Service Based Business Society Podcast

Hello and welcome back to another episode. We are in the studio for season 3 episode 19. I'll be honest, I cannot believe that season 3 has flown by so fast. Don't worry, it's not over yet. We've got six episodes left and there is some special guests in store, some value packed episodes. Overall, it has just been an incredible journey and I just want to say thank you to all of our listeners. New listeners, longtime listeners, and everything in [00:01:00] between. So before we dive into today's topic, which is cash, money, and financing, we're just going to take a moment and say, holy cow, January is over. And I know that I usually kind of talk a little bit about time flying by so quickly in the fall, but honestly, if there's only 12 months in the year, which at this point, I think there should be more, one of them's already gone. So my question for you is, do you really know how the first month of the year went in your business? Like, do you really know how it went? Do you have the data, the metrics, the KPIs? Do we know if we're on track? Do we know if we're off track? And have we got our tax strategy in place? I am not a tax accountant. There are some incredibly talented tax accountants that work on strategy. So if this is you, if you are thinking, "I know it's tax time, but I haven't done it [00:02:00] yet. I know I need to get my stuff in order." There's a couple of things that we need to think about. Number one, your tax accountant, your financial planner, your own personal plan requires data. And so, you know, a little bit of dropping of the bookkeeping services, but if your books are not done, be sure to reach out. So we are, like I mentioned before, undergoing a little bit of a rebrand, but you can still find our bookkeeping services on our original link, bottcher.io. And we are in the middle of updating the branding. And so, if you're listening to this at a later time, you can still go to bottcher.io and click on the bookkeeping link. But now is the time where like, if your books are behind, you need to shove it into gear and get them done. Because I hate to tell you this, there's a lot of entrepreneurs that don't have their books done yet. And when you reach out to a bookkeeper, And are like, "hey, I need my books done. I need them back in five [00:03:00] days. By the way, I haven't done them in three years. And I have six accounts and five credit cards." you're asking a lot. So, we would love to help. We have a great team. And so, if you have not done your books yet, now is the time. Let's segue into data metrics, knowing your numbers. So, January's over. Number one, this is like that time where we're looking at last year's numbers for tax. But now is also the time where if you don't know your numbers yet for month one of the year, you need to because now is when we need to be looking at ways we can increase profit. Ways we can increase sales. Ways we can optimize and create efficiencies. And so now is the time. I can't say it enough. I know I sound a bit like a broken record, but if you do not have this information, you can't use this information and we really need to be making competent, data driven decisions. So, that segues perfectly into our discussion today on cash, money, and financing. Here's what I know. Depending [00:04:00] on the time period that you grew up, you have been told over and over again, that debt is bad, interest is bad, borrowing money is bad, we don't want to finance things. There's a lot of very successful money people online that talk about, "Don't be taking a family vacation until you've got six months of money in the bank" and don't do this and don't do that I want to let you know that these are personal finance recommendations. These are not business finance recommendations. When we start our entrepreneur journey, we don't know what we don't know and so often and I mean often we see business owners using personal finance recommendations for business. Debt in your business is not a bad thing. Debt you can't pay is a bad thing. Really high interest debt that makes it so you can't pay your other bills is not good. But if you are financing things appropriately, that is not this devil that everyone makes it out to be. I'm going to explain why. [00:05:00] Cash in the bank is the way that your business can grow. So often we see people will go and they will work, work, work, work, work until there's say 5,000 in the bank and then they take that $5,000 and I'm just using round numbers and they go down and they purchase some new asset. They take the $5,000, they pay for the asset. Now there is no money in the bank. And they've got their asset. Here's the problem with that when it comes to the business life cycle, there's so many things in your business that you often pay for before you get paid. Let's go typical service based business. You're going to someone's house. There's going to be some kind of human component, then there's also going to be some kind of material component. So let's use an electrician for instance. Electrician is going to the house. So that person needs to be paid on payday. And then they might install some, you know, wire, a receptacle, light switch, light fixture, all of these different things. All of that needs to be paid. And then when the project is finished, we're gonna send the client a bill. Maybe you have terms? [00:06:00] Maybe you don't. Maybe you have no terms and you're going to run it on their credit card, but you know that your credit card processor doesn't transfer those funds for a few days. So oftentimes, by the time you get paid, you have long since paid for the expenses. Well, as your business gets going, more jobs, more sales, more carrying