Navigating Cash Flow and Paying Yourself as You Scale Your Product Business

Catherine Erdly: [00:00:00] Welcome to the Resilient Retail Game Plan Podcast. Hi, it is episode number 248. Hi, I’m Catherine Erdly. I’m your host today, as well as the founder of the Resilient Retail Club. The Resilient Retail Club is my membership group, also my one-to-one offer and my done-for-you services for product businesses.

Whether you are an independent retailer or an e-commerce business, you can find out all about what I [email protected]. But today I want to talk to you about a very important subject that many people find it awkward or difficult to talk about, or maybe just don’t hear that much about it being shared by other business owners.

And that is all about paying yourself from your product business. What I want to do is walk through why it is perhaps not as easy as it might sound, what some of the common pitfalls are when it comes to paying yourself from your product business, and how you can overcome [00:01:00] those. And I want to use this opportunity to bust through some myths, as it were.

So to really have a think about some of the things that we expect, the first off being that as we grow, we’re going to be immediately able to pay ourselves more. And why that just isn’t the case. So you may have hit six figures in your business, and you may still be in a situation where you’re not always paying yourself properly while your cash flow feels chaotic.

And we’re gonna have a think about some of the reasons behind that and the things that you can do to change it. 

Welcome to the Resilient Retail Game Plan, a podcast for anyone wanting to start, grow or scale a profitable creative product business with me, Catherine Eardley. The Resilient Retail Game Plan is a podcast dedicated to one thing, breaking down the concepts and tools that I’ve gathered from 20 years in the retail industry and showing you how you can use them in your [00:02:00] business.

This is the real nuts and bolts of running a successful product business, broken down in an easy, accessible way. This is not a podcast about learning how to make your business look good. It’s the tools and techniques that will make you and your business feel good. Confidently plan, launch, and manage your products, and feel in control of your sales numbers and cash flow to help you build a resilient retail business.

Why product businesses need different strategies

Catherine Erdly: The first thing I’d like to say is that 100% one of the most difficult things about running a product business is that the majority of the information that’s out there is really aimed towards service business owners.

And as part of why I do what I do, the reason that I talk so much about your profit margins, the costs in your business, and how to basically generate more profit. It’s ’cause I’m really, really passionate about people being able to support themselves [00:03:00] financially from their businesses. 

But chances are, if you’re in Instagram, or you are in other general business groups or organizations, that cater towards small business owners and you hear people who are talking about paying themselves. The chances are they’re not going to be product businesses.

They tend to be service businesses. So the majority of the people who will talk about my five figure month or my six figure business and the lifestyle that it gives them, usually, and please do point out if I’m, if you find people who contradict this. But I’m willing to bet that most of the people that you hear talking about how much they make in their business are not product business owners.

And fundamentally, the costs involved in running a product business compared to those running involved in running a service business are completely different.

Now, you could argue that product businesses are more scalable than service businesses. It’s easier to increase the volume and to grow your top line [00:04:00] revenue as you go along for a product business owner, because you’re selling more of the same thing or to more people.

But the costs piece of it is really tricky and really difficult. So for example, if you’re a service business owner, you may have costs around people that you employ in your business to help you. But the chances are, fundamentally, it costs you a lot less to deliver a service than it costs you as a product business owner to sell a product.

And even if you’re somebody who has got really phenomenal product margins, still 25 to 30% of your revenue has to go on those product costs. And probably, for most people, around 50% of their revenue is going on their product costs. So you can imagine that when it comes to what’s left over for the founder, it tends to be a lot more squeezed for product business owners.

In fact, if I had to give a very rough estimate, I would say that [00:05:00] if you’re taking home around 20% of your overall turnover, then you are probably doing really well. I know people who are taking home a lot less than that. So if you are at that 20%, that’s probably pretty good going.

Which, if you think about it, if 50% of your turnover is going on the cost of goods, it’s no surprise that it would be difficult for you to be taking home much more than 20-25% of your turnover as your take home pay.

So you can see that that’s already very different from someone who’s a service business who just doesn’t have that cost of goods sold in the same way. So first off, it’s just to really say that if you hear people talking about paying themselves from their business compared to their turnover and talking about the lifestyle that it affords them, the chances are it’s a very different kettle of fish.

For you as a business owner. That said, I don’t wanna make it all sound doom and gloom. There is more opportunity, I believe, for product [00:06:00] business owners to scale. It’s just that you have to really keep an eye on those costs as you grow to avoid you just being the same situation in terms of being able to pay yourself.

