Episode Transcript
[00:00:00] Speaker A: Welcome to the Independence by Design podcast where we discuss what it means to be a business owner and ways to get unstuck from the day to day so we can design a business that gives us a life of independence.
What the hell does a budget actually look like? And what does good budgeting consist of? How do we approach it and what's the impact on my cash? And how do we integrate the operational decisions and the investments with the ownership, distributions and the cash flow? That is what we're going to be diving into today. I've got my dear friend and my old business partner, Pat Hobby on the podcast and we are going to be screen sharing and it's a working session. The next two episodes are because this is the second episode in this series on budgeting and we're going to be walking through a three statement model and how to actually have your budgeting file, how to actually go through and build up your cost of goods, your overhead, and tie in your balance sheet, look at the cash flow, owner's distributions, forecasting out your taxes. There's a ton of good shit in here. I'm super excited because Pat and I were doing this recording for my coaching program. I'm like, you know what, let's just put this on, on YouTube and on the podcast because I want you, the owner operator, to understand what good looks like. Cause if you don't have something like this, the question is, how do you get it? You know, do you have your finance leader that you now have a way of communicating with them, which could be a great opportunity where you now have a good way to show what good looks like, or do you need to level up your skill sets, get new tools? There's a lot of different takeaways could be coming from this, but my goal for you is this is what good looks like. Anything that is short of this, you're flying blind. And for me and for all my clients, I just, I want to know what my cash position is going to be. So the more level of discipline we put to this and the more thought we put behind it, when you're sitting in that boardroom in the middle next year and you're going through the on track, off track, you're going to have an understanding of the why behind it and you're going to be able to understand how to judge your assumptions that you made and what assumptions need to be modified as you continue to execute throughout the year, year. And then next year's budgeting process should be a hell of a lot easier because you've got A foundation and a process set in place. And your leadership team is getting better at anticipating the questions and anticipating the data that they've got to provide. So that way you can understand all the way from revenue to margins to overhead to net income, net operating income to ebitda, normalized EBITDA working capital, debt, taxes, and the future valuation of your company. So hope you enjoy this podcast. Make sure you to check out YouTube or Spotify if you want to watch. Pat and I actually walking through the financial model people that are listening in. I tried to do my best to make sure that you understood what we were talking about, even if you didn't have the spreadsheet up or the video that you had in front of you. Thanks everybody for tuning in and I hope you enjoy it. I am very excited to jump in. We went through the budgeting tool that you created with my group and there was a lot of good feedback, a lot of questions. Maybe I can start, Pat, with what I have seen and what I did with Kim when I on that recent call was you have built out a template for the three statement models for people to plug in the historicals of the three statements, you know, through a combination of trial balance or hard coding in to get the historical data.
Then there's all the presentation tabs of like, how do we look at that data and compare it to where we're at? But that comparison of where we're at has to be based on a plan, which is the budget. Right. And when I said it, you know, when I was talking to Kim, who's she's focused on getting that predictable revenue in the income statement every single month, I said that you have built a really cool tool and great powerful tool that is outside of that ongoing file, which I call like the master source of truth of the past, the present and the future. But the iterations and the thought process has to happen outside of that file because you're going through and you're building up all your ideas and all that stuff. Kim's work is even done even outside of your file, which is what's the revenue buildup of the customer journey, the client acquisition cost, the product services.
But then that plugs into your budgeting tool and then you go through the assumptions and scenarios and all that stuff to then lock it in and put it into the ongoing file to then have an ongoing monthly ownership meeting, the quarterly board meetings, fair way of kind of compartmentalizing the different activities.
[00:04:22] Speaker B: It does start with sales. You know, sales drives all the other decisions. But you have to Take that and you know, figure out the budget for it and may have different scenarios.
[00:04:34] Speaker A: You know, can you, can you explain why it starts with sales? And like, I mean it, as a cfo, explaining that I think is very important because, you know, if we had a pie chart of level of effort of this entire project, what percentage would you put on the sales part?
[00:04:51] Speaker B: What it typically is or what it should be?
Yeah, both actually, because typically it's, you know, I think typically it gets short shrift, you know, with effort from, you know, trying to predict revenue.
And you know, sales to me is when somebody agrees to buy something, products or services, revenue is okay, we've shipped it, we've delivered the service, you know, whatever. And depending on your lead, you know, you were in an industry where the lead time between sales and revenue could have been months, right. You know, at least a sales effort. And.
But looking in an ideal case, looking at it from a customer level, existing customers and Kim's way better probably at this than I am. But existing customers, what are, what have been their trends? What do they expect for next year? I always encourage sales leaders to have your people talk to their customers, ask them, you know, what do you think you do next year and what is your lead generation and marketing efforts going to produce as far as new customers and how long take and when's it going to, when's it going to hit. But when you think about all the, you know, some cost in the income statement are fixed, your rent, you know, your certain SGA salaries, certain SGA salaries, not all of them are fixed, but there are a lot of, lot of the lines on the income statement are variable and the variable based on the revenue.
[00:06:17] Speaker A: Right.
[00:06:17] Speaker B: So that's why it's so important to try and match them up, match them, match them up and get as close, you know, to what you think is going to happen as possible.
[00:06:27] Speaker A: You know, mapping reality to our expectations. And I think what's.
If you've kept the numbers the same, so people listening in, we're going to be going through a financial model as well. So we'll be sharing screen and we'll be able to, I'll be able to, we'll be able to talk through it. So. But otherwise go to Spotify or YouTube if you want to watch it, if you haven't changed the numbers.
2.162 probably.
[00:06:49] Speaker B: I don't know that these are the same number.
[00:06:51] Speaker A: So at the end of next year, the budget shows we're projected to have $2.162 million in cash at the End of next year.
And the way I think about why I love finance and business is because the question is how well are we thinking about projecting out that 2.162 and everything ties together. And that's when I met you. It's like everything is tied together in this. And so with Kim, just because you haven't listened to that is she walks through in great detail like, okay, how do we actually do a ground up and then downward or and up top down to meet in the middle reconcile. What I think you'll really appreciate about what she covered was actually understanding your revenue recognition of that product or service in the opportunity tile. So like if you had a hundred thousand dollar project and a 50 was in month one, because we actually want to, then she like, she's literally getting the baton handoff completely to you to say okay in the income statement then of the hundred grand, 50 grand recognizes this month. And then it's like 10, 10, 10, you know, for another five months or something like that. So it's all the way down to.
[00:08:01] Speaker B: That sales to revenue. Correct? Yep. May sell $150,000 job, but it's recognized over.
[00:08:08] Speaker A: Yep.
[00:08:08] Speaker B: You know, and you know, our mutual friend Dave Deal says, you know, when you budget, you know, it should be a 50, 50 shot of hitting it high or low. You know, he's like, if you're always beating your budget, you're not doing a great job at budgeting. If you're always missing it low, you're not doing a great job of doing it. But you know, the budget serves two purposes in my mind.
One is to drive operational decisions.
How many direct labor people are going to have? What level of SG and a support are we going to have? What, what level of sales effort do we need to hire salespeople to, to generate that? But then in your world, it also empowers the owner then to make decisions.
Because if you put your budget together right and you got your three statement model, you know, after you see what your cash flow from operations is, then as an owner, then you start making choices, decisions. And about that it does, does that support the goals I have as an owner?
[00:09:08] Speaker A: Yeah.
[00:09:08] Speaker B: Not as an operator, but as an owner. Because it's the place where both of those meet.
[00:09:16] Speaker A: It's so awesome. And we'll be showing this in the three statement model because to regurgitate what you said, in my words is in the income statement is the operations and all the thoughts of how the operations is going to work. And then when we look into the cash flow statement, you know, how it starts with net income, and then there's the changes in working capital down to that cash flow generated or used by operating activities. That's what I call the bridge row between the CEO of the company and then the ownership. Because then afterwards is what do we do with that cash or the lack of cash debt? Is it reinvestment? Are you using tapping lines of credit or is the owner taking distributions, taxes? All that stuff is capital allocation. But there's a very. So this idea of this owner, operator, person that I'm talking about who wears two roll, two hats is not just like, in theory, it's like in the financials, we can actually directly see where they're at. And as we jump into the budgeting the way I like to, I was kind of framing up to people, Pat, Whether it's right or wrong is like, there's this process of like, not only for sales of like, bottom up, top down, you're kind of doing that on all the different areas and. But then in. In like, as a sandwich of this is the owner's goals. Like, you're starting with your goals, and then you go through the operational budgeting process and then you go and, okay, well, that's not enough cash. And I was on with one of our mutual friends and clients yesterday. It's like, this is a first shot. And I had two people in the last week go f that for the. What they. What they saw to begin with. And it's like, that's the point of doing this.
[00:10:46] Speaker B: It's not.
[00:10:47] Speaker A: We're not locking that one in because if it's not enough cash or you don't like the bottom ownership stuff, then we got to go back up and.
[00:10:52] Speaker B: Look at can't take a distribution, revenue.
[00:10:56] Speaker A: Margins, investment DNA level.
[00:10:59] Speaker B: You know, then you got to go back and it oftentimes and client, you know, often the person's the same, but the roles are different. They can be the own, they can be the CEO.
[00:11:08] Speaker A: Right.
[00:11:09] Speaker B: You know, and they're working through the budgeting process on the income statement and down to cash flow from operations. But then they take off that hat and put their owner hat on and say, okay, is this working for me?
[00:11:21] Speaker A: Is it worth it too? Right.
[00:11:23] Speaker B: And am I building value?
[00:11:25] Speaker A: Right.
[00:11:25] Speaker B: It gets to, you know, am I growing the value of this asset that I own?
[00:11:31] Speaker A: And some of the things that I.
[00:11:32] Speaker B: Want, probably their biggest asset.
[00:11:34] Speaker A: Yeah.
And that's on the equity side too, which I think is important. But also, as we're going through the budgeting file and what I want people to think about when they start their budgeting process from the ownership lens. First, if that's the first domino is like what is your time and your cash flow goals? Because that's what we can control. And then we want to see what, what kind of value would that create? Because like when we look at the, the time, well, you can buy your time back, you know, Dan Martell, buy back your time. Like, well, how do we actually do that? Well, the way we actually do that is to say, well, I can hire a CEO for 20 grand a month in May of next year while also maintaining my income through distributions.
[00:12:12] Speaker B: Yeah.
[00:12:12] Speaker A: So then the time is directly tied to that cash flow and where it's coming from.
So we can actually start to look at that time cash flow and then we can look out your to say, okay, if I grew at this pace, what would be my normalized ebitda, my multiple in five years? And if it's not enough value, you might have to burn cash, which would impact your time and your cash flow. So it's just seeing those trade offs is helpful.
[00:12:36] Speaker B: You know, our friend Greg, you know, strategy is just choice. So you got to, as an owner, you got to look at that holistic picture. You know, the head of your sales, your sales leader is not probably thinking about your value three or four years from now. You know, they're looking at now and next year.
