(0:00) If you're profitable on paper, but constantly stressed in life, (0:04) you don't have a profit problem, you have a cash problem. (0:07) Your profit is the story, your cash is the truth.

(0:11) Welcome to The Margin Method, where we talk about how to grow profitably, (0:15) create margin across your finances, operations, and leadership, (0:19) and build a business that runs without you and grows without burning out your team.

(0:24) I hope you enjoy and subscribe.

(0:27) Today, we're tackling something that has driven a lot of founders to near breakdown. (0:32) Something that makes you feel like you're losing your mind. (0:35) You're working your tail off, your business is growing, (0:38) you got sales coming in, your income statement says you're profitable, (0:42) and yet, you feel broke.

(0:44) Every month is a cash crunch, payroll's a stretch, (0:47) you're up late wondering if the business is actually working. (0:51) I've been there before, trust me, I have felt that many times in my life, (0:55) and if that's you, you're not alone.

(0:57) In fact, this is one of the most common, most understood problems in business. (1:02) Today, we're going to fix that. (1:03) We're going to break down the disconnect between profit and cash, (1:06) and I'm going to give you a simple framework to get control of your cash flow, (1:11) starting right now.

(1:12) Let me kick things off with a story. (1:14) A while back, I was working with a founder, we'll just call him Chris. (1:18) Chris had built a $5 million a year business in the home services space.

(1:22) He had a great team, loyal customers, and according to his accountant, (1:26) a healthy net profit. (1:28) But when I first met him, here's what he said. (1:31) He's like, Steve, I'm not sure what's going on.

(1:34) I'm making money, but my bank account doesn't show it. (1:37) I'm stressed out every single month. (1:39) I've even skipped a few paychecks just to make payroll. (1:42) What am I missing?

(1:43) So we dug into the numbers, and guess what? (1:46) Chris didn't have a profit problem, he had a cash flow visibility problem. (1:51) Like so many founders, he was looking at his P&L (1:54) and thinking that meant he had cash in the bank. (1:57) But profit and cash are not the same thing.

(2:00) In fact, I just wrote a book, it's called Cash Flow, (2:02) and the reason why I wrote this book is because (2:04) so many business owners and founders struggle with this concept. (2:08) So in this book, I walk through the exact drivers to influence cash flow, (2:12) and I explain what it is and how to get more of it. (2:14) So if you're interested in that, right now, as of the date of this recording, (2:18) don't hold me to this if you're listening to it later on and I change my offer, (2:21) but right now, you could go to coltivar.com, that's my website, (2:25) and you could get the book for free.

(2:26) If you live in the continental US, you just have to cover shipping. (2:30) I'll cover the cost of the book. (2:32) All right, cool? (2:33) All right, so if that's interesting to you, check it out.

(2:35) I wrote it to be very simple. (2:36) It's not for financial people, and I drew some pictures for you. (2:40) Okay, all right, so that's a valuable tool I have to offer, (2:43) but let's get back to things, and let's clear this up once and for all.

(2:46) Profit is what your accountant says you earned. (2:50) Cash flow is what you can actually spend.

(2:54) So here's a simple example. (2:56) Let's say you land a $100,000 project. (2:59) You bill the client in January, and your P&L, which is also your income statement, (3:04) shows $100,000 in revenue. (3:06) Great, right?

(3:07) But the client doesn't pay until March, and in the meantime, (3:11) you've already paid some contractors, your team, supplies, overhead, et cetera. (3:16) And you're out $75,000 in actual cash before you ever see a dime. (3:21) So on paper, you're profitable, but in reality, (3:24) you're floating your client like a bank. (3:26) And that's the kind of gap that kills good businesses.

(3:29) In fact, I was just on a board meeting call the other day, (3:32) and I was talking to this company, and I said, (3:34) I didn't know you guys started another business. (3:37) And they all looked at me, and they're like, (3:39) we did start a business. (3:41) What are you talking about? (3:41) I said, you started the bank of blah, blah, blah.

(3:43) And I said the company name. (3:44) And they're like, what are you talking about? (3:46) I'm like, you are financing your accounts receivable for your clients, (3:51) because their AR was like over 60 days, even though their terms were 30 days. (3:55) So therefore, they were floating that 30 days extra, (3:58) because they weren't managing their accounts receivable.

(4:01) And that type of mismanagement with working capital is what I'm talking about. (4:05) That's the killer of businesses. (4:06) Now, they thought it was funny. (4:07) Maybe they thought it was funny. (4:09) Maybe they didn't. (4:09) But so many of you out there are running a bank alongside your business, (4:14) because you're floating your working capital, (4:16) and you're not managing it correctly.

