Small Business Series - Why Profitable Businesses Still Run Out of Cash (Ep 2)

Bonus episode # 99: Your P&L says you’re profitable, but the bank account keeps hovering near empty, so what’s actually happening? I walk through the gap between profit and cash and why small businesses can look healthy on paper while still running out of money. Cash flow is the fuel that keeps operations moving, and when you don’t manage the timing of cash in and cash out, even a “good” month can turn into a scramble to cover payroll, rent, taxes, and loan payments.

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Transcript

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Bonus Episode And Series Setup

Stephen McLain 0:00

Hi, this is Stephen McLain of the Finance Leader Podcast. This is bonus episode number 99. I hope everyone enjoyed the first episode of my small business series. If you missed it, last week I talked about revenues and profit and challenged you to review your own top products and services to verify their profitability. I hoped that helped everyone.

Why Profit Does Not Equal Cash

Stephen McLain 0:24

Now this week it's all about your cash flow. Have you ever looked at your profit and loss statement and thought, we're profitable? So why is there never enough money in the bank? If so, you're not alone. Every year, profitable businesses struggle or even fail because they run out of cash. Today, now let's talk about cash flow mistakes that keep business owners stressed and how you can avoid them. Now, cash is the fuel that keeps your business running. Without it, even a profitable business can come to a standstill. The simple point of cash flow is that cash comes in via customer payments and any loans you may get, investments that may come your way, and other streams of income. And cash leaves your business by way of your weekly payroll, your rent, inventory charges, raw materials, marketing expenses, taxes you got to pay, loan payments you have to pay back to the bank, capital investments like for your equipment, and the other usual expenses like your business cell phone and insurance. Now, building on the last episode, the goal isn't simply to generate revenue. The goal is to ensure that more cash is coming in than is going out over time. Now, profit is measured on paper, cash is measured in your bank account. Many owners only check today's bank balance. They don't know what next month will look like. Today's balance tells you where you've been, but a cash forecast tells you where you're going. Now, without that kind of forecasting, unexpected expenses become emergencies, and that's what we want to avoid.

Mistake One No Cash Forecast

Stephen McLain 2:12

Now let's start addressing a few cash flow mistakes. Now, cash flow mistake number one is not knowing your future cash position. Now let's review a very simple but typical small business scenario. Now, today you see $25,000 in your bank and you feel very comfortable. But next week you have to cover payroll and submit quarterly taxes. The insurance renewal may be coming due, and also your loan payment must be paid. Then suddenly only $3,000 remains. Now nothing unexpected happened. You simply didn't anticipate your cash obligations.

Mistake Two Slow Collections

Stephen McLain 2:53

Now let's get to cash flow mistake number two, which is waiting too long to collect payments. Now that is money owed to you. Now revenue doesn't become cash until customers pay. Now late collections create unnecessary stress. Now those receivables may be on your balance sheet as an asset, but it isn't really cash until you collect it. Here are the problems you may be facing. Now slow paying customers, a weak invoicing process with no follow-up, and you are giving long payment terms that hurts you in the long run. The longer that receivable stays on your balance sheet and is not collected, that hurts you. You can't make the payments that you need to make, the get favorable terms that may be available to you, and you are going to be losing out on maybe getting better deals, raw materials that you need to purchase, better loan terms, cash that is not sitting with you, that's benefiting someone else. That's benefiting a customer that isn't paying you what they owe you. Now, here are a few suggestions. Now, I want you to invoice immediately, then automate your payment reminders, and then also offer multiple electronic payment options and follow up consistently. The longer your invoices remain unpaid, the harder your cash must work.

Mistake Three Spending Too Early

Stephen McLain 4:15

Now let's get to cash flow mistake number three: spending before you know you can afford it. Now, growth often encourages spending. You may need new software or new equipment, more employees, a larger office or a bigger storefront, and maybe more advertising. Now each investment may be worthwhile, but timing also matters. You may think that you can even open an additional location before it's feasible. Now a fractional CFO like me may ask, can the business comfortably support this investment? Will it improve the profitability of the business? And how long before it generates a return?

Mistake Four Taxes Catch Up

Stephen McLain 4:57

Now, cash flow mistake number four is forgetting about taxes. Taxes surprise many business owners. That's money sitting in the account doesn't necessarily belong to the business. You have to submit taxes to the appropriate tax authorities. Now that includes income taxes, sales taxes, payroll taxes, and estimated quarterly payments. Particularly for sales taxes, you must submit those in a timely manner. If you don't understand these, please ask for help. Also, are you aware that you are responsible for these types of taxes in your business wherever it is physically located? The usual problem that small business owners get in trouble thinking that they can delay sending in their taxes in a timely manner. So don't delay.

30-Day Cash Plan And Next Steps

Stephen McLain 6:54

Now for action today, open up your calendar. List every expected cash payment over the next 30 days. Now estimate every customer payment you expect to receive and compare the two. If you identify a potential shortfall today, you have time to adjust. If you wait until the money is gone, your options become much more limited. Now successful business owners don't simply monitor how much money they have today, they anticipate where their cash will be tomorrow, next month, and next quarter. Cash flow creates confidence. When you know where your cash is going, you can make better decisions, reduce stress, and focus your energy on growing your business instead of worrying about paying the next bill. Now, if today's episode helped you better understand cash flow, be sure to join me for the next episode in this series where we'll discuss one of the fastest ways to improve profitability, making sure you're charging the right price for your products and services. Would you like greater confidence in your business finances? At McLean Solutions, we help solopreneurs and small business owners improve cash flow, strengthen profitability, and make better business decisions through strategic CFO advisory services. Learn more about our business financial health assessment and discover how a proactive financial strategy can reduce stress and position your business for sustainable growth. Have a great week, and for next week's topic, again, I will be asking about your pricing. Take care and thank you.