costs. And so if you go and spend all of your money on a piece of equipment in cash, or you go and draw a bunch of money out of the business. Like if you don't have any cash, any working capital, key term here, working capital, you can't grow your business. You are literally handcuffed by your cash struggle. It's not always businesses that aren't profitable that run out of cash. A very common misconception is that, if your business is growing and your business is profitable, you will not run out of cash. That is a myth because it takes money to grow. It takes money to invest, to purchase supplies. It takes money to [00:07:00] invest, to pay for advertising. It takes money to invest in the people that are going to work in your business. All of this takes working capital. If we go back a number of years, people would start a business, and there was this conception that you needed a business plan. You were going to go to the bank and you were going to get them to invest in your idea. And I'm not going to say that there is not companies that invest. There's not private equity firms that are going to invest in business, but most businesses these days are bootstrapped. What does that mean? It means the business owner is going to put in the money as they need. Let's kind of walk through a scenario. So, we've got, Sally. Sally's going to start a business. And so she decides, "okay, in order to start my business, I'm going to need a website. I'm going to need insurance. I'm going to need to get my book set up. I'm going to need to get my license." All of these types of things. So in order to start my business, it's going to cost me, round number $5,000. Sally takes $5,000 from her personal account and puts it into her business and gets [00:08:00] going with the hope and intention that by the time the $5,000 has been spent that she has a customer who's going to pay her who's going to put money back into the business. Over time the business will continue to grow and Sally's going to get paid back her $5,000. And we're going to get going. But then, maybe six months down the road, Sally decides, "hey, I have decided now I need to invest in this marketing team, and they're going to help me take my business to the next level." So either the business has enough working capital, or Sally's going to have to put more money in. And so anytime that the business owner is basically self funding the business through work, this means the business is bootstrapped. This is the most common types of businesses we see. But it can be very stressful because sometimes you just need to throw money at a problem to make it go away. And I know people think, "well, that's not really the best way to go," but you know what? Here's the thing. Sometimes you need cash to pay for solutions. You have something you don't know how to do. Well, you need to pay someone to do it. You want to [00:09:00] invest in advertising, marketing, new business cards, website, all of these kinds it requires cash. We always think about this at the beginning. But we don't often think about it as the business grows. As we go, we've decided, "hey, maybe we want to add another service, maybe we want to update the website, maybe we want to take a new direction, run some Google ads, maybe we want to invest in SEO." All of it requires a certain amount of cash. And when I say cash, people say, there's no more cash anywhere. Cash in terms of money that you can actually spend. Not necessarily cash. We've now determined why do we need working capital? Well, we need it to be able to grow the business. It's why businesses often see a business owner who has a business, has grown, is successful, and then they go and buy another business. Or they invest in another business. Because they're really taking the equity from one business and investing it somewhere else. It's the same thing as people who borrow against the equity on their home to buy a property rental. Or, you know, a vacation home. Those [00:10:00] types of things. It's the same concept in business, but here's where business owners, they default to those personal finance recommendations that they've heard their whole life. They default to those and they feel like they're being financially responsible. We recently worked with a client who their objective was just to keep adding money to their savings. This was their business objective. Now, I'm all here for an objective. We know that. I always talk about what is your objective? Keep your objective in mind. So in her mind, adding money to her savings was her objective, but the account had a great balance in it, but there was no discussion with the bank in terms of what is the best return she could get on that money. There was no discussion of investing that money. There was no discussion of making that money work for her. So here's someone who's been a longtime business owner, 20 plus years. It's just sitting there. And sure, it's great for a rainy day. It's great for those types of things, but we want our money to work for us. We want to be utilizing it to grow the [00:11:00] business. We want to be utilizing it if you prefer to put it in an account, high interest savings, that type of thing, that can work too. But here's what we know about cash. We need to have cash available to us. We don't necessarily need it just sitting there. And here's kind of this balance. We don't want to just have money sitting in the bank not working for us. It has to be doing something. Earning its keep, if you will. If we're just going to tuck it off to the side, it should be earning interest, it should be used for investments, it should be used to grow the business. Scale the business. But if we have credit facilities, if we have an overdraft, if we