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.
I am excited to jump into annual budgeting. It's June, so it might be a weird timeline for people, but why don't you tell the audience why you think it's a good timeline? Because you were even talking about, like, when you as a CRO, like when you start to think about stuff. I know you and I are doing this for our content engine and the coaching community and stuff like that, but I also think it's. There's always, always an inappropriate time to talk about planning and budgeting.
[00:00:45] Speaker B: Oh, I agree wholeheartedly. So back from like a CRO perspective come September, when you want to be putting your budgets into place, there are so many steps that need to happen before you can get to me. Like, let's work on a budget. And so in my mind, I would start like in late June. I would start analyzing the first half of the year, and then I would look at my marketing plan for the second half of the year, and I would start to inform myself, what could a potential realistic marketing plan look like for the business the following year? And so that thought process would carry me all the way through August of just analyzing external trends, internal trends, what's going on around me, what's going on in my customer base, segmenting my customers, understanding what kind of pressures they're experiencing, just so that way I could have a really good, solid understanding come the end of August of potential headwinds and tailwinds for the business. So that way, as we started working on the sales forecast and the revenue forecast for the following year, I had all of that already built into my understanding. So while June might seem early, it's really not. This is the cusp of when you need to start wrapping your head around all of that to get ready for the revenue forecasting.
[00:02:02] Speaker A: And if people are having monthly owners meetings and quarterly board meetings, it's just tightening up the feedback loops. So you're. It's just a perpetual mindset, I think in process. I. Did you and I talk about OODA Loops?
[00:02:15] Speaker B: I don't think so.
[00:02:16] Speaker A: Okay, that might be a way digression, but OODA loops is this thing in the Air Force where you observe, orient, decide, and act and you just want essentially you're like constantly looking around, looking around and determining where you are in relationship to your enemies, where you are in relationship to your Goal and you're deciding and acting and you want to increase those feedback loops so you're always aligned and on track.
[00:02:39] Speaker B: And so how exactly do you know that in your journey did you learn?
[00:02:46] Speaker A: Because it's so fun to say. Say it.
[00:02:48] Speaker B: All right, say it one more time.
[00:02:50] Speaker A: OODA Loops.
[00:02:51] Speaker B: OODA Loops, by the way. All right, that's fair.
[00:02:54] Speaker A: I had, I had Grock create an OODA Loops cereal box and it had a pilot with a cartoon on it with Froot Loops.
[00:03:03] Speaker B: That's awesome.
[00:03:04] Speaker A: Okay, major digression.
I was thinking about, okay, how we're gonna tee up this conversation. I.
You know, this is part of our sustainable financials module 4. We have talked about the three statements and interconnecting the three statements and why that's the only way to look at the financials. The second milestone inside of that module is the annual budgeting. Because, like, once we have our foundation, then we can look to the 12 month future. And it's three statements all interconnected for 12 months.
So my definition of a budget versus a forecast. A budget is the annual. Like, I'm looking at 12 columns in my head. Like, 12 columns. All columns. Every one of those columns has all three financial statements interconnected mathematically across the entire year. So we can see then our working capital, our debt, our taxes, et cetera. And, well, you and I are going to break down. How do we actually go about doing this? And what is one? What is it? What does good look like?
Before I wanted to jump into that, Kim, I was thinking about how resistant people are to this and how interesting that is to me, because I have the exact opposite mindset about budgeting than I think a lot of people do. And I was trying to think about this because you and I were talking about our exercise and gym routines before we hit record. And it's like looking at our data and our. And looking at the scale so we can figure out whether we're on track or off track can become an addicting and fun experience because it's a feedback loop. But for others, it can be like, I mean, people will go to the ends of the earth to not do that, right?
So I don't know, like, I just wanted to, like, frame it up. Like, I hope that that's the experience that we can engineer for people because I know it's possible. I mean, I used to hate numbers, but it's like, well, if I have an idea and I want to make sure that I pull 150 grand out of the company this year and still hire the person and hire the agency and grow our company and do all these things, that's a way of actually reconciling my ideas against reality. And that should be a fun experience versus like a daunting paranoid, you know, I don't know any thoughts or comments on that, because I just think it's an important frame of reference.
