Nobody's Talking About Cash: How to Keep Positive Cash Flow

P&L is a story. That's all it is, is billing, expenses, that kind of stuff, but it doesn't translate to what is actually the truth and that is cash. Right. Makes a ton of sense. Some of the techniques that we use when we first step into business engagements is, you know, we tackle cash, cash first of all, start to pull apart their bank accounts and introduce a new method of cash management.

And this is no secret, it's Profit First. I mean, we're a Profit First organization. We preach and practice those principles. Some people hear it and think, oh, this is a gimmick, just a book, another business fad. What is your honest take on it and why is it successful? My honest take on it is it's the opposite of a gimmick, right? It's saved, it has saved many people and many businesses in their financial lives.

And if you don't wanna call it Profit First, which I understand it could have a stigma to it, call it good cash flow management. And that's all that is. The problem is that, you know, when I started out on this, right, my wife came to me and she said, you know, Ryan, you killed it, you know, you're working hard, you're doing your side gig, all that kind of stuff.

Why are we still eating ramen? Right, where's the cash? And so that's when I actually found Profit First, right? Well, I love ramen, right? So is there anything I wanted every day though? Exactly. So many delicious flavors. Yeah, absolutely. And so I was paying everybody else first. I was hoping that there'd be leftovers for me and there weren't. There never were. So I was pushing the can down the road.

I'll pay myself later. I'll pay myself later. And that's what a lot of business owners find themselves doing, is that they're the worst paid employee in their company. Instead, they should be rewarded for taking the risk of starting this company, and they should be the highest paid employee, right? Imagine that. So, you know, one of the tricks that accounting does is it says, you know, revenue minus expenses equals profit.

And that's the financial equivalent of eating the whole buffet and hoping there's a salad at the end, right? And there's never a salad. It's more fried chicken, it's more, you know, steak that you don't wanna know where it comes from, you know, those kinds of things. So when you look at it this way, and this is where Profit First gets its name, is that you say revenue minus profit equals expenses.

And that's where Profit First comes off the top. So if I have a budget, and if you don't have a budget and you're doing three, five, $10 million in sales, you really need to get a budget. That'll be another episode, Jon. Is that we wanna make sure that, you know, if we're saying we're going to make 15 cents of every dollar is going to fall to the bottom line, well, that's where our allocation should be for Profit First.

We should actually take that money out in cash. And what that does is that limits our spending. Those subscriptions that we don't need, that we haven't used, the gym membership that we haven't used in three years, those start falling out and saying, hey, I found some savings here. Because a lot of people don't have a growth problem. They have a spending problem. And so when you start taking money off the table, you can only spend so much, right?

And so when you start using your customer's money to pay your vendors and your payroll, that is a positive cash flow mindset. And that's what it is. Profit First is a mindset change. Pay yourself first, take money off the table, and that's how you can make sure that you have bottom line and that your bank accounts are growing. It forces you to operate in a certain operating budget.

That mindset shift is key. I've been through it. I'm still going through it, but I can tell you I have dollars saved for taxes. I've never done that before with my business. And so, you know, to go through the process and squirrel things away, you start to look at those accounts. We're gonna talk about how it all gets set up. You start to look at those accounts and go, oh geez, I'm actually doing a good job here.

And it feels different in how you run your organization. You mentioned something with cards and payments that you just lose track of. Those things, like it's brutal when you sign up for any subscriptions these days. They come back and they charge you four or five times more the next time you renew. So if you don't get a handle on it, you can just be wasting dollars. It can be flowing out and you're not forced to take a look at it.

So it seems like Profit First really kicks us in that gear to micromanage the expenses, to force the business to operate in a smaller operating budget, which means that profit is available, profit, taxes, things like that are available. How does it work in practice for a small business? Well, you know, in Profit First, you have to plan. And that's the big thing. You gotta be more proactive than reactive.

And one of the things that we do is we separate bank accounts. And each bank account has its own job, and every dollar is working hard, that we earn, that we spend, the whole kit and kaboodle. So when you have just one account, it's meant a little math of trying to keep it in, well, I'm gonna get $100,000 next week and it'll allow me to spend $150,000 to catch up on my vendors' payments, and oops, I forgot that I have payroll coming due so maybe I can only do $75,000, and lo and behold, I forgot to pay myself again.

Right. So what we do is we separate out the bank accounts for their different jobs. So we typically start with five bank accounts. One of them is income. Income is all the money coming in. This is our disbursement channel. If we have $100,000 of income, we can only disperse $100,000, right? Pretty simple. And it also allows us to keep track of these deposits when, you know, we're expecting $100,000 and only $30,000 comes in. Now we know we have a collections issue, right? And so now we want to fix that collections issue. The second one is that we want profit, and what that is is it's sacred. It's untouchable. This is the reward for running your business, for owning your business, for putting in those sleepless nights, right?

