Seven Deadly Cash Flow Sins with Karen Thomson
Welcome to Olive Insights podcast, where we bring you the conversations with finance and business experts from all kinds of backgrounds, sharing actionable tips and insights to help business owners to grow their businesses. I'm Sarah Petty, the founder of Olive Business Partners, a virtual CFO firm that connects business owners with flexible, affordable, and high quality expertise that drives business growth. Let's dive into the conversation with today's expert. Hi, Karen. Welcome to Olive Insights podcast.
Speaker 1:Thanks for joining today.
Speaker 2:Thanks so much for having me, Sarah.
Speaker 1:No problem. Well, let's dive right in. Tell us a little bit about you and your business.
Speaker 2:Yeah. So my name's Karen, and I'm the owner of Busy Women, which is a boutique bookkeeping practice that supports female led businesses.
Speaker 1:Amazing. And I'm really excited to have a bookkeeper on board today because in my role as a virtual CFO, I often work closely with bookkeeper, or get the question of, you know, what's the difference between what I do versus what you do? So I think as our conversation evolves, hopefully we can clear that up, and talk about how our roles, you know, can work together with clients as well. So most of our listeners are business owners and bookkeeping is often the first role that they look to outsource. You know, the the business owner has started it, been doing a bit of the finances on their own.
Speaker 1:But when they get to that point, what support can a bookkeeper provide, and how does this benefit the business owner?
Speaker 2:Yeah. Absolutely. I I often joke, but it's not really a joke, that, you know, nobody starts a business because they're so excited about doing the bookkeeping. It's kind of a grudge task. The thing that keeps a business owner up at night.
Speaker 2:So yeah, to answer your question, I guess I'll I'll answer it with the end in mind. And what I mean by that is successful business owners, they know their numbers, and they use them in their decision making within their business. But the only way to be able to access and know your numbers is by having up to date and accurate financial records, which is globally recognized as pillar 1 for the success of any business. So at a bare minimum, a bookkeeper provides you with that up to date, accurate financials to work from. And then from there, additional service support services can be scoped and factored in for, like, payroll function, accounts payable and receivable advisory services over and above ATO compliance, like activity statements, superannuation guarantee, TPAR, that kind of thing.
Speaker 1:Yeah. Absolutely. And you describe yourself as more of a strategic bookkeeper. Can you tell us a little bit about that and your point of difference? Yeah.
Speaker 1:So great question.
Speaker 2:Yeah. So a strategic bookkeeper is someone who takes what we call numbers 101, which is the the basic, the regular everyday bookkeeping. And we take things to the next level in maximizing profit, cash, and time wealth. We're helping the business owners to to to know and use their numbers to get the outcome in the business and their lifestyle that that they desire and the whole reason why they started the business in the first place.
Speaker 1:Yeah. Love it. Because sometimes even working with an accountant or bookkeeper, business owners can feel like they're speaking a different language or they just give them the work and they're doing it on the side, but it's not really helping them understand their numbers, you know, which is what you're talking about is how business owners can feel empowered. And, you know, accounting and finance language can be confusing if you haven't had much experience with that. Numbers isn't for everyone, as you say.
Speaker 1:Say. So, you know, that approach of really helping a business owner to not just keep their records accurate, but really have them understand the numbers, you know, is a really important role to play. And I can say, you know, in my role as a virtual CFO, I often work really closely with a business bookkeeper, because the work that they're doing, I use that for my analysis when I'm helping them to look forward with strategic planning or projects or whatever it might be. And so if the bookkeeper has a real feel for an understanding and the why behind the numbers, not just the ticking off the tasks, it can work seamlessly. And you can just find those businesses who have a strong bookkeeper, you know, are able to just grow quickly and achieve their goals.
Speaker 1:And so, in your experience, what are some of the biggest challenges that business owners face? And particularly with cash flow, because I think that's one area that we both work with business owners quite closely on.
Speaker 2:Yeah. I would say cash flow is probably the biggest challenge that I see in small businesses. You know, there's a reason there's a reason that 80% of small businesses don't survive the first 5 years, and that reason is cash flow. Core cash flow. So in my experience, and in all the exposure I've had, there's there's actually 7 common pitfalls or mistakes that I see small business owners make when it comes to cash flow.
Speaker 2:I've actually got an ebook about it called the 7 Deadly Cash Flow Sins. And those 7 cover a broad spectrum of so it starts with sales, the misconception that more sales equals more profit, but more sales just equals more sales. And again, this comes down to this this is education around numbers. And I'll kind of digress a little bit to say that I think what I often see is that business owners start a business because they've got a they've got a passion, or or a skill set, or a zone of genius in in whatever their industry is. You don't inherently understand numbers just because you've started a business.
