I recently signed a new client that seemingly had a profitable consulting firm, but she was experiencing severe cash flow problems. Upon further investigation, we realized that over the last seven years, she was making the same mistakes that most paper-profit consultants make.
Paper-profit is a term I created, which means you have a profitable business on paper, but you have no real money in the bank.
As a virtual CFO for consultants over the last 11 years, I realized that 90% of entrepreneurial consultants make these same mistakes. Therefore, in this episode, I will discuss in detail how to avoid or stop making these dangerous mistakes so that you position your firm to say yes to profits.
1. Focusing on earning revenue only.
Earning revenue is excellent, but if you're unable to control your spending, it can have an opposite effect on your business. If you are earning revenue, but it never flows to your bottom line, you will soon struggle to scale your firm. You should have a percentage allocated to flow directly to your bottom line for every dollar you earn in business. Therefore, if you are earning revenue but the money seems to be few and far between, you have a cash flow management problem and not a revenue earning problem. And I hate to break it to you, but earning more revenue will not solve that.
Fixed costs are those expenses that normally never change, such as rent, salaries, insurance, utilities, and more. Fixed costs are there whether you have one client or one thousand clients. Before agreeing to a monthly fixed cost, determine if it's needed to operate your business. For example, do you need that fancy office space or five overrated and barely working team members? It is vital to keep your fixed costs low and determine the ROI on each cost ideally before making or agreeing to the purchase. In my book, SYTP Now, I discuss how controlling your fixed cost will automatically lead to more cash flow.
3. Having too much business debt
Banks are willing to provide business loans to consultants who can provide a personal guarantee in today's market. But that doesn't mean you should take the loan. Please understand that the business loan must be repaid even during a slow period or worst business failure. In addition, if you have more liabilities than assets, you are operating your business inside down. Operating in this manner can be dangerous if the bank calls the loan and cannot pay. This will not only affect your business, but the personal guarantee you used will be in jeopardy as well.
4. Underestimating operating costs
Are you aware of the total daily, weekly, and monthly costs needed to operate and scale your consulting firm? What about the forgotten annual expenses, like quarterly taxes? Most consulting firm owners fail to include all costs, such as their owner's salary and bonuses, just to name a few, when creating a business budget. Therefore, they exceed the budget, and because of that, the revenue their so focused on increasing is never enough.
5. Not understanding the difference between cash flow and profit.
Cash is your business's superpower! It is the oxygen that keeps the business breathing. Without oxygen, what do you think will happened? As mentioned earlier, many consulting firm owners will have a seemingly profitable firm. The P&L (Income Statement) has a Net Profit at the bottom, and they feel amazing! Then they log into their bank account is feel horrible, sick, afraid because they don't have enough money to operate their business.
Profit is how you keep score in business. It is the difference between revenue minus expenses. But if you are not properly managing your cash flow, you can generate revenue and never receive it or pay recurring high expenses and never receive an ROI. Your goal as a business owner is to generate a profit AND increase cash flow AT THE SAME TIME!
6. Not maintaining a budget and cash flow forecast.
A budget is a financial outline or plan of the revenue and expenses you would like to occur in your firm. A budget is a detailed representation of future expectations or results. A cash flow forecast is a best-guess estimate of what will happen within the next few days, weeks, or months. A budget is normally completed annually or monthly, and you will compare the actual revenue and expenses to the budget to determine the variances. The forecast will enable you to prepare for all monies entering and exiting your firm and adjust your business operations to ensure that you always remain cash flow positive. It would be best if you had both in your firm.
7. Overpaying in Taxes
Not understanding the importance of having the correct business structure can cause you to have a higher-than-normal tax bill. As a sole proprietor, you are limited on what you can write off. As an LLC, after generating a significant profit, you will pay high self-employment taxes.
On average, business owners overpay in taxes by $11,000. Why give $11K to the IRS when you don't have to? It would be best to get crystal clear on your potential tax liabilities based on your business structure and daily operations. It would be best to have a tax projection and planning strategy completed to beat the IRS tax game.
The bottom line, managing your finances effectively is key to scaling your firm. Building your consulting firm is not about earning more revenue. It is about what you do with the money you are earning so that you keep more of it in your firm. Start today by focusing on avoiding these mistakes and maintaining a solid financial foundation.
The financial foundation of your firm will determine if you maintain a profitable, cash flow positive firm or if you operate from client payment to client payment.
And if you need customized financial support, strategies, and solutions, schedule a discovery session to chat with me today.