Every Dollar Needs A Job

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Hello and welcome back to the podcast My Accounting Advantage.
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Episode 31.
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And today, every dollar needs a job.
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My Harris, welcome back.
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Thank you, Lee.
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Everyone's so excited about last week's episode.
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They've been speaking to their accounts zero and finding out all these wonderful things that they could never find out.
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So great feedback on that one.
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Take us into today take us into today's episode.
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Yes.
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So today's episode is called Every Dollar Needs a Job.
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What it means is you need to understand how you allocate every dollar in your business.
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What does it do for you and where did it go?
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What spurred me to do this episode is that a lot of businesses, you know, they make money, but the same questions being asked every quarter is, but where does my money go?
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You know?
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Someone's taken it.
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Yes.
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So where did it go?
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Like um you're telling me that I'm making, you know, profit, but I don't know where it is.
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So what I need to emphasize here is that your money are not being lost somewhere.
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It's all about timing.
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What is reported on your profit and loss does not reflect back to what's in your bank account because of the timing of the cash flow.
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So cash coming in, cash going out.
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So in typical profit and loss, you know, when we have a look at it through zero, for example, we pull up a report and you see your profit and loss is actually reading the data from the position where you have billed for your services.
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So it's on an accrual basis.
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So it's telling you that you've billed this much for the month, and then your monthly expenses are this much, and then the net profit is this.
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So, for example, if your turnover for the month is$100,000 and your operating cost is$80,000, your net profit is$20,000.
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That's what we're looking at when we look at the profit and loss, the net profit.
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So net profit of$20,000.
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And for the quarter, let's just say we have achieved consistent net profit of$20,000.
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You should see that you have$60,000 in the bank.
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No, that's not the case.
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So that's a bit of a false understanding of how cash flow works.
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Yeah.
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And that's why I get asked all the time, but you you said I've made$60,000 that quarter, but where is it?
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I only have$2,000 in the bank.
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So our listener today has really got to get this understanding between profit, cash, reserves, and available cash.
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How do you do that?
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Yeah.
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So what you need to do, you need to understand that, you know, your financial data, which is your reporting, is reporting what you have billed for the month and then what are the expenses for the month.
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But your cash that's are coming in, it's not going to land in your bank account until next month.
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So it's all about the timing of the cash coming in, cash going out.
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Why are we accruing the data in the first place?
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Is well, that's how it should be done.
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So it reflects the true financial position of the business.
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You accrued what you've done, what you worked on, and what you've built.
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But when the cash hit, that depends on when your customers are paying you.
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So then you can't just go out and spend that exact amount that you've built because the money won't be there.
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We're gonna need a teaching framework for this.
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Take us into one of your My Harris teaching frameworks for financial clarity flow.
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Yeah, so a lot of people don't understand cash flow, you know, and they always think that because the business is doing really well, the cash balance or cash out bank would reflect that.
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If you're actually showing a net profit of$200,000 a year, I just want people to understand that you're not going to see that$200,000 sitting in the bank available and readily for you.
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Where does it go then?
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Um it goes into business overheads because you would need to pay for the overheads as you go and um for the next month.
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So it's already being utilized.
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And that's why people are very confused.
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Where does my money go?
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So, number one for the financial clarity flow for us is step one to recognize how um reserves and cash flow is being realized.
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So when you actually have reserves, it means that you have spare money and for rainy day in the business.
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Okay.
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And um what what's the difference between reserves and working capital?
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There's two different things.
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Reserves is spare money, cash surplus that you can use for rainy day.
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Working capital is the money that you put away for growth purposes to put back into the business so that you can scale and you can um purchase new equipment, for example, because that will convert into more revenue in the future or nil hire.
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Okay, so that's that's the the two things that you should have within your business reserves and also working capital.
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But how do we have those healthy balances in the business?
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It comes down to making profit.
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So you need to realize that number one, revenue creates profit, okay, but revenue is just a turnover, so it's the leftover, and um that is equal to net profit.
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So profit then creates cash surplus.
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So if you are making a net profit of$20,000 per month, you will find that your cash surplus won't catch up in your bank account until the following month.
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But at least if you're making profit, you will have positive cash flow in the next month.
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And then um step three is to have a look at the cash surplus.
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How much can you push into reserves?
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Okay.
