Gig Economy - Cash Flows and Profitability

KEY POINTS

The gig economy often provides quick cash flows that exceed minimum wage.
Many gig enterprises require lump-sum capital expenditures.
Capital expenditures must be estimated and factored into your business plan.

The Gig Economy Is Everywhere

Almost everyone has participated in the gig economy. It thrives 24/7 and has become rooted in our daily lives.

We are accustomed to whipping out our phones and hiring ride sharing services, food deliveries, searching for home-based vacation rentals, and more. It is a virtual whim of convenience that is cost effective and takes back our leisure time.

Customers reap many rewards.

Vendors do not have it so easy.

Extra income from the gig can be a fantastic way to earn income on passive assets or during your spare time. It provided many with a financial lifeline during the pandemic. For others, it eventually brought unexpected financial hardship. Income potential from the gig economy can be substantial.

However, there are many financial risks associated with entering the gig economy. Some risks are obvious while others are not.

Let’s look at the first and arguably most important.

Cash Flow vs Profitability

If you are contemplating entering the gig economy, you must understand the difference between cash flow and profitability.

Cash Flow ≠ Profitability

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Cash Flow ≠ Profitability 〰️

To be clear, the formula states that cash flow does NOT equal profitability.

Yes, this is a bit academic, but bear with me as the concept is fundamental to your financial success.

Cash flow is how much net cash you generate in a period.

Profitability calculates your net revenues and expenses in a period.

The timing of your revenues and expenses do not always match the timing of your cash flows. Therefore, the two will often be different.

For example, you may provide car sharing services. Each day will generate positive cash flows for every drive completed, and a negative cash flows every time you fill up with gas. What is often not considered is the future cost of car repairs, maintenance, and depreciation.

Car repairs, maintenance, and depreciation expenses are generated every time the car is driven. However, their respective negative cash flows do not occur until sometime in the future.

The following example illustrates the impact of depreciating capital assets and their impact on cash flows and profitability.

Ride Sharing Example

There are many variables that impact what a ride sharing driver can earn (e.g., company, city of operation, type of car, type of fares, trip distances, trip frequency, tips). For our purposes, we will make some broad assumptions to illustrate the concept, more so than to provide a business case for ride sharing.

ASSUMPTIONS
Average earnings per hour	$17.00
Average earnings per mile	$0.85
Average miles driven per hour	20
IRS standard mileage rate per mile	$0.655
Average cost of gas per mile	$0.20

The average earnings per hour is net of TNC Commissions (i.e., the amount of commission paid to the ride sharing company).

The IRS’ standard mileage rate is a reasonable benchmark to estimate the cost of car ownership on a per mile basis. It factors in the cost of insurance, gas, maintenance, and depreciation.

Our assumptions generate the following per hour comparison:

	CASH FLOW / HOUR	PROFITABILITY / HOUR
Revenue	$17.00	$17.00
Cost of gas	(4.00)	-
Cost of capital and operating	-	(13.10)
Net cash flow/ profitability per hour	$13.00	$3.90

Cash flow per hour may be above minimum wage; however, it is below a living wage.

Profitability per hour factors in repairs, maintenance, and depreciation. Some drivers will be surprised to learn they are earning a meager $3.90 per hour based on the assumptions provided.

Insight

Capital costs must be allocated to each period to calculate actual profitability.

BOTTOM LINE

Some jobs in the gig economy are more capital intensive than others. Capital assets may include computers, software, automobile, tools, passive housing, craft supplies, and more. Properly factoring such into your business plan will help you convert your gig into a real business while ensuring you are offering your services at a profitable and competitive rate.

Failure to factor these costs into your business model can have a devastating impact on your profitability and long-term success.