211 | A 7-Figure Business Doesn’t Mean You’re Making Money

Why can a business be profitable on paper and still leave you wondering, “Where is all the money?”

In this episode, Erin breaks down one of the most misunderstood parts of running a business: the difference between revenue, profit, profitability, and cash.

More revenue doesn't automatically mean more money in the bank.

In this episode, Erin discusses:

· The difference between revenue, profit, profitability, and cash

· Why a seven-figure business doesn't necessarily mean a financially healthy business

· How receivables and payables impact the cash you have available

· Why growing revenue won't fix an inefficient or expensive business

· The difference between money actually being tight and money feeling tight

· How moving the financial goalpost can keep you from ever feeling financially safe

· The nervous system's relationship with money and financial safety

· Why every person you hire doesn't need to directly generate revenue

· Looking at ROI through mental space, creativity, emotional relief, and freedom, not just dollars

· Asking whether your business is actually creating the life and freedom you want

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Transcript

Profit Isn’t Cash In Bank

Erin Gray 0:02

I have a profit. I have a hefty profit, but it doesn't feel like there's that much cash in the bank. Profitability, right? Having a profitable business doesn't necessarily mean that you have a lot of cash. And before you make assumptions like you need to make more money, what you need to understand first is where is the money actually going? I always talk about this. Where is the money moving in and out of your business? That is a very important thing to know as a business owner. So let's dive in. Okay, so I don't remember if they taught this in my financial classes, my tax classes in college. I know a lot of us didn't take any of that type of stuff in college. You know, we just decided we wanted to start a business. We had this great idea. And I think a lot of people do not understand that profit, profitability, same thing, and cash are not the same thing. So when you look at your PL, I have so many thoughts around gap and how QuickBooks and reporting shows because it's kind of like from a the same way from a personal standpoint as well. Like if what you make, like let's say somebody works at a job and they work at a job and then they take home their pay and then they pay all the other things, and then they want to save after the point or allocate, I should say, allocate their money after the fact, everything kind of gets already eaten up versus taking from the top, allocating what you want to go to specific things and then using from there. And that's the way that QuickBooks also looks at your PL, right? Like you have your income, then you have cost of goods sold, then you have your expenses, and then you have your profit. So you might show being profitable, but depending on, you know, what your taxes are for the year or for the previous year, if you're having to pay any type of previous payments, setting payments aside for this year, what you think your estimated taxes are going to be for this year, any type of debt payments. This is why a lot of times people will be like, Well, I don't want to pay, you know, taxes, so I'll just buy more equipment. It's like, hold on there. That was always the back and forth that I would have with my

Read Where Money Actually Moves

Erin Gray 2:10

dad until he recognized, yes, you can buy equipment and you can section 179 it, or you can bonus depreciation depending on what your tax accountant decides to do it as, what's the most beneficial thing. But you're gonna take that in that year on paper, right? Because there's a difference between book tax and actual tax tax, right? Book tax will show you, you know, you were able to depreciate it that year. But when you're actually working in your business from a cash flow perspective, you're still making those payments that you already depreciated, maybe fully depreciated the year before. So you have to think about like, what are my debt payments, right? Loan payments, any type of owner's distributions, any like investing back into the business, especially like the timing of your receivables and your payables. Like depending, this is where it's really important, depending on what kind of niche that you're in, industry, whatever you want to call it that you're in, you know, as a construction business, we would invoice, like I talked about in the previous podcast episode, you know, our payups. You might submit a payup on the 25th of the month, which is typically when they were due, but you may not get paid for 60 to 90 days. There were many times that I was filing liens on people in order to protect the funds and to receive payment. So if you are expecting, you know, we we might have billed out four or five hundred thousand dollars that month, but you may only get two or three hundred thousand back the next month because of the timing of your receivables. And also, you know, you think about, but your payables, but you still have your vendors that you're paying, you still have your contractors that you're paying. So you really need to understand like, where is the cash actually coming from, right? Are you quick to receive? Like if you are a salon, then you're probably receiving payment, you know, on demand, right? Like when you service that person. But if you're in a type of construction business, depending on what type of business, you may be receiving, you know, your income 60, 30, 60, 90 days. And so that might be also a difference for you of like, yeah, you're showing profitability on your PL, but your cash in the bank is going to, you know, highs and lows or swings, right? You're gonna have these swings because of the timing of your receivables to your payables. So you got to really understand where your cash is coming from, where it is going. That's why

