Cash Flow vs. Profit and Letting Your Employees Work Remotely (Podcast) | Ep. #019

Mike Kelly and Elizabeth Larkin

As a small business owner, do you understand the difference between your company’s profit and cash flow? And what about letting your employees work remotely? Will that save you money or make your employees less efficient? Join hosts Elizabeth Larkin and Gene Marks as they answer small business owners questions on the Small Biz Ahead Podcast.

Show Notes



Elizabeth: Okay. Welcome back to the Small Biz Ahead podcast. I’m Elizabeth Larkin, and I’m here this week as always with small business expert Gene Marks.

Gene: Yes, expert.

Elizabeth: Are we calling you an aficionado now?

Gene: No, you can call me an expert. That’s fine. But I’m just warning everybody, take it with a grain of salt.

Elizabeth: You’re a small business owner. You own your own business, and you consult with other businesses, so you talk to small business owners all day long.

Gene: Yeah, I do. I have a lot of readers, and I speak to a lot of business owners. I don’t want to say that I’m an expert, but I have heard a lot of really great stuff from smart people making lots of money. That’s what I’m here to share.

Elizabeth: Before we get into questions, I want to mention if you haven’t subscribed yet, we are now on iTunes.That way the episodes will be downloaded every week at the same time. We publish on Wednesdays at 10am, so you can listen over lunch on Wednesdays or on your commute home, or really anytime.

Gene: Nothing. We were just talking about this before. Sorry.

Elizabeth: We are going to get into our first question right after we hear from our sponsor. This is a good one that I know Gene will love. It’s about the difference between profit and cash flow.

QUESTION #1: Thaw is the Difference Between Profit and Cash Flow?

We’re back with our first question. This is from Karen from Sedona, Arizona. That’s a beautiful area. Her question is,

“I recently opened a small breakfast café that’s been doing great. I heard at a local Chamber of Commerce meeting that earning a huge profit doesn’t mean much if your cash flow is low. Can you explain why?”

Elizabeth: I’m going to not even try to take a stab at this. I’m going to let Gene answer it, but I will say that you should think of it as your profit is different from your cash flow. Think about paying your credit card bill. You might have a huge salary, but let’s say your direct deposit doesn’t hit until the 15th and your credit card bill is due on the 8th. That’s a cash flow problem.

Gene: That’s actually a really good explanation. Small Biz Ahead listeners, this is the biggest question that I get from my clients as a CPA. People always ask me, “I don’t know. I’m paying all these taxes based on profits, and I don’t have any cash in the bank. What is going on here?” Remember, when you run a business, it’s all about timing. The best example is this. Say you sell something to a customer in December, and you sell it to them for $1,000. That’s income. That’s revenue to you. Say you have no expenses. If you have no expenses, you sold something to this customer for $1,000, the end of the year comes, you’ve got $1,000 in income and you owe taxes on that $1,000 of income. However, the customer hasn’t paid you yet. Even though you’ve got that $1,000 of income … Everybody’s like, “You made 1,000 bucks. That’s great.” And the IRS is like, “Give us our money because you made 1,000 bucks.” You’re like, “I got no money. My customer hasn’t paid.”

That’s the difference between having cash flow and having profits is that sometimes they are disparate from one another. It gets a lot of small business owners in trouble because sometimes they think they’re making more money than they actually are. Sometimes they’re spending cash they don’t actually have because it works the other way around. Sometimes you’re recording expenses and you haven’t paid the bill yet. You’ve got a bunch of cash in the bank, but you’ve got bills coming due. People think, “I guess I’m rich because I got cash in the bank,” when really, no, no, no. You got an expense, and now you’ve got to pay that bill sometime in the next 30 to 60 days.

Elizabeth: What’s the best way to plan for this to make sure you’ve got enough money in the bank to pay your bills? You don’t want to have money sitting in the bank not working for you.