Money myths and the metrics that matter

Catherine Erdly: So that’s one of the kind of key money myths that I’d like to address in today’s episode is that sales is not the same as profit. I think hopefully we’re all getting much clearer on that, much more savvy that when people talk about their six figure business, that’s their turnover. It’s not necessarily their profit.

And for most business owners there’s quite a big gap between the two. It can feel though, especially if you’re at this point where you’ve grown your business. Maybe you’ve hit that mythical six figure number and you’re thinking, “right, surely now I’ll feel secure,” but you actually still feel like you are winging it.

And the reason this happens is because you’re probably still focusing on your top line sales. You may not be as focused on your margins, and you certainly may not necessarily have a full cash flow mapped out. Now, some people do. A lot of people I talk to [00:07:00] don’t, which means that you get into this situation where you’re trying to base your decisions about purchasing off your bank account.

Saying, “okay, well I think I’ve got money in the bank so I think I can spend it.” But not really having that future visibility that, you know, some of that money was actually for my taxes. Some of that was for invoices I have already placed all those other reasons. And stock is a huge part of that. Even if you’re somebody who makes to order, then just the cost of the stock itself is going to be seriously having an impact on your profit, your bottom line.

And I often talk about there being two things that really determine how successful a product business is or how profitable it is. The first one is, are you making enough money every time you make a sale? So are your profit margins decent? And the second one is how quickly you get your money back compared to when you spend it.

So in other words, if you are paying your suppliers six months before you get that money back from a customer actually buying the stock, then it makes [00:08:00] your cash flow much harder to manage. 

The importance of cash flow forecasting

Catherine Erdly: And often people have a lot of money tied up in stock, which means that it’s much, much harder for them to really manage their overall cashflow, their expenses. And to be able to take that money out for themselves. 

So you know, if the suppliers are getting paid before you do, it can be really tricky to then put your foot down and say, “Right, I really wanna pay myself from the business.”

So what actually helps with this? Again, I’m always keen to give you the information for action as opposed to just telling you why it’s so difficult. And what I really want to stress here is not that, oh, it’s so difficult. But if you have been finding it difficult, then you are not alone.

And there are really good reasons why you find it tricky. But there are lots and lots of things that can help. And in my program, Retail By Design, where I work with business owners one-to-one, cashflow is something that comes up a lot. I would say probably half to two thirds of the businesses that I work with, we actually put together a [00:09:00] cashflow forecast and they go through it.

And they learn to forecast out their sales, really forecast out their expenses, forecast out their stock expenses as well based on their sales and stock plan, and it just gives them this visibility, which makes such a big difference. I’d say the number one thing that people say to me after they’ve done their cash flow, and there’s definitely can take some time to get used to it. 

But we are able to work back and forth until they’re in a position where they really understand it, they can work with it. Usually the first thing they say to me is that, “I wish I had this earlier.” and I think that a lot of people feel that they would’ve made very different decisions in their business if they’d had this visibility with their tax, with their cash flow at a much earlier point.

So here are some things that can really help with this situation. The first one is knowing your margins. As I touched on earlier, there’s this idea that the two main indicators for success or for profitability [00:10:00] in a product business is number one, are you making enough money every time you make a sale?

And that’s because when you think about your margins, I. The only place that you’re making money in your business is the difference between what you’re buying something for and what you’re selling it for. That’s the only place that you get income. Now, of course, you may have other elements to your business.

Maybe you run workshops or offer services as well as selling your products. But if we’re talking about a product business, so we’re talking about a retailer, an e-commerce brand. The only place that you are making money in your business is the difference between what you’ve bought something for and what you sell it for.

So that is effectively the engine for the entire business. Everything you do in your business: every expense that you have, every person that you employ, every packaging order that you place, every stock order that you place. That is all coming out of the profit being generated by the difference between what you’ve bought something for and what you’ve sold it for.

And as a result, you need to be really, really clear on what [00:11:00] that difference is. And you need to watch it like a hawk and just be really aware of it. When people come to me and they have issues with their cash flow, their overall profitability, then there are various different areas that we look at. One of them is things like their fixed overheads.

One of them is how much stock that they have. But then one of them is how much profit are you making every time you make a sale? Are your best sellers high profit items? Are there adjustments that we can make to improve your overall profitability? 

These are all things that are really, really crucial because the more that you have a profit, that’s what I call your out margin. So the difference your actual sales margin, the amount of profit or percentage profit that you’re making on your sales. 

The higher that is, then the easier everything else becomes, the more money there is left over. And many, many years ago, I think probably in about 2019, possibly even 2018. When I first started out on Instagram, I had a reel that went, I’d say viral for me.