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And then um, once you're able to put some balance into reserves, then you'll have enough funds for growth.
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So it becomes um you can split that reserves into two is actual reserves and then also the working capital.
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So one is for rainy day, and then another account can be for growth purposes.
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So that's how cash flow works.
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For our business owners out there who are just taking that in, what's the biggest lesson here?
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The biggest lesson here is if you want to grow your business, you should have money in your reserves and healthy, you know, working capital balance.
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Why is that?
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Because people have false expectation that they're growing, so they should have more money in the bank.
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Not really.
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Pay for their wages, their super.
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Training.
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That's correct.
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Until they're actually generating you until they can generate and profit for you.
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And that could take like three months.
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A lot of people don't calculate the drain.
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And from being in education for a long period of time, the cost of onboarding could be$15,000 to$30,000.
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And you're paying a wage.
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Yeah.
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And they're like, but I'll put this person on and things have gone backwards.
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Correct.
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Yeah.
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And then if you don't have your systems and your processes, it's even worse.
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Yes.
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Because you can't even onboard them.
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Yeah.
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Give us a real life story example, and you've got one here of a real estate agency.
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Take us into that.
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Yes.
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So it is very close to your heart, Lee.
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Very much so.
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Yeah.
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So imagine with the real estate agency, you know, this is one of many businesses that will experience, you know, the cash, the cash flow mismatch.
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Special right now.
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Yes, that's right.
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Because you have quite a big overheads and you're paying for the overheads like, you know, staff wages, superannuation, rent, marketing costs, software subscription, insurance, vehicle, etc.
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Up front.
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And what are you what are your revenue streams?
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So for a real estate agency, your revenue stream can come from your sales, right?
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And then also your management agency commission.
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So there's quite a there's two streams here, but the one that you don't can't count your chicken on is the sales commission revenue stream, because you are depending on the settlement on when the property will be settled, and that's when you get your cut.
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So for the rental management fees, you'll get that on a monthly base.
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That's okay.
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You know, that can be you, you know, enough to just pay for your fixed costs.
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However, your admission, that's not going to be paid until the property settles, and usually it takes up to six weeks.
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Actually, minimum six weeks.
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Minimum six weeks.
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Isn't that?
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And at the moment we're seeing that go out to three months.
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Yeah.
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So it's so important that to realize that the cash that you have today will need to be utilized for those operating costs up front until you receive more.
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So your pipeline needs to support that.
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And that's why, you know, when I see many businesses, they have quite a substantial fluctuation in monthly revenue each month.
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I always encourage them to change the way their bill, the way they negotiate um their contract, because they need to be more consistent in order to withstand the monthly operating costs.
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You need a minute certain amount, certain minimum cash flow coming in per month, at least to pay for wages.
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So that's, you know, where there's cash flow mismatch and cash flow understanding need to be quite solid for business owners so that you don't have a cash flow problem because you know your business can be profitable, but without cash, you can't operate.
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And this is where a break-even point becomes really important that everyone in the business understands.
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Because in business, people see money coming in, think, oh, the owner must be killing it.
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But the break-even point is in a lot of businesses that that could be 10 sales a month before we break even on all these expenses that we have.
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Continue on.
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So the biggest mistake I've seen with business owner is them they are assuming that money in the bank equals money available to spend.
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That's not the case.
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So you need to have a look at the cash at bank and then think about how do I allocate these cash into appropriate expense pool.
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And I'll have that as, you know, a reserves for those expenses.
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And by the time you you know dissect it and break it all down, you probably will find that most of that cash is already spent.
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So yeah, the mistake a lot of people made is they go, Oh, I've got$150,000 in the bank.
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I'm just going to take it and I'm just going to spend it on something else or pay down my home loan.
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But then the next month you having, you know, cash flow issue, so you have to transfer it back in.
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Well, this brings it back into our title that you can explain even better.
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Every dollar needs a job.
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Yes.
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So what I mean by every dollar needs a job, it just means that you need to review how you spend your money and then allocate cash into different types of reserves.
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So number one, very close to all business owners' hearts, which is tax reserves.
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Okay.
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So the purpose of the tax reserve is to prepare for the tax obligations.
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That includes GST, PYG withholding, income tax, and payroll tax.
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The next one is payroll reserve.
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This will help, you know, making sure that you protect your employee obligations and you have enough money to pay for wages, superannuation, and also leave entitlements.
