Profitable But Broke? Stop Making This Mistake

You are running a profitable business, your accountant and your salon software says so. So it's got to be true. So why does your business account look like that? Build your salon. In 27 years of running a salon business and now a coaching business, I have faced bankruptcy three times. Three times. And to be honest with you, I want to jump into what that actually feels like because it's not what you think. Yes, the numbers are depressing. Yes. Looking at the spreadsheet again and again stings, but that's not what nearly finished me. It was the stories that I told myself about what that meant. That I was letting my clients down, that I was letting my team down, that I was some kind of fraud who'd spent their career telling other people how to run a successful business while their own was quietly falling apart in the background and most of all, that I was failing my family. And it's those stories, the ones that you tell yourself at three o'clock in the morning, they're what do the real damage. And I'm telling you this because if you've ever stared at your bank account feeling sick, despite working harder than you ever have, despite your booking software telling you it was a record month, despite your accountant telling you that you owe money on your profits in the form of corporation tax, you are not alone. You are caught in a trap that catches almost every business owner at some point. And today I'm going to show you what that trap is, where your money's actually going and what to do about it. Right now, I'm Phil Jackson, your queen of salons coming all over the internet again with another dose of my Wise Owl wisdom. How on earth are you achingly? Well, I hope, and I hope this topic's not too gloomy and depressing for you on a bank holiday Monday. That said, I expect lots of you are catching up later in the week and I hope you had a wonderful weekend doing something that filled your heart with joy. So where do people go wrong? Well, they go wrong because they think that profit and cash are the same thing. And that's a fundamental misunderstanding that sits at the very core of this salon owners. And honestly, in my experience, most small business owners believe that profit and cash do the same and they're not, they're not even close. Your profit and loss statement is like a report card. It's showing how your business performed over a period of time. It's showing how much income you had, take away your total expenses. And it's a useful measure of long-term health. But cashflow is different. Cashflow is the actual money that's moving in and out of your bank account right now and it's how you can pay your bills today. The problem is timing. And part of this we highlighted in a previous episode when I was interviewing my friend Braden, when you perform a service, your accounts record that as revenue straight away, as soon as the client's paid. When you buy a big stock order, that cash leaves your account almost instantly as well. But your accounts don't count that as a full expense until those products are actually used up. So there's a gap and sometimes there's a significant one. There's also a gap between what's going on in the business right now and what your accountant is telling you is going on in the business. There's a delay between what's happening in the business today and what your accountant needs to report to His Majesty's Revenue and Customs. And sometimes that delay can be quite sizable. It can be months, maybe even over a year between you carrying out business today and you getting the data that you need about those business transactions. So the numbers say one thing, but what you've actually got profit wise as an accounting concept is different from what's actually going on cash wise in the bank account. And this is where people start to get unstuck. They either start spending money that they see in their bank account but actually isn't profit at all. And at some stage that's going to have to be paid out on expenses or paid out on taxes. So they get themselves caught in a trap there or they are believing that they are profitable from the accounting side of things. They start spending money, but the money actually isn't in the bank account at all. So there's a couple of traps that people fall into when they don't differentiate between profit and cashflow. And what Braden's trying to achieve is that you get that information in a much more timely fashion. So where does the money actually go? If the accountant is telling us that we're making a profit, if our salon software's telling us we're making a profit, where the hell is it? And I've been in this position a lot of times where the accountant saying, you owe X amount in corporation tax because you made X amount in profit last year. And I'm sat here thinking, well, where the fuck is it? Because it's not in my bank account. So usually it's hiding in one of a few places. Firstly in stock. And we're going to talk a lot about stock and stock control this year. Every bottle, every tube, every box is cash sitting on the shelf doing nothing. So when you overorder or God bless them, when your suppliers persuade you to overorder or hold onto slow moving products, you're tying money up that should be in your bank account. Second, this isn't a problem in my business because I've tightened this up a lot and I hope you're the same as well. People who owe you money, if you are waiting on anyone to settle up, whether it be a wedding party, whether it be a corporate account, even a client on a payment plan or a client that you've said, transfer the money when you get home, your accounts are showing a profitable sale, but you can't pay your rent on an IOU. Next up owner drawings, and this is an uncomfortable one. This is where you've dipped into the business account while it's looking healthy and start skipping yourself, paying yourself. When it doesn't look healthy, what happens is you're draining the cash reserves because you don't have a system for paying yourself properly. So what's happening is that the money is disappearing into your account because you need that money. Actually what you need is to figure out what the business can reliably, predictably afford to pay you month after month. Next up is the timing of your costs. And I call this the first of the month anxiety. It's because in my own business what it felt like is that the rent, the wages, the insurance, all those direct debits and standing orders, they don't care if you've had a slow month and they all land or they seem to land for