[00:05:35] Speaker B: Yeah, I wouldn't. I, I definitely do not want people to look at it as too daunting or too much analysis or too much data or anything like that, because I wholeheartedly agree with you in that in order to develop the right growth strategies for the business, you need to have this framework so that way you can see, see potential current future impact on cash.
So if you end up saying like, my ownership goals are X, okay, great, but what's the roadmap to get you there? Let's build the budget and see what's reasonable along the journey versus just saying, five years from now I want to be a $50 million company. That sounds great. Five years from now I want to be A10, a $10 million in my savings account. But if I don't have a plan to get there and the framework and the numbers and it does me no good. So I think it shouldn't seem daunting. It should be exciting. Like you were saying,
[00:06:26] Speaker A: the forecast and so budgeting being 12 months monthly, month by month by month, line by line by line, and then the out year projections and the value gap is what we're going to be doing next week. And that is the five year. So it's five columns and then the valuation target, like the bookend, so that becomes the closed loop system. And so the closed loop system is where everything has to reconcile mathematically. Everything goes through cash. And so if it's wrong, we were going through, we just onboarded what, seven people on Monday or something like that, and we're going through a bunch of other people in our boardroom.
I've never once seen a good, clean set of financials, not once.
Because if you mathematically tie it all together, you can't hide it. You can hide something and put something under the rug for, for one month. Because the balance sheet can rec and say, great, but if it, if it's not connected over time, that's what the cash flow statement is, is the changing of the balance sheet. So it has to all tie together.
And so I want to start with, and you and I are just doing free thinking and, and covering this, so you're gonna have to help steer me because I'm, I Want to get us to the point where, like, so people listening in. You. What, what did you just do there?
You're walking, walking motion or steering motion? I suggest that we start with ownership's goals first, because I like to say, what do I want out of our time? Cash flow and wealth. Like, what is the valuation target we need by the end of this year?
Multiple normalized EBITDA, net debt and working capital.
And then I would want to know, how much cash am I going to be able to cash flow am I going to be able to make this year?
And that's a combination of salary and my ownership distributions. So I would want to know, okay, well, what, you know, how much am I going to get paid for the work that I'm doing as my job? If it's the CEO, it's market rate plus bonus, whatever the job is.
And then it's the owner's distributions, which is after working capital payables, receivables, inventory, taxes, debt payments, reinvestment, and like, okay, I've got the ownership distributions that are left.
So I guess I was just building out and working on the financial model. So Pat and I could do the coaching session for next week. And like, this is the power, Kim, with Claude and with the, with the concepts and the approach that we take it. Claude keeps trying to deviate, and I'm like, you can't change cash.
It's like, oh, you're right. It's like. Because what happens is everything else has to reconcile.
Like, I mean, if it's negative, if cash in the checking account, I'm thinking the bottom, because we have the income statement, balance sheet and cash flow statement at the bottom, cash is negative.
It would be tapping your line of credit.
So that's how we know how is it going to work. And everything is included in that. Every single operation decision in the income statement and every single capital allocation decision in the balance sheet and the cash flow statement is taken into consideration to get to cash. So that's why I like to start there. And doesn't mean we can't change it. But this is where I think, top down, bottom up, what you and I keep talking about, I want to start from what do I want first?
So that way, as we start this budgeting process, we have the ability as the owner to say, well, how much do I want? Insert the idea.
And then I can figure out, like, should I buy my time back by hiring some people? How bad do I want that growth?
You know, when we start, we have a frame of reference for all the Trade offs that are going to come throughout this process.
I want to stop there because that's my starting point of what I want to do and what I like doing with clients. So that way we know what does this whole journey mean to us first before we start wrapping the business ideas inside of it.
[00:10:33] Speaker B: Yeah, and I agree with all that. One thing that comes to mind is we can look at it and say what is it that we want for our ownership goals? But it also has to be grounded in reality. Like I've known plenty of owners.
