A Profitable Business Can Still Go Broke: The Cash Flow System Every Owner Needs

In this episode of How to Win Big at Business, Joe DiChiara explains one of the most dangerous mistakes small business owners make: running the business by looking at the bank balance.

Joe breaks down why cash flow is not simply “what’s left over” after paying bills. Cash flow should be a system — one that tells you where the money is going, what needs to be set aside, what belongs to the owner, what must be reserved for taxes, and what should be protected for future stability.

As a CPA with over 40 years of experience and a lifelong entrepreneur, Joe explains why every viable business needs two things: sales and positive cash flow. Sales prove people are willing to buy what you offer. Positive cash flow proves the business can survive after expenses, taxes, owner pay, operations, and reserves.

Joe introduces a practical “bucket” approach to cash flow, including money set aside for:

• Taxes
• Owner pay
• Operations
• Surplus and reserves

He also explains why revenue is not the same as cash, why QuickBooks is software — not a system — and why every business needs real accounting, reconciliations, budgets, and cash flow monitoring.

Joe shares two real-world examples: one business with plenty of cash but terrible financial management, and another profitable contractor who had strong sales but no cash because customers were paying too slowly and suppliers were being paid too quickly.

The message is simple: your bank balance is not your financial system.

If you want to build a real business, you need a cash flow system that helps you make decisions before the crisis hits.

If you’re a self-employed professional trying to build a real business, this podcast was created for you.
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Because running a business shouldn’t feel like wrestling an octopus… alone.
 

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Thanks for listening!

If you want fewer headaches, fewer IRS surprises, and more smart systems running your business (so YOU don’t have to), let’s talk.

Book a strategy call: www.timewithjoe.com

Because running a business shouldn’t feel like wrestling an octopus… alone. 

Also check out:
www.Bedrock360BusinessSolutions.com (Complete Coverage)

www.Bedrock360TaxSolutions.com (Tax Gaurd 365) 

www.Bedrock360BusinessTraining.com (Courses)