Speaker 2:People like you and I, we've studied and trained in continuous professional development to to to keep and hold our knowledge. That doesn't just automatically happen for other people. It you know? So, yeah, the misconception that more sales equals more profit is is probably the first mistake I see. Second one is under expenses and not monitoring expenses closely and regularly, and probably the biggest leaky bucket that I see is subscriptions.
Speaker 2:Keep on giving when it comes to profit bleed inside a business. Receivables, a broken or lack of debtor management strategy. Payables, paying supplies and staff before your customers pay you. There's a real cash flow gap there. For those companies that have inventory and sell stock, holding onto dead stock, so not keeping inventory moving is another way that, for profit bleeds and cash flow strain.
Speaker 2:Number 6 is cash in the bank. Mistaking cash in the bank for profit. And the one thing I say to small business owners is the cash in the bank is not all yours. So again, not applying, the the the correct understanding around that. And the last one is based around owner drawing.
Speaker 2:So an owner not using a reliable formula before withdrawing cash from the business for personal use. And again, it kind of ties back into that cash in the bank. So it's it's really understanding financial reports, what they mean, and how to use
Speaker 1:them. Yeah. Great. A lot of good nuggets in there, and we'll put the link to your ebook in the show notes so so business owners can find it. I wanna touch on a couple of those points there, just expand on it a little bit because I think they're really important.
Speaker 1:Absolutely the sales that, you know, does not equal profit or cash and is a common mistake that business owners make. Why is that the case? Why can't I just sell more and it should increase my bank account? What are the other things that I need to be thinking about as a business owner?
Speaker 2:The key here is net profit. And the way that net profit works is it's your sales less your direct costs and your operating expenses. So you could have fantastic sales, fantastic turnover, but your expenses, your operational costs are really high. So a general broad rule of thumb, for a healthy business, and it and it's very industry specific, but we'll just speak in general terms, is a 66% net profit. That's a good position to be in.
Speaker 2:So what I often do with my clients where that's not the case, where it's not a minimum of 66%, is we drill down and we really identify, well, what's what's not optimized here? Is it your direct costs? Is it your wages? Is it is it your operating expenses? Is it what what is blocking that or preventing that from being 66 percent?
Speaker 2:Sometimes it is a lack of sales. Sometimes it's seasonal fluctuations. It can be any number of things, but it's really drilling down further. It's not top line. It's not looking at it with a broad lens and going, oh, yeah.
Speaker 2:We'll just need more sales. We'll make more money.
Speaker 1:You you know, people would have
Speaker 2:often heard that sometimes when a would have often heard that sometimes when a business scales, they make less profit. You know, sometimes to say small but
Speaker 1:mighty is actually more profitable. So it's
Speaker 2:really it's really working with that and and drilling down and and getting deep with those numbers.
Speaker 1:Yeah. So I think what you're saying is not to just look at sales in isolation. It really needs to be considered with the expenses. And then what is the net profit at, you know, at the end of the day? You know, and I see businesses too, particularly where they're, say, product businesses, and they don't understand the profit margin they're making on particular products.
Speaker 1:And so they're just, you know, they have a price that they're selling to their customers and don't realize the manufacturing, logistics and packaging, whatever it might be, the cost of that product is actually more than what they're selling it for. And so for every unit that they're selling, they're making a loss. There's no cash going into the bank. Yeah. And, and so it's really important to understand that, that full picture, as you say.
Speaker 1:Yeah. Absolutely. The expenses piece. So you just touched a little bit on there and subscriptions. Oh my God.
Speaker 1:Is the killer of everyone. I think not just for businesses, but, you know, in your personal personal subscriptions too, you can get out of control. How frequently should businesses be looking at their expenses? Is it okay to just check it once a year?
Speaker 2:Monthly. Every month. You should be reconciling the bank every month, running your financial reports, looking at those financial reports on a line by line basis every single month.
Speaker 1:Yes. I think so too.
Speaker 2:Not a just when you're big and got lots going on, doesn't matter how small your business is. It's every month. It's a nonnegotiable.
Speaker 1:Yeah. Yeah. And those things can just blow out of proportion really quickly if you're not on top of it. Sometimes it's you know, when you even check your bank statement and then you suddenly see something, you're like, I don't even realize that I've been paying for that for 6 months. I haven't used it, you know, in a long time.