But the process enables you as the owner then to say, okay, when I roll this out, my out year projections for three or four or five years, where does that put me?
It's not in the place you want to be. Then you got to start, you got to make choices, you got to develop strategies that say, okay, I need to, I need to make some changes.
And it, and it could be cutting costs, it could be spending money, you know, right. I, I need, I need to open another office in another city and do the same thing I'm doing to capitalize on that market and am I going to burn, burn ebitda?
[00:13:25] Speaker A: Well, it's the investment. Yeah.
[00:13:26] Speaker B: Cash to do that. And is that going to put me in a better place three or four or five years from now?
[00:13:31] Speaker A: So as we, as we jump in, one of the, kind of like, you know, what you were talking about, Greg, One of my doctrines, my beliefs are, is the owner, operator as the CEO, the role that they're playing as both at the bare minimum, doing this at a detailed level the first year. You and I've got multiple people that we know that are doing this and it's like ideally you're doing it without like external pressures from a bank or lack of cash flow. But ideally you're doing it for the first time. And what I, what I experience is with imaging path is doing that one year and then the year two, year two was 10 times easier.
But it allowed me to understand when I was in my ownership meetings to know exactly the story behind the numbers. And like how did actually sales build up their thought process behind those revenue? How did operations get me to those margins? And then how did the CFO then also help me understand the overhead costs and how did the CFO work with sales and operations to make sure we had all the costs accounted for? And it was me understanding that level of thinking that allows us to sit in a board meeting and ask questions. And I think this is where a lot of PE firms fall short pat, because like they don't know. They don't have a BS filter because they're not in the operations. You've told that story about that one guy, kid, the kid in the suit that wanted to like, look, you've never been in a manufacturing plant before. It's like. So they, they like what I think empower, empowers the owner operator is they actually understand their operations intimately. And by connecting all these dots and going through this process.
So you're starting with sales. And as I'm thinking about this too, I'm actually thinking we'll put, we'll put this episode out first before Kim and I'll, and I'll tee up for everybody. Why that is because we're setting the framework of everything here, starting with sales, then going to operations, then going to SGA and overhead and then the owner's goal. So that's what we're going to be walking through.
And it's this iterative process. Right. For a couple months.
And I think that's what I noticed. I've had to re reiterate to a lot of people like this is an iterative process to get to a point like December 15th where you've locked something in that you can then measure against.
[00:15:43] Speaker B: Yeah, one of my clients has been doing this for a lot of, a lot of times. And they do high impact planning, you know, right out of G.G.O.B. and all that. I mean we have a budget timeline, you know, this information, this person, the sales leader here, and they got to.
[00:15:56] Speaker A: Get back, you know, I want to see that.
[00:16:00] Speaker B: And, but it's like December 18th, 19th, somewhere around there where final budget is, you know.
You know, and this is a, this is a company where the Owners are not active. They've hired a CEO. So you know, the next and last step is, you know, the CEO presents the, the budget to the owners and then final approval. So you know, and if you haven't done, if, if, if somebody hasn't done it a lot, then your description of working with the leaders, sales leaders, operations, you know, SG&A, you know, overhead folks, that's the way to do it. Because that I'm telling you then when they look at those financials in their mind, they'll see what's going on behind them.
If they wait and if they were involved in asking questions about, okay, explain to me how you got your revenue level, you know, and Pat, what I think is, you know, we, we set margin goals at 35. Why are they at 30, you know.
[00:16:59] Speaker A: Yep.
[00:16:59] Speaker B: But it'll be very helpful for them to.
[00:17:02] Speaker A: And I honestly like as you and I, before we hit record, like there's no easy button really.
And what I think is like so.
[00:17:10] Speaker B: Empowering is if somebody finds one, call me because I no free lunches.
[00:17:14] Speaker A: Man.
[00:17:15] Speaker B: This is hard work. This is hard work.
[00:17:18] Speaker A: It's hard work, but it's, it's our goal in the, the rest of this call is to make it easy, easier to understand because it's not rocket science. You're not doing quantum computing or any of that. It's just taking the discipline to go to the gym every day and then the results will come. And you can trust the process because you can understand what the outcome is looking for. And that's what I want people to get out of this is the outcome. And one of the outcomes is outside of the budget that's actually thought through with accuracy. To predict the future of cash is the owner's role. I see it as, you know, even like the highest level executives who are strategic thinkers.
It's the owner's job to, to help with the trade offs of the constraints to say, okay, like we only have this much cash, so we can't do this project and that project and that project at once. And it's the goals and the, the cash through line. So they're on the call. The group call that I had yesterday. One of these constant questions is well, what level of information do I share with the executive team and the people below? I said, well, the cash flow statement and like the, the owner's decisions should be the owner and the cfo and you at least, even if you're not doing full open book management, which you know, there's a argument to do that. But even if you're not. You know, you talked about one of your old companies, you were making so much money, you didn't want to share with everybody how much money you were making, which is fine, but we didn't have.
[00:18:40] Speaker B: We didn't even have to do budgets because we had cash.
[00:18:43] Speaker A: Is this here?
[00:18:44] Speaker B: It is.
[00:18:46] Speaker A: So the. The point is, by the owner going through this process, if, for example, sales is supposed to be $1.5 million in March and margins are supposed to be 45% and net income is supposed to be what, you know, whatever it would be, 500 grand, they know how much cash they will have because they did this effort. So they can see the through line to say, okay, if sales is off, how are. So you can still share the appropriate amount with the appropriate people. If the owner knows the whole picture and it just empowers them to then help with the priority to say, okay, Pat, as the CFO or the sales leader, we don't have a constraint here that I have total visibility into. So as a team, we need to walk through the constraint together to debate what we want to do with that constraint.
[00:19:36] Speaker B: You've got to give them visibility to what they're responsible for.
And in my mind, from an operational point of view, running the business, your CEO, if there's somebody other than the owner, your sales leader, your operations person, your financial person, cash flow from operations is the number they've got to be held accountable for.
[00:19:58] Speaker A: Yep. Yeah. We'll walk through in the financials to why that is.
[00:20:01] Speaker B: They've got to. They've got to see that you want me to share and.
[00:20:04] Speaker A: Sure. And then. And as you're pulling that up to. For everybody, the CFO's job.
[00:20:09] Speaker B: Can you see this?
[00:20:10] Speaker A: Yep. Is to facilitate this entire process.
And like the CFO's job, if. If a CFO is going to be sitting in a board meeting and explaining the numbers, the CFO is leading the project with, you know, extracting the numbers from sales. So when you listen to Kim Clark's episode, it's. The sales leader has to do everything that Kim is talking about so the CFO can put it into the model. And then the CFO then has to work with the COO to make sure that they're putting everything into the model. So there's this synthesized process that you, as the cfo, is helping lead the initiative.
[00:20:42] Speaker B: Yep.
So I thought let's start with the end.
[00:20:46] Speaker A: Yep. I like it.
[00:20:47] Speaker B: So when. When you get done, when you get finished with your budgeting process, you're going to have a monthly Budget. This is the income statement. This is what most people are used to.
Projecting revenue, cost of goods sold, indirect labor, you know, whatever your cost of goods sold is, assuming you have that or cost of services provided, gross profit and gross margins.
SGA costs, you know, from sales, finance office, you know, and it's going to be different for every company. So you can't, you know, take this and just, you know, retirement benefits, whatever it is, SG and a net operating income. That's a really important number. Net income.
[00:21:28] Speaker A: Explain that a little. Yeah, explain that in a little bit.
[00:21:30] Speaker B: Net income can be a little bit misleading because it's maybe interest expense on debt. Well, your operations people aren't really responsible for that.
You know, it may be interest income on investments or you know, if you have a bunch of excess cash investment accounts, you know, you sold a piece.
[00:21:47] Speaker A: Of machinery or a building or a.
[00:21:49] Speaker B: Gain on the sale of equipment. You know, you could have none operational expenses you could have, you'd be paying somebody or have expenses that aren't directly tied to an operation.
I'm going to give an example. If you had an owner who wasn't really active in the business, you'd want to put their cost down below the line. Below the line.
[00:22:15] Speaker A: Is that almost like a plug for normalized EBITDA too?
[00:22:19] Speaker B: Yeah, it's like normalized net operating. You know, you wouldn't want to put them in, up in SGNA because if they're not really that active in the business, but you know, they're drawing a salary.
[00:22:29] Speaker A: But there is a differentiator between net operating income and normalized ebitda because you could have something in your income statement like a recruiting fee.
[00:22:36] Speaker B: Yep, that would be in your. You got depreciation right here or you've got, you know, you've got recruiting fee. You know, you spend $50,000 to hire somebody and that's, that's going to be normal. That's going to be part of normalized ebitda. But net operating income is an important number. So this is what most people. So you get down here and you get to net income, you know, and then even on the budget you want to, you want to predict your adjustments.
You know, you get EBITDA's reported which is just going to be net income plus interest, depreciation, taxes if you had them, and amortization. And then so you get, you get, your EBITDA is adjusted or normalized before.
[00:23:20] Speaker A: Before you keep going. If we just go up for a second, I want to just orient us so we have 12 columns for all 12 months.
And when we listen to Kim's podcast and training session, all of that level of thinking is what goes into building up that revenue. And then, you know, when we talk about good data pet, you know, there's a lot of people in my group where splitting out their revenue buckets because we want the information of how, you know, this product or service line, what's the actual, what's the sales funnel for that broken out product or service line and then what's the actual gross margin of that product and service line? Because we want to do more stuff that's more profitable or understand the interplay of all these different products or services. So the matching principles of accrual and breaking out the right data. Any, anything you want to speak on as far as like then what?
[00:24:15] Speaker B: Yeah, I listed here, you know, some examples. You know, I advise people in their general ledger, which is their chart of accounts, some people might call it have that detail, that level of detail. I don't care if you have 500 accounts in your chart of accounts. It's easier to combine them, rolling them up to get summaries than if you have one line that says, if we just had one line here that says revenue 21 million 4,54 for the year. And somebody's like, okay, what's that made up of? Well then you're sending people off and you know, to a guessing game, hand to hand combat of trying to parse out what all that is. The more detail, the better. Your margins are different, you know, and, and the sales activity, the cost of customer acquisition for different lines of business could be different, you know, so it's important to, you know, your old business, you had equipment sales, you had, you.
[00:25:04] Speaker A: Know, service document management document.
[00:25:08] Speaker B: I, you know, you had all those. They were very different businesses.
So being able to identify those is really important. But there's one for every column and then a total on the income statement.
Most people, when they think of a budget, think of this.
I would venture 90 plus percent probably.
