Why Is Your Business Profitable but Always Short on Cash?

(upbeat music) - Hi, I'm Kendra Korman, the host of Imperfect Marketing. If you're a solopreneur, small business owner, or a marketer, you know marketing is far from a perfect science. And that's why this podcast is called Imperfect Marketing. Here you will hear from marketing experts and successful business owners about their marketing tips. And of course, their lessons learned along the way. - Hi, I'm Kendra Korman. If you're a coach, consultant, or marketer, you know marketing is far from a perfect science. And that's why this show is called Imperfect Marketing. Join me and my guests as we explore how to grow your business with marketing tips. And of course, lessons learned along the way. (upbeat music) - Hello and welcome back to another episode of Imperfect Marketing. I'm your host Kendra Korman and I am super excited to be joined today by our finance guru who's gonna be sharing with us all the things about profitability. Thank you so much for joining me, welcome. - Thank you for having me. My name is Emily Billy. I'm one of the partners at Thorn Advisors, where we are focused on helping business owners turn profit into actual cash, reduce their taxes, strategically build wealth and legacy at the same time. And so that, the statement I just said is like the foundation for why we started is that we know a lot of business owners start because they're passionate and good about the one thing they're doing and the one thing that all business owners need to know is finances. And it's usually the one thing that most people don't, but they are passionate about actually growing wealth and building legacy for their families and beyond. And so that is why we got started, but a little bit about me, I'm a mom to three, my oldest just turned seven last week. So it's been a crazy few years, but I came out of big for accounting. I was an audit and I really did that like grind lifestyle and though I learned a ton, I really learned that in order to be present at home, I had to kind of like build my own thing and do my own thing. And so what I recognized was I was really good at giving people advice on how to do things more efficiently and effectively, and then my business partner and I were like, hey, you know how to do taxes? That's her specialty. And I know how to help people make cash. We should do something with this. And now it's turned into this passion to not only reimagine the small business owner's experience, but also accounting firms because we both came out of public accounting and it's all been the same thing. And we really wanted to do it differently and show other people like you can still have impact, do the thing you're like technically trained to do, but also have a life and that be like the forefront piece of it. - I love that story and I love the fact that you're helping people identify really opportunities to live their dream because yes, a lot of solopreneurs, entrepreneurs, they build a job for themselves, not necessarily a company all the time, right? And sometimes they sort of magically become a company, right? With employees and everything and it's so amazing, but those fundamentals are still gone a little bit. So I know cash flows are extremely important. So I actually have a master's of accounting. So I should know numbers. I should, but working, we're not gonna take credit for that. But it's much different when you're pricing your services and working on having people pay you on time or it's a lot more complex than I think a lot of people give it credit for. And so I personally struggled with it, right? I struggled with how to price my services and how to make money and how to pay myself, right? 'Cause and then it was always a timing thing, right? Like March is always my high expense month because that's when my Microsoft for some reason, like 90% of my stuff were news in March. I have no idea clearly I get bored in March and do all my subscriptions, but I was just looking at that the other day. That's why I happen to know this. So my question for you is how do you help people who are profitable actually have cash? 'Cause there's a difference between the two. So maybe we should start with a difference. - Yeah, so I think this is very common and I think because most business owners are taught to look at their profit and loss statement, they think it has all the truth in it. And so even if they're outsourcing their but I mean, and we're talking like most people struggle to outsource their accounting one. And then when they do, somebody like sent you statements and they're like, okay, it's done. And you're like, what is this? But most seasoned business owners even have only gone as far as looking at their profit and loss statement because when you're talking about business strategy, all of those things are always talking about top line revenue, but nobody's talking about how much money you're actually taking home with you or how much money is left for you to reinvest in the business. And so the difference between profit in cash is it shouldn't be that much, but it can be. And the reason being is if you're looking at a profit and loss statement like accounting 101, revenue is the money that comes in, expenses are the expenses that go out and sometimes they're purchased on credit cards, which will be key later, but sometimes they're purchased on credit cards, sometimes they're purchased with a loan. And then at the bottom of your expenses is your net income. And so when you get to that net income number, the IRS and every other taxation board assume that's how much money you have in your bank account. But actually, if you go to your balance sheet and you look at your bank balance and your assets, sometimes that number does not match, well, I should say most of the time, that does not match that net income number. And the reason being is like, for example, a great expense would be if you did use a credit card and you don't pay off the balance of that loan or of that credit card, then you are paying interest on it. So the only thing you're seeing on your expenses is the interest and the thing you paid for, but not the principal amount that you paid down. And so that's how those two numbers start getting off. The other thing that will make it get off is when you actually pay yourself. So if you are just a normal LLC that's taxed as a sole proprietor, you just give yourself distributions, which is your cash. But that's not tracked on your profit and loss. So if you're only looking at that profit and loss, you kind of are missing the full picture of