Podcast 137: My Business Is Making Money But I Don’t Have Any Cash In The Bank with Shawn Van Dyke

This makes all the difference!
If you underprice your work you’re going to get work simply because you’re underpriced and you’ll most likely be working for the wrong type of client, who will drain more time, energy, and money from you. You’ll have to produce work and this is when you’ll find that money starts leaving you faster than you could have imagined, then you’ll be at the phase to start finding more work again because you’re running out of cash and you don’t have enough money to pay for the job that you’re on. Shawn explains this cycle as the four phases of the “Craftsmen Cycle”:

Price work
Get work
Produce work
Find work

You have to sell your value because there are customers out there who have a problem and will pay what your work is worth so that you can make a profit. Avoid the customers who tell you that they will never pay your prices.
At first, it may seem that a lot of money is coming in because you’re charging more money than perhaps you ever have before, but this is deceptive! You must understand the difference between margin and markup.
“The $100 Example” is a great way to remember the difference between margin and markup, as Shawn relates.
If you buy something for $100 and you mark it up 20%, the price you’re selling at is $120.
The gross profit if you buy something at $100 and sell it at $120 is $20.
Now here’s the mistake people make: Many think if they marked something up by 20% and they have a 20% profit and they spent $100 to get it, that $20 profit divided by $100 = 20%, and that’s their margin. Therefore, they think their margin and their markup is the same. WRONG!!
The $100 isn’t what you sell, it’s your cost.
You don’t sell your cost, you sell your price. The $20 profit needs to be divided by your price ($120), which would equal 16.7%. This 16.7% is your margin.
A 20% markup will ALWAYS produce a 16.7% margin.
It gets worse the bigger the numbers need to be.
A 50% markup will ALWAYS produce a 33% margin.
You have to start charging where you want to be so that you can generate the cash to get there.
Profit is not an event, profit is a habit.
The earlier on you can sell value, the more profitable you will be. Lower volume, higher margin.
Learn how your CPA could be giving you wrong “business” advice, although their “tax” advice is correct.
Your income is 100% of your budget. If you spend more than 100% of the money that comes in to your business, you will have problems.
Pay yourself what you’re worth. How much would you have to pay another person, or multiple people, to come in and do what you do?
Don’t forget your taxes! That has to come from the income that comes from your business. If you get a $10,000 check to start a project, a portion of that will go to your taxes, some will go to your salary, some will be profit, some will go for operational expenses.
Go to your bank and set up a profit account!
This is not accounting, it’s cash management.
Here’s how cash flows: when money comes in we have to account for it, then we management it, and when it leaves the business we have to account for it again.
You are responsible for the numbers and you have to know what they mean and whether they’re correct or not. Shawn provides a story that will drive this point home.
This really is a simple way to run your business and be profitable.