[00:25:31] Speaker A: Not this level of detail either. And maybe you want to speak or maybe this will get to where you're going, but top down versus bottom up and then reconciling the two. But to your point, the income statement is what most people forecast out. And then they go, I'm growing that gangbusters. I have no cash. My CPA said I did great, but I don't know where my money is. I have this big, you know, $180,000 insurance expense in May or I have my tax payments, no cash.
[00:25:59] Speaker B: So what to get around that problem because the income statement only tells part of the story.
That tells the revenue and expenses for a period of time. A month, a quarter, half a year, a year.
That is not the whole story.
So I'm going to scroll up here.
When you get finished with your budget, you're also going to have a budget for your balance sheet.
[00:26:26] Speaker A: And for the people listening, in every single 12 columns is all three financial statements mathematically tied together.
[00:26:33] Speaker B: See, you're jumping ahead of me, but that's okay.
[00:26:34] Speaker A: Okay, sorry.
[00:26:35] Speaker B: That's story.
[00:26:37] Speaker A: So excited.
[00:26:39] Speaker B: The balance sheet, you know, accounts receivable, prepaid, fixed assets, you know, are you buying equipment? You know, I put in here goodwill if you bought a company, accounts payable, you know, other accrued expenses, accrued pto.
You've got to project. And people may say, well why, why project your balance sheet? What does it matter?
And it matters because of what you said. Once you do, once you, once you calculate and estimate all of these balances on your balance sheet and sorry for the rapid scrolling. Is that big enough? Can you see it, Ryan?
[00:27:12] Speaker A: Yep, yep, you're good.
[00:27:13] Speaker B: You get your statement of changes in cash flow. You have to have your balance sheet in order to project your cash flow.
Because just a quick lesson. You start with net income, you add any non cash expenses, depreciation, amortization are the biggest ones. A gain on the sale of a piece of equipment would be another one.
Then you have all your changes in working capital and you notice these, these lines are the things that are on the balance sheet. Accounts receipt, tory, prepaids, you know, all these things. Which gets you to net cash flow from operations.
So starting with your income statement, using day sales outstanding. And we can talk a little bit more about these days, outstanding days, inventory outstanding, you know, customer deposits. If you had, you know, things like that, projecting those on the balance sheet then enables you to prepare a cash flow.
These are mathematical differences in the accounts on the balance sheet. I'd love to tell you there's some really sophisticated, you know, magic stand magic behind this, but the 1400s figured this out and it hasn't changed since.
These are the mathematical differences between the balance sheet accounts.
And if it goes up, that's a use of cash receivables comes down, that's a source of cash.
[00:28:29] Speaker A: Well, and that's where like when I, if you go up to column, go back up, it's like it was column BG. So April 26th.
So we have a. Because it starts with net income of 73 grand.
But then we have, then the qu. What the cash flow statement is saying is like, what's the use of cash or cash source to then get us to that net cash flow from operating activities? So we have a $73,000 net income, but 285 grand in cash flow from operating activities. So we have over $200,000 more in cash than our net income that month. You want to explain kind of why that is?
[00:29:08] Speaker B: Receivables came down and inventory came down.
Those come down, they generate cash.
You know, inventory comes down, you sold something, so it becomes a receivable. You know, it kind of rolls through that. But those things, when those things come down, just imagine if you're the receivables coming down, you just collected more than you build.
Your AR balance comes down because you'll see this $140,000 difference is the difference between this number and this number, which.
[00:29:41] Speaker A: Is the balance sheet receivables over March and April. So it went from $2.2 million to 2.069.
[00:29:49] Speaker B: So we collected, we had more in cash.
[00:29:51] Speaker A: And back to your point where like if, if what I want to look at from the board perspective and a capital allocator is how much cash do we have at the end of every year or every month?
All of this stuff has to be mathematically linked together.
So the only way we can get that cash flow statement is. And the story of what's moving in and out of the business is if we forecast out the balance sheet.
And maybe this is a, you know, when working capital pat, what I've noticed is like, you know, when I was running our family business, didn't understand what that word meant or cash conversion cycle. But I definitely knew that I, when I woke up and there was no money in US Bank's checking account, it was stuck in my receivables inventory. Or I could push off payables, or I could do customer deposits.
I think every single owner knows where to go to to find cash. They just haven't labeled it and then realize that they can forecast out that pulse, that heartbeat of the business, which is this working capital. And there are levers. And if you're forecasting out the balance sheet, you have to make some assumptions, which is where that dpo, DIO and DSO is. You want to explain what kind of level of thinking?
[00:30:58] Speaker B: Yeah, let's just finish this part first. So you get cash flow from operations. And this is all the, this is the result of all your operations for activities, your sales, your operations, what your margins are, what level of sgna you have how well you collect money, how quick you pay your bills, how well you're managing your inventory.
That, that's the thing. And I don't, I just don't want to skip over that. This is from a, this is from a CEO.
Sorry, I didn't mean to go, you know, point of view.
You know, this is the cash flow generated for the year, month by month, that the owner then, as an owner can make decisions about.
Right.
[00:31:36] Speaker A: And that is where that hyphen of the owner operator that line, which is 183 here in the spreadsheet, is the bridge. So if you have both roles, as I mentioned earlier, your payroll for your job is in the income statement. That's reflected in net income.
And so a CEO should be responsible for everything up until line 183, which is cash flow from operating activities. And then I would, you know, in one of my group calls recently, Pat, we were talking about, okay, the other C suite executives, sales will be responsible obviously for predicting revenue. But then the COO should also be helping manage inventory. Yeah, because like one of my clients, they have, they're bloated with inventory now and he's, you know, the new CFO that they hired is like a stickler on. Okay, we have to get the revenue because we need to know, like, what are the inventory levels where like, no one can purchase any more inventory after this dollar amount unless it's approved because it's tied to the sales forecast. So, and then the CFO is helping with the payables and the receivables so that, like that. And the CEO is sitting on top of everything. So like, all of these levers are very visible for the operational C suite team.
[00:32:49] Speaker B: You know, if this is, if, if the actual for June of 26th was a negative $400,000 cash flow from operations, you could literally line up the two actual versus the budget and dig into why were sales down? Were margins worse? Did we, you know, did we not manage our inventory? Did we not collect our receivables? Are we paying our bills too fast? You know, it makes it a way to, to compare, to understand that. But like you say, this is the bridge between the operations and the CEO. And then as an owner, you know, manage your capex and that, that influences your operations. If you're, if manufacturing want it, we're going to grow and we got to buy more equipment. You got to make that decision. But as an owner, you know, but.
[00:33:32] Speaker A: Where that I still have.
Yeah, but after. So we have cash flow from investing activities where if it's a capex.
Do you pay debt or you pay cash?
[00:33:41] Speaker B: And when you say this, and you have this, and this part here is from finance, you got to pay your debt down and then you have distributions for tax and discretionary. And you can plug in, we'll come back to that. Well, you can plug in. I want to get X amount as a distribution.
[00:33:58] Speaker A: 30K a month in distributions after taxes.
[00:34:01] Speaker B: Yeah, you can plug that in here. You could, you could literally just key them in here. I did 40%. You know, just as a way to do it. You can either do a percentage or you can say I want 30, 30,000amonth. Is that then when you get down here to your change in cash in your, in your net cash balance, then you'll say if you've got six months in a row where this is negative because you had a big fixed asset purchase in a month, you're like, okay, the operations are not generating enough cash flow to pay for that out of operations.
So now to either cut back on my distributions or go borrow money at the bank.
[00:34:37] Speaker A: And then that's where the finance finance equipment purchase. And when I think about really what a capital allocator, like what does that actually mean? It's matching the capital source and the cost of capital with your goals.
So it's because the question is, okay, if that is if I have zero cash and I can see that I have zero cash for four months, but then there's a bunch more after that. Hey, line of credit, line of, you know, as long as I got enough room on my line of credit. Or you know, do you go look at a conventional loan? What's the AM schedule? Is it an SBA loan? But like there's all of those different types of capital that you can go get and the cost and how that impacts your cash flow and it should be reconciled against the owner's goals of distribution, how much cash you have and what the final goal of the valuation is. But it becomes that decision tree of like back to the constraint. If there's no money. We're not Jerome Powell. We can't just hit control print. Like we have to like manage to what are the trade offs of the cash sources based on our goals.
[00:35:36] Speaker B: Yep. And outside of this budget. But you cover in some of your other teachings is your out years. You know, this is 20, 26 and you roll this into 27, 28, 29, 2030, you know, what does that look like at a high level from, you know, in the PE world they always talk about the J curve. If you imagine we're going to burn, we're going to burn cash and EBITDA now to set ourselves up for faster growth in the more cash flow.
[00:36:04] Speaker A: Yep. And then we, as a note, before we move on, like when that is done and you project that out on a higher level, we could then see normalized ebitda. We could take some multiple assumptions. We would actually see how much debt and cash we had for a cash free, debt free company and we could look at some taxes and say, okay, here's what my company would be worth in the market value regardless of the buyer to at least understand the impact of those decisions.
[00:36:28] Speaker B: Yeah, that's exactly right. You, you, a low, medium and high range of a multiple. You get enterprise value, you take out your cash and, and pay your debt, you know, take out your debt funded debt and you get your equity value, you know, to get close to your net proceeds apply, you know, apply a tax rate. You're going to have basis and gains, all that. But at a high level you're going to get an idea of okay, here's what if I, if I sold this company in this year for this amount with this waterfall, here's what I'd, here's what I'd walk away with and put in the bank.
[00:36:59] Speaker A: Is it enough for me? Yeah. Is it enough for me to work.
[00:37:01] Speaker B: With, work with the choices that I.
[00:37:03] Speaker A: And the way I think about valuations, Pat, is I call this. There's three lenses that I've really locked in for this framework of thinking the owner's utility value is what's, what's the business worth to you from your time and your cash flow. So if you're decoupling your time, like I got a couple clients now where they don't work, work in the business and it's like, well, this is worth, you know, the cash flow is really good to me and I can see the risk because I can judge the risk because of all the process we're talking about here. And I don't have a, I'm not working in the business. So at the bare minimum, what's it mean to you and your lifestyle by looking at the cash and your time, then you can always reconcile against, hey, on the, on the third party marketplace at any given point, if I were to trade my, my business right now for cash and then have an investment strategy, could I have the same lifestyle? Yeah.
[00:37:49] Speaker B: If I took out 5% of my, my investment amount from it, then how close is that going to be to supporting the lifestyle that I want? I mean but this gives you the information.
This, just this, just this format of having all three statements modeled out in the budget is exponentially better than just having an income statement.
[00:38:13] Speaker A: And because.
[00:38:16] Speaker B: Okay, I'm making money, but then the. In March when you have no cash, why you. You won't know why.
[00:38:24] Speaker A: All right, and, and before we go into like, how we're actually building this out, because we're going to get into some of the levers that people can like on the build up of payroll and cost of goods and all that stuff, and then where the, the payables, receivables and inventory are and how to actually make some of those decisions. I'd say, like, the last comment I have of like, what good looks like here.
