Cashflow Problems? It Might Not Be What You Think

[00:00:00] Excuses. Here I am. So. [00:00:07] Hi, guys, I'm Stephen Edwards and I'm the founder of Grow Profit First Accountants. And welcome to the Profit first podcast. If you've been following me for some time, you will know I'm a certified Profit first accountant. We're an award winning firm, so I will share strategies, insights, real stories, all about Profit First. But I'm passionate about business and I'm passionate about helping business owners get the life that you want. Because at the end of the day, that's what it's about. I've literally wrote the book on the subject how to build a business that runs without you. So I'm really passionate. And building a business that kind of works for you. I know it sounds cliche, but you're, you're not a slave to the business. You've got a lot of freedom, you've got opportunity, and you kind of do the things you want to do. But I understand to be able to do that, which is the topic of the conversation this week, based off a real conversation with a business owner, is that you need to have the money, you need to sort the money out, you need to sort the finances out, you need to understand your numbers, you need the cash flow. And that's where Profit first comes in. And I'm going to give you a little bit of a recap just in case you're new to Profit first or new to the podcast. So you might have read the book, and the book is fantastic by Mike Michalowicz. It's changed a lot of people's lives. And quite simply, the system behind Profit first is all about Parkinson's law. The more supply we've got of something, the more we're going to consume. So the example I give is at Christmas, when you go to friends and family's houses or in your own house, there's more food around, so we tend to eat more. So the supply is more, it creates more demand. Because we're like, this is brilliant. There's plenty going around. Let's just get stuck in, let's help ourselves. [00:01:57] It's the same when you go to an all you can eat, sort of buffet restaurant. And what we do is we take that human nature, that instinct, that habit, and we use it to our advantage with our business and with our numbers. And that's where profit first comes in. How can we create the illusion that you've got less money available? And it makes you more resourceful, it makes you more innovative, it makes you more creative because you've probably seen and you've probably experienced this in your own life. Often when people earn more money, they haven't always got more spare money because they spend more money, they've got a bigger mortgage, they've got probably more expensive car lease, they probably go out for more meals, they probably spend more on coffees, more on clothes and so on and so, and that's why profit first works. It's not about just cutting your expenses, it's about playing with our habits. Because as business owners, we're not trained to be accountants and bookkeepers and go through our numbers on a weekly basis, a daily basis, we absolutely believe help educating you as a business owner. When we work with people one to one, we help you understand your numbers, we understand your profit and loss, understand your margins, your KPIs, that the key kind of numbers that really matter in your business, your cash flow, your profitability. However, in the real world, day to day, we know you are picking up your phone and you are looking at your bank balance and you're making a kind of a judgment and your emotions in many ways are impacted by what's going on in your bank account. Which really nicely leads me into my story this week. So I've been speaking to a business owner I've been coaching and he's going through some challenges in his business, which is by the way, is completely normal. Challenges, struggles, you know, even if you want to call them failures. [00:03:48] It's all learning. It's how we grow, we hit a ceiling and we need to get to the next level. He's having some challenges around cash flow because the business is getting bigger, there's more team members, the numbers are bigger, there's more at stake, there's more pressure. And I've been working with him to help him understand first and foremost, kind of as a business coach as opposed to a profit first accountant. But the sensible place to start is his numbers because there's no point me talking about what needs fixing in your business. What can you improve? What's the challenges if I don't really know what's going on? And in profit first, when we work with clients in my firm, Grow, grow profit first. We kind of, we do a profit assessment and we create a profit plan for you. And it's like getting on the scales at the gym. If you go to the gym, you want to get in shape. We need to understand where you are, how much of how overweight are you. Do we need to lose fat? Yes. You might want to put muscle on, but you might need to lose fat as well. And you know, so we put your business on the scales. That's kind of what I've done with this owner. I put business on the scales, I looked at the numbers and in this case he even had an accountant already who's been working with him. And quite simply, before I dive into everything else, I got the picture by reviewing 18 months worth of his figures there and then on our first phone call and I went through the numbers and yes, cash flow is a problem, but I said, you haven't actually got a cash flow problem. Yes, we know you've got a cash flow problem, but that's a symptom, it's not the