Speaker 1:So it is important to stay on top of it quickly.
Speaker 2:I think the other thing too on that is that, again, when businesses get get a bit bigger and get a bit busier, that we forget, you know one thing I see often is, you know, someone will change tech systems, and, you know, they used to be with Dropbox. And then all of a sudden, they moved over to G Suite, and they forgot that the Dropbox is on an auto renewal every year. And all of a sudden, they're paying for both.
Speaker 1:Yes. Absolutely. That that
Speaker 2:creeps in, and you'd be surprised how much it adds up over a year. Yes.
Speaker 1:And the, you know, the subscriptions, there's often different levels for your tech stack. There's different levels of subscription. And, you know, at one time you might be needing that higher level when you're using it frequently, but even reviewing that, or could you drop down to a lower level is something else to have a look at. Yeah. I wanna touch on the receivables and payables piece that you talked about.
Speaker 1:And, you know, you you'd mentioned about having a process around receivables. And often that's something businesses struggle with is that even when they've made the sale, collecting the cash from their customers or clients can be a challenge. And then you were talking about the timing of payments as well. Can you expand on that a little bit of how should you be thinking about receivables and payables and how they work together? Does it matter if we're paying things more quickly than we're collecting from our client our customers or clients or vice versa?
Speaker 2:Absolutely. Yeah. It's that that cash flow gap is critical. Even if it's just a matter of days, it can be really critical inside a business. So one example, in that is even just for for businesses that have got payroll.
Speaker 2:So the one of the the one of the best payroll calendar cycles is fortnightly Monday to Sunday, with payday being the following Thursday. That 4 days can make an enormous difference in relieving pressure on cash flow. So that's number 1. That's always a red hot tip I'll tell a client that comes my way. Another one is, yeah, when it comes to debtor management, you know, and I think sometimes when you start a business and, you know, you not that you're desperate, but you're so keen to get sales that you'll almost accept any terms, and it's really important that you set yourself up for success, that you have payment terms that work for your business.
Speaker 2:And one block that I work very closely with a lot of business owners on is upfront payment. You know, we, as human beings, we tend to lean towards being too flexible, and what I, what I the little mantra I tell my clients is just remember you're not a bank. You're not in the business of lending money, and by delivering a product or a service before you've collected payment is behaving like a bank. You go and book a concert ticket to a concert in 18 months' time. You pay for it at the time of booking it, and that's how we need to approach particularly small business.
Speaker 2:So it's really wrapping your head around that and challenging yourself as a business owner to to to, you know, almost trust me now, believe me later when I say that. So whether, you know, and I understand with, you know, particularly with a consulting service or any sort of service based business that might be for a project, you know, you're not you're not necessarily going to bill for the entire project upfront, but having incremental installments that's broken down based on when you're starting a piece of work. So you might have a 6 month project, bill for each month at the start of each month before you're doing the work. And the same with products, you know, I see it all too often that, you know, e commerce businesses that are that are preparing and shipping product before they've received payment, and it's just, honestly, it's a recipe for disaster. So having payment terms with your, you know, if you're selling wholesale, having payment terms with your wholesale customers, your wholesale suppliers, that means that the formula works in your favor, that you're receiving money from your clients before you're needing to pay your suppliers.
Speaker 2:And the same with your payroll, making sure that before you pay your staff, you've effectively received payment from your clients and your customers for the work that that's the staff have done for that period.
Speaker 1:Yeah. Definitely. You know, I think the upfront payment is a really good point. And there's times even when I've engaged a service provider and they haven't charged me until the work is done. And I was almost surprised by that.
Speaker 1:I was expecting to pay something upfront. And the way that I kind of look at it too, particularly when you're providing a service and even product to a point, because, you know, you're still providing the service of the shipping and, you know, delivery to the, to the customer. If you get the payment in advance and you don't deliver on your service, the client can still request a refund of that money for non delivery. If you deliver the service and they don't pay, you can't request your service back. It's gone.
Speaker 1:You've done the work and it's for free if they don't pay you. So it gives yourself a little bit of insurance. And you're right, Karen, that, you know, if it's a quite a large project, it can be a lot to ask someone to pay all of that upfront. And, you know, we want to work with our customers and clients on cash flow management as well. But having those at least increments through the project, and charging some sort of upfront deposit to potentially secure the engagement, is often a good way to think about it as well.
Speaker 1:Now what about when you do have customers or clients, but then haven't paid? Even if you've asked for the deposit or you have given the terms and they just are not paying. Do you have any tips for collection or how we should be managing debt collection?