The, the experience we're trying to strive for is if I look at column BH and it's May 26th, I want to sit on an owner's meeting after the financials are closed, and I want to go budget to actual with my cfo, my CEO, and then just ask why A bunch of questions a bunch of times. And you know, to our earlier point, Pat, where if someone went through this process and they understand the level of thinking that went into it, they can then challenge the thought process of their team from the owner's perspective. That's what a board does of a PE firm. They go, why, why, why, why, why, why? And if they don't have good answers, they need to go get the good answers. Because there's this process I see of like having a good explanation is like, first and foremost. And that sometimes that takes time. Right? You're not going to get there right away. You're testing your assumptions. But at some point there might be bad explanations and then is it a people problem or is it like an external problem? But we can better identify what the actual problem is by looking at the whole thing and understanding explanations, understanding data and challenging our assumptions. But at the end of the day, we're just doing a budget to actual once a month so that way the owner can take out safe distributions and they can keep going without having to starve the cash of the company or they're not taking more cash out because they need it because they're in a rough patch. Whatever it is, you're just looking through on a monthly basis what we, what we're, what we built.
[00:40:01] Speaker B: I mean, how many times you talk to owners who've taken distributions just to have a couple months later put it back in?
[00:40:06] Speaker A: You know, unfortunately, too many times.
[00:40:08] Speaker B: Too many times. And you know, and you know Sometimes in the evaluation, especially in the early years of budgeting, the comparison between actual budget is learning. Okay, how do we come up with these assumptions? Oh, we assume this. That didn't turn out to be right. So next year we're going to, we're going to make different assumptions. We're going to, we're going to refine that process.
[00:40:29] Speaker A: A fun story on that, this Candace Bradley, who I interviewed on the podcast. She's one smart cookie, and we were talking about all of these assumptions and everything like that. And she goes, you know, once we go through a process like this, it really is just challenging assumptions. She goes on her own personal business because she worked in pe, VC and a bunch of them, but then she had her own company that scaled to zero to 10 million bucks. And then she goes, we had all these assumptions, and I decided not to sell. And my assumptions were wildly wrong, she said. But like, she goes, given everything I knew, if I look back, instead of having resentment to my past self or having regret, she goes, I wouldn't have made any decisions differently. I was just wrong in my assumptions. And then I just have to change them going forward because things changed.
[00:41:11] Speaker B: Yeah.
So this is what the end product looks like.
You get done, you go through a couple iterations, you stack hands on. Okay, this is our budget. You take these numbers for these three statements and plug them into what we call the ongoing file.
You're static.
It's. You know, I'm not a fan because.
[00:41:34] Speaker A: You want to judge your, you want to judge how well you thought.
[00:41:37] Speaker B: And then I'm not, I'm not a fan of changing budgets. In my opinion. Most times people change. Now Covid comes along, you change your budget. I'm sorry, you know, big, big events like that. But oftentimes I've seen people are changing their budget. Well, we're, we're running 20% behind, so let's just change our budget for the rest of the year. Oh, we look, we look right on budget. You're just, you're just excusing bad behavior times. So once you pick a budget, that doesn't mean you can't forecast and say, okay, what does the next quarter really look like?
And I have a client where we do that. We have a budget doesn't change, but we forecast every quarter because the budget.
[00:42:15] Speaker A: Is your original predictions. And, you know, you, the, the, the best practices are still going budget to actual. So, like, if it was in June, you could see where you're at in relationship to your annual budget, so you would still be able to See that benchmark?
[00:42:30] Speaker B: Yeah.
[00:42:31] Speaker A: And when I. Some good conversations I had with Kim in the group too is like, and a couple of my other clients that I was on their budgeting kickoff recently, Pat, where set your lower bound or your base case based on like, hey, the owner can get 30 grand in distributions. Everything's going to be fine here. But then the upper bound or the stretch is. Let's say you want to go from $1,500,000 in net income and 30 grand in cash flow from distributions to 2.5 in net income. Well, now we have compensation plans for sales, for operations, for everybody in the team to strive towards that, that the bonus pool and the bonus pool should pay for itself. And then you trickle it down based on all the KPIs. But I've watched it be really helpful for owners to go, if we hit this base case, I'm still fine. I can sleep at night, everything will be fine. And then I want everybody's bonuses to stretch towards something. And then I don't know what your comments are, but what to share with the team, how you go through that kind of thought process.
[00:43:32] Speaker B: Yeah, I heard that's one approach. But again, I go back to our friend Dave Neal of setting a budget. 50% shot of exceeding it. 50% shot of missing it. Low.
I'm not a fan of setting a low budget. Okay, well, as long as we do this, we'll be okay because human nature is, you know, once you put it out there, that's what people are going to be shooting for.
[00:43:57] Speaker A: So would it be helpful for the owner though?
[00:44:00] Speaker B: That's not, that's realistic, but tough to get to the results.
[00:44:05] Speaker A: I subscribe to that as well and.
[00:44:08] Speaker B: Maybe agree to say, here's a stretch budget and if you, if you accomplish these metrics, you're going to get paid more. I'm all for that, but I don't, I don't want to set up worst case budget. I'm not, I.
[00:44:20] Speaker A: Okay, maybe I think a different way of approaching that is I've just watched it become very useful to say, okay, if the, like just maybe for the owner with the CFO saying, there you go.
[00:44:31] Speaker B: If that's what you're talking about.
[00:44:32] Speaker A: Yeah, that's what I was talking about. Like, like I was on with someone that we both know and it was like, if this, if this trend continues throughout all of 26, you're still going to be fine. It's not gonna be awesome, but you're still gonna be fine. But don't share that with everybody. Right it's like.
[00:44:45] Speaker B: Or, you know, once you set your budget, then the owner can say, the cfo, tell me, tell me how low everything can go for me to get 30,000.
[00:44:54] Speaker A: Okay, there we go.
[00:44:55] Speaker B: Exactly that way I'll know and know.
[00:44:59] Speaker A: Whose ass do I got to kick if this starts trending that direction.
[00:45:01] Speaker B: Are we. Are we in danger of, you know, of. Of having a problem? Yeah. Okay.
[00:45:07] Speaker A: I like it.
[00:45:08] Speaker B: Okay, so, you know, on the. I'm going to go back to the income statement and scroll over here a little bit.
You know, there. There are two things you have to have a budget calculation method.
I. And I put here on some of them. It varies with business, it varies with industry, and that, you know, revenue, you know, and I put, you know, revenue spread. The spread is most likely comes from the sales leader. Not only the spread, but the calculation.
[00:45:38] Speaker A: The spread over the months.
[00:45:39] Speaker B: So spread over the months and. And the total, you know, this is. This is coming from the, you know, I should put in here. You know, this comes from the sales leader in the sales. They've got its revenue.
Yeah. What's. What's the revenue for the year?
And most. Now they may take an approach on the sales team. It's easier for us to do it month by month by month to start with.
[00:46:02] Speaker A: Yep.
[00:46:03] Speaker B: And.
[00:46:03] Speaker A: And so what some people are like.
[00:46:05] Speaker B: Okay, here's what we think our run rate is now, and here's what we're going to add next year. And so our total is going to be 21,454. And we're all comfortable with that. Now, how do we spread it? You know, it could go either way.
[00:46:18] Speaker A: And I think that that's where the top down, bottom up converge and reconcile. So for everybody listening, how I would word this is what Pat's got going on here is we're coming up with an annual for 26. So we say, okay, if it's gonna be 21 million 454, it's gonna be broken out by product or service line.
And what we're doing is we're taking the trailing 12 months and saying, okay, now each product or service line, we think, you know, equipment sales need to go to 10%. Service might be 8, whatever, special projects might be 5 based on last year's trailing 12 months. And then what Pat is doing is he's spreading out that annual with the additional growth rate and then spreading that out over 12 columns based on January's percentage of the total. So it's not just taking it, dividing it by 12.
[00:47:11] Speaker B: It's taking the historicality some seasonality, it'll pick that up. And that's right, that's what this formula in here does. Some of it is specific to months. You know, this, this new line of business four, we're not going to have anything until, you know, July.
[00:47:28] Speaker A: And then it's kind of like that.
[00:47:29] Speaker B: I mean it could be, but yeah, these other ones, when it says based on trailing 12 months, January of 25 divided by the forecast for 25, of course 25 is not over times this new 6 million one to get it, to get it spread over the month.
That's doing it. Now some sales teams may say, look, we've got this dialed in. We, we've, we've, you know, maybe Kim's helped them with some forecasting and we think, you know, the economy is going to grow in 2H26. So we're gonna, we're gonna weight it more in 2H26. Here's how I would connect ways to do that.
[00:48:03] Speaker A: But yeah, but I think in a very practical way of connecting the dots, what I think is best practices is the question is how do we come up with these growth rates for each of these product or service lines? And that's where I would consider this part of the top down process. Where then it's like, okay, well instead of just guessing 10%, where are we at in the ABCD business cycle based on our trends, based on our, you know, how we stack up in the business cycle to come up with then this top down.
And then you keep saying is there are sales teams that do bottom up.
I still think everybody should do that. Whether it is, you know, an engineering type marketing approach like Jimmy Fritz or if it's like a sales led organization with sales people, the sales team should be in, the marketing team should be doing the ground up. And then we go, we're wildly off or we're within 5%. What does that tell us? Because if we're wildly off based on the business cycles and based on our trends and then the sales team went off and did a bunch of exercises and we're 25% off, I would want to go like what, what is the reason that we're this far off? Because we're trying to converge those two to enhance our level of thinking and predictability. So you know, to your point, five.
[00:49:13] Speaker B: Salespeople and they made projections, you put them together and say, okay, that would mean an 87 increase over last year. That's.
[00:49:19] Speaker A: Yeah, right.
[00:49:19] Speaker B: That's probably not going to happen, you.
[00:49:21] Speaker A: Know, or it's like we're acquiring a company and they're going to come with five salespeople and like. But you're just building all of these assumptions of why per month you're going to have that revenue per product or service line bottom up, ground, top down, ground up. But I think, you know, the Kim Clark episode will really highlight why this is so important. Because even though we're looking at a budgeting file that will be locked in and put into the ongoing statement, the budgeting for sales and revenue should have its own exercise build up to make sure that we feel good about the revenue. Because if, if we're trying to predict cash in the middle of June or end of the next year, everything starts with revenue.
[00:50:01] Speaker B: It does. And that's why this is just the result of all that work that goes on from setting quotas and you know, how many salespeople are we going to hire and how many, you know, what's our current customer base doing and what's the economy doing? You know, I'm looking forward to listening to Kim's episode so that on that.
So this is, this is where it starts it.
When you get to cogs, it really varies depending on industry.