(4:17) So when you look on your P&L, your income statement, (4:20) it shows that you have profit. (4:21) And that's what I used to do when I was running my landscape company back in the day. (4:25) And I had no clue that there's a difference between profit on the income statement (4:29) and my bank account or cash flow, right?

(4:32) So when I look at the income statement, I'm like, (4:34) this is not helpful, because I'm looking at my bank account. (4:39) I'm like, we could barely cover payroll coming up. (4:42) So that's the disconnect you may be feeling.

(4:44) So let’s dig into a few of the usual suspects that I’m talking about.

(4:48) Number one is slow paying clients. (4:50) So you finish the work, you send the invoice, (4:53) and then you wait, and you wait, and you wait. (4:55) The longer that cash sits in your client’s bank instead of yours, (4:59) the tighter your situation gets.

(5:01) And I’ve seen companies with hundreds of thousands of dollars, (5:04) even millions of dollars in accounts receivable, (5:06) while the CEO is personally funding payroll. (5:10) That’s what I’m talking about here.

(5:11) Number two, okay, pre-spending for revenue. (5:14) A lot of businesses, especially in construction, services, (5:18) or product-based industries have to spend before they earn. (5:22) So you go out there and you buy materials, you bring on team members, (5:25) you mobilize to a job site, you invest in software or contractors, (5:29) but the revenue doesn’t hit for weeks or months. (5:32) This time gap is a silent killer.

(5:35) So when I was the CFO of this billion dollar company, (5:38) that’s the situation we’d oftentimes find ourselves in. (5:41) Because we’d go to our clients and say, (5:43) all right, can we send you a bill for mobilization (5:44) or for these materials that we just bought? (5:47) And oftentimes they’re like, yeah, you could do that, (5:49) but go ahead and mobilize and ship things to the job site, (5:51) and then send us an invoice and we’ll pay you in like 30 or 45 days. (5:54) Well, guess what? (5:55) The company would have to cover that. (5:57) They’d have to front that cash.

(5:59) All right, so you have to be very careful about that.

(6:01) Number three, one-time big purchases. (6:04) Let’s say you invest in a $50,000 piece of equipment. (6:07) You write that check today. (6:08) Your accountant will depreciate it over five years.

(6:12) So it barely touches your P&L. (6:14) Instead, that asset that you just bought is recorded on your balance sheet under fixed assets. (6:21) It doesn’t show up on your income statement except under depreciation, (6:24) but you’re only going to get a portion of that depreciation hitting your income statement.

(6:30) And that’s where the discrepancy comes in from your income statement and actual cash flow. (6:35) So the cash is gone today. (6:37) And if you don’t plan for that, it feels like the money just vanished.

(6:40) Number four is taxes and distributions. (6:43) You made $200,000 in profit, which is great, right? (6:47) But now Uncle Sam wants his cut, and so do you. (6:50) But if you already spent that cash because you took a distribution from your business (6:54) and you didn’t put aside money for taxes, (6:56) you’ll be scrambling when the tax bill hits (6:58) or trying to make additional personal draws or distributions (7:02) from a business account that’s bone dry.

(7:05) So my advice to you is if you’re taking distributions, (7:08) I tell my clients this all the time, (7:09) if you’re taking distributions or dividends out of your business, (7:12) then be sure to set aside a certain amount of money in a separate account. (7:17) So in my businesses, what I do is I have a tax savings account. (7:20) This is a personal account.

(7:22) So I’ll take a distribution for the business. (7:24) Let’s say it’s $100,000. (7:26) I’ll set aside 35% and I just put that money in the savings account (7:31) and it just sits there until I true up things with taxes.

(7:35) And I use this account to do my estimated tax payments. (7:38) And you can do the same thing.

(7:40) What you don’t want to do is take a distribution, go spend it all. (7:43) And then at the end of the year, think, oh no, (7:45) like I don’t have any money in my account to pay taxes.

(7:48) I ran into this once with a client who was in the healthcare space. (7:51) He came to me, he’s like, Steve, (7:53) the IRS is saying I owe a million bucks in taxes.

(7:55) But he said, look at my balance sheet. (7:58) I don’t even have that much cash in the business. (7:59) How can that be? (8:01) And it’s like, because you’re taking distributions, (8:03) you’re taking distributions out of your business.