have a line of credit, if we have a good balance on the credit card, that means that if we need money, we have access to it. It doesn't mean we have to, but it's sitting there. It's ready for us. And so that means that we can put some of the other money that's currently sitting in savings, in case something happens. That's that expression like "oh, well just for a rainy day." We can do other things [00:12:00] with that money if we have credit facilities. Where business owners get into tricky situations is that they don't apply for financing, credit facilities, until they desperately need it. It's kind of like dating. Desperation doesn't serve you well. When you're desperate, this is the time you're either not going to get financing, or the financing you're going to get is not at the terms that you want. We, worked with someone last year. They were having a really hard time collecting their accounts receivable. And so they ran into a cash problem. Business is growing. Business is profitable. But their receivable collection practices are slower than they wanted. And they ran into a cash problem. They needed to make payroll. They got desperate. And they committed to a really high interest loan. We'll talk about interest in a moment. It's not always bad. But when it's so high that a third of the money that you're paying back or more is actually just going to interest, it created a [00:13:00] compounding effect on their cash problem. So now, they're paying their expenses in a cash crunch and all of this interest. Their business was profitable. They had a great accounts receivable balance. They could have borrowed money from a better source had they done it earlier. Had they been organized enough to say, "Oh, our cash projections are not great. What's happening is our accounts receivable, although we want to be paid in 20 days, is actually taking more like 50 days on average for us to get paid. And so that means that we have paid for supplies. We've paid for people, paid for all of these things. And we're carrying those costs for a really long time. We're going to need some extra working capital to make that possible." Had they done that, the bank could have potentially looked at financial statements, they could have gone through a process and gotten a reasonable interest rate. But because at the 11th hour before payroll was due, All of a sudden we're trying to get funding. Now you're going to pay for it. [00:14:00] Chances are, if your business is profitable and you've had some good success, you'll be able to get the financing, but it created a compound effect where the interest on this, it almost got into that if we go to like the traditional personal payday loan, where you can't really get ahead of it because you're paying so much in interest, you're not actually paying off the loan. This is a real struggle for this business. And in the end, she decided to go and get a personal loan, invested in the business, pay off the high interest loan and solve it through that way. So things can be fixed. There's always ways to solve a problem. But we need to be making strategic decisions. What was the mistake there? She waited too long. Why did she wait too long? Because she didn't have the data to tell her, " Hey, we have a problem." There was nothing waving the flag. There was nothing to say, oh my goodness, until literally it's like the day before payday and there's no money in the bank. But there were many, many signs of that problem. And many, many junctions in the journey that would have been a much better time to get that funding. So you've got [00:15:00] that situation. And it stems from the lack of desire to get funding in the first place. It becomes a last resort. And this episode is here to tell you it shouldn't be a last resort. If you can get the appropriate credit, start building business credit. Apply for a business credit card. And sure, you might not get approved. Day one. And if you deal with a very small local credit union, you may be less likely to get approved or get approved for a smaller balance, but in my experience a lot of the bigger banks once you have some good business track record They'll approve you for a business credit card. Sometimes you have to put a little bit of collateral money up in order to get the card at first, but it's almost always worth it. Get that business credit card, apply for that business loan. A lot of times they'll do overdraft, line of credit, that type of thing. Last year when we were looking at our agency, we have a business credit card that we got very early on in the journey. And what I was noticing was that the balance was no longer [00:16:00] serving us. Real story, we would have to pay the credit card four or five times a month because we would max out the balance, something like an auto charge would go process, and it would be over limit, and I would get an over limit fee. $30. Oh, crap. Okay, pay the credit card, whoop, it would rack back up. If you're running a lot of ads, if your ads are profitable, if you're spending the money wisely, and you're eating through your balance, well, I don't mind paying the credit card a few times a month. I mean, it takes a few seconds. That's not the issue. The issue is that all of a sudden it would be out of balance and then we would get charged. I was noticing it was like, overlimit charge, overlimit charge, overlimit charge, and I was paying the credit card on repeat through the month. So, what do we do? We go to the bank and we say, "hey, this balance is no longer serving us. You can see that we are paying the credit card five times a month here and we've always paid right on time. We're never paying interest on the card because we're paying and paying and paying the card