[00:10:45] Speaker A: Million dollars.
[00:10:46] Speaker B: Yeah. I know plenty of business owners over the years. It's like, well, next year I'm going to be X amount. Great. How did you come up with that number? Well, that's because the number I want to be, okay, it has to be grounded in reality. So that way it's executable by everybody else below you. And so I think there has to be a part of that, yes, document what it is that you want, but then from there also taking a look to see what is realistic and do the two align. So like you said, it's kind of like that top down approach.
Yeah.
[00:11:16] Speaker A: And I like having control over should I do something or not? And what does that mean to me? Like literally the power of negotiation is what do we want?
So that way, as we have the trade offs in front of us now we have the ability to first of all see those trade offs instead of just wondering. I think a lot of stress that people have is they don't have any idea how these different ideas that are in front of them are going to impact their goals. So I'm starting then with the ownership goals of cash flow.
And that doesn't mean that we're, I mean mechanically we could, if we had the three statement model, we can actually plug that in and we can have a starting. We would want to take the trailing 12 months and then we can make some assumptions off of that. And the trailing 12 months is just the income statement. So my point is we have a starting block in the financial model because if we have the ongoing three statements and every single month we have a full three statements in a column, it's very easy to say, okay, well to your point, we could be having, we have a constant rolling 12 to 18 months, so doing that understanding of what I want first. And then we can go up and start tweaking the income statement that's going to impact the cash flow statement.
[00:12:38] Speaker B: Yeah, one thing that's funny that popped into my head and it's just a term that Stuck with me. Much like your fruit loop one is batna. So when you say like the negotiation of like what are the trade offs? And so always having a batna as part of your thinking as well, that's your best alternative to a negotiated agreement. And so that's something that I always like to keep in mind too is ideal, less than ideal. And what's my alternative to both of those scenarios? So it really is, I like this time of year because it requires a lot of working on the business, not in the business and strategic thought and taking a step back and looking at, like you said, starting with those ownership goals and then going from there.
[00:13:21] Speaker A: So the way to start is if we have that ongoing financial three statement model. So we'll put a link below to, I think it was like December of last year I did the only financial model you'll ever need where I did actually like a video or where I pulled up the financial model to show people like, hey, this is what it looks like and it's module four. And that's what all of our blueprint clients get as a starting block. That then allows us to start with a draft call, like a working draft to see the income statement, the balance sheet and the cash flow statement all tied together.
So then when I think about like the annual budgeting and we're, we're. The reason I'm even slightly hesitating is because we're going to be ping ponging back and forth into your revenue because that is not only module 5, but you are going to be such an important part as a Chief Revenue officer actually building out that sales forecast. So let's put a pin right now in that sales forecast, knowing we're going to come back to that in more detail in this conversation, we can lay the groundwork for sure and even dive into it. But I wanted to explain mechanically, how do we have that starting version because then I think it allows us to then go back and then with some real thought start playing or pulling the levers on the revenue side.
So when I look at that financial model, I want to look at the last 12 months. So the trailing 12 months of the income statement say, okay, well if that's what we've done. And I would want to know if it's seasonal because that's the whole point of the trailing 12 months is we can go look and we can see the trailing twelve months month by month by month for the whole income statement and then we can actually look at the growth rates. And if we were even doing even next level we'd be looking at the rates of change and the business cycles that you've been promoting forever.
And we would then roll that forward and say, okay, per month. So for example, let's say January of last year, we did 8% of the total year's revenue.
And then February was 12, right. So we're taking, and then we're then taking a growth rate on top of that January's percent.
So that allows us to have a starting block of not just whatever we did last year divided by 12, but we're taking the seasonality and then adding a growth rate. So one of our mutual clients, we did that and then added 5%.
Like, hey, we can, you know, through some basic price increases and like without a whole lot of growth, we feel like that this is very doable. So we then we have 12 columns of the, of all three statements and we say, okay, we now have per month what we did as a, as a percentage of the whole last year, plus the growth rate for every line item of the business.
And like, we have to, to do this. When I say every line item, I'm talking revenue lines broken out.
