Mastering Cashflow: The Key to a Thriving Business
In this episode, Melissa, seasoned photography business owner, discusses the critical importance of understanding cashflow for small business success.
Highlighting that many boutique business owners overlook their financials, she explain that knowing what money comes in and goes out is essential. With insightful examples and practical advice, like monitoring expenses and maintaining a rainy day fund, she emphasizes that grasping this concept can differentiate a struggling business from a profitable one.
Aimed at demystifying business finance, this episode is a must-watch for any entrepreneur looking to ensure their venture's financial health.
00:00 Introduction to Business Finances
00:29 The Importance of Cashflow
01:48 Understanding Cashflow Basics
03:27 Real-Life Example: Jan's Story
05:00 Strategies for Managing Cashflow
06:54 Conclusion and Next Steps
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It is fascinating to me how many boutique business owners we've worked with that don't know their numbers or ignore their numbers and therefore don't recognize the connection between the health of their business and what their business makes and spends.
Welcome. We're Keith and Melissa, photography business owners for more than 25 years. And our mission is to help you find the success you want. And we know firsthand the role that mindset plays in figuring it all out. Now, today's episode.
In today's video, we're going to talk about cashflow and why it's important to the overall health of your business.
60 percent of small business owners say they don't feel knowledgeable about accounting or finances.
This is why I want to make business finance or business money as easy to understand as possible because my friend money can be easy and when money is easier, your business benefits. And you know why? Because small business owners that understand the financial side of their business and pay attention to their numbers and their money are a million times more likely to succeed.
I just made up that stat, but I know there's a stat out there somewhere to back this up. But I did hear a stat years ago at a wedding conference in Las Vegas that pointed out that business owners like us only keep about 25 cents for every dollar we bring in. This stat really hit home. To put that in perspective, if you want to earn 50, 000 a year in your creative business, You need to have sales of 200, 000.
You need to book 200, 000 in your services or whatever it is that you sell.
Every dollar matters. So we need to understand what comes in, what goes out, and what is left over. Or if not left over, where are you coming up short?
How do we get this answer? We need to know our cashflow.
So what is cashflow? And it's simplest form cashflow is the money that comes into your business and the money that goes out of your business. And why is this term important for you to know? Because cashflow is like a thermometer. It can gauge the health of your business.
If you have a bunch left over at the end of the month, that's a big yay. And if you don't have enough money left over and you're negative, then we need to take a much closer look at why.
Here's an example with the most basic cash flow equation. Let's say 10, 000 came into your business, 7, 500 went out of your business, and the money left over, or your net cash flow, equals 2, 500. I know some of my clients, when I first started working with them, thought that the money that came in was how much they were actually making. Yes, it is the gross amount that you're making, but what do you truly keep, or what is left over after you pay all of your bills?
This is the more important number.
If you're like us, our cash flow fluctuates due to the nature of being a wedding pro, such as seasonal shifts, market conditions, and other reasons why some months or some years are different than others. Now, what makes the cashflow number become super important since all months are not equal and we generally don't have consistent income each month.
We need to pay close attention to this. After all, something like 40 percent of small businesses like ours fail because they don't have enough cashflow, meaning they either didn't keep enough on hand to ride out the leaner months, or they didn't pay attention at all to the ebbs and flows of how their business operates.
And as I mentioned before, the industry average is something like you're only keeping 25 percent of what comes in or roughly 0. 25 for every dollar that you make, so let me tell you a little story about Jan, a one woman show who makes incredible wedding stationery. She works hard, yet feels like there's never enough money for the amount of effort she puts into her business.
Every month she pays her storefront rent, pays her bills for the paper and the supplies and everything else that goes into creating Gorgeous invites. But it is always a struggle. She feels like she barely has enough left over if she has anything left over at the end of the month at all. But she has a hard time giving me specifics.
Understanding her finances is where Jan needs to start. First, Jan needs to check her numbers. Know exactly what is coming in. If Jan's business is like ours, we have deposits coming in throughout the year with final payments being made closer to the wedding day.
So it isn't always an exact science. But if she looks at her numbers week by week, month by month, and understands what is coming in and what is going out, she will start to see a clearer picture emerge. And since she's been doing this for several years, she can compare numbers year over year, giving her an even clearer picture of her business.
And then she really needs to track those expenses. Where is all her money going? And when you really start to pay attention, you may see expenses you have that you can trim or that you don't need at all. discover spot situations where you might be overspending.
Depending on what your service or product is, you may have a ridiculous amount of inventory or too many subscriptions or other areas where money is just slipping away. Give your money a plan. If you just randomly spend and don't monitor your expenses, you will be surprised your money disappears into thin air.
So have a really good understanding of what you're spending and where.
So when Jan started paying close attention, she definitely noticed a few places where she could work on trimming her expenses. She made a goal to reduce her expenses by 10 percent while also trying to increase her bookings. This is where understanding your cashflow becomes that superstar for your business, because wrapping your head around what's coming in and what's going out is the surest way to create or maintain a healthy business.
Because in every small business like ours, there are highs and lows. The difference between a successful business and one that can't keep going are these numbers, understanding them and knowing what to do with the information. On top of that, for example, if I have a great month and my cash flow is positive by say, 10, 000, I can't just go and blow that money.
I need to look at my numbers year over year or season over season and plan and project for months that may have a negative cash flow. By planning like this and paying attention to these key numbers, you will be able to, quote, save for a rainy day or be prepared. And how I want you to be prepared is to have a rainy day fund, especially when you're starting out. Having this little cushion so that you can handle an expense that comes out of the blue, or you can still pay yourself and pay your bills in the slower months.
This is critical to long term success.
When you do have a positive cashflow, put that money into that rainy day account, put a number that you feel comfortable with three months of your average expenses, for example. That way, if business is slow during the later winter months, you don't have to worry or worse start having to use credit cards and go into debt.
Having this rainy day fund will give you the peace of mind and security that every small business owner needs.
A little planning and paying attention goes a long way. Okay. Understanding cashflow is a simple math equation, but one that can mean the difference between a business that just gets by or one that is profitable. I will have a more involved explanation of this using real bookkeeping software and another episode coming up, but I wanted this shortie episode today to just start getting you familiar with the idea of knowing your numbers and why they're so important to the health of your business.
This is especially important as we head into the end of the year, we'll be creating projections for next year and having the knowledge of this past year is super important to helping create those big audacious goals we want for 2025. Thank you. I'll see you next week.
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