so frequently. Go through the process and within a week, we [00:17:00] had quadrupled our credit card balance. Now we don't have any over limit fees. We don't have any issues. But they said to me at that time, " Would you be interested in also getting this other card?" The terms were different. On a credit card, you typically have, you know, 21 days where you don't pay interest and then you start accruing interest. They said, "well, ma'am." They always say ma'am when you're on the phone with the bank. " Well, ma'am, we can get you this other card. The interest rate is lower, but it serves more like a line of credit where you're going to pay the interest right away." So we have one card that has a set balance on it, a lower interest rate, but the 21 days are not waived. So I would pay interest from the moment I put a charge on the card. Okay, so we have that card, or we just have like our standard card. I'm going to be honest, I've never used the second card. I've never needed it, but it's there. And if I ever was in a position where I needed that money, if I needed that to invest in the business, if I was like, "Oh my [00:18:00] goodness, this is what we need to do. We have to do it." It's available to me. No desperation, no stress. The funds are available. But we often hesitate. I had another client and they would invoice at the end of the month, they had always worked residential. Service based industries, most times, those who serve residential, or what they call B2C, Business to Consumer, most times you don't offer terms. When you send the invoice, it's due. But when you start dealing with B2B, Business to Business, oftentimes, it requires terms because it's not just a matter of like, "Hey, here's the invoice," and they're going to write you a check, send you an e transfer, do those kinds of things. But when it comes to business, typically if you're selling to a bigger reputable business, oftentimes their accounting department has a number of pieces. What is the purchase order number? Was this approved? They don't do a check run every day or a payment run every day. So oftentimes there are terms required for those kinds of purchases. This client of ours had moved from [00:19:00] the business to consumer space into business to business. The sales were great. Things were going amazingly. Until they realized that they actually would invoice on about the fifth of the month. And they really wouldn't get paid for a full 30 days. That business owner decided, " I can't afford to carry all of those costs for 30 days. I don't have the working capital," and they canceled the contract. They said, "I can't afford to do this work." And they turned it down. All of the investment into growing the business in this direction, all of that in the end to say, " I don't want it. I can't afford to do this work." Had they had a line of credit working capital, they would have said, "okay, no problem. We are going to move some funds around and we're going to get things going." If you start to look at the way that you process your transactions, if someone's offering you terms, use them. Use your credit card. Don't pay for 21 days. People get this whole like, I must pay. Invoice comes in. It says 14 day terms, 30 day [00:20:00] terms, 21 day terms. And they say, "Oh, I better pay right now. So I don't forget. I don't want to forget to pay. So I'm going to pay right now." That's the wrong answer. If you think about, maybe you need to purchase some supplies. You can either go take cash out of the bank, pay with your debit card, whatever, and go and pay for those supplies. Or, you can put it on credit card and pay for it in 21 days. Or, if you have a vendor with 30 day terms that takes a credit card, you could get 30 day terms from them, and then you could get another 21 day terms with the credit card. This is called cash planning. And if I go back to my very early career, my mentor will, we still laugh about this story because I'm a pretty black and white person. It's time to pay the payables. It was an industry, most vendors provided 30 day terms. It's like my very first time ever going to be paying the payables. And I bring the list, and it says, whatever the number was. Let's choose a random number. $50,000. $50,000 is due. I said, "okay, get the payments ready." And he's like, "well, what's your [00:21:00] plan?" I said, my plan is to pay the payables." He said, "which ones?" I said, " the ones that are due." And I will never forget, he laughed and he said, "well, if only it was that easy." I said, "well, what do you mean?" And he said, " how much came in in checks this week?" And I gave the number, and he said, "What about last week?" Gave that number, and he said, "Okay, so is it safe to assume we'll get that same amount next week?" And I said, " Yeah, that sounds reasonable." and he says, "Okay, and payroll is next week." And I said, " Yeah." And he says, "So will we have enough to pay all the payables and payroll?" And I said, "No." And he said, " So does it seem wise that we would pay all the payables?" And I said, "No," and he said, "well, you have learned an important lesson. Let's go back to your office and let's make a plan." And it was in that moment that I realized this isn't just as easy ,as "it says $50,000, so we need to pay $50,000." Because there was planning that went to it and as soon as you wrap your head around the fact that there's [00:22:00] planning required and sometimes you're gonna borrow from Peter to pay Paul That's business. And what happens is, I see business owners start to get into the, "Oh, I need to make this work." And they start to just panic, or they feel like a failure, or they start to really not know where to prioritize, what things to