You know, if the way I've set this up is, you know, certain lines of business, you know, have certain margins and I just haven't, you know, the same. But that, you know, one margin, one business may have 26% margins when they have 47% margins, you know, and you got to decide are we going to improve those margins or not? That's where the operations person is like, you know, we've really got a bottleneck here and we just did a. We just hired somebody to help us come in and streamline our processes. I think we're going to gain points on margins next year. You know, you build that in there and that way, you know, you can, you can see if those results actually.
[00:51:04] Speaker A: Come and pat, you'll have that we'll get to. But the hiring and the build up of payroll, whether it's direct costs or indirect, whether because of whether they're cost of goods or part of overhead, all of that build up will be done by month and by fully burdened too. So we'll get to that. But I just wanted to, yeah plant that seed where we're looking at the margins. You have to make sure that all of the cost of goods that are recorded for that product or service is actually in there and when and how you're going to hire or invest in those activities.
[00:51:32] Speaker B: And to be honest, with that, struggled a little bit with this because you can have line of business one and you can have direct labor, materials, outside services. You can have that for five lines of business if you do develop it that way, you know.
[00:51:46] Speaker A: So in the copier business, Pat, all of our technicians and the cars and the insurance and all that shit was all in costing goods it services.
All of the payroll was in sgna and when we recorded the time against cost of goods as they were submitting tickets. So there was like wildly different ways of recording the accounting behind each of those. And we just needed to see the information. I just needed to know why it was organized the way it was so I could actually trust the gross margin line.
[00:52:12] Speaker B: Yeah, yeah. But speaking of payroll, in, in this file, what I did was I just, you know, employee, you know, whatever.
[00:52:21] Speaker A: We have a payroll tab where we've got then all of the list of employees.
[00:52:25] Speaker B: You start with your current employees. And most people will do this in late September about now or October, more likely. Take your current list of employees based on your revenue projections.
What new positions are you going to.
[00:52:45] Speaker A: Add and when and how much and.
[00:52:49] Speaker B: How much are they going to get paid and when do they start and when are you going to give raises?
You know, I mean based on the revenue it all, you know, these new positions are based on the revenue in this file. We won't go through every single one. But you have, you know, you have their base rate and you know, this one happens to give a raise in June and it just calculates by person. You really need to do this by person.
You got 30 people, it's not a big deal. You got 350, it's a bigger deal. But it's still important to do this because it's.
[00:53:23] Speaker A: Well, I mean rent and payrolls are the biggest line items of every company for the most part.
[00:53:28] Speaker B: When you get, depending on your industry, if you get past materials and direct labor and that you've got sales, you've got payroll and some of your fixed ones, rent would be a big one. Marketing, advertising, depending on what your business is. But the way this is set up, you have your, your, your monthly compensation here.
[00:53:49] Speaker A: And I'm sorry that it's per, it's per column. So we then have like 12 columns with 12 months to say when is that monthly payroll going to.
[00:53:57] Speaker B: And you'll see this one starts in March and this one starts in April. You know, you know, I made these up. Obviously you just pick sometimes when they start.
You. Some of it gets a little geeky accounting, you know, when you got Social Security, you know, you got to calculate it by person their limits. You know, I set it up so it, it has a min max, you know, it's not going to go over what the limit is.
[00:54:23] Speaker A: So this is where it gets into the fully burdened because every owner knows. Well I, I know I'm not just paying them, you know, eight, three, 100 bucks a month for 100 grand or whatever. Like I've got all the other that's included, that's workers comp, Social Security, health care, all that kind of stuff.
[00:54:39] Speaker B: And I have a, and I have columns in there. Medicare, you know, it's a lot lower but it's, you know it's, you just have to do it by month.
And then you know you state unemployment tax, federal unemployment tax and workers comp.
You know, you've got all your taxes.
To me, if you're going to go to the effort to budget by person and you have to, you have to budget by person. And what department they in? Are they in direct labor? Are they sales, Are they office, are they finance?
Go ahead and do the extra work to get. And once you set this up, you know, for your budget, then you've got the template every year do that and do work. You know, you got workers comp rates, you know, so it's calculating what all those are.
[00:55:20] Speaker A: And then if you go back to like then the 12 months of the fully burdened and as we're, because this is the. Everything is just double clicking to get more levels of detail because then we can then look at, hey, the payroll goes from like $176,000 a month to $210,000 a month because we're adding some people, we're giving some raises, but yeah, and to. For a total of 2.4 million bucks for the year. But it.
[00:55:47] Speaker B: These just roll over, these just roll over to the appropriate line on the income statement.
[00:55:52] Speaker A: I mean it's, it's amazing if you.
[00:55:55] Speaker B: Come in here and you add one, you know, you know, if I added a whole another person for engineering.
[00:56:05] Speaker A: And this is why as you're doing this, like the CFO is guiding these conversations because the, the love the types of conversations are, is hey, we're going to do $2 million in May of what products and services, operations and saying well I need another technician or I need another customer service rep if we're going to be handling that kind of volume. But we don't need to do that until May.
You then put in the May start date. You put in all those additional details and then all of a sudden that payroll pops in to the appropriate columns, which are the appropriate months that then roll into the income statement, roll over.
[00:56:40] Speaker B: To the, to the budget tab. You know, one of the, one of the ones that is a big expense is health insurance.
And so, you know, you're going to have to get your HR people, you know, if you use a broker or, you know, this is, that this is the company cost of providing health insurance to the employees. Again, do it by person.
You know, you've got, you've got the information on the bills, you know, and just figure out, you know, have the agent. And again, this is probably done outside and brought into this.
Figure it out. I mean, you know, health insurance as well. No. Is not a small expense, Pat. Where, where I have insurance and disability.
[00:57:24] Speaker A: Here, you know, where I get really encouraged with this level, like why this level of thinking is so important for the data so we can make decisions, multiple clients. Where if we got millions of dollars next year that we're forecasting, let's say it's 4 million bucks at the end of 26.
The question, the highest level is like, how much do we believe that?
Well, okay, if we're going to give it a handicap, let's say we give it a handicap of, to 2 million bucks because we're not sure on our level of thinking. Well, that effectively is a discount rate in the dcl. We're quantifying the stomachache. But then what I think is powerful, as we talk about inflation on wages, it's only going to get worse. We have demographic issues of people retiring. And I think that there is a strong thesis that I have where I've got clients, where they're getting their, their people poached, where, like, they were getting paid 85 grand by my client and they're getting poached for 130 grand.
And instead of denying this shit of like inflation and wages, like the new, the old 90s, 150. Now, instead of denying that and giving people 3% raises, which, like, whatever, do whatever you want, but like, if we start hearing rumblings in our company or start seeing things that are happening, to go into a file like this, say we're going to go into payroll. And I would want to know if, if you're my cfo, I'm going, okay, Pat, I'm just going to go for the fricking moon here. And I'm just going to be ridiculous. Like, what if we gave everybody a 10% raise this year and we paid for their health insurance? I want to Know, can I still pull my 30 grand cash out?
[00:58:55] Speaker B: You can, you could do that. You could, you could in here and put 30% and you could, you know, you could, I'm sorry, not 30, 10%, you know.
[00:59:03] Speaker A: Well, whatever it is, like whatever it is. And then testing ideas out.
[00:59:07] Speaker B: Yeah. And, and put that in there. You know, just on that comment periodically, companies probably ought to do a compensation study, take their positions and their true responsibilities and have somebody go out and in your area, your size, company, your industry, what is, what is the going wage?
[00:59:26] Speaker A: We're just trying to eliminate the skeptic or the denial. Like, like we just, let's just map reality to what our numbers are. And then, you know, one of my clients, when they hired their cfo, I'm like, we're, we're in the process stepping on the scale right now, so we're going to go from hoping that everything's fine to like just seeing where we're at so we can actually start making intentional decisions based on what the reality is.
[00:59:46] Speaker B: Yeah, well, and you know, turnover has a cost.
I don't know if I believe it's twice the, you know, some people say it's at least twice the, the compensation. Maybe it is, but says the people.
[00:59:56] Speaker A: That do the consulting around it.
[00:59:58] Speaker B: Yeah, but there is a cost, you know.
[01:00:00] Speaker A: Right.
[01:00:01] Speaker B: But if you're, if you're significantly behind the market in wages, like you're saying, you know, 30 year people leave, you're going to end up paying that higher wage anyway.
Right.
[01:00:11] Speaker A: And, or like, and the disruption of it.
[01:00:14] Speaker B: So. But this, I think this job was really worth $90,000, you know, thing has.
[01:00:20] Speaker A: Changed and where I think that this shows up and I just, I'm seeing it more and more, which is why I keep bringing it up. I think it shows up in crappy people first before people start quitting, they started quietly disengaging. They're not answering the phone, as happy as they. I mean, so like you and I both are big proponents, the small giant community. If you really want to do good by your people and create a good lasting organization, it's just getting ahead of this stuff. So that way people can actually live good lives instead of pretending that we can pay people beer money, which is what you know, they spe.
[01:00:49] Speaker B: They spend half their time talking to their fellow employees about griping.
The point is develop your payroll person by person, month by month, compensation, you know, taxes, benefits, those kind of things. You set it up once and it takes a little bit, but this one set up, you know, it rolls up it just rolls up month by month. You know, go down here to, you know, officer, you know, finance people.
[01:01:14] Speaker A: So that tab is getting sucked into this tab.
[01:01:17] Speaker B: You'll see here where it's adding up from the payroll tab.
[01:01:19] Speaker A: Yep. Okay.
[01:01:21] Speaker B: Right here.
[01:01:22] Speaker A: So that and the re. And the reason I'm doing it just.
[01:01:24] Speaker B: Kind of do scenario planning.
[01:01:26] Speaker A: And I think just as with the practical way of using this budgeting tool or anybody that develops a budgeting tool is the moment that something needs more detailed buildup. Just keep double clicking. Right. So in Kim's situation, you're going out and building up the revenue because it takes more effort. And then you've always said, regardless of Whether it's a $500 million company or 5 million bucks, there's probably 10 line items that really matter. So you're probably doing that to five to 10 things, which why you did payroll, because payroll is so important for most people, but you're just taking it one step further when it's necessary.
[01:02:01] Speaker B: Yeah. Office expenses, throw a 5% increase on there and be done with it. You know, six grand a month, you know, something like that. You know, focus. And if you're starting just. You may not even want to focus on 10. You know, you may want to take a shortcut on the few.
But do you know the big cogs, lines, people, health insurance, rents. You got a lease. Just look at the lease. It'll tell you. It'll tell you when the increases are coming.