So in, in our Advanced solutions case study that we're constantly bringing up, we have equipment, we have project work, reoccurring service, one, two, and then consumables. It's just a basic model off of my old business where there was just you sell stuff and you service stuff.
Each one of those revenue lines has different attributes to it anyways, different, different cycles of sales, but also different margin attributes.
So equipment was bleeding where, you know, the services were good and then ours and manage it, the margins were even better. People have a lot, I mean, we work with a lot of clients that are distributors, right? So they sell stuff and they service stuff and there's just different attributes to the margins.
And before I keep going on the line item, the purpose of doing this, Kim, is because if you and I want to help people predict In August of 27 how much cash will be in the actual checking account, not the net income, not the gross profit, not the normalized ebitda, but actual fiat cash in the checking account, we have to understand how much equipment are we going to sell month by month by month, line by line by line, with the right margins and the right overhead, we have to take every decision into account to predict cash.
And that's why, like, I just find so much peace in this, going like, okay, it truly is not rocket science, it just is work.
I think that I will give a huge handicap to everybody because Until I came across Pat, I'd never seen a model that was a forcing function for the discipline.
So like there is a huge handicap that's like this had. I'd never seen any of this QuickBooks.
We were at a call with a client and it was me, our new client and Pat.
And this guy is like in the inner circle of QuickBooks's like exec team. And Pat's like, hey, when you go to that retreat, can you tell them it'd be really nice to the cash flow statement tied out to the cash and the balance sheet. And I was like, what?
He's like, yeah, still doesn't die out. I'm like, what do you take out of it? It's just like, because the accounting systems aren't forcing good accounting, it's literally whatever you put in there.
And then like CPAs. I mean I had a client that they have millions and millions of dollars in inventory and their full blown audit did not tie out to their balance sheet for four years.
And then you just go like, okay, so like there's no guarantee that this is right in the accounting system.
But what we have to do if we have this financial model is we have to have the income statement line item by line item through revenue lines matching the cost of goods lines.
So that way we can see the margins per month.
Then we can go over to OPEX and overhead, sga, whatever you want to call it, to then normalize net operating income and then net income, ebitda, normalized EBITDA like that then flows through the balance sheet and the cash flow statement.
And if we do that month after month and we mathematically tie those together, we can't hide anything and we want to know what the cash position is. So my point is that model allows us to see, oh my gosh, depreciation's wrong because it's a non cash event. And if that doesn't flow forward, then we can't predict cash correctly.
So it's kind of where I'm kind of bouncing around. But if I separate this into, into we're talking about the income statement, which is why we have to be so disciplined on the budgeting of the income statement, because that then is tied to the balance sheet and then the cash flow statement is just the mathematical difference of the balance sheet. So like all of this stuff has a formula that ties it all together and if it's not done correctly, it's like wrong.
And so if we're trying to predict cash in the middle of the year or at end of Any month.
We just have to do this work.
So it's line at your month by month by month with the seasonality, line by line by line with revenue, line by line by line with margins, which is operations, and then line by line by line with overhead and sgna. And we need the three functions to own each bucket, to be talking to each other along the way. And then the CFO ties everything together. So I want to pause there, but I just wanted to like level set us there and then we can start talking about the process. I think would be very helpful for people. But any thoughts, questions or comments about how I laid that out?
[00:21:23] Speaker B: No, I. My only question would be if that sounds. Because we said at the very beginning of this episode that it could sound daunting and that's why a lot of people don't do it. In your experience, the people that you're coaching and helping through this process, how, how daunting is it? Like how much time do they have to spend investing to get this type of closed loop system up and running? Is it three months, six months, two meetings with Pat? Like what is, what does the experience look like for that?
[00:21:52] Speaker A: I don't know if you're intentionally trying to help us with a huge plug here, but I'm gonna, I'm gonna do it.
[00:21:57] Speaker B: To be honest, I was. And it was the question that came to mind.
[00:22:01] Speaker A: So ridiculous. I mean, without trying to be too self aggrandizing, is that the right way to self promoting, whatever that the word would be is.