So, you know, we're gonna put in a certain percentage of the money coming in so that you can do whatever you want to do with Mr. and Mrs. Owner, right? The third one, just as importantly, is owner's pay. Because you're a human being, you're not an afterthought, so you need to pay yourself well. And that's part of the whole thing, is making sure that you're going to your company and not dreading it, right?

And you're not being paid minimum wage, you're being paid very well to take on that risk. The next one is tax. So we want to make sure that in April, it's not a horror show, right? In that we're dishing out $30,000 trying to figure out where it's going to come from. We're saving money along the way so that when we hit the $30,000 mark, here you go, I've got the cash for it.

Oh, I thought it was 35, I get an extra $5,000. Now I'm gonna go take my family on a vacation. That's how that works. And that tax account is for your business taxes and your personal taxes. So for your personal tax returns. And then what's left over, the big clump of account, is your operating expense. So this is where you get to pay your employees, your products, your subscriptions that you don't use, and that's what the allocation for that is.

So a lot of companies will start, they see that they have $100,000, they're going to spend $100,000. So when we allocate from the income account, now it's only $95,000 that you can spend on these other things because you put some away for profit and tax and owner's pay and those kinds of things. So now it forces you to look at your expenses. So separating these out is very easy to keep track of and your accountant's going to grow all and say, oh, that's four more bank accounts I have to reconcile.

When you're transferring money a couple of times a month, it's not that hard. Right? And if your accountant's still grumbling, maybe you need a new accountant. Quick shout out to our sponsor Align, run by my co-host Jon. Align works with business owners who are great at what they do, but terrible at telling people about it, which honestly describes every client I've ever had. Jon, you want to add anything?

He's nodding politely, very on brand. HelloAlign.ca. But what happens if an owner can't afford to set aside profit right now? Things are tight. That's the owner who needs it most, Jon. And I say that with love and hopefully the tone of your doctor who says you've got to make time to diet and exercise. You've got a problem. If you can't save that profit now, yesterday was today. Today was tomorrow. Yesterday already happened. So we've got to stay on top of this and you have to do it now.

This is going to force you to look at your company through a different lens. And we're only going to start with 1%. So you put 1% away for taxes, put 1% away for owner's pay, 1% for profit. Now we're planning for the future. So now I've got 95 cents to pay for my bills.

If you can't run your business off of 95 cents of every dollar that you take in, you've got to re-look at your model. You got to take a look at your, in the mirror and say, how did I get here and how do I get out of it? And the first thing you do is by allocating that and forcing the savings, right? So we're gonna make sure that, you know, you build up this muscle by doing 1% every week or 1% every two weeks of your deposits that are coming in or of your gross profit percentage.

However you wanna do it, it really does not matter. As long as you do it and you build up that muscle. A client that we have is borrowing some money from our Profit First account for what it was intended for, which is a capital expenditure. We bought a bunch of vans, we're taking out $150,000. This is money that we've been saving for the last year and a half. We have money in that account for this specific reason, and so we're also, with the muscle, putting in 3% of every dollar coming in as well. So we're taking money out, but we're still flexing the muscle, putting money back in, right? That's how that works. It's a discipline, it's a mindset. Every week we go over and forecast what money is coming in based upon our collections efforts and what money is going out based upon what our vendor terms

are. And so we're only using money that we have, that we've collected, that we will be collecting, to pay for those vendors. That's it. No more, no less. And now we have a positive mindset, a positive cash flow mindset. Our payroll is paid, our insurance is paid, now the vendors get their payment. And it's been working perfectly. We're fantastic payers, but even more yet is that we're better collectors.

Right. It's taking your business from it just being challenging to manage from a cash flow perspective with everything going in all sorts of different directions and no control to actual full-on organization with structure and I want to say financial controls, but also a disciplined mindset that actually reinforces itself because your business gets in better position. Absolutely. And when a business is in better position, now you have options later on with what you want to do with that business.

You said right at the start, nothing works until cash works. What does that mean for other levers? Marketing, hiring, systems, things like that. How does it all tie together? Every other investment is a bet. Bets are fine if you can afford to lose, but if you can't, they're not bets, they're prayers. So if you don't have the cash to pay for marketing, it doesn't matter how great your marketing is.

If you can't pay the bills, if you can't pay your vendors on time, if you can't pay your payroll on time. So what we need to do is focus on that. So if you wanna hire a marketing agency, can you fund it for six months without flinching? Right? Can you hire Jon who we're marketing, even good marketers are gonna take time to get funnels in and to close the deals and get more sales.

So you need to be able to shore up that you have enough money to pay these folks, right? And so typically it'll be, well, I'll pay it back later, but you don't, you know, later is fictional. It's fictional, fictitious. Well, I just made up a word. Hey. Yeah. It's, you know. We're smarter than we thought we were. I'm smarter-ist, right? Yeah. It's the same thing with salary, right?