Speaker 2:I guess the first thing I'd say is that if if you're providing a service, cease providing a service immediately until you have a conversation with the client and come to an agreement, because you're in control. The whole reason we start our businesses is so that we can claim back some control about our own for our own destiny. So if you are providing a service, yeah, cease providing that service until a new arrangement is made. If it's something where you've already provided the service or the product, and essentially, you are no longer in control, and a bit like you were saying before, it's almost like your insurance policy is gone, then I would say not holding back in contacting, you know, acting swiftly. So, I think the other thing that we can get a little bit bogged down, a little bit blocked in is, you know, it's really easy to send an email and hope that that's just going to trigger something.
Speaker 2:In saying that, I will say that I think sending monthly statements to clients on their account is a nice gentle way to nudge to remind people who have just genuinely forgotten. That I think is a good best practice, but if there is someone that hasn't paid you, it's not hesitating to pick up the phone and have a conversation. If they don't answer it, send them an SMS. 99% of the time, human beings don't mean to not pay you. But it's about coming from a position of thinking about the impression you're giving to the outside world and to your clients if you're relaxed and sloppy in your debt or management.
Speaker 2:You know, what does that say about your business? What does what reputation are you setting up for yourself? If you're on top of it, you're professional, you're polite, but you're you're efficient, I think that speaks volumes for the type of business owner that you are, and and that holds you in good stead. So not being afraid, not thinking that you're doing the wrong thing, that's number 1. If it really does drag on, then engage the services of a debt collection agency, because as things drag on, the the mental energy that you're as well as the the the time that you're pouring into this ends up outweighing what that debt essentially is to you.
Speaker 2:So I guess, yeah, it's acting fast is probably the biggest tip there.
Speaker 1:Yeah. Absolutely. And I agree in my experience, most people are not trying to avoid paying you. You. A lot of the time there's just not much of a process in place and it has been in their inbox and slipped their mind.
Speaker 1:And so a quick phone call to say, hey, just checking that you're still able to pay that invoice. You know, that's totally fine. And the approach I often take is a just seek to understand what's going on, rather than go with an accusatory sort of approach.
Speaker 2:Mean. Don't
Speaker 1:Yeah. Because sometimes it is they're having you know, they're waiting on a client payment to come in to be able to pay you or, you know, at least if you understand, you can either you know, they will pay or you can negotiate some sort of extension to the terms to get the payment. Yeah. I I think it's just sort of seek to understand to start with, but if it gets to a sort of dire situation where they're just not responsive and not acting on it, then getting a help from a debt collector. The other thing, I found, Karen, is offering, different ways of paying because sometimes, even, you know, having a credit card payment option, even though there is fees and you can pass on fees to customers if you choose to, it can mean just the ease of payment.
Speaker 1:I think that's the other thing is make it easy for your clients to pay you.
Speaker 2:Areas to get paid. Yeah.
Speaker 1:Yes. If it means, you know, I have to look up your bank account here and I have to enter it there and it would just be, oh, I'll do that later. Whereas if I can click a button, do it. For a lot of people, that just makes it easier. So that's a little tip there as well.
Speaker 1:Yep. So we're coming into Christmas time, which is often a seasonal either peak or trough, depending on the nature of your business. So what strategies would you recommend to businesses to help maintain stable cash flow year round and manage those seasonal ups and downs depending on their business?
Speaker 2:Yeah. I think for anyone that's a stock based business, it's really important, like I was saying earlier, not to hold onto dead stock during the non peak time. So moving stock along and having those clearance, clearance times throughout the year. Not holding on to too much stock, that's the other thing. But otherwise, just generally speaking for all businesses, I would say that a bit like anything, we're not looking at any anything with our financials in isolation.
Speaker 2:We've got to look at it broadly and holistically, and I'd say zoom out and look at your financials on an annual basis, work out your averages on an annual basis, and base your monthly cash flow decisions off your monthly average across the year. Meaning that during the peak months, you're essentially reserving cash for the non peak months.
Speaker 1:Yeah, absolutely. Because if you're only thinking about it in the next month, you can quickly be taken by surprise with unexpected seasonal expenses or, you know, ups and downs in your sales. So I think looking at it on a holistic annual perspective is the right thing to do there. I want to pick up on one point that you mentioned earlier, which was around the cash you have in the bank isn't all necessarily yours. What do you mean by that?
