Sometimes professional advisors really fail to understand the real world of small business.
A client of mine was advised by a financial person the other day that since their business had not earned any profit in 18 months (the length of time the business had existed) the main contractor should get a job.
Now this business has no debt. It had invoices out for more than its monthly payments and jobs in his area of specialty were scarce. So getting a job, if he could, would be a challenge. Meanwhile, if he takes his eye off current and future contracts to look for a job, the family would be in dire straights.
No Profit. So is a job the answer?
Profit and cashflow are 2 different things. Profit is a bookkeeping total whereas cashflow is the flow of money in and out or the business. Many businesses have good profit but poor cashflow. They have high debt that prohibits growth and yet they are profitable.
So if your financial advisors are telling you to get a job because you have no profit, look at these things before you make the move.
- Is your cashflow positive or negative?
- Does your debts and operating expenses allow you to pay yourself a wage?
- Do you have any work coming up that you are sure to get?
- Are there any job vacancies in your field or are people being made redundant and losing their jobs?
- Is there contract work out there, if only you could find it?
Having a job is lovely as it guarantees a steady income. But does it really guarantee your future?
EVERY employer can restructure and you can find yourself out of a job. EVERY employer can be sold, have the owner die or have some physical disaster happen that closes it down overnight.
If we taught every child to read, write, do arithmetic and be responsible for contracting their physical energy and mental acumen to others who need that service, the world would be in better shape.
If we paid out only what we earned minus 10% then we would reduce stress, sickness and financial problems. In other words, we lived within our income.
Profit is a great measure of a successful business but only contribution and the ability to pay debts and manage growth, truly indicate a successful business that meets the needs of its clients, owners and the community.
Today commit to your financial management to managing cashflow rather than profit.
Has anyone ever told you to get a job? In the comments below share what you did? Oh and please share this blog with others. Thank you.
To your success.
Roberta Budvietas
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Guest Blogging with Jon Morrow
Brilliant timing of this blog post, just hung up the phone with a friend where I was telling her about a meeting I had today with a business ‘advisor’ and had just uttered the words “I feel a bit depressed that all they are interested in is the bottom line, the bloody profit.” I wasn’t advised to get a job, but they were also not particularly interested in hearing a lot of what was going on overall, which meant they missed a lot of the positive things going on.
Luckily it made me more determined to remember why I am in my business in the first place, as I am sure ‘profit’ will follow.
Thank you also for the reminder about the difference between cashflow and profit.
Susy
Hi Susy. Yes this seems to be a real challenge with some advisors and having turned around a number of companies by working on their cashflow rather than their profit, I know you can move forward when money is flowing.
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October 12, 2012
There are more than just these two issues.
Many small business folks understand that owning a business means that deductions occur that don’t exist, when one is an employee. Driving to and from work as an employee is an expense that has no tax preference. Driving to visit a client is deductible. So, while they both may entail the same cash flow, the former costs $1 for every dollar of cash flow; the latter costs from $0.7 to $0.9 of every dollar of cash flow.
Calling clients if you are employed- and your cell phone is NOT reimbursed by your employer is totally on your dollar; doing so while self employed is a legal deduction from income.
These two expenditures lower your profit, but don’t lower your net cash flow in an equivalent matter.
If your accountant (and most don’t) do not discern such differences, you need to call a more enlightened group like ours to help you make those distinctions!
Good points Roy. The challenge so often in my experience is that schools teach watching profit rather than watching and figuring out cash flow. When you have cash flow, you can make things happen for the business. However simply having profits may still limit you. Bankers, advisors and many other “professionals” fail to understand this difference. I also think this is why debt goes so high.