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Unknown

You're listening to the Profit First for Real Estate Investors podcast. This show is all about helping real estate investors and entrepreneurs bring clarity and structure to the financial side of their business. In these sole episodes, we focus on practical financial strategies that real estate investors and business owners can actually implement, whether it's profit, cash flow forecasting or mindset.

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Unknown

The goal is simple to help you run your business with more confidence and less financial stress. Enjoy the episode. Profit does not matter if you run out of cash. And that seems so counterintuitive, right? If it's like, what if I have this big profit number at the should I have a lot of cash then? Like, that's what seems intuitive of I've got this profit number and my CPA told me this, or I'm looking at my profit and loss.

00;00;49;18 - 00;01;15;24

Unknown

And at the bottom line on the net profit line. And it's like it says 100,000 or 200,000 or 1 million, like however big your business is and you're like, but I have $5 in my bank account. What's the disconnect there? There's a big difference between profit and cash. Cash is what the actual fuel for your business. But it's really the cash that you collect from the customers or from the clients or from the sales that you're doing.

00;01;15;26 - 00;01;33;04

Unknown

And we have to have a system to manage the cash. So the cash can either reflect the profit or be greater than what the profit is, because profit on a profit and loss, like if you have the financial statements, the three foundational financial statements, you've got the profit and loss. You've got the balance sheet and you've got the cash flow statement.

00;01;33;06 - 00;01;53;03

Unknown

Well, if you're looking at the profit and loss, most business owners have seen a profit and loss before. And that very bottom number on the profit and loss is called the net profit. And that's where people just always look like what was my net profit for last month or what was it for last year. And this is where they can look at that, but then open up their bank account and have it on this other screen.

00;01;53;06 - 00;02;14;06

Unknown

And then they say, but there's no way there's I'm have a lot less money in the bank account than I do. The profit that is showing on this profit and loss. And the biggest difference is, is your cash does not reflect your profit, because a lot of people, depending on your business, use that cash for things that sit on that balance sheet.

00;02;14;06 - 00;02;35;02

Unknown

They sit on another financial statement. And I don't want to bore you with like assets, liabilities. Going into all that, I don't have fancy pictures or a little, you know, theme behind me, like to draw on or anything like that. But the balance sheet shows you this is where the cash has gone to, where your cash is sitting, and then the cash flow statement is showing you how the cash flows moves.

00;02;35;05 - 00;02;51;21

Unknown

The cash flow statement shows how the cash moves through the business. But all that doesn't mean anything to you. All you care about is how much cash do I have? What's it earmarked for and why is it not lining up with the profit that I'm showing on the profit in the past? So how do we figure those two things out?

00;02;51;24 - 00;03;14;07

Unknown

Number one, if your cash is wildly different than your profit, then we probably don't have a good system to track the cash. And there's lots of cash flow systems out there. I am very partial to the profit first cash flow management system, which literally deals with bank accounts and naming them to be able to say, here's where all my money is flowing and going, and here's what it's earmarked for.

00;03;14;07 - 00;03;48;24

Unknown

You're literally naming every dollar that comes through your financial system. So you make a sale, and then from that sale you've got bank accounts and they're tied to in different names. Like I like to have the profit first set of bank accounts, which is profit owner's compensation, owner's tax income and opex operational expenses. What does that mean? Or like what are those bank accounts for there to earmark every dollar that comes into your business and give them a name to make sure you understand that if I make a sale and that sale comes in, I tell the money where to go.

00;03;48;28 - 00;04;06;13

Unknown

And now if you have profit on a profit and loss on some financial statement on that bottom line, you know that bottom line. Now you can see does that match up with the money that's in my account. And if not now you can at least see where the money's going because a lot of people confuse profit and cash.

00;04;06;13 - 00;04;35;20

Unknown

But if you are a business owner, especially if you work in an industry that has a lot of inventory, whether that be, you know, like restaurants or whether that be, I don't know, real estate and fixing and flipping, because when you're fixing that property up, you might get a cash influx in from a private lender. But if you're doing your own lending on your own deals and you're using your own cash, it's like even though you'll get a good return when that property is done, you're putting all that cash out there, even if you had a six figure month last month.

00;04;35;27 - 00;04;59;08

Unknown

But if you use all those reserves and all the six figure profit to be able to go out and do that next deal, well then guess what? Your cash is going to wildly be different than the profit on the bottom line. That's showing on the profit and loss. So that's where people can get confused. It's like you're using the dollars that came in and from the profit, and you're using it for the next deal or for the next marketing campaign or to hire someone.

00;04;59;15 - 00;05;19;12

Unknown

And it's like, okay, but where is that on the on the profit and loss? So some of those things actually sit on the profit loss. Like if you pay someone on payroll that will sit on the profit, the loss of the income statement, but then if you are, let's say you're in real estate and you buy a property that's not going to show up on the income statement is going to show up on the balance sheet.

00;05;19;12 - 00;05;35;09

Unknown

So you're like, hey, I've spent all this money getting this deal and purchasing it and then putting money into it for the repairs and all that. But then you're like, but why is it not reflecting on the profit and loss? It still shows us that we're that it's like we didn't even buy this property. Well, that's because it sits somewhere else.