where that money is. And so that's why oftentimes it's hard to get those two numbers back on course because you just don't realize how your money flows in and how your money flows out. The other thing that can be tricky in the online space is we count sales of packages sometimes and then we put them on payment plans. So you sold a $5,000 package, but they only paid $197 for it. And then they have all these subsequent payments. And so sometimes you were like, oh, I made a great sale today, which you did. But in all actuality, you only collected that $197 at the time. So there's so many nuances there that kind of show up in those financial statements that can make it kind of difficult to understand. And that's why sometimes tapping in an expert that can be like, hey, how does this actually work versus how I'm interpreting it can make such a difference? - I think the difference is really important to note. Now, one thing I know you said that it's your partner's focus is taxes. So many people wanna make that profit number small, depending on what their goals are for sure. But that's not always the best thing to do. - No, no. So one thing we do differently, and I feel like sets us apart from like a tax strategy standpoint is understanding what your goals are in the next year, five years, 10 years. And the reason being is like, let's just say you are gonna be a first time home buyer and you've only been in business for yourself. Having that profit number look really low is not going to lend itself for you to achieve that goal. And even if you meet a line of credit, say you want to grow in scale, but sometimes you have to purchase like hard assets in order to do it, you need to qualify for a loan or a line of credit. If that profit number is low, it appears to the bank that you aren't responsible with your finances. And so it's definitely a balance in making sure that your tax person, especially if they're doing strategy with you is aware of what your ultimate goal is. So then they can come alongside you and say, hey, I know the goals to pay the IRS the least amount of money, but we need to do it in a way that doesn't make it look like you make no money in your business because ultimately the goal is to build wealth at the same time. Yeah, so I was scrolling through TikTok and there was this mortgage guy that he specializes in getting solo printers and single-person LLCs, self-employed people, their mortgages. So they wanted to do like a bank statement mortgage and there was another one that he talked about. Anyway, it was like none of it backed up, what they said, but like, oh, I've got a hugely successful company. And it was like, you doesn't show that you've made a profit in five years. Like, no, that's not good. And it was just, it was really interesting how there was that different level of expectation. For sure. And I think this is where there is an importance that you either have your CFO working alongside your tax strategist or your business strategist working alongside your tax strategist because those two together can work it out to make sure that you have the cash you need to do the strategy that they want to implement. And then also just making sure there is a good flow of like the cash coming in cash going out. So you're never strapped because there's so many strategic decisions and changing your entity type, getting loans, getting a house. So you're a business owner like there are so many things that go into it. And I think there's just not enough expertise, generally speaking on these topics. That's why you want your situation looked at specifically. And build confidence in you, you get educated on it. You know in the future when something similar or something close to it happens, you're like, oh, well, in this scenario, I had to do it this way. So probably the same going forward. So let's talk about that let's go back to a profitability again right and cash and yes, the numbers can sometimes be close, not always right depends on what you're doing if you're paying yourself from those funds, you don't necessarily see this the equity going out the door. So I guess my question for you is what are like some of the big mistakes that you see business owners making when they're focused on the wrong number. I think the first is not having their bookkeeping up to date. I can't tell you how many times and like, I've been guilty of it myself or you're in the 11th hour. Yeah. Yeah. You're in the 11th hour and you're like, oh, I got to get this all together. But all of that's reactive and all those things have already happened. So like not having your books done is really putting you in a detriment to make actual strategic decisions like you can't do it. If you don't really know, I talk a lot about personal finance and when somebody's like, I think I pay, I'm like, then you don't know because if you kind of think that means you don't know it well enough to be confident in the next decision that's made. And I feel that way about books. So I always recommended people like if there's only a few things you can outsource that would be the first thing because you don't need to be spending time messing with quick books trying to make sure if it hits accounts that you don't even know matter. And so I always recommend that the other sneaky thing that I think happens to people regularly is being priced wrong. And often we price based on market and industry or how much it costs us to do the thing. And then we just tack on a surplus, but we're not factoring in like what it costs to turn the lights on every day, every week for the month. And so when you're not factoring in that overhead percentage, you're really at a detriment and you can't even make predictable margins because you don't know how much it costs you to just be in business flat line before you've even made a dollar. So that is one thing I think is super impactful for people when they start looking at their cash and their pricing is that they're like, oh, so for every dollar that comes in, there's a guaranteed amount of money that goes out. I never even thought about that and it is and so that is one way I like to work with business owners is showing them their pricing and what it either doing for them or not doing for them and talking through how to strategically increase their prices and be able to explain it to their clients patients, whoever they're talking to. And saying, hey, oh, I get it like now you do need, you know, life is more expensive now we have to pay for more things that's why you're increasing prices. And so I think that's another part of having that cash