root cause. What is really causing the cash flow problems? There's normally a root cause and it might be that your model's not working, it might be that you're not charging enough, it might be your team's not efficient and all of those could be valid things. And I looked at the numbers and I quite simply said, you've got a profitability problem. You're not making enough money because the numbers are way too tight to give you the buffer, the freedom, the flexibility, the peace of mind with your cash flow. [00:05:52] So why have we got a profitability problem in our business? What's the next thing to look at? Well, that's the million dollar question. [00:05:59] You know, the first thing is to ask thoughtful questions is to understand, act like a consultant, you know, when we were with people's drilling and understand what is really the problem. So now we're going down the right path. Yes, there's cash flow problems. Stuff needs to happen in the short term. How, how am I going to pay the vat, how am I going to pay the wages, how am I going to pay the suppliers, how am I going to pay the pay and all those sort of things that we need to do to stay afloat. How am I going to pay myself and pay my own mortgage? However, let's understand why you're not making enough money. And then we do benchmarking, we do financial modeling. What does best in class look like for your business? What should be possible? What do we know is possible? Because we've seen other clients, other businesses do it before we even get to the aspirational figures that can be completely life changing. Longer term, how can we understand what does good look like? So, for example, I don't know, let's pretend you're a hundred meter sprinter and my son's actually 100 meter sprinter. He plays football and he's kind of addicted to the gym and he Jogs and he was actually ranked the 21st fastest kid under 15 years old in the country for 100 meter sprint without much training. [00:07:16] I'd love to say gets it from me, my wife thinks he gets it from her. But it's probably a combination of both. He's his own person at the end of the day, but when he's tracking his time, he's, you know, he's below 12 seconds, but he's looking for a low 11 second time. You know, he's trying to get to the. I think he's done 11.4, might be as fast as 11.4 seconds. [00:07:38] But how do we know 11.4 seconds is good? Because in a different environment, this is an athletics club in a different, say, school, it might be that he's doing 14 seconds which was closer to my time actually when I was younger. [00:07:51] And, and, and we might think that good because we've got nothing to benchmark it against. So this is where a model comes in, this is where benchmarking comes in. How do you know your business is performing? You need to take a step outside of yourself and understand what does good look like. And we help people do that. And that's what we've been doing in this particular case. So the takeaway I guess today guys, is if you've got a cash flow problem that is virtually never the real problem. There's stuff underneath the bonnet going on in the engine, the profit engine. The car might break down, that's a cash flow problem. I'm kind of making these analogies as I go along, but the car is breaking down. [00:08:32] But actually that's the cash flow problem. But when we lift up the bonnet, there could be something wrong with the engine and that's a profit problem. Then we diagnose where is the profit problem. Is it, you know, is it the cam bout? Is it, is there some, is the oil low? [00:08:47] I'm not very practical, I'm not a mechanic, so I won't guess all the parts in an engine. But is, is there things, is it a sensor that's off? And actually in many ways that's the third thing we need to do when we work with people is understand the sensors, calibrate, understand what's going wrong when it goes wrong, rather than waiting three months, six months, a year down the line. And you've got all these major problems. So if you've got a cash flow problem, it's more than likely, not always, because I've got clients where they're simply getting paid every two or three months from big corporate customers, and that creates a timing problem with the cash flow. But if you're not getting paid on account and stuff like that, and you're not waiting a long time to get paid from your customers, then there's a strong chance you've got a profitability problem. And that could be to do with pricing, it could be to do with your team structure. Maybe it's not lean, it's not efficient, it could be to do with your processes. The person we've been working with is bringing in a lean consultant in terms of optimizing their workflow and their processes and making it more effective, which is inspired by Toyota in, I think, around the 60s and sort of about Kaizen Continuous Improvement. How can we improve our processes? [00:09:55] But sometimes it could be just as simple as your pricing. It might be that you're discounting too much and it's wrecking your profits. You think you're giving a 10% discount, but it's the difference between you paying yourself and having enough money in the bank to not having enough money in the bank. [00:10:10] So you hopefully have not overwhelmed you. I've just given you something to think about. If you don't know where to start and you've got cash flow problems, by all means, reach out to me and we can have that conversation. And have a great week, guys. I'll speak to you soon. Cheers. Excuses. Here I am. Sorry.