Gene: First of all, there’s a couple calculations that you can do, by the way. I’m not sure if I want to get into that on this answer. Maybe we will. Let me start this way. Smart clients of mine, smart business owners, are always projecting their cash flow. 90 days, it doesn’t have to be that complicated. Based on what you know of what your sales are going to be over the next 90 days, and you can base that based on what you’ve had in the past and what you’ve got in the [back log 00:06:08]. Based on what you know your margins are, like, “For every product I sell or every service I provide, I’m generally making 30% margin on that based on the actual direct cost for it.” Based on your actual fixed overhead for the month, and you know that. You know what your rent is and what your salaries are for your people or whatever. You’re going to come down to for the next 60 to 90 days what your projected cash flow will be. Then all you want to also think to yourself is, “Is there anything unusual coming up in the next 90 days, a tax payment I have to make or a large insurance payment or a debt payment, or something like that that might disturb that cash flow?” You should always be thinking ahead 90 days. That is really how smart business owners I know are always looking.

The other thing is, and I will go into it, is days cash on hand. The more cash you have on hand, the worse your business can be. Typical investors when they look at a business, they look at it like an asset. Any good investor or buyer of a business or capitalist will look at a business and say, “How much cash do they have versus how much assets do they have?” If you’ve got a lot of cash based on what your assets are, your return on assets starts going down the more cash that you have going up. What you want to do is you want to make sure you only have a certain amount of cash on hand over a certain period of time. Generally, you don’t want to have any more than 4 months of cash on hand.

How do you figure out how much cash that you have on hand? Look at your expenses over a period of months. That will make you figure out how much expenses you have on a monthly basis, and you can do it on a daily basis. When you look at what your expenses are on a daily basis, you can actually calculate how much expenses you have over a 4 month period of time. For example, say you’ve got $1,000 of expense per month, you figure out. Over 4 months, you’ve got $4,000 of expense per month, which basically means you need at least $4,000 of cash in the bank to cover your next 4 months of expenses. If you’ve got $15,000 sitting there in your business, that means you’ve got way too much cash in your business than you need because you know you only need about 4 months cash on hand. That’s what the average is.

That money just sitting there in your bank account isn’t making you any money. You should be doing something else with it. Can you be investing it somewhere else? Should you be pulling it out of the business and putting it away somewhere? Should you be buying real estate with it or equipment? Knowing how much cash that you have in the bank and knowing how much cash on hand, use that bench marker of 4 months. That usually will give you an idea of whether or not you’ve got too much cash in the bank.

Elizabeth: Do you think those formulas would apply to a business like Karen’s, because she’s running a small breakfast café, she’s probably taking in a lot of cash every day, and she’s maybe doing a large food order once a week, every two or three days?

Gene: Such a great question. I gave this general number of you should have 4 months of cash on hand. It’s general. Each industry, it’s different. If you’re in the landscaping business, you need to have a certain amount of cash on hand before you go into your busy season that you wouldn’t need say in December when it’s not your busy season. If you’re running a restaurant or a business similar to Karen’s, there are different requirements. My advice is this. Even though I gave you that benchmark of having 4 months of cash on hand, you really should find out from your industry how much cash you should have on hand, what’s typical for a restaurant owner. You go to your industry association or you Google around for experts that are in the industry that are writing on this topic. You’ll find out because different industries are different. Maybe in her industry, she should have 6 months of cash on hand. That’s important to know.

Elizabeth: All right. Thanks for the question, Karen.

Gene: It’s good.

Elizabeth: We’ll be right back with a question about remote workers that I know Gene will love.

Gene: Yes. Keep them remote.

QUESTION #2: Should I Let My Employees Work From Home?

Elizabeth: Okay, we’re back with a question from Kimberly S. from Telluride, Colorado. Kimberly asks,

“I run a small but successful web design company. I have five employees, and I rent office space to accommodate all of us. Recently two of my employees have asked me about becoming either part-time or full-time remote workers. They’re good employees, and I do think that they could get the work done at home, but I don’t know. I worry that I might lose them if I don’t decide soon. What should I do?”

Elizabeth: I am very pro remote workers. I think as we’ve said in the past, if you set up good goals and projects and you’re in touch with your employees, you should allow them to work remotely because the future workforce is going to be mostly remote workers. Actually, it’s going to be mostly contingent, which means it’s going to be a lot of people who have a specialty focus and you hire them on a contingent basis. In several years, you might not even have any full-time employees if you’re a small web design company. You might have all contingent employees, and they’ll probably all work from home. This is a good time for you to start figuring out how to manage this. The second part is you really do need to have a policy. I don’t think you can just let two people do this and not give the option to the whole office, but I’m going to defer to Gene on that, because you actually switched from a brick and mortar office, a traditional office, to a remote.