[01:02:29] Speaker A: And I like to say, whatever ideas that you hear everybody talking about in your EOS meetings or in the hallway, we need to hire these people. Do we need a recruiting expense or we need a new ERP system, or we're switching over to HubSpot. It's like those big ideas that are going to be driven based off the salesperson, sales leader saying, hey, we need a sales consultant, we need to spend more money in marketing, and we need a new CRM. It doesn't mean they get all that stuff right off the bat, but it's part of that iteration process. Same thing with the coo. It's like, hey, we might need training processes, or we need to have a training program for our technicians, or we need to increase our customer service, or we're doing an AI project. It's the therapeutic process that I found coming from the visionary role that I and a lot of people are. It's like we're just seeing the impact of our ideas so we can figure out when do we want to do them and what's going to be the Result of doing those. So not only there's those five to ten lines, but it's a parking lot of ideas that you start synthesizing and then you start dwindling them down based on the cash impact of the owner's goals.
[01:03:28] Speaker B: Yeah, yeah. And you know, depending on your company, you know, travel, you may have different departments.
You know, think about your old business. You had, you had different, you had ops, you had customer care, you had, you know, those kind of things. And you know, some of the bigger line items, they want to look at those at departmental level and roll them up. I didn't incorporate that into here, but it, you know, but that about what the drivers are for, for that.
[01:03:57] Speaker A: And that should be the C suite leader's job to unpack that. So cfo, crc, chief revenue officer, sales leader, and then the COO is the one saying, well, this is the level of travel that I need for my department.
[01:04:11] Speaker B: Yes.
[01:04:12] Speaker A: And then they're submitting. That's where the first, first crack at it comes from. Okay, here's all my ideas. Then you go, okay, CFO and owner are kind of refining everything, going, okay, well, everybody needs to.
We have extra cash or we have less cash. And now we have to go back to the drawing board to say, like, what are the trade offs of doing all of those things that you wanted to do.
[01:04:28] Speaker B: That's right.
So, you know, a lot of people are somewhat familiar with this. I think, I think when, when most people think about their business, they're thinking about it from an income statement point of view. The operation.
We have a sale, we get revenue, we produce the product or deliver the service. We have, you know, back office people, we have rent. So I think, you know, just developing it in an annual way and spreading it in a logical way. Allocating it, I think is the word.
[01:04:56] Speaker A: I like that.
[01:04:57] Speaker B: You know, in a logical way, you're going to be off, you're going to, you know, you know, when you spread it, when you spread it from. Based on the ttm, you know, did the CPA for the tax prepared, do they send their bill in March or April? Well, right. You know, it's.
[01:05:11] Speaker A: Yep.
[01:05:12] Speaker B: Don't get hung up on things like that. It's the overall picture.
When you, once you develop your monthly income statement budget, then you want to go to your balance sheet and start developing those. Cash is always the plug.
[01:05:27] Speaker A: It will explain what you mean by that.
[01:05:28] Speaker B: It'll cat the statement of cash flows. Once you, once you develop all the other lines on the balance sheet from a budget point of View.
It'll feed through the statement of cash flows automatically. If you have your file set up. Right.
And ending cash on that comes from here. You'll see that this cash comes from sell be 209. Be 209.
[01:05:54] Speaker A: So ending cash in February 26th comes from right here.
[01:05:59] Speaker B: The ending cash be 209 cash at the end of the period.
[01:06:04] Speaker A: And it's almost weird, like changes in.
[01:06:07] Speaker B: Cash flow that gets to your interconnectivity of the income statement, the balance sheet, and the statement of cash flows.
[01:06:13] Speaker A: Yeah. And it's almost like the balance sheet has to tie out and the assets and liabilities have to bounce up.
[01:06:21] Speaker B: You see this little right here, this check That's.
[01:06:23] Speaker A: Yeah. Is this a math thing?
[01:06:26] Speaker B: This is where math, this is where math comes in. You know, those have to be zero.
[01:06:29] Speaker A: I will never forget Pat, when we were sitting down, remember that head of that bank here in Minnesota, and we're like, what are your goals for this year? And he just goes, I want all my clients balance sheet to tie out. We're like, holy.
[01:06:40] Speaker B: Yeah, I do remember that.
[01:06:42] Speaker A: But okay, so going back to like when we look at cash and when, when I, when I heard you say this years and years ago is when it's the plug. And maybe this is a, if you want to speak to like gap accounting versus real cash or like when you say cash is the plug, this is what owners actually manage to, which is if that's zero, it's going to tap the line of credit because it has, it has to balance out. So we either have cash or we have none. And it has to go somewhere because it's a negative number that has to go on to the liabilities as a line of credit.
[01:07:14] Speaker B: Yeah. When I do the modeling for this, if the ending cash was zero, this would just be a negative number.
I don't move it to the liability because most times we're like, okay, we want to, what I do, I want it to stand out.
I don't want this to be $10,000 and we got a million dollar line of credit balance. I want to see what the line of credit balance is going to be.
[01:07:37] Speaker A: Yep. Can you, like, you know when you, when I was trying to develop the model before you and I started talking again last year, I had that finance guy that was helping me and like the gap accounting world or accountants are like, well, what you pull from retained earnings or like, so explain like, like the difference of like how retained earnings and other accounting entries are different than like actual cash that we're measuring here. And like, and maybe I'm saying the words wrong or, or framing it up, but I just know that like, when. And other people in the past, they're like, they're not actually cash.
They're pulling from other. Like, you know, they're, they're adjusting retained earnings, which is different than actual cash.
[01:08:16] Speaker B: Not sure what you're talking about. You. So it's just the sum of the entirety of your profits or losses from the beginning of time, less any distributions you've taken.
That, that's in essence retained earnings.
[01:08:34] Speaker A: But for some reason, Ali, when he was building out the file, he wasn't pulling, like, it wasn't actual cash that he was looking at. He was like adjusting retained earnings or something.
[01:08:43] Speaker B: Don't go down that road. He was doing that wrong.
[01:08:46] Speaker A: Okay, good. But I think what, just the only point I'm trying to make here is what we're saying here is how the real world works. And we all are just trying to predict out our cash position.
So there's so many accounting words that get people confused who are not finance or accountant because they started in their trade. And we're trying to map reality with a usable financial model onto people on how they're actually running their business based on the allocation of cash.
[01:09:14] Speaker B: Yeah, if, if these numbers were exact on the income statement and we collected our money in a certain, in the predicted amount of time and inventory, these would be your cash balances, if it all worked out. But kind of day sales outstanding is how quick you collect your cash. You can look historically and calculate your dso and say we collect our cash in essence based, you know, on certain number of, certain number of days, 36.
[01:09:42] Speaker A: Days, 45, 60, whatever it may be.
[01:09:44] Speaker B: And if it, if you think it's, if it's real high and you think you're going to make improvements, be careful because the lower you make your dso, the quicker the cash is going to show up on your balance sheet. So if you're, if you're looking and say, my gosh, we've been running at 75 days of outstanding sales outstanding, we've got to get that down to 45. Well, that's not going to happen in a month, you know, so you got to be very measured in. But you can, in the model, you could go from 75 to 73 to 70. You know, you could gradually break it down. And because that will affect your state, your, your cash flow from operations, that's one of those working capital because you're.
[01:10:22] Speaker A: Because you're in the process of what we're trying to do is forecast out the balance sheet. So.
[01:10:27] Speaker B: Oh, yeah, if what we're trying to.
[01:10:29] Speaker A: Do is say if we do $6 million in May of these types of. Well, that's not, that's the balance sheet. I'm sorry, if we, if we did.
[01:10:39] Speaker B: If we did a million, four million.
[01:10:40] Speaker A: Three, a million four in sales, 400 grand and you know, whatever it is in equipment and service, we, based on those line items of sales, how fast do we collect the receivables? That's how we project out the, the balance sheet to say how many receivables would be on our balance sheet in that month?
Even though it's not, it's, it's in the future.
And the, the, the levers that you're highlighting here of payables, receivables, inventory and deposits is what, based on sales activities is what changes that cash position. And you're making those assumptions. And what Pat's got highlighted here is then the levers in each column of each month of the budget. Those are the levers that you can then manage according to how much you're turning your inventory, your payables and receivables.
[01:11:26] Speaker B: Yeah, and see here I have the, I have the days coming down. I haven't come down pretty dramatically, you know, from 55 to 36, just say 55 is too late. We don't have somebody who's paying attention to collecting our receivables. And we're going to put effort to that. We're going to hire a person, we're going to, we're going to do all that.
But these metrics are, you look at sales, you figure out how much sales per day times these number of days, and that gives you your receivables. You do the same thing for your inventory.
How much in cost every day are we spending over the last month or two.
And the same with payables. What expenses do we have running through payables and how quickly are we paying the bills?
[01:12:11] Speaker A: Could you do an example to show like maybe in August of 26, if it goes from 36 days up to 75, how that impacts cash? Because I think one of the big things that a lot of people experience is.
So why don't you do that and see what happens? So it's 2.945. So 2,945,000 in cash.
[01:12:33] Speaker B: So let me just, let me just.
Whoa.
[01:12:36] Speaker A: We went from 2.9 million in cash in August of 26 to negative 1.48 million just by our receivables going up to 75 days. Where this comes home for people, Pat. I mean, I can't tell you how many people. It's like I'm getting insert large blue chip company and they f with us on the receivables and I really want that client. But then it's 120 days.
But they just don't know. Like, everybody goes for that big blue chip company they can use as testimonials, but the next thing you know, they're out of cash in three months.
[01:13:08] Speaker B: We had conversation with a client yesterday on a, on a L10 about, you know, for. There's some big customer potentials.
But, you know, how do we, how do you fund the cash flow? How do you fund the working capital?
You know, you know, you have to buy inventory and you have labor in there. But if you're not, if you're not. If you're not paying attention to this and it's not going to go. It's not going to go that way. But if you're not paying attention to it and you know, some. Nobody's worrying about collecting your receivables, you're going to go from 3.2 million to $1,700,000.
[01:13:46] Speaker A: Yeah.
[01:13:47] Speaker B: This is the benefit of doing this is to say we have the expectations. We're going to get down to 36 days.
Your industry could be 45. I mean, there's no magical number, but.
And I can put this on here. The cash conversion cycle.
[01:14:05] Speaker A: That's what that is. Yep.
[01:14:07] Speaker B: Is how long it, how long it takes you to collect your money, plus how long you, how many days of inventory you have, minus how long you use other people's money in your payable. So the cash conversion cycle, you know.
[01:14:22] Speaker A: It'S going from 60 down to like high 40s.
[01:14:25] Speaker B: Yeah.
And then back up to 55 in this case, you know, so this is, this is part of running the business.
[01:14:36] Speaker A: And these levers are what? So on the income statement, if people are just forecasting out the income statement, it's not showing this. And this is where these levers are in the cash flow statement between net income and cash flow provided by operating activities. So these are the levers. That's why it's still an operational activity for a CEO to be managing to these cash conversion cycle levers.
[01:15:00] Speaker B: Yeah. Look at these. Negative cash flow from accounts receivable.