focus on. And I will always say, number one, your employees. Payroll. This is a non negotiable. You have people, they are feeding their families, they are doing their things. Like payroll is a non negotiable. And then, supplies, the vendors. You must pay them so that you can get your materials. Paying the credit card. Now, it doesn't mean you need to pay all of the credit card. Ideally, yes, because we want to keep that interest low, but we don't have to. We can carry a balance. And if it comes down to certain things, you know, government remittances, always file. But sometimes if you can't pay, here's the gray area recommendation, so often business owners,[00:23:00] if you don't pay, they'll charge you interest. They might send you a nasty letter, but as long as you, pay a little bit later, that's life. People who don't pay come to me and they say, "oh my gosh, I didn't pay." And I said, "well, the government offered you a loan you didn't ask for. You just took". People get in these panicky things, oh my goodness. As long as you filed if you take a couple extra days to pay so that you could pay your employees, you could buy the materials. It's okay. You're not a failure. Your business is not a failure You can solve these problems. I have seen businesses really do some crazy maneuvers to make it all happen and in the end they go on to be very successful. Should we build a business with that being the plan? No, but does business always go according to plan? No. Interests, whether it's from the government with your remittances, whether it's from your credit card company, whether it's a line of credit or an overdraft, the interest expense is a tax write off. It's a taxable expense. You can use that. You can't use the penalties for not filing. That's why I said still [00:24:00] file. If you do not file and you get a penalty, the penalty is not tax deductible. The interest is. Almost every successful business out there has some kind of credit with interest and that's okay. Our personal finance teachings say interest is bad. But when it comes to business, it's a tax write off. It's not bad. Too much interest that kills your cash is bad. So we have to have our information. We need to have our data so that we can make the decisions at the right time. We don't want to be getting financing when we're desperate. Would we want to lose our business because we didn't ask? No, but if we have the information ahead of time, if we know what our plan is, if we see these numbers, then we can ask for the loan earlier. Then we can be a little choosier, making sure the terms work for us. Interest isn't bad. As we head into month two of the year, let's make sure we have a plan for our books, that we have the information. If you offer terms [00:25:00] and you say, our terms are 30 days. Do you know what the average length of time to receive your money is? The actual number, not the 30 days, and at a time where interest costs are higher, the economy is not as great as it was historically. Sometimes people are taking longer to pay. So if you have 30 day terms and someone's going to 40, 45 days, 50 days, one customer, two customers, okay, things happen, they're working on it. But, if your whole receivable starts to go to 45 days, 50 days, this is going to cause a cash problem. So, awareness. Knowing what the numbers should be, what you hope they are, but also knowing what they actually are, and making plans based on that. When your business is doing really well, that's the time to ask for the financing. Not when you're struggling, not when you're wondering if you're going to make it another day. That may sound dramatic to someone who's never been in that spot, but so many business owners have been in that spot. Where, you're like, I really need that person to pay me so I can [00:26:00] make payroll. Especially if you don't have a lot of working capital. Over time, the longer your business goes on, working capital builds. But when you're a newer business, or you're in growth mode, you don't have as much working capital. Utilizing credit facilities is so important. If you have the option to finance a purchase over time, you're gonna go and invest in a big purchase, big piece of equipment, and you have the option to finance it for a reasonable interest rate, do it. Don't give up your working capital so easily. Protect that cash balance. Loans, financing, it's not bad. If you do not have a company credit card, now is the time to figure out how you're going to make that happen. If you do have a credit card, do you have a line of credit? Do you have overdraft? These are important things. These are how you access working capital. Because if 2024 is the year where you want to grow your business, you want to scale your business, you want to invest and do all the right things, I can tell you, it's going to require cash. So let's make a plan, let's get it [00:27:00] organized, let's grow your business in 2024. That's all for today. I hope that this has been a very valuable episode that provides some tangible tips of things you should be thinking about. And if you do not have your books caught up, and you're thinking, I don't know how to get that information, set up a call. Head to the link bottcher, B O T T C H E R. io. If you're listening to this in a future episode, it will likely have a button to link to our new bookkeeping page, because like I said, we are going through that rebrand. But either way, bottcher.io will get you there. Book a call, let's go through what you have, and let's talk about what you need. Because when it comes to data, it must be timely, and it must be accurate, and then you can make confident, data driven decisions.

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