Gene: Right, to where everybody is working out of the office, yeah. Your advice is great. That hits it right on the head, Elizabeth. This is what changing times are. Again, more than half of the workforce today are millennials, and millennials want independence. They want freedom. They want the ability to be mobile. They want the ability to be remote. When I meet business owners today … and sometimes it’s hard. The average age of a business owner in America is 51.7 years old. That tells you something about a generational difference. You’ve got a 52 year old person that’s running a business, and they’re trying to contend with … who’s used to doing it a certain way and having the employees come to work every day at 9:00 and leave at 5 and lunch break at 12 or whatever, and then they’re trying to attract millennials, who again, make up more than 50% of the workforce. Millennials are like, “We don’t really want to do that. We can be just as valuable to you, but I want to work from home a couple days a week, and times have changed.” Smart business owners I know are changing with those times.

What you recommend is 100% what I would recommend, where you should have a policy. The thing that I’ve seen work really well with clients is it’s temporary. You say, “We have a policy for remote workers that want to work at home. It’s for everybody in our company.” You cannot single out individual employees. It’s discriminatory to do that, and you can get into trouble. You should be able to say that we do have a policy, a work from home policy. It could be worked out among a manager or the owner and the employee. It’s usually on a trial basis, like we’ll do this for 30 days. We’ll set you up to work from home. The tools and the technology are so simple to set somebody up to work, and inexpensive, so they can work from home really easily. But then once they’re doing that, it has to be agreed upfront that if it’s not working out, the person’s got to come back in the office and resume their work as normal. If it is, then that’s great.

Some of the criteria of working out, though, some of it is more qualitative than quantitative because you want to make sure that that employee has got the ability to as often as possible, they are proactive and reactive, they’re working during work hours, they’re as productive as they would be in the office. Some people can work from home and some people can’t, and you never know. You could work from home, right? I could work from home.

Elizabeth: Yeah, I do a combo of both. I have to say, I get so much more work done on my work from home day.

Gene: Me, too, when I work on my own, yeah.

Elizabeth: Because I’m doing editing and writing all day long. I have a home office. I go in there with my cup of coffee at 7:30 in the morning, and I don’t look up sometimes until I have a conference call at 1. I’ll look up at 12:30 like, “Oh, my God. I have a conference call at 1.”

Gene: I would be so horrible working in your office, I have to tell you, because not only would I … I get distracted by what’s going on around me … but the minute that I’d start getting, I’m like, “I’m going to take a break. I’m not going to get any work done. If I’m not going to get any work done, I don’t understand why Elizabeth has to get any work done. Let me see if she wants to get a cup of coffee.” You know what I mean? I would be like an infection. I would spread non-productivity around your office. Some people do work better when they’re own their own than if they’re in a working environment. Having said that, there are a lot of people that will argue that a working office environment is collaborative. It creates ideas and innovation, and you share ideas. There’s a balance.

Elizabeth: I think I have a good situation where I can do both because when I am in the office, I am the person interrupting people. I’m constantly saying, “Do you want to go down to the cafeteria? You want to go get coffee? You want to go for a walk?” Because I just can’t sit still at my desk for that long because I don’t get into that flow, that focus that I do at home. But I’m available for meetings. I get to chat up my co-workers. It’s a little different. I am pro remote workforce. I am definitely pro that. You must be saving a lot of money on not having that overhead.

Gene: Yeah, we are. We really are. My entire company … For anyone who’s listened to this podcast before and know a little bit about my company, I have 10 people in my company, and I have contractors in addition to that. Everybody works from home. We used to have offices, and we closed them up almost 10 years ago. Everybody works from their home offices, so we have no overhead, no rent, no whatever, which is great. When I had offices, people weren’t coming to the office because there were a lot of clients. It matched the culture of the company. I’ve joked about this before that we’re the world’s most dysfunctional company because we never see each other as a group except around Christmastime. We talk to each other all the time on the phone, and I see people [inaudible 00:16:31] clients, but we have people in my company that have seen each other … and it’s a 10 person company … once in the past 2 years.

Elizabeth: That’s crazy.

Gene: I think we are losing something by not being that collaborative. An issue comes up with a client, and we’re talking about it in the office. Then again, that wouldn’t happen, because I had the office and nobody was in the office.