At the time, it probably got about [00:12:00] 60,000 views and it was a cake. And basically the idea was that when you sell something, that selling price, say it’s 10 pounds. You know, there’s a portion of that that then goes to taxes. There’s a portion of that that then goes to cover your costs, your fixed costs.

There’s a portion of that that goes to covering your salaries. And then there’s what’s left. And is it gonna be crumbs or is it gonna be a decent slice of cake. And I think people liked it because it was a visual representation of how much the impact of your profit margins, on your overall business.

So it’s very, very hard for you to build a successful business, a profitable business, if your margins aren’t right. So if you are sitting here thinking, yeah, do you know what? I don’t pay myself enough. I really would love to pay myself more, then one of the things that you need to do is double check your margins.

And the second thing that can really help is planning out your sales and stock. And that is having a sales plan. So number one, you know how much you’re actually [00:13:00] expecting to get in through the business. Which is very, very important and really hard to do yourself a proper cash flow forecast, if you don’t actually know what you’re expecting to bring in.

And then also helping you identify how much stock you should have based on that sales plan. So one of the questions I get asked a lot is, “How much stock should I have in the business?” And the answer is always, “Well, what are your sales? What are you intending on doing with your sales?” 

And that’s really, really important because you can easily get yourself in a situation where you’ve got too much stock because you haven’t linked those two things together.

You haven’t linked your stock plan to your sales plan, so you’re just ordering stock. But you don’t know whether you are actually expecting to sell it all, if you’re gonna be stockpiling. And sometimes you can end up in a situation where you don’t have enough stock.

And this is something that, again, several years ago I worked with Lucy and Yak, the Dunga rebrand, on a [00:14:00] situation that they were having at the time, which was that some of their key best sellers, they were kept going outta stock because they were finding it difficult to really forecast that demand. 

So we did some demand forecasting work to make sure that they had enough stock to hit their sales and that they weren’t in a situation where they kept running out. Because running out of stock consistently is leaving money on the table.

Too much stock is choking up your cash flow. So neither of those are great. And one of the things that really helps you overall with the visibility of your business. The ability to make decisions like paying yourself and the ability to really understand what’s going on under the hood of the business.

That all comes from having that sales and stock plan. It can stop you panic buying. It can stop you having feast and famine cycles where you’ve got stock coming in and then you’re out before your next launch. But equally so it can stop you stockpiling, which will have a really, really big [00:15:00] impact on your overall cash flow.

What business owners should pay themselves

Catherine Erdly: And then the third thing that I would really stress, the third habit that really helps with this situation of really managing the way that you pay yourself from your business is to prioritize paying yourself. So you need to have a plan. You need to know how much is coming in. You need to know how much is going to be going out.

You need to make sure that you are not spending too much on stock, because that can really just eat up all of your cash flow. And you need to make sure that the stock that you’re selling is a decent enough profit margin that you’ve actually got some money to play with once the sales have been made. So all of those things are really key and really important.

But if you don’t prioritize paying yourself from your business, then you’ll also be in a situation where you’re just gonna keep plowing that money back in. So part of paying yourself more from your business is putting your foot down and saying, I need to be rewarded financially from this business in a way that is level [00:16:00] with the effort that I put in.

And a lot of people, I don’t really know where this belief has come from, but a lot of people feel like the best thing that they can do for their business is to reinvest money in as much as possible. And I believe that’s actually counterproductive. 

And for two main reasons, number one. It doesn’t encourage you to be super disciplined about the stock that you’re buying, or it means that you are maybe slightly less disciplined than you might otherwise be because there’s a bit more wiggle room.

You can say, oh, well I’ll take that money I was gonna pay myself and I’ll buy stock. Instead of saying, do I need this stock? Is there another way for me to raise the money to get this new stock? Have I got some old stock I could sell? So, number one, it doesn’t encourage you to really have that discipline in your business.

And number two is really, really hard to run a business and put the amount of work and effort in that is required for running a product business. It’s really hard to do that if you’re not paying yourself enough. [00:17:00] And I’ve seen it maybe three years in, maybe the first three years, you’re kind of going on adrenaline. But then you know, some point sooner or later there will come up a day where you just think, right. Well actually, am I better off getting a job? And based on my hourly rate, this is not a great situation.

So I’m a huge believer that we should be able to support ourselves from our product businesses, from creative businesses. And part of that is insisting that we pay ourselves and taking that money out as a non-negotiable and trying to work out, make things work basically effectively.