Taxes Depreciation And Debt Payments

Erin Gray 4:35

when I'm working with clients, when we look at, you know, setting up, like I think this was episode, go back to episode 209, and I talked about the chart of accounts and setting up chart of accounts, really setting up where the accounts work for you so that you do put in a profit account. You do put money comes in and it just profit is taken off of the top and it goes into its own account. Like I think everyone, and and I will always say this everyone is so different and everything that I say is so nuanced, right? Like what I might recommend for you might be different for someone else because of the type of industry that you're in. You know, I might recommend more cash for somebody in the construction. And it's also like, what is your nervous system? Like, what can your nervous system handle? And I mean that from such a loving and supportive place. I think sometimes, you know, we hear these just blanket statements of like what we should, I think about like the the Dave Ramseys of the world, like how much you should keep in cash and all that kind of stuff. But what can your nervous system handle? Like sometimes some of my clients actually want to be a little bit more cash heavy. Yes, that might be a nervous system thing. And also it might be because they are looking to make some different investments in their business. So it's going to be different for everybody, but you really have to start looking at, you know, how is your money moving in and out of your business? And what are your receivables like? What are your payables like? Do you have like it it all tells a story and it doesn't always tell the story on the PL. That's number one. Number two is more revenue doesn't actually always equate to more cash. I remember when I came on and I think it was the year before or two years before, our revenue had doubled. And I was like, wow, like what created that? Well, when I went back and I looked through the financials, we had several huge projects. Great, more revenue, but the cost of goods sold were equal to that. So even though our revenue had increased or doubled, so did our cost of goods sold. So at the end of the day, it was a wash. But on paper, you might look at it and say, Oh, wow, you know, like, oh, your income doubled from the previous two years. And like the bonding, I remember talking to the bonding guy, and he was like, Well, why were you, you know, at this level two years ago and now you're at this level? I'm like, yeah, but look how much more profitable we are, and our income is not. And this is why it's so important is like people like I hear people on social media or whatever, you know, it's like a seven-figure business owner. It's like, what is that even? I know what it means, but it's like that doesn't tell you anything. Like you could have a $10 million business and you could have, you know, nine million, nine point five million in expenses, right? Or you could have a three million dollar business and you could have a million in expenses, which is the more profitable business, right?

Receivables Payables And Cash Swings

Erin Gray 7:15

So it's not about revenue, it's about actually what do you actually keep? And so as your business grows, right? It's natural that you're gonna have more expenses. You might have more cost of goods sold. You know, you're gonna hire more people. Maybe you're gonna have, and this goes back to like depending on the type of business that you have, you might have more contractors, you might have more overhead. But like I said, I mean, someone that has a $3 million business, but you only have a million in expenses is way more profitable, probably has a lot less headache than somebody that's got a 10 million that's you got nine and a half million in expenses. And when I say expenses, I'm combining cost of goods and expenses. But, you know, so you really have to look at like, you know, not just how much is our revenue, but like how much are we actually keeping? Where is it going? How is it being utilized? What is the business actually producing for me and how profitable are we? And I think also too, it's easy to, as you grow, it's easy to believe that you need to increase expenses. Yes, you will increase expenses, but what I'm always thinking about is how can we be more efficient, right? If we're gonna hire this person, how is it going to lead to not just an a financial ROI, but how is it also going to help you from an ROI, right? If you hire somebody and then now you have more mental stress or you have more emotional stress, granted, like I'm already assuming that you're already doing the work and all that kind of stuff, but there's more tension because it's not a best fit for you, even if they are more profitable for you. Is that really helpful? So again, with the nuance and understanding, like I'm always looking at it from that 3D perspective and that 5D, right? From a 3D perspective, yes, you want someone that you hire to be profitable for you. And I will say this too: there will be some centers that aren't necessarily a air quoting, a profitable center for you, like on paper, like the construction guys or the service guys, there was a direct correlation to how much they worked to how much they invoiced, right? That is a easy to see on paper. But I was considered an air quote, and I want to say this, a cost center on paper, right? There wasn't anything that I was invoicing for. But what I, what I was creating was for one, like a thinking partner with my dad so much, advising him, like me suggesting not to hire this person or to let this person go. What did that create? Like me protecting, we would call it like you put liens on because people weren't paying. Like I think I know it was well over several million dollars of what we were able to receive because I knew contract law and we were able to file liens in the correct time and things of that sort, right? Understanding when I got in there and I started to understand how franchise tax worked, like that was probably, I don't know, $20,000 to $30,000, $50,000 that I was saving them, right? So we can't necessarily just look at like, oh, is this person going to make me more money? Yes, there are different places in your business where, you know, if you hire someone to help you in your salon and they are doing those tasks, then yes, they should be bringing in more money. But if you hire maybe a VA, yes, they're not going to necessarily be bringing in more money for for you from that standpoint. But what are the, what is the mental and the emotional relief that you might feel that you're not having to do some of that stuff, where you then can have more ideas and creative ideas and then be able to grow, you know, and continue to scale your business. So I want to say, and I'm always playing in this 3D and this 5D world of like on the one hand, yes, the math matters, the money matters, like all of that stuff. We have to make sure that the math is the math. And then also on that spiritual, that 5D lens of like, yeah, but for me personally,