Because our days are going up, our accounts receivable balance is going up. We're not collecting cash as fast.
So, you know, for the year in this case, we grew our business, but we slowed down our cash receipts and it cost us a million three.
[01:15:22] Speaker A: So we grew like gangbusters. And we have no cash is right there.
[01:15:25] Speaker B: We have no cash. I mean, it's so, it's, it's.
Is it a little geeky? I guess maybe. But if you really want to be able to project and to say, because as an owner, one of the lines, you know, your discretionary distributions, that's a big deal.
Any owner who tells you it's not is really.
[01:15:44] Speaker A: They've never used it.
[01:15:46] Speaker B: Yeah, they don't have any. You know, because being able to take out a certain amount of money, you know, being rewarded as an owner, you're getting a paycheck for doing a job, CEO or being the sales leader, whatever, you don't have to be the CEO is one thing, but then is this asset that I own able to give me a return on my money.
[01:16:08] Speaker A: And.
[01:16:09] Speaker B: Being able to project, this helps you make decisions.
[01:16:12] Speaker A: And what we've got here is we're looking at the cash flow statement because if we buy, build out the income statement and we build out the balance sheet, forecast what Pat was saying based on those KPIs, then the cash flow statement mathematically rolls together and then we can start to see what we want to do with the money or lack of money. And when, you know, when you had that, a lot of people, Pat, do not have the breakout of distributions for discretionary versus distributions for taxes. Because, you know, the big misnomer, you know, like with normalized ebitda, it's before interest, taxes, depreciation, amortization. Well, most people aren't C Corps, so they're taking a distribution for their taxes. So it's a use of cash, even though.
[01:16:55] Speaker B: Well, but, yeah, but earnings, yes, distributions.
[01:17:00] Speaker A: Or dividends aren't part of normalized ebitda.
[01:17:03] Speaker B: Ebitda, because.
[01:17:04] Speaker A: And that's why I was saying with an LLC or S Corp, everyone is most likely taking a distribution to pay their tax bills. So it's a use of cash. And I just have always liked how you broke out the two, because even if it's bundled into one line item, which a lot of people have, they have to do mental math of like, what'll be my prepaid estimated taxes per quarter and how does it impact my 30k. So you just have broken out that activity into two lines so that you can visibly see the difference of those two.
[01:17:32] Speaker B: And I have it that way in the financial.
Because they're different. Because, you know, you can look at it say, this shows I had distributions of $1.8 million. I didn't, I don't have that money.
Yeah, because 1.4 of it went to taxes or whatever, you know, whatever the number is. That's why it's just helpful to do that and in the budgeting process, you know, and you can, you know, usually paid you, you have January, April, June and September if you're passed through, you know, you can work with your CPA or CFO may have enough, they're booked to tax differences. I didn't get into that here. But you know, or if, you know, or even if you're paying the safe harbor amounts, you know, every tax return done for one year and your CK says if you pay, you know, $112,000 for each of the next three, then you're covered. You can put that in here, you.
[01:18:24] Speaker A: Know, and what we're looking at here is so the, these are 12 columns at the bottom of all three statements and they're the levers of the cash conversion cycle. So the receivables, payables, inventory, and then it's the owner's KPIs, right. Of like, okay, like what am I going to be doing with the cash? So these are the inputs.
[01:18:43] Speaker B: If you have, you know, if, if you had to buy a half million dollar or five million dollar piece of equipment, now all of a sudden you.
[01:18:50] Speaker A: Know, there's no cash.
[01:18:52] Speaker B: What, you know, because we didn't add debt to it, you know.
But this kind of tool, when you develop this helps you all the way from thinking about sales, which is the starting point to what money, I don't want to say is left over. What money's available based on these results that I can use as an owner.
[01:19:19] Speaker A: Yeah, and you've even got in here the, so like outside of like these owner, the distributions, the taxes, capex down here, then you've got another tab for loans and then normalized EBITDA because the loans, you know, back to if I, if I don't want to use $5 million in cash, I want to take on what type of loan, what's the AM schedule, you know, what's the interest rate, et cetera.
[01:19:44] Speaker B: And I just have it in here, so I have a certain number of them, you know, with how much you're going to borrow, when you're going to borrow it, you know, and most bank, you know, they tell you it's seven and a half percent. But most banks calculate their interest based on 360 days versus 365, you know, just so they can pick up a little bit extra But I, I just always use that, you know, to come up the monthly payments. And then, you know, you have your, then you just know what your debt is, you know, all the way.
You can just change these amounts, you know, you can put. If you wanted to get that $5 million and it was going to be seven and a half percent, you know, over 10 years, you know, you got it.
[01:20:24] Speaker A: Nope.
That's so awesome. Yeah, I mean, it's just data and.
[01:20:28] Speaker B: These, you might not have all this in the first iteration of it, or you might want to, you know, but having these kinds of tabs in here where you can plug these, it just, it enables you to spend time thinking about the results.
Thinking as opposed to, and again, normalized ebitda, whatever adjustments you may have, you need to roll these in here. This is more, this isn't affecting cash flow because you may have, you're going to have the, the cash outlay for whatever expenditure it is. But then when you get to normalized EBITDA and then you flip over to the out year projection tab, you know.
[01:21:07] Speaker A: And that's where like if, if the, you know, if the, if, like the COO said we need to hire a director of OPS and we need to hire a recruiter who, it's going to be a $50,000 fee.
That will be done in the income statement budgeting led by the CFO and the COO talking together. But then you're writing down footnotes of the ERP implementation or the new CRM, that's 50 grand HubSpot. Whatever those implement, one time expenses are just being noted and then just also allocated over here. So even though it's already accounted for an income statement, you're just making those footnotes and it'll roll into the normalized EBITDA row in the income statement budget.
[01:21:48] Speaker B: And this number on an income statement when you get to EBITDA is adjusted or normalized. Same thing.
At what level do I, does this need to be.
Is this a 15% normalized EBITDA business or should it be 20 or is 10?
But this is what you're going to get to when you start thinking about the valuation of the company.
You know, which is, which is then.
[01:22:18] Speaker A: Back to the J curve. Yeah, well, I was going to say back to the J curve too. Which is why like looking at this and not just looking at net income is so absurd on so many reasons other than taxes. Because like you said, there could be other business activities. That's inside net income. You got all of the noise. But like someone looking at and say yes, I spent the recruiting fee, did the ERP implementation, all that stuff that's going to reduce my net income.
But those one time expenses are going to be captured and taken out. So you can actually look at a percentage that's meaningful for normalized EBITDA.
[01:22:51] Speaker B: I've still got a 15% normalized EBITDA business, which is what I want.
You know, my net income's 12.
[01:22:58] Speaker A: Yep, yep.
[01:23:00] Speaker B: But my goal is to have a 15%, you know, normalized EBITDA business.
You know, this just helps you to track that. But once you do the income statement, the balance sheet, some of the things on the balance sheet, you know, your, your accountant will have to do, you know, some accruals or prepaids or things like that.
Generally they don't have that big of an impact on the cash flow. You gotta.
[01:23:23] Speaker A: How about three payroll months?
[01:23:24] Speaker B: Oh, don't do that, don't do that.
[01:23:27] Speaker A: So many people do that. I can't believe it. I just, I get so much joy of watching your face because it's such a data point for the controllers and the finance leaders when it's you're like.
[01:23:37] Speaker B: We lost money this month. Well, we had three payrolls.
No, don't do that.
Have your account, if you're listening to this, have your accountant do accrued payroll each month and it takes probably five minutes each month. But those are the accruals that you have, you know that. But again they're usually not huge numbers. Customer deposits is one exception. You know where if you're in an E Commerce and somebody swiping their card today and you're getting their money but not delivering their product or service for three or four months, that's a whole another exercise of just again, sales. Sales are today, we're getting. But we're getting the money today as well.
[01:24:19] Speaker A: Yep.
[01:24:20] Speaker B: You just got to figure out when are you going to fulfill those orders.
[01:24:23] Speaker A: Maybe additional commentary on people that are doing like percent completion or milestone billing where like they might, you know, get. It's a hundred thousand dollar project but they're recognizing it. Like all. Any comments about how that would be?
[01:24:37] Speaker B: Yeah, that, absolutely. That would be one of these other, you know, and I probably ought to put that in there. That would. If you have a, if you have a business where you're recognizing revenue on the percentage completion basis, you're going to have cost in excess of billings and billings in excess of cost and margin and you're going to have those on your balance sheet and you've got to put those in There and you've got to, you've got to, you know, home remodeling, you know, $150,000 job and we, you require 30% down. So you're going to get $45,000 today, this month that becomes a liability and go down here on one of these other accrued expense lines.
And then as you earn that, it's going to show up in revenue and your liability is going to go down. That liability represents the services you have to provide in the future.
And as you perform those services, that liability turns into revenue. And so you absolutely would have to do that.
[01:25:40] Speaker A: Or if you're prepaying inventory and you're releasing inventory off of like this is just where the finance leader should be having all that logic. I mean, it's not rocket science. It's the same thing when Kim was talking about it, where that's going in the opportunity tile too, in a CRM like, because we're not going to recognize, you know, we've got a client that both of you and I know where it could be a half a million dollar equipment sale, but it's recognized over the course of four months. So you're not going to put a half a million dollars in revenue in June. You're going to actually recognize that revenue and recognize the cost in the appropriate months based on the percent completion or the milestones. But the cash in and out will be based on the logic of how they operate those projects.
[01:26:21] Speaker B: And if you're, and if you're actual accounting incorporates those, it's easy to translate that to your budget process because you.
[01:26:30] Speaker A: Understand, explain just a little bit. What do you mean by that? Like if it's easy, if you do.
[01:26:33] Speaker B: A percent of completion for your actuals, you know, I got a, I got a $300,000 deposit today on a job, you know, that's going to earn over 4 months.
When your sales team is building out their sales projections, they say the sale occurs here in May.
[01:26:50] Speaker A: Yeah.
[01:26:50] Speaker B: We require 30% down.
[01:26:52] Speaker A: Yep.
[01:26:53] Speaker B: So that million dollar job is 300,000. We're going to have cash of 300,000, but it's going to be on the balance. We're going to put it on cash and we're going to put it, we're going to put it as a liability.
[01:27:04] Speaker A: Yep.
[01:27:05] Speaker B: And so the liability goes up on the balance sheet.
So if you look at this accrued expense too. Okay, no change here. Right.
[01:27:17] Speaker A: So it's $57,000.
[01:27:18] Speaker B: Yep, yep. So on the statement of cash flows, it's going to be zero. But if I say we got 300, and we got 357, $457 as the balance at the end of the month, because we got a $300,000 deposit on a job. When you scroll down here to the cash flow, see, there's a positive $300,000.
[01:27:40] Speaker A: Which it's very like.
[01:27:42] Speaker B: Which will then add the cash.