me around the beginning of the month. So all we need is one month where all those bills land at the same time and we've had a bad couple of weeks and suddenly we've got a crisis even in what's a long-term healthy viable business. Less of a problem these days, but still a problem for some businesses is card processing delays. It's a small annoyance, but it is real for some businesses. You pay the processing fees and then we've got that delay in between you taking in a big chunk of cash into your business on credit card and the money actually hitting your account. And if that's falling around the first of the month as well, that can cause some stress. Less of a problem these days, lots of card processors are paying out much more quickly so that delay is a lot quicker. But if it's over a weekend or over a bank holiday, sometimes that can cause problems for businesses too. So what have you got to do? You've got to stop running your business from your bank balance. It's a really dangerous habit. I know what you do. You check your account on a Friday, see a decent number, feel relieved, buy a new bit of kit or get a bit of extra money to yourself because you've worked really hard this week. And then what you don't realize is that bank balance is just a snapshot. It's not showing the stuff that's due on Tuesday, that we've got payroll next week, that the supplier invoices are coming in, that the rent goes out on the first of the month. So you're making decisions based on a number that isn't telling you the whole story. And that's how a lot of very profitable salon and clinic businesses run out of cash. So once a month, what I want you to do is to stop being blindsided. What I want you to do is add up every penny of actual cash that came into your account this month and then add up every penny that went out in terms of rent, wages, suppliers, those loan payments, your drawings, everything. And then calculate the difference. Obviously we want to see more coming in than going out. If you've got more going out, well then there's another problem. And we've probably got to put ourselves on a bit of a financial diet for a while until we can get our income up and above our costs and then compare that number to the profit on your accounts for the same month. If your accounts are showing that you've made a 5,000 pound profit, but your cashflow is showing 2000, you've found the gap and you need to identify where that gap went. Is it because we've got huge amounts of stock sitting around? Is it that we've got a loan repayment we didn't take account of? Is it because you took some money out of the account in the form of owner drawings without accounting for it properly? Once you can see it, we can start to deal with it. And these are structural changes. This is when we stop managing a salon and start actually running a business profitably and properly. And it's a faff, I get that. And it can be scary. There are lots of us in the salon and clinic industry that don't like numbers. We don't like spreadsheets, we don't want to open more bank accounts. We want to run everything through one account. At the minimum, I want you to open a separate account for your tax and start putting money into it every single week without fail. A third account for profit is even better if you haven't read Profit First, you need to read it. It's a beautiful read and actually one of the examples in the book is a salon business. That separation starts to create some clarity and it stops you accidentally spending money that's already spoken for. It's about paying yourself first, not last at the start of every week. Transfer a small percentage of revenue into your profit account. It makes it non-negotiable and it means you start to run the business on what's left. Get really serious about stock. If you want an episode about stock control, reach out and let me know. I need you to understand what sells and what sits around costing you money. I want you to get rid of some slow stock even with a flash sale. Even if you're not making a lot of money on those products, just get rid of it. Let's get that dead money working for you in the business as well. If you've got payment terms with your supplier, see if you can negotiate longer payment terms. Even an extra 15 days to pay can make a big difference to your cashflow. Look forward. Don't just keep looking backwards. Your profit and loss statement looks backwards. It's showing you what's already happened in the business. A cashflow forecast looks forward. So set yourself up a spreadsheet. It's a little bit clumsy, but it's fine for now. And start mapping when you think money is going to come into the business and when you think expenses might leave. If you see a problem, and my accountant used to help me with this, we used to have columns on that spreadsheet that were red and it's when I thought there might be a problem coming up on the horizon, it gives you enough time to do something about it. Do we need to increase our marketing activity? Do we need to change the timing of some of the spending that's going on in the business to allow for that tight month? The gap between paper profit and cash in hand can kill a business. And it's not because you're not working hard enough. You almost always are working hard enough. Not many of us in this industry are lazy. It's because no one showed you how money actually moves through the business. If you want to keep hold of more of the money that's coming into your business, I put together a very simple guide. I'm going to give you five money fixes. I'm calling it the 10 Minute Money Fix. You can head over to 10 minute money fix.com. It's nine quid to get this cheat sheet. And because I know lots of you don't like reading, I've recorded the cheat sheet as videos as well. So there's five videos that you can access or if you want to listen to it while you're walking the dog, I've included the audio version as well, Orhan nine quid. So head over to 10 minute money fixx.com and get your copy today. It's not about making more money in your business, it's about keeping hold of more of the money that you are making. I'm going to put that link in the description below. So what do you think? What have you missed? What's your story? Why not reach out and let me know my email address, scrolling at the bottom of the screen right now, phil@buildyoursalon.com. I love hearing from my salon owner friends. Anyway, just a few short days until I'm coming all over the internet again with another dose of my Wise Owl Wisdom. And until then, stay profitable and take care.