More Revenue Can Still Be A Wash

Erin Gray 10:55

Erin, right? Having someone that can edit my videos, which I absolutely love the work that she does. Like, what is that helping me to be able to free up? Because that is an energetic drain for me because I don't enjoy editing, right? I enjoy creating, I enjoy thinking about podcasts for you, I enjoy about talking and teaching things, but that part slows me down. And so, what is that? There is a value there, even though it can't be itemized on the PL of like, oh, well, how is this making me more profitable? So you have to look at everything from that lens of like, how does this apply to me? How does this help my business? How does this help me have more sanity and more space and more time to think and to create and to envision and to grow my business? So I think a lot of people think, oh gosh, if we're not making, you know, enough profit here, let's just grow and we'll make more profit. Like they think it's a one-to-one ratio versus the question we need to be asking is how can I be more efficient with where I am? Like before you grow, before you double, before you go to whatever next level you want to go, like, are you running the most efficient team, efficient numbers, efficient business, simple? Like, I think at times also too, we want to have like this elaborate business, but like, how can we make business so simple? And so really look at your numbers and your PL from that standpoint of like, am I being the most efficient that I can? Do I have duplication of people? Sometimes people have like fear of paying high income tax. But the thing that I would always have a conversation with my dad is like, let's just have the money to pay the tax. Like you buy a new equipment, you're gonna pay on that for the next five years, or you're gonna use that amount of cash and pay it off, you know, whatever it might be. So it's like it's one of those things of like sometimes we we are looking at our PL and our financials and we're making emotional decisions versus being grounded and making decisions like, okay, are we buying equipment just to just so that we don't have to pay tax versus what are my beliefs around paying tax? Or why don't I give, you know, an increase to some of my employees and it goes to them. And then, you know what I mean? So you really just have to start thinking about why I am making the decisions that I am making and being very clear on that and not making it from an emotional standpoint when you see or you think like, okay, revenue where it is and my profitability. And then, oh, if I just increase my revenue, then I'm just going to create more cash. And then the third thing is, like I said before, I'm always playing in this 3D and this 5D reality. Sometimes money feels tight because it actually is tight, right? There is actually a math thing that we need to look at and we need to get clear on your numbers and see where the money is coming in, where it is going, how are we holding it? What are your receivables, your timing,

