Why Your Business Is Profitable but You Still Feel Broke

Welcome to the Creative Mind Smart Money Podcast where we turn financial confusion into creative confidence. I'm Samantha Ek, the keeper and fractional CFO for creative entrepreneurs. Each week I'm sharing my financial expertise and actionable strategies to help you build a thriving creative business. Plus, you'll hear from industry experts who bring fresh perspectives on growing your business beyond the numbers. As building a successful creative business starts with strong financial foundations, your next chapter starts now. The question I get too many times over and over and over again is if my business is profitable, why do I still feel broke? And that is so common and so misunderstood. I really want to just talk about it today and dive deeper into it and why it's so misunderstood. Because if you are feeling broke, it doesn't mean that your business is failing, it doesn't mean that you're irresponsible, it doesn't even mean that your business is bad. It just means that there is a disconnect between your performance and your cash experience. So we want to kind of dive into closing the mental gap that we have with that so that we can really dive deeper into that. So that's what we're going to talk about today. Let's get right into our topic, shall we? So first things first, as with most things, our profit lives on paper whereas our cash is something very real and very tangible. That is a measurement of performance. So when we look at our profit loss or our income for the month and we're saying to ourselves, okay, I made $10,000 last month, we're looking at the performance that we made over the month. That $10,000 doesn't necessarily mean that that's what's left in our bank because our business doesn't stop right. So if I'm your bookkeeper and I'm looking at your past month and I'm delivering your financial reports by the fifth or even the tenth or the fifteenth or the twenty of the month whenever it is that we have on our contract, that profit is already gone because you're already allocating that to new things. Cash is where the timing is. So you're not necessarily going to have that money in your account anymore. Emotionally, this is why a lot of people really resonate with profit first is because when you look at your business at the end of the day and you say, okay, you know, I have $50,000, $100,000, $150,000 in profit at the end of the year, but you didn't see that hit your bank account or you didn't see that being able to spend. Now you're like, why am I not profitable? Why is my business not successful? And we've talked about this a lot before the difference between profit and cash, but I think really we want to just talk about like the emotional standpoint behind it, also like the timing and like really digging deeper into it because no one really explains it clearly when you start your business and all of a sudden you have all these expenses, you have all these things going on and all of a sudden you're looking at your bank account and you're saying, okay, well, I have $500, but last month I made $5,000, like where is that money? And of course, if you've contractors, if you have a social media manager, if you've all these things coming out of your business account, of course, it's no longer there anymore because it's already allocated to something else. It's gone. You've already given that money away to someone else. So having that misunderstanding is going to constantly give you some sort of second guessing or something that is not 100% what you needed to be. Timing is honestly the biggest stress point for when it comes to cash and profit because the revenue doesn't necessarily arrive and the work is done. It really depends on your business and sometimes you know, you have revenue coming in before the work is done. Sometimes you have revenue coming in months after the work is done, especially if you do payment plans. It's all about the timing and of course, your expenses aren't going to wait for your revenue to catch up. If you have a monthly subscription to chat, you be T, for example, that $20 is going to come out every single time at the same time of the month, whether you want it to or not unless you cancel it. It just doesn't wait for you. You know, these things are just constantly going and services businesses feel this especially hard because most of the time with service businesses, we have a monthly recurring revenue or MRR which means that our revenue comes in at the same time every month. It's good for predictability but of course, we also know that sometimes you have project base work. You have a lot of good things going on. So good months like where you have $13,000, $14,000, $15,000 and you have $11,000 in outflows can still feel really tight because at the end of the day you're looking at everything and saying, "Okay, well, I don't actually have any money in my bank account." Everything feels really pressure filled and it feels like, "Ooh, what did I do wrong?" The truth is you didn't do anything wrong. It's just that again, you're looking at the wrong number and you're focusing on the wrong number, which is why I think a cash flow forecast and things like that are so important. You almost need a cash flow forecast with your monthly books because otherwise, you're just not getting the full picture that you really do deserve. Obviously, again, growth can make the problem that we have in our business much louder. So a lot of people think that, "Oh, you know, once I grow, it won't really matter because I'm just going to have the money." But the problem there becomes that more revenue obviously equals more commitments on your time and more commitments equals less flexibility, which means there's more money spent. Either on contractor, software, systems, whatever it is to really allow you to be more flexible but that doesn't necessarily give you the same level of flexibility you had when you were at $10,000 when you're at $100,000. So scaling, obviously, without having some sort of structure or financial backup in place, is obviously going to increase that pressure. There's so many times I've heard it where it'll smooth out on a tone if I just make more money, if I just get more money, if I just keep going, if I just do this, everything will get better. The truth is that it doesn't, right? Like it just creates more stress, it creates more problems because obviously things are going to pop up with the more clients that you have and the more things that you have growing. So that's one of the things that we really want to think about as well is that the more that we grow, the more that this problem is going to become prevalent to all of a sudden, you know, your $10,000 at the end of the month revenue, minus your $5,000 bonus pay, minus your next payroll that's already coming out this coming Friday. They all just add up, right? And if you don't know what's coming, it's going to make you so stressed. You're just going to be looking at everything and be like, oh my gosh, like what's happening? Obviously, one of the things that we also know of is that the bank balance is lying and it's a bio mission. It's not like your bank balance is lying to you on purpose. The bank balance does show you what's in your bank account, but it doesn't show you what's already spoken for all of the money in your bank account could already be spoken for. It could be used somewhere else using it as a decision tool and looking at your business