So, your salary isn’t what’s left over. It’s a very important cost and often when I’m working with people inside my one-to-one program, Retail By Design, one of the things that we look at is a breakeven analysis. Which is all about understanding the costs in the business versus the sales.

And one of the things that I insist people [00:18:00] put in is the cost of their salary or how much they would like to pay themselves. Not even how much they currently pay themselves, but what would you like to pay yourselves? Okay therefore, what do we need to do in terms of sales? Profit margin? 

Because I think it’s really, really important to. It’s not selfish, it’s not greedy. Certainly not greedy. I think most people running product businesses don’t pay themselves nearly enough for the amount of work that they do. So it’s essential for the sustainability of your business. And we talk a lot about sustainable businesses.

Many people say that they want to have a business that’s sustainable. But sustainable also means that you can keep doing it. You can keep doing it, you can keep going, and it’s very hard to keep going if you’re not paying yourself enough. 

How to start letting go of your financial fears

Catherine Erdly: So those would be my top three suggestions for changing your relationship with paying yourself from your business.

And number one, knowing your margins. Number two, having a really good plan for your sales and stock as well as your cash flow. And number three, [00:19:00] prioritizing paying yourself. Why is this difficult for people? I think again, I would just want to really stress if you’re listening to this thinking, “Oh, I should have got this figured out by now. I really should know better.” 

Do not feel like that ’cause it is an extremely delicate balance and something that we have to learn. And probably a skillset that most of us would never have learned or never been even had to grapple with if we didn’t have our own businesses. And yes, of course everyone has to run their own personal finances. 

But for most people, there isn’t that extra level in their personal finances that you have in your business when you might have to pay a big invoice to a supplier or work out the best time to bring in a certain product or all of these other things all together. So some of the fears or things that happen that come up when I talk to people about this is people say, “I’m not a numbers person.” 

That’s something that comes up a lot. Or they feel like they just don’t have the [00:20:00] ability to really wrap their head around their business numbers. And what I’d always say to that is, none of it is complicated. When you really boil it down to the step by step of creating an effective cash flow, an effective plan, effective strategy for your business.

None of it is complex maths. It’s not like we have to do algebra or anything like that or anything. To be honest, it’s like my children’s GCSE or A-level maths. A lot of it is about, okay, what? What have I got coming in? What have I got coming out? What my incomings and outgoings, effectively all your cash flow is.

So it may be that you have to really focus on doing the numbers, and a lot of people find that is part of the issue, is that the effort it takes to sit down and really engage their brain with these numbers, it almost feels insurmountable. And I think that’s again, [00:21:00] why the one-to-one work really is helpful because we have time in our sessions to sit and do it together.

And also a lot of people find external accountability really helpful. So if they know that I’m going to be asking them if they’ve put all of their bills into the cash flow forecast in two weeks time, that’s a clear deadline that they can work towards. So for most people, I don’t really believe in the concept of not being a numbers person.

I know obviously some people have. There are people who really do struggle with numbers. But I think for the vast majority of people, it’s just simply not really their comfort zone. So they’d much rather do almost anything else. And as a result, it kind of gets pushed to the bottom of the list. And yet it’s the thing that probably would bring them the most freedom and peace of mind.

Some of the other things that I’ve touched on already. Fears about, you know, I should just reinvest everything. I’m really going to be damaging my business if I take money out for myself. But you know, [00:22:00] ultimately, and totally I subscribe to the same philosophy as Mike Michalowicz, who wrote Profit First. Which instantly, if you’ve never read Profit First for Your Business, I really highly recommend it.

It’s slightly trickier to implement, I think, for product businesses, but I think overall as a philosophy then go check out Profit First. Mike Michalowicz. I’ll put a link to it in the show notes. But one of the things that he talks about is effectively, your business should work for you and not the other way round.

So if your business isn’t giving you money effectively, then what’s it for? It’s really just there. That’s what it’s there for is to pay you. So you are not gonna be damaging your business if you are asking it to do the function that it’s designed for. And then one of the other things that people really struggle with is just, again, finding the time to take the time to put that plan in.

And also because it’s just gonna take that much longer if it’s not something that you’re comfortable with. 

Get 1:1 support to sort out your retail finances

Catherine Erdly: And a lot of people find it very stressful trying to put [00:23:00] together something like this by themselves, and they just need that extra support. So you don’t need to be a CFO to manage all of this.

I’ve worked with lots of people who didn’t have a cashflow plan or have even been running their business for years and years without a cashflow plan, and we’ve been able to put in a structure, a sales plan, a stock plan, a cashflow forecast, and it’s made a huge amount of difference to the clarity, the support having a system that you can trust and you can make decisions about.