Efficiency Hiring And Real ROI

Erin Gray 13:55

all of that? What does that look like? Sometimes that is an actual fact that money is tight. And then sometimes there's that spiritual part, there's the 5D part that money feels tight because it is in a nervous system. It is an emotional thing, right? Like I always talked about how I would move the goalpost, right? Like I thought we needed to have X amount in investments. And then we would get there and then I would just move the number, right? Because it wasn't ever about the number. It was about teaching my body and my nervous system how to feel safe. So you really have to look at both, right? You have to look at, okay, is there any breakdown here that needs to run, that my business needs to run more efficiently? And if all of those boxes are checked off, then you really have to look at, okay, what is it about me? What is it within my nervous system? This is why I strongly suggest that people work with an emotional release therapist. I love mine. I highly recommend her stormy, but really working through and having someone that you work through on the emotional side because sometimes we want to make decisions on the 3D side, but really what we need to really take care of is our emotions and be releasing some of the, and I would even go as so far as to say, like some of the money trauma that we have. Like I think a lot of us have money trauma and we don't even know that we experience it or have that relationship with money. So I always say, like, okay, let's actually look at the numbers. Cause it's not like just think your way into like, oh, you know, the numbers are wonderful when the numbers are not, right? If the numbers are not, we got to fix the numbers. And then once we have fixed the numbers, then it's like, okay, what does, you know, enough actually mean to you? Like you have to define it. Enough is such a gray blanket statement, right? Like, what is enough? You have to really define like, what is the amount of cash that I want to keep? And not even from the place of like, what is the amount of cash that I want to keep to make me feel safe, but what is the amount of cash that I need that I want to allocate to run my business comfortably, efficiently. You're always gonna have highs and lows. That's just part of life. And I don't mean it from that place of like expect lows, but I also mean it from like there are seasons. There are seasons that you might want to be in where you're like, you know what? I just kind of want to not grow right now. I just kind of want to hang out and allowing for, you know, the the cash that you have allocated to absorb some of that. Okay, so to summarize, go back and look at your PL and look and see where profit and cash are not the same thing. So you really want to look at like what are your average taxes, right? What are your owner's distributions if you're an S-corp? Like, what are you taking? Because those might be quarterly or however you have them. So really start to look at like, you know, and that's the thing is like, like I said at the very beginning, it's it's always gonna be you, you know, your net income is gonna be at the bottom versus what do you want your profit to be? And just start allocating that and then working off of everything else. The second thing is just because you want more profit or you want more cash doesn't necessarily mean that more revenue is gonna fix that problem, right? I've always said this. If you

Numbers Versus Nervous System

Erin Gray 16:55

have a chaotic business, if you have an inefficient business, if you have an unclear business, if you have insert whatever, right? If you don't have, if you're not really clear on your numbers, when you grow it, you're just going to grow more of the same. So you really have to first dive into the numbers to see like, what are my numbers? Because more revenue, like I said, we had double the revenue and we had almost, you know, double the cost of goods sold. So it was a net wash. And if you don't understand that, if you don't, if you're not planning for that, you're like, okay, well, I just feel like I worked even harder. And then what did I, what did I get as a result from that? And then the third thing is is really is that 3D and that 5D, that spirituality, right? Like the math is the math is the math. And then also there is there, the human, right, behind it. There is the human in your business. There is you that is, that has a nervous system that has stories around money, that has a relationship with money, that has a childhood with money, whatever it might be. And so really getting clear on like, okay, well, if I am profitable and my cash is there and I'm still just upping the bar or I'm changing the goalpost, then I really have to look at that and I really have to make sure that I'm doing the inner work, the emotional work to have a better relationship with money. And if you are a brilliant, beautiful female founder who's like, I know that my business is making money, but I don't actually understand where the money is moving in and out of my business. I don't know where the money is going. Or I look at my PL at the end of the month and I'm like, I don't even know. Like, I love doing this kind of work with clients. This is this kind of stuff that I do in my private advisory. And I am accepting clients. So we will look at the numbers. We will get into the nitty-gritty, into the weeds of things. We won't stay there, but I do think it's important in the beginning to really start to understand because I don't know if a lot of CPAs and bookkeepers do this type of actual work with their clients. And I think it's really important work that we do to understand our numbers. That is some of the time that I took when I went into my family's construction business. And I really got, and I always say this, like intimate with the numbers and the books,

Summary And How To Work Together

Erin Gray 18:55

but I could tell you exactly like I noticed patterns, I could see, like I knew how much money we needed to have because I knew receivables, what that lag was. Like that is really important information that we need to do as a CEO and the founder of our business to understand what is happening in our business in our numbers. So we will look at the, you know, the numbers, we will get into the weeds, which will then help you be able to make better decisions around those numbers and then what you actually want your business to provide for you. So if you are a seven-figure founder and you want someone who is a strategic thinking partner, someone who can be in the foxhole with you, who can help you see a different perspective. I think sometimes we're in the weeds of it. We aren't able to zoom out that 30,000 foot view. That's some of the stuff I love doing with clients to give them a different perspective and to also give them the information from a very neutral, unbiased, nonjudgmental place. If this is something that you are looking for and you want to explore, I will put all of the links in the show notes for how you can connect and apply to work with me. Okay, I will see you in the next episode.