This is just what we have learned. So I used to send the podcast the patent because like we are not a CFO business just for anybody listening and we don't do fractional CFO services. I don't offer that anymore. I never want to offer that anymore. I don't want anything to do with professional services.
More power to you. For anybody that's got a professional services business, I get how difficult it is to grow that. We're always looking for great people to help with that. But so here's where I'm going with this is I kept sending out the videos of Pat and I. I even like was like, okay, Pat, this is like 18 months ago. Can you just make me a template so I can like send it to my clients? Because like their director of finance or their quote unquote cfo, if we just give them the template, I have like a lot of optimism and encouragement that people can go through these.
Like what we're describing is not that complicated from a business exercise.
Right. But something needs to capture the ideas in something that's correct. So I was like, so after some schmoozing, I got Pat to create us a template.
And I'd send it over. We had videos created, and then people still couldn't build it all.
I mean, totally wild. So, like, I. And now it's even. We got Claude. I'm like, I don't know. I'm freaking. Claud. Pat. Pat was talking to Claude on the way to an appointment. I was like, oh, my God. He's like, I'm on the dark side now.
He's totally hooked. And. And so what we're doing with the boardroom blueprint, our 90 day program. So answer question on timelines. 90 days we are building out. We're taking people's historicals and, and we're putting it into the model. It doesn't mean it's right. But what that does, it's a forcing function to be like, here's like, it's very obvious. Depreciation, drawing, retained earnings and net income are not rolling forward because it mathematically breaks everything. You don't have a hundred percent margins because you have no cost of goods, by the way. You have one line item that says cost and you have four revenue lines. Like, if you want to know, product line per, you know, or service line margin, you should probably break those out.
So the model forces the. It's essentially like it's. I don't give a shit about a gap audit. I care about, like a financial model that shows operationally how we do them with cash and with operations. So, like, that's what this does, is it presents all of the.
It highlights what is wrong and needs to be fixed.
So, I mean, 15 grand, three months, and our 90 day boardroom blueprint coaching program. It's the short answer.
But anybody that's got AI and knows what they're doing can build out a spreadsheet like this.
[00:24:52] Speaker B: Yeah. And we do have information available on the website. So for folks listening in that want to try stuff out. Right. We have the operating system that's on there to learn more about it. I was just trying to think in terms of if people are listening to everything that you explained about the closed loop system, how daunting does that sound? Are they like, shutting down the podcast or like, we have no time to figure that out. It's like, well, no, there are tools out there. There are. There is help and there are ways to get this because.
And I'd love to hear from your perspective, this tool is needed to put forward an accurate Reliable.
[00:25:25] Speaker A: I don't know how annual budget, like
[00:25:27] Speaker B: everything else comes from this.
[00:25:29] Speaker A: Yeah, I don't know what, I don't know how anybody makes any decisions, to be honest, Kim, like, I, I truly don't know. And I, and so like, no joking aside, like, go build the model or go have your CFO. If they're a CFO, build the model, go have a CPA. I just have been at this for 12 years and I found one person, Pat.
I mean, we have Kyle, who, his CFO did it because the guy was in private equity for over 10 years. So. And then I also have Darren who also has a CFO that like, like, I've now got three people that I've met that they build out a three statement model because I don't know how we make any decisions. Like, people are buying companies and have no idea.
People are like building out products or building out locations or like, and I'm going like, you have no idea how much cash you're going to have.
Like, normalized EBITDA is a proxy for cash. Like our clients can have 2 million in normalized EBITDA and $2 in the checking account.
And so I don't know, Kim. Like, like people are just very comfortable, like flying blind. I guess I just would never be able to price out the value of a company without knowing how to do this.
And so as a way of like making it not daunting, like, I think what's really important for owners listening is like, don't do this yourself.
Go through the effort to find the person who can do this.
And like now with Claude and the Excel plugin, like every day there's less and less excuses of why people don't have this.
