pricing increase, I’ve worked with a number of clients lately on pricing. What we’ve found is that their inputs, their costs to deliver the services have gone up and the pricing hadn’t gone up to match. So you could be delivering the exact same services for 5% more or 10% more depends, it could be more than that.

They are things you can look at, it might be around introducing a new service line that your clients are really demanding. It could be looking at the spacing of appointments between clients. Is there a way to incentivise them to come in sooner? Are there different things you could offer to them to have them come in sooner? There might be other businesses where, they get service A, B and C when they’re only going to purchase A, and it can be packaged up together and they do get a discount but you’re selling B and C that you wouldn’t have sold otherwise. So there’s all these different things you can look at. It’s really dependent on your business and that’s why I try not to speak to specifically on the tactics and what exactly to do to increase profitability in your business, because that is something that needs to be developed based on your business, based on your costs, based on your client’s and it needs to be modelled out and see, does that actually increase profit and increase profitable revenue if I do that?

What we wanted to explore is where are the pieces that you could make change so that you can set aside cash profits? So we looked at where we can increase revenue, we can run our business more efficiently. That might be reducing some costs with the idea that I’m managing cash flows and setting profit aside before I run my business so that I don’t get to that position at the end of the year where my accountant says, “You’ve got a profit, but there’s no cash in the bank”. We want to change that and have had a system where we’ve set aside profit and we know my accountant is going to show me I made a profit for sure, but my bank account also reflects it.

So I hope this has helped at least to start to educate you on why this happens and what you can do about it. Like I said, I would love to hear from you if this is confusing, not clear if you’ve got questions, I really want this podcast to be the opening of a dialogue, so come on to @laurajohagan on Instagram, send me a DM and say, hey, you spoke about this, but I’d love to hear you go a bit deeper on this and explain this more. You mentioned this, but I didn’t really understand how it connects that. Like, I want to know, or if you’re like, hey, you spoke about this and I absolutely get it and I’d love to hear more about this. I want to make sure that this podcast is responding to you and what’s helpful for you and developing your understanding of finances in your business.

So, I trust that that has helped with that today. I am going to love you and leave you here. I cannot wait to hear what questions you have, what’s come up for you, what’s been an ah-ha moment where something has dropped potentially in your mind and made sense in a way that it hasn’t before. And yeah, I’ll leave you to prosper and profit, have an amazing week. I’ll talk to you again soon. Bye.