Chantal: Mike, welcome back to week two of the intensive series.
Mike: It’s good to be back.
Chantal: Well, this week you are joining us to talk about improving cash flow in our fitness business. Can you share with us your top tips?
Mike: Yeah, to improving cash flow. So the thing is to realise cash flow is the … First you need to understand the basics. Cash flow is the flow of money into an out of your business, so tip one is understand what cash flow means and the goal here is to manage cash flow. Meaning, I can have thousands and thousands of dollars of memberships due to me, right, so lots of money due to me but not collect the money. That means there’s no cash flow initiated and that’ll crush my business. It’s so obvious but at first blush, a lot of people don’t understand that. Tens of thousands of dollars of memberships fees due to me sounds wonderful, sounds like I have a wonderful running business, but nobody’s paying. So cash flow, tip one, is understand it’s actually the receiving and the spending of cash.
How you accumulate profit, this is tip two, is the delta, also the difference, between inbound cash flow and outbound cash flow. We want to increase, if we want to increase our profitability, increase inbound cash flow decrease outbound cashflow. Now, there’s other elements too if we get more sophisticated, sometimes increasing outbound cashflow triggers more inbound cash flow, so advertise well. Effectively, I need to spend money to make more. That’s the way you have to understand. The other element though that most entrepreneurs listening to this show, I guarantee, I shouldn’t say I guarantee, but I highly suspect don’t know how to read a cash flow statement. And the reason I suspect that is I don’t know how to read a cash flow statement, not effectively, and when I go to my accountant and tell them to interpret it for me, they struggle to interpret a cashflow statement.
I found that most entrepreneurs revert to what I call bank balance accounting. And what bank balance accounting is we log into our bank accounts and see what money’s there or not. Partly to the disdain of accountants and bookkeepers, we’ve been told never look at your bank balance, they will confuse you because maybe you have checks that are going out, maybe there’s more money coming in. That’s not representative of where your business is. You need to go back to the cashflow statement itself and the balance sheet, and the profit and loss, the stuff we talked about last week. But most entrepreneurs revert to bank balance accounting. Therefore, and we talked about Profit First last week, therefore when I receipt a profit for a system, it’s about leveraging our bank balance, meaning, allowing us to look at it. Because if we look at our bank balance automatically already, instead of change a behaviour that we’re struggling to change, why not capture that behaviour and build a system around it.
So my tip here regarding cash flow is if you check your bank account with some, you know, periodically, increase the frequency to check it once a day, even if you’re not doing Profit First. It doesn’t mean if you’re using the system or not, but at least you log in every single day and see what your balance is, you’ll see naturally how it’s increasing and decreasing, you’ll naturally see the flow of your cash. So the fourth tip is understanding your bank balance and actually doing what’s called bank balance accounting. Now this is a tendency that entrepreneurs naturally have. Most entrepreneurs I work with and know, log into their bank accounts, see their bank balances. The irony is our accountants and bookkeepers, the traditional ones tell us never look at our bank balance because it’s not indicative of where our business stands. Instead, look at our profit and loss statement, our balance sheet, our cashflow statement and so forth. Which they’re right from a logical standpoint, but how most business owners manage their business is by logging into their bank accounts and seeing what the balance is.
So what I argue in Profit First, and you don’t even have to use Profit First to do this, but I think we should be checking our bank balance regularly. Because even if you don’t use Profit First, as an example, just by logging into your bank accounts every day, you will see the fluctuations, is your cash growing or is it decreasing? How’s it changing? Is there big spikes going away? But you become more aware of how cash flows to your business. And what’s important here, and I think this is the fifth tip is, I believe in any business, the most important element of the business is cash flow. I think it’s more important than sales. I think it’s more important than the services and products we deliver, which you think would be absolutely critical. But the thing with cashflow is, once you understand what’s driving cash flow, it directs you to what action you need to take next.
I know businesses that say, I need to sell more, I need to sell more, but when you look at their cash flow, their expenditures are increasing so extraordinary fast that they can’t sell their way out of it, it’s actually expense control we need to take. So once you understand how your cash is flowing, then you could make adjustments to your business that will actually support you and bring you to where you want, a more profitable business. The challenge with profit and loss statements, cashflow statements and so forth, lot of things can be manipulating. The story I like to share is that Enron was profitable until the day they closed the business, right, I mean, it was all manipulated. Of course, they had ill intent. But any business can have numbers that are reflective that can give you a false representation of how the business truly is health ways. But log into your bank account, it’s undeniable. The second you wire that money out, the money’s gone. It isn’t coming back. The second that deposit goes in, it’s in your account. It’s a hard fact. It’s cash.
So by looking at your bank, even if it’s not a sophisticated bank, it’s just showing you a balance where you can drill down and see individual transactions, that’s adequate. The shame is, I think many entrepreneurs are told by their accountants and bookkeepers not to look at the bank balance. It’s a distraction. It’s not a true reflection. And so we’re hesitant to do it, when we do it we’re a little bit confused. My experience and we now have over 40,000 companies doing Profit First, is this. Log into that bank account every single day, even if you’re not running the profit for a system, just knowing how the cash is moving and changing will give you a real thumb on the pulse of your business.
Chantal: I have to share with a story about one of the things that I did after reading Profit First and it has made the biggest difference to my savings, and that is I now allocate or I setup an account that I can’t touch for all of my savings.
Chantal: I set up a vault account and I learned that from Profit First, and I cannot tell you the difference that has made to my business and to me personally in having that extra kind of account off to these side that I don’t use for anything else other than to put savings into. So I have to thank you for that.
Mike: I love that. When I was touring Australia, I was telling you, I was just down there recently, and I was in, I think I was in Brisbane when this came up. I was presetting Profit First to all these Australian entrepreneurs and one of the people raised their hands and said, do you know in Australia, we have what’s called credit only checking accounts where you can set up your checking account, where it can only receive deposits, but you can’t pay out of it all without physically going to the bank, having the bank open the account for that one transaction and then closes, clamps down again, and it’s depository only. So they’re called credit only accounts or credit only settings and I was like, this is amazing. We are protecting ourselves from spending money and we’re putting this massive wall in front of us that if we really need to get the money, we can get access to it, but it takes a massive Herculean effort, and therefore we’re not going to spend the money. It’s the vault but with this kind of protective barrier in front of it, makes it even harder to access it.
Chantal: It’s such a good strategy so I thank you for that because you’ve been able to help me save money ever since Profit First.
Mike: Well I love that, I love it.
Chantal: Okay, so I just wanted to touch on … so next week, you briefly mentioned expenses today, because next week when you come back, we’re going to be talking about some strategies to reduce expenses, which I think is an area that everyone’s going to be really, really interested in. So last week, in week one or in between weeks one and weeks two, you gave everyone the action, or I gave everyone the action to go and read Profit First and then you gave the action of dragging out your PNL statement and having a look at your year to date finances. Are there any actions that you would recommend that people can do between weeks two and week three, perhaps around improving their cash flow? What would you say
Mike: Yup, so here’s what I want you to do. I want you to call today, your existing bank, if you like doing business with them, let’s keep doing business with them, and I want you to add one new account. Literally setup one new savings account there, or checking account and nickname it Profit, because what we’re going to do in week three is, we know from week one, we know what your historical profit is. Week two, today, we’re setting up this account to start storing profit, and next week we’re going to start making you more profitable than ever. We’re going to start moving money into that account. So I can’t do it next week unless you take the steps today, so do it now. Set that account.
Chantal: And Mike, thank you once again for joining us this time for week two of the intensive series.
Mike: See you next week.
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