Why your business is profitable but you have no money
Can you have a business that shows a profit but have no money in your bank account? 😳 The answer is actually YES, and it happens all the time. Definitely NOT the reason you went into business for yourself, right?
I’ve seen business owners with profitable businesses that look successful on paper, but are slowly draining their bank account.
Now, I bet you’re asking, “but Kaylee how can that be?” It’s actually simple, but also kind of confusing.
It all starts with what I like to call the “Broke But Busy” trap.
So what is the “Broke But Busy” trap?
It’s basically what happens when you’re making money, but for some reason you find you have nothing to show for it. So you think you need to work harder and bring in more sales, but that not only burns you out but also leads to a bigger tax bill. So you’re working more and yet STILL you find yourself broke.
Here’s what the Broke But Busy trap could look like…
Sales are coming in and I’m swamped with work. But I have no money to show for it. So I keep taking on more sales, but there’s still no money…and now I just have a bigger tax bill…but then I work some more…and more…
And on and on it goes, and it feels like it never ends. 😰 This is when you realize that you even though your Profit and Loss report says you SHOULD have money, you don’t.
Now, here’s why this happens…
Your Profit & Loss Report, aka your Income Statement or P&L report, only tells half the story. The other half is on your Balance Sheet.
These are the kind of expenses that don’t show up on your P&L report but might be causing the negative Cash Flow…
- Estimated tax payments that come out of your business account
- Owners Draws (not on payroll)
- Inventory purchases (that are not yet sold)
- Loan Payments
- Security deposits
- Personal expenses ran through the business
- Paying off credit card debt (especially if you have been running a balance for a while
Here’s an example of the “Profit But No Money” debacle…
Let’s say on my P&L report I have a profit of $2,500, which is the amount I’ll be taxed on. This means I should have $2500 in my checking account, right? But then I look at my checking account and see only $835. So why is that? 😳
Then you realize there has been some spending that isn’t included in the balance sheet, but reflects in your Cash Flow, like these items:
- I have a car loan payment of $350 (the loan shows up on the balance sheet so all payments go against that loan since only the interest is deductible)
- I paid my quarterly estimated taxes of $1,200
- I forgot my personal credit card so I had to use the business credit card at Target the other day, and that total was $115
Now, here’s the trap: after I adjust my income against all cash need items the ending cash I only have $835 left. AND, I haven’t even taken my monthly draws as an owner yet so now I am risking taking ALL of the profit.
This puts me back to square one: taking on more work to increase my cash needs. But in the long run it’s only increasing my taxable income, AND my tax bill! So there I am, “Broke but Busy.”
How do you get out of this Broke but Busy trap and get your Business Profit going again Here are 3 shifts you can make now:
- Focus on your Cash Flow (read more about that right here)
- Review your ROI on services, and focus on the most productive streams of income.
- Set up different bank accounts for each area (tax savings, R&D, Inventory, Draws, deposits, etc.)
Start taking these small but powerful steps to help you avoid being Broke but Busy, and finding yourself with serious business burnout. It’s one of the most important things you can do for your peace of mind as an entrepreneur!
Have you ever found yourself in the profit but no money situation? What questions do you have about avoiding the Broke But Busy trap? I’d love to help! Let me know here in the comments.
Until Next Time,
Love, light and MONEY, Honey…
Kaylee