flow, CFO support is like it's not just me telling you what's wrong or what you need to do, it is actually partnering with you to be like, how can you effectively fix this going forward. Because I do think there's usually a gap there. Yes, and I think the pricing is that is a huge gap because people don't understand what it costs them right and I think too often small business owners that are starting out right creating a job for themselves. They're not even looking at what it costs them they're coming up with a number based on what they were paid right at their company that they just left or whatever that happened to be right and we have a tendency to look at our time not as valuable and I think that that's that's a really big issue when it comes to pricing and so I think there's a there's a lot of really good nuggets there so that's awesome. So when you're working with somebody to help them increase their prices or to identify that there's a pricing gap. What's one thing that tells you that that's off so usually I can usually spot it right like you see enough of things after a while like I can look at your financial statement and say oh it's pricing right off the back because they're overhead is over 30 40% so usually pricing is going to 100% of the time be part of the issue because your overhead percentage is based on every dollar you bring in so the higher that percentage is that means your expenses are overtaking the money that you're actually bringing in. And so once I look at that I'm like okay this is an issue and then we literally will sit down with you and say here's your offer this is how much it actually cost you to do this directly. So all those clogs numbers which is cost a good sold we won't get into the technical jargon but like all that direct costs that's really easy to quantify and then I tack on the overhead percentage and then learn like so I make no money every time I sell this product i'm like yes. And I mean I just did this recently for a digital media agency a hundred 1.4 million of like unaccounted for expense that could have been recouped in the proposal process and the high side of it is they were pretty profitable to begin with so they felt really good about it but then when they saw that number they were like. And so we changed the proposal process and we walk through okay how can we do this strategically especially because they have multi phase proposals and so on the projects they knew in different phases they weren't profitable they were able to recoup some of that cost later but then it just changed how they proposed on projects in the future and made sure they always knew what their overhead percentage was. So it's one of those things that can be hard at the beginning but it makes you super powerful beyond that because you can create those like predictable margins and that's what we're all shooting for at the end of the day yeah the predictable margins are a big help because if you're under pricing yourself one of the big things that you you start to resent the work that you have because you know you're not making any money and nothing's moving forward. And you resent your clients and the work that you're doing and you built it because this is what you love and that is just such a hard balance to do so this has been awesome I love all of your tips I love all of the insights and information that you've been sharing especially because again profitability is not cash right depends on your entity structure things like that and how profitable you are shouldn't just be minimizing that line to save on taxes you really need to look at your overall goals and I think that there's there's just so much there that people really need to ask themselves what is it that you're trying to do I also love the idea of outsourcing your bookkeeping that is why of the first things that I did outsource because I would spend hours doing my books at the 11th hour and I was hiding my face earlier because I am behind my bookkeeper sends me notes saying, "Hey, submit a statement, Mike Kay, Mike I will next month." So Mike will just save it all for them. We're almost at the end of the month. So it gets a little crazy but she's awesome because she stalks me for them and then I don't have to do anything. So really, really helpful. But before I let you go because again this has been amazing information and I loved how you laid it out just so simply. But before I let you go I do have to ask you the question that I ask all of my guests and that is that this show is called imperfect marketing because marketing is anything but a perfect science. What has been your biggest marketing lesson learned along the way? Oh, definitely consistency and visibility and messy action. I feel like sometimes especially if you are of the account nature you want to do things right all the time. And what I have found that just getting out there and stumbling through it and figuring out your groove and doing all of those things is actually pretty endearing to your client and lead on the other side of it because they realize, oh, you're a person too. And then the second part of it is just that it teaches you so much about yourself and you build that confidence and that clarity the more you do. So don't be afraid to pivot. Don't be afraid to say, hey, this worked before. It doesn't work now. It just gives you this opportunity to keep refining your message. Oh, that's fantastic. But yes, consistency and visibility are extremely important. That's why no matter what, I constantly put out these podcast episodes, right? And my my life gets busy a lot. And busy is a four letter word that I'm trying to work out of my vocabulary. Clearly, I'm not doing that well. And but it allows me that time, right? That buffer time to make sure that I'm still out there that people can still see me. But I don't have to necessarily be doing things every day. And I can be present at the events that I'm at. And so that's one of the decisions that I made that way. But I love it. I love having you as a guest. Thank you so so much for showing up and sharing all of that great knowledge. I really hope that if you're a business owner and you've been listening to this episode that it gets you asking yourself some questions and looking at more than just your P and L statement or your income statement, right? You want to be looking at the whole picture. So be sure to be doing that and reach out. If you have any questions, we'll have contact information in the show notes down below wherever you're listening or watching. Thank you so much. Have a great rest of your day. [Music]