(8:05) That doesn’t show up on your income statement. (8:07) So you’re showing profit on your income statement, (8:09) but it’s not reflecting the distributions you already took and spent.

(8:12) And therefore he found himself in a huge cash bind (8:15) and he had to pull in his line of credit just to pay his taxes.

(8:18) So you don’t want to do that. (8:19) All right.

(8:20) So now we’ve diagnosed the problem. (8:21) Let’s talk about the fix. (8:23) You need a system to build cash flow confidence. (8:26) This means knowing where your money is, (8:28) where your money’s going and what’s coming up next.

(8:31) Here’s my four step framework that I use.

(8:34) Number one is I build a cash forecast. (8:37) This is not the same thing as a budget. (8:39) A budget is a plan. (8:40) A forecast is reality.

(8:42) You should be looking at a rolling six to 12 week forecast, (8:46) or I prefer the 13 week cash flow forecast (8:49) because then it represents every quarter.

(8:52) And what you should have on there is your starting cash, (8:56) the expected inflows, your client payments, right? (8:59) Or new deals that are closing. (9:01) And then the known outflows like payroll, rent, debt, (9:04) subscriptions, tax payments, et cetera. (9:06) And then bring all that together to arrive at ending cash.

(9:10) So even a very simple spreadsheet can help you stop guessing (9:14) and start making confident decisions.

(9:16) One of my clients told me that just this one habit (9:19) helped him sleep so much better for the first time in months, (9:23) just by having this rolling cash flow forecast tool.

(9:27) All right. It’s pretty simple to set up.

(9:28) Number two, step number two, shorten your cash cycle.

(9:31) So think of it like this. (9:33) How fast do dollars turn into more dollars? (9:36) You want to shrink that time between spending money (9:38) and collecting money. (9:40) And here’s some easy ways to do that.

(9:41) Number one, collect deposits upfront. (9:44) When I was the CFO of a solar company, (9:46) we would get massive down payments, (9:49) upfront payments, right? (9:50) For these jobs. (9:51) And we’re sitting on so much cash and that was helpful.

(9:54) And we just negotiated that in our contract terms.

(9:57) So maybe you want to change how much cash you collect up front (10:00) or deposits you collect on jobs. (10:02) And that can be helpful, especially with your cash flow.

(10:04) Just be careful because deposits aren’t revenue. (10:07) They’re not profit. (10:08) You have to actually earn it.

(10:09) So don’t just take deposits and go spend that, right? (10:12) You get yourself in a very bad situation.

(10:15) But if you collect deposits upfront (10:18) and use those deposits to cover the expenses (10:21) you’re incurring on the job anyways, (10:22) that will definitely help with cash flow.

(10:24) You could also bill in phases instead of waiting (10:26) until the end of the month.

(10:28) So instead of billing once a month or once a quarter, (10:31) you could bill once a week, once every two weeks, et cetera.

(10:35) All right. So that can be helpful.

(10:36) Even for companies that have recurring revenue, (10:39) instead of billing monthly, you could bill every four weeks. (10:42) And then at the end of the year, (10:43) you’ll get 13 billings in instead of 12. (10:46) So that can help with cash flow.

(10:48) And it can help with profitability, (10:49) depending on your model.

(10:51) You can offer auto pay or ACH options. (10:54) So just make it super easy to do business with your company.

(10:59) I was working with this other business recently (11:01) and I told them, I said, (11:02) you guys should eliminate paper checks (11:04) because they would get paper checks (11:06) that take a while to come through the mail. (11:08) And then they’d have to take it to the bank (11:09) and process it like that.

(11:10) And I’m like, just send a notice out to your customers (11:13) and say, we’re not doing paper checks anymore.

(11:14) For now on, we’re just accepting electronic payments.

(11:17) So you can do the same thing in your business (11:19) and it’ll allow you to collect your cash faster.

(11:22) You can also incentivize early payments with small discounts.

(11:25) So you could change your terms and say, (11:27) look, net 10, 1%. (11:29) In other words, if you pay us in 10 days instead of 30, (11:32) we’ll give you a 1% discount.

(11:34) So you could set your discount, whatever you want it to be.

(11:36) And then you could penalize late payments with fees (11:39) and then enforce them.

(11:40) Just make sure you follow the laws (11:41) because depending on where you’re at in the world, (11:44) like in the United States, (11:46) the max that you can charge for interest is 18%, (11:48) which is 1.5% a month.

(11:51) Now that may change so just make sure, like I said, (11:53) you check with your area and with your lawyer (11:57) to make sure that you have the right percentages (12:00) in late payment terms built into your business.