Elizabeth: I think Kimberly’s company, it’s a web design company. I feel like those types of people would probably benefit from maybe one day in the office, and then the rest of it …

Gene: Yeah.

Elizabeth: If you’re a developer or a designer … I don’t want to get interrupted constantly. That takes a lot of concentration. I was just reading an article in Harvard Business Review about a company that instituted a policy where people could work from home as much or as little as they want, or remotely. They called it remotely. You had to be in the office on Wednesdays. That’s when they did all of their meetings and they did all of their big announcements, and they did brainstorming sessions and everything. You were expected on that day to come in and have your A game and be with people.

Gene: Sure. That makes sense.

Elizabeth: They said it really boosted company morale because it showed the employees that the owner really trusted them to get their work done.

Gene: Right. I believe that.

Elizabeth: He had a couple of hours, I think there was a 4-hour time frame during the day, that everyone had to be working. I think it was 10 to 2 Eastern. They were all on Eastern time. Then you could work any hours you wanted, but you had to work those 4 hours. If you weren’t working those 4 hours … let’s say you’re a night owl, so you decided to work 8 to midnight … you couldn’t get annoyed with anyone not also working at the same time. You couldn’t expect an immediate response to your question.

Gene: Okay, fair enough.

Elizabeth: It worked out. It was about the same size as your company. I think it was 10 to 20 employees, and it worked out really well for them. So yes, we’re pro remote workforce. Do you think at some point she could possibly push all of her employees remote and get rid of the overhead for her office?

Gene: It depends because she’s a web design firm. That’s certainly something that could be done. A lot of people take up space in incubators or a temporary workspace, and they get together that way. The model has worked for my business. Just know that going into it, it does have its pros and cons.

Elizabeth: Definitely, and as we always say, you can attract more and maybe better employees by having the perk of being able to.

Gene: The more flexibility the better, particularly if you’re after millennials.

Elizabeth: Yeah, definitely. We will be right back with Gene’s word of brilliance.


Elizabeth: We’re back, and we’re going to hear Gene’s word of brilliance.

Gene: Two words, Elizabeth, two words. My two words are yellow submarine. Those are my two words of brilliance.

Elizabeth: Okay, I have no idea where this is going.

Gene: This has to do actually with an article that I wrote for a little bit ago. It has to do with this. There was a study that was done earlier in 2016 by some researchers at Cornell University that found and concluded that if you play happy music in your office, your employees will be more productive and profitable to you.

Elizabeth: Really? What is happy music?

Gene: Yellow Submarine is a perfect example. There was another one. I had some examples because I brought up the article on my phone here. Katrina and the Waves, Walking on Sunshine. That is right. That right?

Elizabeth: Yeah, that’s a great song.

Gene: If you play music and not … Everybody, just to let you know, out of respect to you the listener, none of us, myself or Elizabeth, will be singing either Yellow Submarine or Walking on Sunshine. Don’t worry. You don’t have to stop this podcast. What they did is that these researchers at Cornell, they did a study where they took test groups of people. They played happy music, and they gave them tokens that they could share with each other. When the happier music, they shared more of these tokens. When they played down music … Some of the down music, so that all of you know, Smokahontas by Attack Attack or You Ain’t No Family by I Wrestled Bear Once. I don’t know the songs. Is that bad? Hopefully, it’s just because of me because I’m a classic rock person. I don’t know Smokahontas and I don’t know You Ain’t No Family, but hopefully, you know that. Anyway, apparently those are downer songs. You know what I mean? The people in the test group were giving less tokens away, they were sharing less, when they were doing that. They did that again and again, and they found that the happier the music that you play in your office, the happier your employees will be and the more productive they will be. So, play happy music in your office.

Elizabeth: Interesting. If my boss tried to pipe in music to the office, I would be so annoyed.

Gene: That’s another interesting question because what are you … you’re playing Walking on Sunshine all around the office when you’re trying to get work done? Where do you play the happy music? Maybe in the employee break room. Maybe it’s on and it’s low in the background somewhere. Just keep that in mind. If you have the ability to play music in your office, make it happy.

Elizabeth: Break room. Yeah, I can get behind that.

Gene: Yellow Submarine.

Elizabeth: Thanks for tuning in, everyone. We will be back next week. Wednesday at 10am we publish our new podcast.

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