Transcript

SPEAKER_00 0:04

Believe it or not, a profitable business can still go bro. And if you're running your business with your eye on your bank balance, it's like driving with one eye closed. My name is Joe DeCaro. I am a CPA over 40 years and lifelong entrepreneur. And I want to welcome you to episode number 29 of How in Big a Business. I created this podcast specifically for small business owners that can't guide through the numerous obstacles, let alone the IRS and government interference. Things like marketing, startup issues, tax minimization is important. I'm a CPA and I do a lot of tax minimization. But the bottom line is taxes aren't always what puts people out of business. And I'm here to talk about those things that do put people out of business, those obstacles, those inevitable, oh my God, moments. Why is this happening to me? It happens to all of us. So if I've gotten your attention, let's talk for a few minutes about why cash flow is one of the most important things in your business, how you can monitor it, and more, hopefully a lot more. If you enjoy what I'm talking about, please follow me. Give us some love, give us some reviews, anything that'll help me spread the word to the millions and millions of US business owners that are out there unnecessarily struggling. So let me tell you what cash flow is not. It's not what's left over after you pay everyone. Cash flow should be a system that helps you run your business. I've been saying for decades, a business needs two things to be viable. Number one, sales. If you don't have a viable product or service that somebody's willing to pay for, there's no cash flow. You're not even in business. Number two is positive cash flow. That means positive cash flow after all of your expenses, including, yes, including your taxes. Because unfortunately, profitable businesses, successful people, despite what you may believe or have heard on the internet or whatever, successful people do pay taxes. In fact, successful people pay the bulk of the tax. And when I say taxes, I'm not just talking about income taxes because that's what politicians and clickbaiters like to focus on. They're going to go by, oh, the richest people in the world pay the lowest effective taxpayer. Well, when you when you add to the equation the fact that business owners employ all the people that have jobs and add to that the payroll taxes, the compliance, the insurance cost. Successful people pay the most taxes. But I'm not here to debate that. But the fact is that your cash flow needs to be a system. Think of it as having different buckets. Instead of having one bucket where all the money goes into, and then you pick and choose what you're going to pay. What if you had a system that goes by percentages? In other words, you're going to put X amount away for every dollar that comes in, you're going to put X amount away for taxes. As hard as that might seem. Okay. Face the fact that you're going to have to pay some taxes. Number two, owner draw and salary. How much is going to set aside for you? It can't be arbitrary. Let me see how much is left at the end of the month, and then I'll decide how much you take. That's not a good cash flow system. Number three, operations. How much are you going to set aside for your regular, ordinary, and necessary business expense? And number four should be surplus. How much are you putting away for your cash reserve? So let's just go through a couple of the issues here. One of the biggest lies that self-employed people make is that I'll figure out the cash later. Just like when we start businesses, and I'm guilty of all the stuff that I accuse every business owner. Like I said, I'm an entrepreneur. The only thing different is that I also have a CPA license. So I've studied for decades everything I could at saving taxes legally, how to reduce my own taxes and my clients' taxes legally. And there's a lot of ways to do that. Okay. Most business owners, most small business owners that haven't learned these lessons, run their business by looking at their bank. They don't have any real accounting system. And let's take a step back because in order for you to have any cash flow system, you need something called an accounting system. One of my mentors, my coach, Larry Barton, always said if you can't track it, you can't measure it. So you need to have a solid accounting system. And I'm not talking about QuickBooks. QuickBooks is accounting software. And right now, there's a lot of other choices besides QuickBooks. 35 years ago, when QuickBooks first came on the scene, it was the 800-pound gorilla. There weren't that many choices. Today you have numerous choices, probably hundreds of choices. In fact, I wasn't even happy with the choices. So I went out and hired a programmer to make my own accounting software. But the fact is that the system is not the software. The software is a tool that helps you track your accounting. So depending on how big, how small you are, if you're running a business on your kitchen table, use an Excel spreadsheet. That could be a start, but you need some system, checks and balances that include reconciliation. You need to have a budget. This is all part of the cash flow system. Now, another thing to understand is revenue is not cash flow. Revenue isn't even cash. Okay, depend on your accounting system. So let's talk a little bit about accounting systems, accounting methods. Okay, there's two methods, two main methods. There's the cash basis, and then there's the accrual basis. Now, cash basis is basically anything that's going in and out of your of your bank account. A more accurate measurement is the accrual based system, where you're recording revenue when it's earned and expenses when they're when they're incurred. Okay, so there's a timing difference. When at the end of the month, you bill clients depending on, and this goes to your cash flow system. But say you have a business where you invoice clients and then you have to wait. Well, you've earned the money. Once you send the invoice out, it's technically revenue, but it's still not cash in your bank. Okay. On the other side of the coin, you have bills that you might owe. Okay, they're legally owed. Utilities, your telephone, unless you're on automatic payment, which most people are now. But let's say you let's say you get a bill from your attorney, you pay it later. Those are expenses. It hasn't come out of your bank account yet, but they're still expenses. At the end of the day, you have to pay those expenses. So let's take a step back to my first statement, which was you could have a profitable business and still fail. And on the other hand, you could have an unprofitable business and stay aflock. So let me give you the second example because these are both personal clients that I had. I had a client that had a pretty large body shop, okay, did a lot of business. People were always after him to buy their parts. So the biggest expense in the body shop business is, well, besides labor, is the parts. So this business was plenty of cash. My client was living large and real estate. Problem was what I found out is he was nine months behind on paying all of his suppliers. If we had taken that into account, if he stopped sucking money out of the business to buy his real estate, we would have been able to have the right picture. Because the way he was operating out of his bank account wasn't proper. Not because I didn't try, because he didn't want that. Unfortunately, he passed away, his business failed, and that was a sad story. But the fact was he had plenty of cash, but he had a bad business because he refused to install a good accounting system. Had he had the good accounting system and he could show some constraint, he might still be in business. He might still be alive, but that's another story. On the other end of the spectrum, I had a successful contractor, large floor installer, commercial flooring, doing about three and a half million dollars a year, but no cash. He had tapped out his $150,000 line of credit. He had plenty of he had as much business as he could handle. The problem is he could take on big jobs because here's the other side of the coin. He was profitable, he was paying taxes. I developed a really good accounting system for him. Everything was recorded. And what we found out was number one, his clients weren't paying fast enough. In fact, he had no collections department until I came on board. He gave them terms and people, because nobody was reminding him, them to pay their bills. They went 60, 90, 120. Invoices got lost, but he was making plenty of money. He just didn't have the cash. On the other end, he was paying all for all of his materials. He had no terms, no terms with his supplier. So what did he do? We went to his biggest suppliers. We asked them for terms. Instead of net 30, can we get net 60, net 90? And all of them said yes. We got better terms. We it took over a year, but we got on top of the receivables, and we were able to get them a bigger line of credit because now we could produce strong financial reports, and that was the story. That was the story. Don't think your bank is your financial system. You have to be working closely with the CFO. Okay, that's what this is. Okay. Cash flow is a function of what a CFO does. So I'm primarily a tax accountant my whole career. Things are changing now, things shifting. A lot of it has to do with AI because today I can do a lot, a lot of things with AI that my clients couldn't pay me for before. In other words, the amount of time that it takes to do cash flow analysis, budgets, things like that has shrunk. It's shrunk. So now we have been pivoting from focusing on tax compliance, tax strategy to CO level work. And it all comes down to cash flow. So that's my story, folks. I'm sticking with it. I hope you enjoyed the content. I hope you enjoyed the delivery. Follow us. Uh, I'm here every week. You should be monitoring your cash flow every week. If you ever want to reach out to me, just go to timewithjoe.com and be glad to have a conversation with you about your business. And this podcast is all about how to win big at business. God bless all her and out. Thank you.