You know what I mean? Like, even the people that are like, hey, you know what? I can't find the CFO or the financial leader now. It's like, hey, plug this transcription, go to YouTube, grab this transcription, go all the, like go grab all the other transcriptions from ours or plug it in the quad and see if you can start. I would argue your time should be spent other places and more productive to find the person. But I just personally want to know how much money I have. That bad
[00:27:34] Speaker B: one to drive your other decisions that you're going to be making. I mean, so I think about it. So if we say I'm going to backtrack a little bit, we say 90 days to get the insight that you need to make all the decisions that you need to make for the annual budget you're planning on Setting an annual budget, say September, October time frame. I think that goes back to the very beginning of our conversation. Like this is why now you need to be thinking about all these things to put the pieces into place that you need for that annual budget setting. And then one of the other things that you had said in there was it made me think when you from the ownership seat are able to see this very clearly and have trust and faith in it, you are then able to with confidence hand it over to your operational leadership. And if things aren't executed as planned, you have clear line of sight into what kind of conversations to be having with your operational leadership or assumptions incorrect. Is it the wrong person on the seat? Like this Clarity gives you so much more power than just a solid budget, I guess is my ultimate point.
[00:28:41] Speaker A: I was actually seeing if I could pull up the three statement model just to give a, a quick glance at it because like to, to validate what you said. And I've watched it with our clients where like once you know how all of the variables interconnect, you don't have to do the work because I, I just know what questions to ask you, Kim, for the sales, like okay, revenue, like let's walk through it. And, and this is where I think this can keep us going on the, on the conversation for, on the, on the progress.
I'll just quickly show this for anybody. You can go to Spotify or YouTube and actually see what I'm showing here.
And Kim, the.
If we got all three statements right month by month by month in each column and then each column has the income statement. So I'm going to shrink all these for a second so we can just see the high level overview of each area.
And I'm open to even continuing this like this if we want to do this for the rest of the episode. So each column is all three statements. Income statement, balance sheet and cash flow statement.
And the cash at the end of the period is money, like actual money. And so if we look over to the end of December here, it says that we're going to have 300 grand in cash in the checking account.
Every single decision associated with the operations, meaning the income statement, and every single decision related to the ownership, which is taxes, reinvestment distributions and tax and debt all have a correlation to that 300 grand. So we're trying to predict. People think about it like a puzzle, like a square, a rectangle. We're looking at the bottom right hand corner and we're trying to predict that number.
And so that's what we're trying to do, Kim. And like, and you can see here in each column, we're like, okay, well, in this year we show that we're making advanced solutions. Got 12 and a half thousand bucks every month in distributions. And they still have cash. And there's. Their cash is still growing.
And but to your point about the person, I don't know what this is right here we have revenue, gross profit, and then there's not net operating income, net income, ebitda, normalized ebitda. Those are just four different proxies for cash flow.
We would have three different people. So total revenue here would be Kim.
And then we have, let's say it's Paul and we got Pat.
Those are the three people that are responsible for those numbers. Like, I'm constantly talking about three functional leaders. We've just, we just got done with executive compensation that we were talking about. This is how we can tie the compensation to all this.
And if we expand revenue here we have five line items. And you can, you can see that they're changing every month with what we have.
And we have to start with revenue first. And then everything cascades from revenue. Because you got to comment on that
[00:31:47] Speaker B: because, like, yeah, I just wanted to comment really quickly and how you're getting those numbers you said earlier in our conversation is that you're looking at what you had previously done and added an escalator. Is that accurate for these numbers here? So that way, again, it's not just, I feel like we're going to close this mount. It is still grounded in what has occurred in the past and then taking into consideration any new things that might allow you to reach that escalation. And so just thinking from the CRO hat, that's super helpful because then I can take this down even further layers to the sales team and say, I know Linda is a hot rod and is doing a good job, so I'm going to put most of the ownership of this escalator on her and compensate her and her comp plan accordingly. And I know Bob over here is just checking in and checking out every day, and I'm going to put less towards his sales quota, but still a little bit. And so it just allows the CRO to then have confidence in those numbers, take it, break it down even further and allow it to be operationally executable instead of just a, this is a nice to have ownership goal a hundred percent.