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So it does help in big businesses or medium-sized businesses that have so many employees to make sure that you accrued, you know, your employee leave entitlement because that can hit you pretty hard if you don't have that data available to you.
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Is that a separate account they should run for leave?
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Is it like a are you saying that they should have a bank account?
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Yeah, you've got tax reserves.
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But if someone says, I'm leaving and they've worked for the business for 20 years, um, that's a big payout.
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Yeah, and unfortunately, I would like to say yes, but a lot of businesses don't have that cash luxury to do so.
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So, I mean, with all of these reserves that we are talking about, you don't necessarily need a separate bank account for each one of these.
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You just need to have enough, you know, like um bank balance to support these different expenses that you should have reserved for.
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And um, you can have like a spreadsheet to track it if you want, but at the same time, like I encourage businesses to have at least three separate bank accounts.
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Number one is for everyday, um, day-to-day business income and expenses.
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Number two is definitely tax account.
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Number three is for super, because now we know that you know, payday super, you have to pay it straight away.
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So, and if you don't have money for super, you can be very heavily penalized by the ATO.
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And they they brought that in for a very strong reason.
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And the penalties are severe.
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Yeah.
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Especially if you're running a big company and you miss that one, yeah, that could shut you down.
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Yeah.
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So what about supply reserves?
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Yeah, with supplies reserve, well, you can't run the business if you don't pay your supplier.
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So you need to have money put away for your creditors, subcontractors, and also recurring supply commitments.
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So already you can see that you know, the money that is sitting in your bank account is being reallocated in different places.
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The next one is operating reserves.
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Well, this reserve is very important.
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It's like you asked me before, you know, how much money should you have in your reserves to uh, you know, to be able to sleep at night.
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I said, well, definitely a month worth of operating expenses.
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That's a minimum willing.
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Yeah, that's what I think.
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Because if you run into trouble, you know that you're going to survive for the next month.
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Definitely.
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So your operating reserve is to keep the business running.
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That includes rent, subscriptions, insurance fix, overheads, and you know, for business continuity.
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So anything that keeps the business running.
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And if you are doing so well, you can have a growth reserve.
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And I really hope a lot of businesses have thought about this.
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How can I grow?
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So you can't grow unless you have cash to invest.
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It's just like how do I grow my property portfolio?
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Is you should really have cash and savings to put towards an investment, and that is the same concept.
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So it would be money put away for you know future recruitment, marketing, equipment, technology investments, and also training.
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And that will support the business expansion.
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And the last one is emergency reserve.
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So a lot of businesses don't have this, and it's a backup reserves for rainy day, for some if something happened, like the business downturn, etc., you want to be able to keep opening your doors.
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So this will this reserves will protect the business against unexpected events.
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So what could could that be?
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It would be economic downturns, equipment failure, major debtors, defaults, and unexpected expenses.
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Another thing that I want to encourage, you know, businesses to think about is key person insurance.
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Okay, so there are some businesses out there that have a key person, and without that key person, the business will fall.
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So look into key person insurance.
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It is tax deductible.
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And should something happen to that person, the business can still keep going.
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What is the mindset shift that most owners need to have?
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And what questions do you have around this?
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Yeah, so that's a good question, Lee.
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So most owners often ask how much money is in the bank account at the moment.
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But what question they should actually ask is how much of the money in the bank has already been allocated.
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And so that they look at cash in the bank differently and they're not spending unnecessarily on something else that they shouldn't they shouldn't be spending on.
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So what's some questions we should be asking ourselves?
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We we should really ask how much cash is currently is in my bank account, and then are they being allocated already?
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And after we've spoken about all these different reserves, most likely they have already been allocated.
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And what's left?
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Can I take the the balance?
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If you already have the cash allocated into different reserves and it's paid for, and the projected number is that you still have cash left, the answer is yes.
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So whatever's left, you can take.
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Well, that gives every dollar a job.
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Give us our final wrap-up of this program.
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Yeah, so the final wrap-up I want to leave with everyone or the listeners here is that you need to understand how cash works and the timing of the cash coming in, the timing of cash going out, very important in order to manage your cash flow and have your reserves worked out so that every dollar is being allocated and utilized, and then you can determine what is available at the end of the day.
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A wonderful episode.
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Thank you, Lee.
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See you next week.