bank account is obviously going to create a whole bunch of loopholes for you because you're going to delay your owner's pay because maybe only see $2,000 in there or something like that. You're going to make panic or rush decisions based on what you see in your account and you're going to overuse credit or overuse other things that you have because you're looking only at your bank account. So it does keep a business in reactive mode when you're just looking at your bank balance or you're just looking at your profit. You're being very reactive to your business overall and that's not something we really want to see or recognize, right? Generally, when we feel super broke, it's usually some sort of systems issue. It's not because we don't have the income moving in. It's not because we're not disciplined with our money. It's not because we don't have the willpower to not spend money. It's that we have a financially supported business that has separation between the performance of your business and what's actually cash, like what is actually your cash, the context around your obligations and of course those clear decision boundaries. There's no explanation of how it's just really what good looks like. So if you're saying, okay, you know, I had $2,000 in the month, I'm doing good. There's no explanation of how are you doing good, like explaining that to other people. So usually it's just that you don't have some sort of cash flow forecast or you don't have an understanding of what's actually coming in and out of your business. And I know I've said this like a million and one times before, but that is so important is knowing what's actually coming into your business and what's actually going out of your business because sure, you can just say, okay, you know, I have six software subscriptions. I got this person coming in next month. I've got a project next month. No problem. I've got the money. But the problem is you actually know how much you have coming in and you actually know how much you have coming out because if you have $5,000 coming in and you have $6,000 going out, you've a problem, right? So the truth of the matter is actually understanding that and having some sort of system, whether that's a cash flow forecast, whether that's just writing it down and knowing what's going in and out of your business, right? Now, feeling broke while also being profitable doesn't fix itself. So I'm kind of just talking about all these different reasons why we feel broke, but don't feel profitable. But the truth of the matter is it doesn't fix itself because if you're avoiding looking at all of this data and actually understanding what's coming in and out of your business, you're just making the gap that you have wider because you're not stopping growth. Your business is still growing. And then of course, your guessing is going to get riskier because you're going to start guessing, okay, I think I can afford to hire someone. You're going to hire someone. And then six months down the road if you don't understand. what's coming in and out of your business, you might not be able to afford that person. You could get lucky, honestly, I've seen it thousands of times before where people have gotten lucky and they're just doing phenomenal. But the truth of the matter is 90% of the time, maybe even 95% of the time, that doesn't happen. You don't just get lucky and by chance your business is so successful that it's just, you know, things don't really matter. And of course, you could be someone who's really frugal too. But the problem then becomes like, what are you paying yourself? What are you paying your employees, everything like that? Just understanding that in a greater context and knowing, okay, you know what, I deserve to be paid or my employees deserve to be paid more and just really understanding all of that as a whole. There is just an emotional cost I've never feeling safe with money. And one of my clients that I work with specifically, we do her budget, we do her cash flow. She always feels an immense amount of relief every single week, whenever we talk, whenever I do her cash flow. And she doesn't really make money and told decisions without discussing them with me because she wants to feel safe with her money. And even if I've told her the week before, hey, you know, you're good, you're good for payroll, you don't need to follow up with me, go ahead and run it next week. You know, we've already set aside the money for payroll, we're good to go. She's constantly asking me, hey, am I okay to do this? Am I okay to do this? Because she wants it, she wants it safety. And she already does feel safe because we've been working on this for quite a while. But the problem then also becomes that she just wants to feel that confirmation and that availability to be like, okay, I know Samantha says that I'm good, I'm gonna go ahead and do it. And that's not necessarily saying that you need me to do that. You could do that yourself for yourself, but definitely having some sort of idea of what's coming in and out of your business is gonna be so, so important. Because that clarity, it requires the intention that you want to bring to your business, right? You want to have that intention that you know what's coming in and out. When you feel broke because of your business, but you're still profitable and you're seeing that you have 100,000, 150,000 coming in, it's not a verdict that you are doing poor, you're doing well. It's the feedback that you need to really understand what is going on in your business. And it is really useful when you have someone that actually can help you interpret it. Because of course, your business isn't broken, it's not doing well, it's not doing anything, it's just actually asking for a better understanding of money and how it actually moves. And that's really where people like me come in, whether you have a CFO, a bookkeeper, whoever it is, helping you understand not just the past, not just what happened, but what's coming in the future. I mean, that's mainly what a CFO does, right? Because a bookkeeper, we've talked about this before, but a bookkeeper really looks at the past whereas a CFO is looking at the future. And you want to know both, you don't just want to know right now, you want to know what's coming up. And that's so, so, so, so important, okay? Profit tells you how well the business performed and cash is going to tell you how supportive it feels and you need both, you need to be looking at both, you need to be understanding both. And know again, looking at your bank balance is not going to give you just that answer. Because again, you don't know how much and that money is already allocated, okay? As always, if you enjoyed this episode, please like it, share it, subscribe to the podcast, leave a comment, let me know how I'm doing. And of course, if you're leaving a comment, you have an idea for a topic, go ahead and do that. I'm so excited for next month's episode because we're going to get a little bit personal. I realized that I haven't really talked about myself or the business in general. And I feel like we really need to dive into who I am and why you should even listen to me. And that's what we're going to do next month. So, if you guys enjoyed this episode as always, like I said, subscribe, like, share it. And if you need anything else, of course, feel free to reach out to me. I wish you guys the best week ever. We'll see you next week. Farewell, fellow travelers. [BLANK_AUDIO]