Profitable but Broke: Why a profitable business might still struggle with cash flow

By Erline R.

One of the Sharks on the TV show “Shark Tank” is Kevin Leary, an entrepreneur referred to as “Mr. Wonderful” because of his business successes. O’Leary is fond of saying, “I love cash flooooow” in a very particular way to indicate how significant cash flow is in the success of any business and how much it influences his interest to invest in a business being offered by a fledgling entrepreneur on the show.

What Kevin and many successful entrepreneurs know, is confusing money in the bank with long term cash flow is a sure way for businesses with a great P&L to continue to struggle, and unless the situation changes, can lead to bankruptcy.

A friend of mine told me about a recent conversation she had with the owner of a local advertising and marketing agency that had a few key employees and would scale up with independent contractors as needed.  They were overjoyed when they landed the contract from the state’s Board of Tourism to provide every piece of communication for B2C and B2B campaigns for the following year. Their compensation was in the hundreds of thousands of dollars with the possibility of becoming the agency of record for future campaigns.

They received $150,000 upfront with the rest in incremental payments due every 90 days with the largest payment due upon delivering all final marketing materials. They were so excited they decided to hire two new employees and instead of continuing to operate out of their homes leased office space to impress the Tourism Board when they came for

their first meeting. With $150,000 in the bank, things were looking great, but by the end of the second month they were struggling to meet their expenses. What happened?

They did what many small – to – medium sized businesses do. They managed their cash based on their current balance, not on when they would have to pay their vendors, subcontractors, taxes and other expenses. The timing of inflow and outflow (cash flow) is crucial. They failed to consider how much cash they would need for projects scheduled over the next 90 days including video and radio production, printing and social media plus payroll, rent and miscellaneous including electricity, office equipment and order-in meals. By the end of 30 days vendor invoices started coming in. By the end of 60 days, more invoices hit and the owner was trying to figure out who to pay and who to try and hold off. Of course, everyone expected to get paid, even though new cash wouldn’t flow in for another 30 days, and that still might not be enough.

What You Don’t Know Will Hurt You

Was the agency owner stupid?  Absolutely not.

Business owners make smart decisions all the time. The agency owner decided on the campaign to present to the Tourist Board that they loved. She signed off on the media buys and financial contract that her Account Manager presented to the Tourist Board. She, like most business owners, are superb at doing what they love, but not so good at doing what they don’t love. And that’s great. Because, truth be told, you don’t have to.

Many business owners don’t have the data they need to make informed financial decisions, often because they don’t know where or how to look for it. Why not? Because it’s not what made them want to start their business in the first place. It’s not what they like to do, want to do or were trained to do.

Clarity Instead of Confusion

If you have the right bookkeeper you’ll know where your money’s going, when it’s needed throughout the month, how much you’re keeping and what to do next to increase profit.

Traditional bookkeeping focuses on the previous month, not what’s going to happen next month based on your obligations vs. cash intake. Profit First bookkeeping is different. It’s uniquely designed to give you forward-looking cash flow analysis to plan ahead in decision making. With Profit First Bookkeeping you’ll have rolling cash flow forecasts, closely tracked receivables and accurately know their burn rate. And you’ll actually keep more money than you spend every month. Instead of struggling you’ll feel confident, instead of confusion, you’ll have clarity.

At Rize Advisory our Profit First Bookkeepers will make certain you know where your money is today, and where it needs to be tomorrow. Our services include:

• Bookkeeping
• Reconciliations
• Payroll coordination
• Tax-ready reports
• QuickBooks Online Setup & Cleanup                                        
• Monthly Reconciliations & Transactional Reviews
• Accounts Receivable & Payable Oversight                    
• Payroll & 1099/W-2 Management Support
• Monthly Financial Reports and Insights

You’ll have clean, accurate, and timely books delivered every month. And we’re virtual, so we can be anywhere that you are. If you’d like to say goodbye to surprise expenses and hello to a positive cash flow, if you’d like to turn confusion into clarity and save more money every month, give us a call. At Rize Advisory we say, Do What You Love, Outsource the Rest and Rise!

For a Free Consultation, Call 855-683-2002.

Or email at: info@rizeadvisory.com