Today we are talking about the number one reason why businesses fail, yes, the number one reason why businesses fail. Did you know that 82% of businesses fail due to poor cash flow? That is the conversation for today: what is cash flow?
I want to share why I’m here with you today having this conversation, and why I’m here with you every single week.
We have been podcasting since October 2017. That is five years that we have been showing up here with the intention of reducing your financial overwhelm, showing you how to make money and generate wealth in a way that is relatable and attainable, to be an advocate for experts getting paid, and really putting some voice out there for those of you who might be frustrated with the lack of open discussion that you’re seeing in online business circles around business finance, like the real stuff though beyond the hyped up seven-figure revenue goals.
Now we’re talking about seven-figure months, like how to make $100,000 a month or million-dollar months, I don’t remember, it was really wild. I was like, “Okay, we need to stop this right now. This is not attainable for most people.” Even if this is aspirational, it is such a distraction to the actual things that need to happen to get you all paid, which is what we’re talking about today, cash flow.
What is cash flow? Why is it important? How can you do a better job at creating cash in your business?
You have cash flow in your personal finances as well. Cash flow doesn’t just exist in our businesses. But if your business is the way that you are earning income, so you’re earning income independent of an employer, what happens with the cash flow in your business impacts the cash flow in your personal finances.
What is cash flow?
Cash flow is simply the movement of money in and out of your business or in and out of your personal finances. You are receiving money that is inflow and you are spending money that is outflow. It is really the balance of your inflow and your outflow of cash that allows you to grow your business and allows you to create wealth for yourself. It is the number one reason why businesses fail.
This is why I’m such a big believer in Profit First. It’s why I am a certified Profit First consultant because Profit First is essentially a cash flow management system. It gives you a simple system for managing your cash. It helps you create language and a framework for talking about money. It gives you easy metrics to determine the success of your cash flow. It provides a structure for paying off debt, investing in the future, and making sure you get paid. It’s a giant roadmap for financial clarity.
For me, it’s a tool for helping me manage my nervous system. Because when I am implementing a system and I have structure, I feel really calm. When I first implemented this cash flow management system, what it allowed me to do was really get out of my head about money. It allowed me to stop spinning around and around and actually see what was happening with the flow, with the directionality, with the path of my money.
Why is cash flow important?
You need to have great cash flow so you can create profit, pay yourself, and create a cash cushion for your business so that if anything happens, you have some financial reserves sitting there for you. It allows you to go and get a small business loan if you need it or a line of credit. It helps you to continue to invest in your growth as well as your business’s growth.
Typically, when we talk about cash flow and profit, there is a standard equation that is used: sales minus expenses equals profit.
Now, what that does is it prioritizes your expenses over your profit, sales minus expenses, you gotta pay your expenses first and then with what is left over at the end, you would take for yourself and pay for yourself or profit.
That’s where Profit First comes in and says, “No, we’re not going to do it that way. We’re actually going to prioritize you, the business owner. This is financial self-care. This is about financial well-being. We’re going to prioritize you and make sure that you get paid first.”
In Profit First, the equation is sales minus profit equals expenses.
That is really a huge shift in how business owners can think about their cash flow. It actually ensures that there is always cash flow because you’re going to make sales and then you’re going to prioritize your business payments by making sure you profit, first you take profit right off the top, then it says you pay yourself, so you’re going to actually pay yourself twice, once through profit, and once through CEO pay, then you’re going to pay your taxes, and with what is left over, you are going to run your business.
Some people might say, “But that doesn’t leave me enough money to run my business.” That might be very true. But the reality is that it forces constraint. If you need more money to run your business, I guess you need to go out and you need to sell and make more money or you need to think more creatively about what you’re spending your money on.
Now in an online business or in a service-based business that operates remotely, digitally, virtually, whatever you want to call it, there is very little that you need to be spending your money on; this is an actual cash cow of a business. It is very cash rich. Unfortunately, that’s not what actually happens.
What happens is that in these traditional online-business models, they’re actually very expensive to operate between paying the people who are marketing to you, paying for what you believe will create clients, which most people overspend on marketing, then the tech required to run the marketing, then you don’t have those tech skills, now you have to hire somebody with tech skills to run the marketing.
That all becomes incredibly costly. When you are actually hiring the people to run the marketing, you’re not paying them a straight dollar-per-hour wage like you would be paying an employee. You’re paying them as a contractor and you’re essentially paying them to run their business which is why this starts to get even a little more expensive when you hire contractors.
I’m not saying that you shouldn’t hire contractors or that you should hire employees. What I’m saying is that this is why the expenses in online businesses tend to really escalate quickly. It’s the belief that you have to spend X amount of money on marketing. It’s the belief that the marketing now is very technical and you don’t understand it, don’t want to learn it, or don’t know it so you need to hire somebody, and then the business starts to become really cash intensive when it doesn’t have to be.
Cash flows are the inflows and the outflows of the money into your business. You need to have cash flow because you need to be able to pay yourself. You need to be able to pay your taxes and you need to be able to pay for the investments that will grow your business. You also need to have some money saved aside in the event that you need it for whatever reason. The best way to look at this is through the lens of sales minus profit equals expenses.
How can you do a better job at creating cash flow in your business?
Now in order to get more cash flow, you can either raise your sales, you can increase your sales, or you can reduce your expenses which would give you more cash. Ideally, it’s probably a little bit of both that you’re doing at the same time. But the only way you know how to balance that cash flow is if you have the numbers in front of you and you have a system for doing so.
Otherwise, what winds up happening is you want to panic selling because you think you need more cash than you need. You’re not realizing that you’re spending more than you should and the business becomes very stressful, very anxiety-producing, and incredibly hard to manage and work.
If you are someone who values your time, if you are someone who values ease if you are someone who wants to earn more and work less, the answer to that is Profit First. The answer is managing, having a simple system to manage your cash flow to ensure all these things are happening without you having to go out and either overspend or overwork. That is what cash flow is and that is why it’s so important.