(12:04) The key thing is, is you’re not a bank. (12:07) So don’t let your clients treat you like one. (12:09) It could be very expensive and very taxing on your cash flow.

(12:12) All right, step number three is treat owner compensation (12:15) like a real line item.

(12:17) Way too many founders draw cash randomly. (12:19) You had a good month, so you pull some cash out. (12:22) You hit a rough patch, you skip your pay altogether.

(12:25) That’s a recipe for burnout and inconsistency.

(12:28) So instead, set your compensation intentionally.

(12:31) So start with the base pay by asking, (12:34) what would you have to pay someone to do your job?

(12:37) Then layer in profit distributions (12:39) based on a percentage of actual available cash, (12:42) not just P&L profit.

(12:44) So you can have a system put in place (12:46) to determine what your distribution payout should be.

(12:50) So this is really critical.

(12:51) That other point that I mentioned (12:54) about paying yourself what the market would demand (12:56) is really critical because I’ll look at businesses (13:00) and their profits are inflated.

(13:03) In other words, they’re showing high profit margins, (13:05) but it’s because their salary or their market salary (13:09) is not built in to their numbers.

(13:12) In other words, they may be paying themselves $50,000 (13:15) or something like meager to run their business (13:18) when they should be paying themselves $200,000 (13:20) because if they ever left, (13:21) that’s what they’d have to pay somebody (13:23) to do their actual job.

(13:24) So they’re tricking themselves. (13:26) They think they have these profit margins (13:28) and they’re doing well, but actually they’re not.

(13:30) So treating owner comp like a real line item (13:33) helps to build predictability for you (13:36) and it protects the business.

(13:38) Step number four, manage by cash, not just by profit.

(13:43) Let’s say your accountant shows $250,000 in net income. (13:46) Before you go celebrating and have a party, (13:49) ask yourself, number one, (13:50) how much of that is actually in the bank?

(13:53) Number two, how much is tied up (13:54) in accounts receivable or inventory?

(13:57) And number three, what big cash needs (13:59) are coming in the next 60 days?

(14:01) So make sure you look at those things (14:04) because your profit is the story, (14:06) your cash is the truth.

(14:09) All right, so here’s a little bonus for you. (14:10) This is one of my favorite tools I use with clients. (14:13) It’s a simple spreadsheet that looks out 13 weeks (14:15) and attracts starting cash, all inflows, (14:18) all outflows, and your ending balance.

(14:20) It’s a 13-week cash flow model. (14:22) All right, so I have a template. (14:23) Every week you can use this, you can roll it forward.

(14:26) It’ll become your early warning system (14:28) and it will help you to avoid surprises (14:31) and no gut-based guessing, just clarity.

(14:34) So if you want that tool, just go to coltivar.com, (14:37) look under resources under the navigation (14:39) and you’ll see the template. (14:41) I’ll put the template in there so you can download it.

(14:43) You can use the tool for free in your business (14:46) because I want you to start paying attention to cash.

(14:49) All right, that’s critical.

(14:51) So let me give you one more story. (14:52) A founder I worked with was considering shutting down. (14:55) She was overwhelmed, she felt broke (14:56) and thought the business was a sinking ship.

(15:00) To help her, we implemented a basic cash forecast.

(15:03) So week one, she realized she actually had a buffer.

(15:07) Week two, we collected on $48,000 in past due invoices.

(15:11) Week four, we adjusted payment timing (15:13) and negotiated better terms with vendors.

(15:16) Just 60 days later, she had $72,000 in the bank (15:20) and was taking home a consistent paycheck (15:22) for the first time in years.

(15:24) No fancy tech, no big loans, (15:26) just visibility, discipline and a plan.

(15:29) And if your business is bigger than this, (15:31) just think about how this can be amplified in your company.

(15:34) If you’re profitable on paper (15:36) but constantly stressed in life, (15:38) you don’t have a profit problem, (15:40) you have a cash problem.

(15:42) And you can solve it with starting with visibility, (15:45) forecast weekly, shrink the cash cycle, (15:48) pay yourself intentionally (15:49) and don’t trust the P&L alone.

(15:52) Because when you understand your cash, (15:54) you can finally lead your business with confidence.

(15:57) All right, that’s a wrap. (15:58) That’s what I’ve prepared for you.

(16:00) If you ever want to talk about your business, (16:02) you can connect with us at coltivar.com.

(16:05) Until next time, take care of yourself.

(16:08) Cheers.