Do you know the difference between cash flow and profit?
If not, there’s no shame — Caylee Augé of Salon Profit Project assures us, many salon owners aren’t aware that cash flow and profit are two different things. However, considering a lack of cash flow is the number one reason businesses fail, the time to learn is now.
Profit refers to the money left over or “money made” after all expenses have been paid. It is your total income (sales of products and services) minus business expenses (payroll, products, supplies, rent, etc.)
Cash Flow refers to the amount of money available and ready to use at any given time. As mentioned in our first Tuneup Tuesday, it’s possible to have an unprofitable business with available cash flow and vice versa.
While we often think that profit is available for the owner to use or simply pocket, this isn’t true.
Think of a construction company that pays out contractors before they get paid themselves. While the source of incoming money is known, the money available right now to use — their cash flow — is negative. Similarly, stocking up on inventory is a source of profit — however, it diminishes your cash flow for a time.
That’s why it’s essential to know the difference between your business’ profit and cash flow, and exactly what your cash flow statement looks like. It’s how you can build in a buffer to ensure you always have cash on hand for expenses outside your regular business costs — such as loan repayment or a new hot water tank. As Greg points out, “it’s the same reason an airplane has to carry more fuel than it needs to get to its destination.”
So how do you figure out your cash flow?
Caylee warns, “just like cleaning your house, it gets messier before it gets better.” And this is especially true if you’re figuring out your cash flow for the first time during this pandemic. But she promises, it will be so worth it!
Of course, it’s scary to look ahead and find out that in a few months’ time, you’ll have run out of cash or be down $40,000 in your bank account. But as Caylee says, “if we look ahead now, we can also influence change and implement strategies to see that it will go back up.”
To start, you’ll need to get three documents from your bookkeeper:
- Profit & Loss
- Statement (P&L)
- Balance Sheet
- Cash Flow Statement
Caylee warns that interpreting these statements can be like learning a new language. So a service like Salon Profit Project will help you understand where your business is at, as well as where you can earn and save on expenses moving forward.
The result? “By looking at your numbers now, you can learn how to earn more money than you need,” says Caylee, “so you can do what you want and have control over your life. It’s so empowering.”
She acknowledges that as artists in the beauty business, it can seem much more exciting to learn about and focus on all the other fun and exciting things going on in our industry. However, while learning your numbers might seem boring at first, it is truly life changing: “When you get ahead of your numbers, you can actually think about money less — because you have it. It’s so empowering.”
Not good with numbers? BeautyCouncil members get 75% off Caylee’s services at Salon Profit Project.