00;05;35;14 - 00;05;53;17

Unknown

So if you can understand that those financial statements interact with each other, that's where you could do a deep dive and learn that. Or if you have someone on your team like a fractional CFO, they can actually teach you the difference between profit and loss balance sheet and how you can utilize them. Because honestly, the balance sheet is even the most important statement, I would say.

00;05;53;21 - 00;06;11;18

Unknown

So that way you can really see what are you building? Are you building a true business that has actual assets in there, and that you're building your cash and your cash balances versus just the profit and loss? That's kind of like the scoreboard of like, how am I doing today? But that doesn't necessarily tell you how you're doing for the long term, like the balance sheet does.

00;06;11;24 - 00;06;34;14

Unknown

So there's a big difference between cash in a bank account and the net bottom line profit, where a system for cash would be like profit first and timing every month, every single dollar. Where to go telling your money where to go and naming every dollar versus the profit and loss is more of a bookkeeping, financial tracking, knowing that where should an expense sit on?

00;06;34;14 - 00;06;50;29

Unknown

Should it sit on the income statement and the PNL, or should it sit on the balance sheet? This is where a good bookkeeper comes into play that actually knows their stuff and is worth their salt. Like I want you to have someone who understands where to put that thing, you know, to put the transactions. So that way you can actually analyze the business and the numbers.

00;06;51;02 - 00;07;10;03

Unknown

But if you're confused between cash and between profitability cash, what's in your bank account can be controlled by cash flow management systems. So you know what every dollar is earmarked for. But rarely will the cash in your bank account match the profit on the bottom line. Because the profit is just like that snapshot. How did I do last month?

00;07;10;03 - 00;07;28;14

Unknown

Or how did I do last year where your cash is constantly in motion? But then if you have reserve accounts, it can at least be easier to find. Like how much do I actually have that isn't earmarked like for reinvestment or what is actually mine for profit or for paying myself for to be able to have an actual reserve for my business?

00;07;28;14 - 00;07;47;29

Unknown

Those are the biggest differences between cash and between the bottom line profit and why you need systems for both. You need a system like bookkeeping to be able to know what your profit is, but you also need a system like profit first for your cash to know what the cash in your account is earmarked for, because rarely do those two match up of yeah, my net profit looks like this.

00;07;47;29 - 00;08;05;28

Unknown

So that way my cash looks like my net profit over here. They're wildly different. And the way that they're just one's a snapshot in time. The other one is more of like a constantly in motion. The cash is constantly in motion. Having a system like profit first can give you more of that clarity. To be able to get where you really want to go and be able to pay yourself.

00;08;06;00 - 00;08;24;04

Unknown

And that way, you know, okay, if I take care of my cash, usually the profit and loss will also take care of itself. Like if you can control your cash, usually your net profit looks pretty good as well too. So that's where I just help people like really control this cash. And then over here on the net profit, just make sure that you're trending in the right direction.

00;08;24;07 - 00;08;44;02

Unknown

Because sometimes people even try and make less money on the profit in the loss. Like if you're in real estate and you could take depreciation and all of that, you're trying to get your tax liability and the profit number down as much as possible. But if your cash is good, then great. What sucks is the opposite. Like if you're like, my profit looks good, but my cash looks horrible and then you're going out of business.

00;08;44;05 - 00;09;00;14

Unknown

And that's what happens in a lot of industries like fixing and flipping, where they have a lot of their own money out in the flips, even if they've been doing good. On the profit side, I had one guy who had a call with me. He had 20 projects that where I think 16 of them were on the market.

00;09;00;17 - 00;09;22;29

Unknown

Four of them were still in process in the projects. And he's like, I have like $2 million worth of profit waiting to close. But I these four are literally killing me on my cash. And I'm considering bankruptcy and just turning it all in on like, what you have several seven figures waiting to close, but you might be considering bankruptcy just because these four properties are sucking so much cash out of your business.

00;09;23;04 - 00;09;41;00

Unknown

And it's like people run into that all the time. On smaller scales. On larger scales, the bigger you get, the harder it is to manage the cash flow. But that's why you need to know where's the cash, what's the bottom line, and why aren't they the same? The bottom line is the cash. The cash is everything that's in your bank account and is constantly flowing.

00;09;41;00 - 00;10;03;16

Unknown

The net profit is more of a snapshot in time. Whether it was last month, last week, yesterday, last year. It's like, where were we in the business here? And how healthy were we from the cash that we collected as income, minus all the expenses to give us our bottom line, then managing the profitability from the cash perspective through a system like profit first is going to help you understand, okay, where's my cash?

00;10;03;16 - 00;10;24;29

Unknown

What's my profit? And are they both at a healthy position? Thanks for spending time with me today. If this episode gave you clarity or a new perspective, be sure to like, subscribe, and comment below if you're ready to apply. What we talked about today with real guidance and accountability, visit profitrei.com to schedule a free discovery, call with us to create your path to financial clarity and freedom.