And you can see, “Oh yes, I can take some money out for myself. I can take more money out than I have been doing.” Because I’ve equally, as equally worked with people who actually have got a fair amount of money in the business, but they’re too nervous to take it out for themselves because they’re worried they’re going to need, it was almost when you can demonstrate that actually look, this is what we’re gonna need.

This is what you. You may need this or you may not need this, but we can [00:24:00] demonstrate what we think you’re gonna need in terms of your product purchasing, and that can mean actually, yes, I feel more comfortable taking money out for myself.

So when I work with founders inside Retail by Design, which is my new name for my mastermind program, I renamed it incidentally because one of the things that happened with it being called a mastermind was that a lot of people thought it was a group program as opposed to a one-to-one program. That is a group element to it.

We have a weekly group call. But the really at heart, it’s a really fantastic one-to-one program and a way to work with me on an ongoing basis. So when I work with people inside Retail By Design, one of the first things we do is a full financial review. So we look at your margins, we look at your pricing, we look at your stock, we look at your reporting for your business.

We look at what [00:25:00] you’ve got in terms of a sales plan, a stock plan. We put together a cashflow forecast, if that’s something that you want to focus on. Or something that you don’t already have. And we also look at other elements too, things like your support structure you’ve got in your team. We look at your overall strategy, we look and identify if there’s anything missing in terms of your marketing, your product offer.

We look at planning it all out. So basically it starts though, generally speaking, with that financial understanding of what’s going on and the beauty of working with me is that I’ve worked with over 200 businesses, product businesses, one-to-one over the last seven years. And so as a result, it’s something that I’m able to very quickly see the things that are working really well and the things that need more support, so it’s never about making you feel bad. 

Sometimes people say, oh, I’m worried I’m gonna get like my school reports. It’s not about that. It’s about giving you a full picture so you can really grow with confidence [00:26:00] and because, ultimately, I don’t want you to be sitting there feeling lost and feeling stuck.

I don’t want you sitting there not knowing if you can pay yourself. I don’t want you to be not able to pay yourself what you deserve for the amount of effort and work that you put into your business. And so if you’re listening to this and thinking, “I want that clarity too, I want that support,” then I do encourage you to sign up for a discovery call.

It’s very relaxed. It’s just an opportunity for you to tell me more about your business. Retail By Design is a especially well suited for people who are at the VAT limit or above. There’s loads more details on my website. You can head over to resilientretailclub.com and find out more about Retail by Design.

And there’s a link there also to book a call. And you can also have a look in the show notes. There’ll be a link to book a call there. So if it’s something that you would like to get more support in terms of paying yourself, in terms of looking at your business in a more strategic mapped out way, [00:27:00] I would absolutely love to help you with that.

And yeah, let’s have a chat. So just to kind of recap then, what I want you to know is that running a product business, paying yourself sufficiently from it, it’s not as easy as it may sound. Or probably seemed at the beginning. There are a lot of different bills that go out. There are a lot of different demands on your cash flow, especially when it comes to your stock.

And it’s really something that you need to have the right balance. You need to really understand your sales plan and your stock plan in order for you to have a really good handle on your cash flow. Once you have a handle on your cash flow and your profitability, you are able to make much better decisions about paying yourself.

You’re able to really identify how much money you can take out for the business. Also, get really clear on what your sales need to be. If the amount you’re taking out of your business isn’t as much as you feel it should be, or also to understand is it that, is that happening because you’re spending too much money on stock?

There’s [00:28:00] lots of different elements that can play into the, to you not paying yourself enough from your business. So it makes such a huge difference to people when they’re able to look forward and say, in six months time, this is what my bank balance will look like as long as all of these things happen as I expect.

And then to be able to adjust it on a weekly basis, adjust what sales actually came in, adjust what bills actually went out, adjust what you actually spent on stock. And so that you’ve always got an updated living picture of your cash flow, and you’re able to really make those decisions about the business.

Personally, the way I make decisions about my business is I always run the numbers first. But because I’ve got that cash flow, because I’ve got that set up and the forward plan, it’s something that I’m able to do and really play around with before I make big decisions. And I’m able to work my way around tight spots.

I’m able to just anticipate when there might be pinch points, and it just is so super helpful. I personally couldn’t run my business without that. [00:29:00] And I know from the people that I’ve helped that it’s really helped them feel much more calm and confident in their business when they’re able to see those numbers mapped out.

So if you wanna know more about Retail By Design, then let’s have a chat. Otherwise, if you have a moment to like and review the podcast, it makes a huge difference in getting out there in front of other people.

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