So if the faucet were to shut off, do you have an emergency reserve? Can you afford to pay your folks for three months without getting that next sale? There are companies out there that can. Apple has hundreds of billions of dollars in cash just waiting to take advantage of that opportunity. It didn't happen overnight. They were methodical, they planned, they used their own version of Profit First to say, we're gonna make better products, we're gonna make money on those products, we're going to pay our people well.

Oh, and by the way, we're going to save up money so that when we see an opportunity, we can pounce on it when others can't. Right. So it makes it a ton more effective. It basically sets out to achieve the objectives that you, the reasons we got into business in the first place, right? So it tidies things up, allows you to allocate, allows you to grow, make responsible decisions.

Because the whole purpose of this, like the reason we're all in business, is we wanted to make some money, ideally eventually sell the business and kick back and retire with lots of cash. So how does it tie into exit planning? If somebody's thinking about selling in a number of years, two, three, five, seven, why does it matter right now? Is it something that I can kick down the line and worry about when I'm close to selling or do we need to get ahead of it?

You need to get ahead of it, Jon. Exit planning is expensive. You hire folks like me, you hire brokers, you have attorneys, you have everybody coming out of the woodwork. And so it's very expensive on the buy side and on the sell side of things. So when we're on the sell side of things, we have to pay our advisors because they should be having, we should have a return on investment from them.

And so buyers, when they're looking at us, they don't care about our best month. They care about your worst month and did you survive it and did you survive three of those? That's what they care about. They want to make sure that your business is a cash machine. It's a printing ATM. If I'm looking to buy a business, I don't want to buy a job with overhead.

I want to buy a well-oiled machine where I can just come in and collect my dividend checks. That's really what I'm looking for. It can run itself, and this is another episode, but it's a cash machine, right? And that's what I'm looking for, is cash flow, so that I can take that money and then buy another company and then buy another company. When we're looking at something where, hey, it's got great EBITDA, but it doesn't make any cash, everyone's gonna walk out the door, they're gonna low-value, right?

And so, when you get your business running like a well-oiled machine, it's profitable, your bank account's soaring. You make that money along the way, just not in the three, seven year mark when we sell it. You're making hundreds and millions of dollars along that way as well as that big exit of $15 million. And that's the thing that people understand is that I'll make $3, $4 million along the way there plus the $15 million.

Now I'm close to $20 million. Whereas before, I couldn't even afford to pay myself. So it creates the consistency that people need to see to be able to make the investment to buy out your business. Yes, absolutely. And that's ultimately what we want. Either give it to our kids as a legacy or someone else as a legacy, right? Why wouldn't you want to give them a well-run machine?

Mm-hmm. Right? Yep. Makes total sense. So hopefully light bulbs are going off with people. I know when I heard about it, and I mean, you introduced it to me. And the implementation was interesting, relatively painless, but highly effective, it allows you to turn the corner with your business. But if somebody's sitting there, got a ton of revenue, but starving for cash, what's the very first move?

Open a separate bank account today, even if it's a profit account, right? Even if it's the income account. Start, just open it up today, not tomorrow, not Monday, not when things calm down. Stop what you're doing. If you're driving in the car right now, just pull a U-ey, go right to the bank and say, I want to open up a bank account. That's the first thing to do because that's going to start giving you a view of your company that you haven't had before.

And if you do open up that one account, let's call it, let's just label it Profit. And what I want you to do is transfer 1% of every deposit into that account and don't touch it. So if you're gonna do it on a weekly basis, every two weeks, whatever that is, if I collected $100,000, I put 1% in there, my math says it's $1,000, and then I'm gonna let it sit there and not do anything with it, and I'm gonna pay my bills with the other $99,000, right?

And I know it sounds simple, embarrassing sell, but this is the way that you're going to start looking at your business and it's going to become a cash cow in months to come. Right. Right. So one account, 1%, don't touch it. Like this podcast, it sounds really boring, but it's life changing, right? It is. It's the best decision I think people can make all year. Okay, so yeah, I think it's getting close to my parents' nap time.

Our two listeners need to switch off and go and have a snooze. So what's the takeaway here? Wrap it up for us. Revenue is applause. Cash is oxygen. Open up the account. Move 1%. Don't touch it. Fix the cash first and everything else, the marketing, the hiring, the systems, the exit, it stops being a gamble and starts being a plan. Just 1%. Do it today, not tomorrow, not Monday, today, not when things calm down, things are never going to calm down, and that's the whole point.

Right? And your electrician Mike will be proud of you that you're gonna pay in cash and not in an IOU. Right, awesome. Good episode, Ryan. Linchpin, I think, for future episodes. We got a bunch more coming. Thanks for tuning in, Mom and Dad. And we'll see you next time. Oh, we got another subscriber. Oh, no, they unsubscribed. Okay. That was my sister.

That'll do it for this episode of From Burnt Out to Bought Out. If anything we talked about today hit home, do us a favor. Share this episode with another owner who needs to hear it. And if you're sitting there thinking they're talking about me, good. That's the first step. Head to the show notes and book a free triage call with our team. No pitch, no pressure, just a real conversation about where you are and what's possible.

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