Speaker 1:So
Speaker 2:when it comes to financial reports, there's 2 key reports that, as a bare minimum, any financial professional will look at and use to guide a client, and it's what any business owner should be looking at on that monthly, you know, non negotiable basis. And that's your profit and loss report, or income statement sometimes called, and your balance sheet. They represent different financial stories. A profit and loss is your sales, your income minus your expenses that's going to give you your net profit. However, your balance sheet gives insight into another part of your financials that your profit and loss doesn't give you, and that's your liabilities.
Speaker 2:And liabilities are commitment of funds that you've agreed to pay out in the future. They are things like your GST liability on your BAS that is not yet due. The same with PAYG withholding. It might be credit card, you know, you get 30 days interest free. You haven't yet paid it, it hasn't happened on the profit and loss report, but it's there for next month.
Speaker 2:So what happens with the biggest mistake I see when business owners use cash in the bank as the guide for how much money they've got, what they're failing to recognize in that moment, again they're looking at it in isolation, cash in the bank is simply cash in the bank. That's not all your money. What you need to be determining and working out your formulas based on for good cash flow is okay, I can see that I've made x amount of net profit this month, but I've also got these liabilities that need to need to be met next month. I need to deduct those off first before I'm looking at a figure that I could confidently take from the business, and, you know, without compromising cash flow.
Speaker 1:Yeah. Absolutely. And the end of year tax return and payment is often the one that trips people up, if you're not thinking about putting money aside for that. You get you know, make all this great profit. The business is booming.
Speaker 1:You've spent the money. You've paid yourself out a great bonus, and then you get your tax bill, and you don't have the cash in the bank to be able to pay that. So I think Karen's right in that, you know, it's thinking about all of those things that are due through the year and putting money aside as you're building a cash balance or cash reserve. Karen, I don't know how you think about it, but I also often advise clients to think about having a bit of a cash reserve just for unexpected expenses and keeping something aside. Because, you know, we all have those moments where something pops up, something goes wrong, and you just have to reactively deal with a problem, whether that's you know, sometimes it's been a legal issue that requires advice, and we know lawyers aren't always cheap.
Speaker 1:Or, you know, there's a maintenance issue with your equipment, or you've had a product recall. Do you think that's something that, business owners need to be thinking about?
Speaker 2:Yeah. Of course. And I think it's also it might not even be that something's gone wrong. It might be that, you know, an opportunity presents itself for, I don't know, some kind of an an advertising opportunity that wasn't in the original marketing plan. And by having a cash reserve there, you can tap into that to go, you know what?
Speaker 2:I want to leverage this opportunity. There's also some really great apps out there that can help I find it's particularly helpful with small businesses to help them extract and and take care of some of those ATO liabilities like GST, PAYG, income tax, to be reserving directly against your ATO accounts each month or each fortnight if you like, whatever time you'd like to do it across, to kind of be reserving that money for you so that it's sort of locked away and it's done. I find some small business owners like the discipline of that, so they're not tempted to tap into that. But otherwise, even just having multiple bank accounts that you're moving money around, the only thing I will say is don't move money around too frequently because in the end, it's more time and essentially money in your bookkeeping.
Speaker 1:Yeah. Yeah. Yeah. Absolutely. Yeah.
Speaker 1:A balance there between making sure that you're not touching it, but not, not moving it all over the place. Yeah. Okay. Great. One last question before we finish up.
Speaker 1:I know we've actually given a lot of tips on cash flow management over this conversation, but what is one money management tip that listeners can take away from today?
Speaker 2:Always maintain up to date and accurate financial records. Everything else is superfluous without that.
Speaker 1:Yes.
Speaker 2:So it's just got to be a non negotiable. And if you're you're struggling because of knowledge or time, reach out to an expert.
Speaker 1:Get the assistance that you need,
Speaker 2:because everything else you will literally be running your business flying blind if you're not maintaining up to date and accurate financial records.
Speaker 1:Yes. A 100 percent. And none of us want to be doing that. Karen, thank you. That was a great conversation and I'm sure listeners got a lot of tips out of that today.
Speaker 1:So if they're interested in what you do, where can they find out more about you and your business?
Speaker 2:Yeah. My website, busywomen.com.au. And I'm also on all the social media platforms, LinkedIn, Instagram, Facebook.
Speaker 1:Yeah. Amazing. All right. And we'll put those links in the show notes. Thank you so much for your time today, Karen.
Speaker 1:Thanks for being so generous with your knowledge.
Speaker 2:Thanks, Sarah. Thanks for
Speaker 1:having me.