[01:27:44] Speaker A: I was going to say it's very inverted for what people think, because you're. Even though you got. So you got a down payment and you didn't do the services yet. So even though you got cash, it's a liability.
Just like an insurance company, we pay our premiums and then we have expenses. At some point when we file a claim, you owe someone something, but even though you owe someone something, your cash went up because you bought, like, the same thing. If you got a loan from a bank, you would have more cash, right? So your liabilities go up. You actually have more cash, which is like a lot of payables.
[01:28:20] Speaker B: If you, if you stretch your vendors and your payables go up, that's the source of cash. You're using other people's money. But when you set up your. Your model, when you get your balance sheet, right, because the statement of changes in cash flow is just the mathematical difference of all those accounts, it'll flow through and it'll increase cash.
[01:28:40] Speaker A: So awesome. I just love data so much.
[01:28:43] Speaker B: And again, if, if somebody's not doing this, you. You start with your income statement. What are the drivers? What. What is it that's driving my revenue? What, you know, Kim's, Kim's, you know, logic of, of forecasting that. What are my expenses, you know, to produce those items? What are the variable costs and what are the fixed costs? Rent fixed, you know, and then go to the effort. Start with the DSO Dio and DPO on your. On your balance sheet and look at the other items. Most companies don't have a whole bunch of other things that are big numbers unless you have customer deposits or unearned revenue. And let the statement of cash flow do its work and to tell the.
[01:29:26] Speaker A: Story, and then tell the story, and.
[01:29:28] Speaker B: Then you, as the owner, you know, to make your choices.
[01:29:31] Speaker A: As we wrap up here, Pat, I have a comment. And then I want to do a quick exercise of what we.
If, once this is done, what is your experience like as a CFO doing a monthly budget or monthly owner's review? You know, my, one of my takeaway from all of this, Pat, like, what I've realized is the missing gap in the marketplace is for Someone that's not from finance, which is all of my community and my clients.
By showing them this is what good looks like.
Like, it's math, It's a spreadsheet. It's very, like, knowable first principles of a business.
By showing what good looks like, I think it empowers people that are listening to say, why don't I have this?
And then once you start grappling with that question and answer. Is it the team member?
Are you missing a team member? Is it a skill set issue? Is it an education issue? Like, that's. I. I really think what. When I say empowering, like, everybody, like, when I think about cultures, how people handle this is, like, really part of their personal DNA. You want to be like, a total. And like, you. Like, you give one person 12 week or 12 days to figure this out, and otherwise they're fired.
[01:30:46] Speaker B: Sure.
[01:30:46] Speaker A: Yeah. I mean, I saw your face. Like, Or. Or I would say, you know, the people that you and I work with probably are way on the other end of the spectrum. If I give people, you know, people give people way too much rope.
[01:30:57] Speaker B: Yeah.
[01:30:58] Speaker A: And it's like, well, now that you know what good looks like, it's up to the person listening in or watching us to say, what level of pressure do I want to put on this person? What kind of development plan do I want to get? But, like, it's inarguable. Like, what we just showed is possible.
[01:31:13] Speaker B: Yes.
[01:31:15] Speaker A: So, like, what do you want to do about it?
[01:31:17] Speaker B: Yeah. And, you know, if you have somebody on your team and you want to do this, you go to them, say what has to be true for us to have this.
[01:31:26] Speaker A: I love it so much.
[01:31:27] Speaker B: You know, we have to have somebody build it for us. I don't have any idea how I would even approach this. Okay. You know, then. Then you, as an owner, make a choice or CEO is, you know, do I want to hire somebody to help them do that and do it and just hand it off to them or, you know, do I want to find another person?
[01:31:43] Speaker A: But I think one of the gotchas.
[01:31:45] Speaker B: That I've been seeing, it's not acceptable to be in the dark.
[01:31:50] Speaker A: Yeah. Well said.
[01:31:51] Speaker B: To me. To me. Yeah.
[01:31:52] Speaker A: No, I want me too. And, well, and the reason that people are coming to me or listening to the podcast, spending this much time listening to it is like, I'm sick and tired of being in the dark, and I don't know who to blame or what the reasoning is. And I think one of the gotchas that I've seen people Just kind of look out for is.
I think it's an indicator of a good human being where, like the people that you and I have watched, where the finance leader goes, holy, the owner finally cares about what I do. Like, that's like the best case scenario because then everybody starts working together and they're like teammates trying to figure out how to get to this. And there's no egos. And it's like, hey, we're just dealing with the short, the shortfalls. Well, I don't know how to build that file and I need some help or maybe I just need a little bit more education. But, like, I think that's the best case scenario that the gotcha is I've seen, oh, I got this. I can do this. Because it's just fine. And like, it's like this ego driven. And then I get on a call and I'm like, it's effing wrong. So now I don't believe anything.
[01:32:47] Speaker B: Yeah.
[01:32:48] Speaker A: And then they're not willing to admit why it's wrong because they think that they need to prove something to the owner, that it's just. And back to the empowerment. It's like, it, hey, this is what it is. And it's your, it's your job to judge whether the people's rationale, their level of discipline, their approach, their process is sound.
And then is it, you know, your whole timely, clean, and accurate. It has to be accurate. Right?
[01:33:12] Speaker B: It's math and it's, you know, but nobody's got a corner on all the good ideas. You know, I learned, I learned new stuff all the time. And, you know, if, if, if an owner says, I like what I see in things like this, you go to your, your finance leader, your CFO and say, I want this.
How do we get there?
You know, if they're totally in the dark, they may self select them out of the whole process and quit. Yeah, I've seen that before. But, you know, it's not. It is. It's not rocket science, this.
[01:33:46] Speaker A: And it's the thinking that all owners do mentally anyways.
[01:33:49] Speaker B: And you've been, you work your whole life to try and help owners see what's good and come up with a path to get there.
This stuff is not out of the reach of. Yeah, well said business owners.
[01:34:02] Speaker A: As we wrap up here, like, quick commentary on, like, if this is all done, then just transport us into a time capsule where you're sitting down with an owner and you're. And as the cfo, what does it look like as you're Reviewing this in the middle of May of 26.
[01:34:19] Speaker B: Yeah. And back up one step it. When you do this and you engage the sales leader, the ops leader and all those people in, in sgna when you have your monthly meetings on the financials from an operation side, you get a lot better conversation.
Sales leader says, oh, we anticipated this, that and the other. It didn't come through that quick or it's coming through quicker than we thought. That's why, you know, and the ops person is like, you know, we've been working on our margins and you know, you have a better conversation about how you understand this.
When you get to the owner, it's really hard for them sometimes to take off their operations hat their employee hat you know, you're in May of 26.
Are we on pace to achieve this year's goals which are part of the out year goals?
And you may have no intention of.
[01:35:12] Speaker A: Selling, but I want to know what cash I have and what my time is.
[01:35:17] Speaker B: Know how valuable this thing is.
[01:35:19] Speaker A: Yeah.
[01:35:21] Speaker B: All business ownership transitions at some time you die.
What? At some point.
At some point you, you know, at some point you're going to want to sell it and you just, you know, people look at their, their stock portfolio, not that they're thinking about selling your house on Zillow. They want, they want to know what it's worth their house on Zillow. And so your business is probably one of your biggest, if not your biggest asset. It's a good thing to keep track of the value.
I think it's an so having that conversation. We're on track to achieve this year's goals. It looks like, you know, we're doing it and somebody like Kim's like, you know that we're on the upswing in the industry over the next three years or on we're heading to a downturn over the next three years and you know, start thinking about the planning for what happens in a downturn or what happens on an upturn.
Expand in other markets. Are we going to all those strategic.
[01:36:14] Speaker A: Things and you as the CFO is the only word I can think of is the co pilot to the owner operator where you're synthesizing all the partner.
[01:36:24] Speaker B: Yeah, yeah.
[01:36:25] Speaker A: I mean you're synthesizing all of the operational data and then you're having that meeting with the owner saying, okay, can you take your distribution this month?
Because we would like, ideally we'd like to do a bank wire of your 30k into your personal checking account and we know we're fine. How are we Doing with debt, taxes, talking to the bank, talking to cpa, looking at M and A, like all the. The bigger picture stuff. Because you're the thread between both.
[01:36:48] Speaker B: Yeah.
[01:36:48] Speaker A: You know, you're the bridge along with the CEO if they have a different CEO. But like you're with them on both sides of the owner and the operator equation to make sure the whole thing works in symbiotic relationship.
[01:36:59] Speaker B: Yeah. And it really gets fun when you think about acquiring somebody.
Then you, then you roll those together and say, well, you don't just buy.
[01:37:07] Speaker A: A company and hope it all works out.
[01:37:11] Speaker B: It happens every day. But no, you should.
[01:37:13] Speaker A: I know. Do you remember that one client?
[01:37:15] Speaker B: That's why the three statement model, like, even what I do for acquisitions, you know, I mean, and that comes my PE days, you know, where you like, oh, you gotta.
You gotta know where the cash flow is.
[01:37:25] Speaker A: And you're literally just like. If in a quick summary is you're taking all the level of thinking that we just went through, applying it to acquiring that company and combining the income statements and the cash flow statements and the balance sheet, to say, well, like. And the fact that people don't do that is just crazy to me. And like, yeah.
[01:37:42] Speaker B: And you do it on the acquisition, on the target first by itself. You say as a standalone.
What does it look like? But you build in your synergies and all those kind of things.
[01:37:52] Speaker A: Yeah.
[01:37:52] Speaker B: Yeah.
All right.
[01:37:53] Speaker A: This is so fun.
This is so fun. I hope people found this valuable. I. I think they will, because you and I have good exposure to a lot of owners and what they're looking for. This will kick us off to the budgeting season. And it's an iterative process. And I think there's one thing I'd say is like, don't let perfect be the enemy of good.
[01:38:11] Speaker B: Absolutely.
[01:38:12] Speaker A: And it's an iterative process. You know, some information and like, it's just testing out what works and what doesn't work. And I think that what I've seen, Pat, is when people go through this process, it's the first time they have a better understanding of who is on their team. Because a lot of times they don't know how to judge these people. But once you go through this, then you have a better objective way of saying, I might have some weak people or I've got a really good people. I just didn't know it because we weren't working together.
[01:38:38] Speaker B: And you'll learn. They'll know what questions they ask.
They have a better idea of what questions they ask. You just again.
We've talked to so many owners who literally sleepless nights because they just, they're in the dark.
[01:38:51] Speaker A: A lot of them. Yep.
[01:38:53] Speaker B: And there's no need for it.
[01:38:55] Speaker A: Well, we are going to keep our mission going. This has been a lot of fun. And, you know, people can go to the YouTube channel, the Spotify if they want to see the video and more of these budgeting episodes to come. And I, I'll be continuing to wrangle you in whenever you got the time and are willing, happy to do it.