[00:32:56] Speaker A: And what I think we could do here is let me, let me do a flyby on like how to go through all and for anybody. Again, we're going to keep making sure that if you're listening, we're. We're covering it so you can just listen. But this will be on YouTube and Spotify where there is the video. So that way, if you wanted to see it, you can. But I just think it's valuable to actually just show what we were talking about. Because if I, if I go through all three statements, Kim, and just to show how they are, like, here's how we're actually getting to these numbers. I want to come back to then have you give a little bit more explanation of like, okay, so if in April we're supposed to do $71,000, the process that you would go through to, if I was the owner and CEO, how you came up with that. And so that way, on our monthly owners meetings and our quarterly board meetings, you can explain to me how well things are going and what data we would have. What do you think about that? That flow?
[00:33:48] Speaker B: Yeah, I think sounds good.
[00:33:50] Speaker A: So we're going to come back to revenue, but we have. Everything has to start with revenue. Because if we go to gross profit, then you can see here, Kim, we've got the different line items for the gross profit, because we did that whole profit war room and I did a podcast about how to analyze your gross margins. Every single cost of goods has to match the revenue line in order to understand the gross margins of that product or service line.
So that's why in the three statement model, data accuracy and revenue recognition and milestone billing and all that crap has to be matching for us to be like, we sold 202,000 and we cost. Our cost of goods is 127 in April for equipment.
Because if we don't believe that, nothing matters. It's like, okay, cool, you have a bunch of numbers on a spreadsheet. That is not because we. Because we immediately don't believe cash.
Yeah, back to like, do I believe cash or not? And like, I think that this is back to making this not daunting.
What's so fun for me is all of our clients who are owner operators, they're generally disproportionately skilled at asking lots of questions because they were not very good in school or they were like the people always asking why in school. And all we do is ask why.
So this becomes the way, the. The feedback loop of our answer, hearing the answers.
So then we can ask why. Why did we hit, you know, why are we getting these numbers? So if we go from revenue, then to cost of goods, we would then go to the COO who would then build out their cost of goods plan based on the revenue and the product lines that you said you were going to build.
So the COO then says, okay, well here's, you know, if we have to hit these kind of margins and the blended margin is going to be 36%, 36.7, okay, how and why then once that COO works and it works their magic and has a collaborative effort and the CFO by the way, is guiding this entire thing. Because the CFO is responsible for that financial model and is responsible for the accuracy of everything, doesn't mean that they're the one saying what is going to be in revenue or saying what is going to be in cost of goods. They're the ones sitting down with you as the CRO or sitting down with Paul the COO and saying, okay, now what are you going to have in there? Because this has to be accurate. And we're going to be spot checking this every month.
Then in the SG&A sales general and administrative and or OPEX and or overhead, I mean people call these numbers, I mean names everything. So it is what goes from gross profit to the net income, payroll, it, hr, travel, entertainment, legal, all that stuff has to be thought through. And you, the CRO and Paul the COO are going to need some opex, right? So we're going to have to work together to say, okay, well how much do you need in sales training, Kim? You know, this is where the CFO would be asking you your client acquisition cost, trade shows, paid media, you know, comp plans, all that stuff has to be in here if we're trying to predict cash.
So then we would go through, the CFO would then be working not only on their stuff, you know, like the admin function which the CRO and the COO don't have much to do with. But then extracting from both the other functional leaders everything that you need in OPEX to do your numbers.
Then we can get to net operating income and normalized net operating income, which is the first, that's the first cascading number for the company wide bonus pool that then cascades into the executive team annual bonus plan because you all built the plan that you're going to execute on and we can track what normalized EBITDA would be. So in here we've got normalized EBITDA because we, we go into the normalizing budget and we can say, okay, well we've got an ERP implementation that we're going to do. We're going to hire a consultant for strategic planning. We had a family member that's sucking off the cash flow. We got a recruiting service that we're going to be doing. And we would be incorporating all that to get to normalize ebitda.
This I believe, Kim.
It just takes time.
But it's not rocket science.
If someone has a template, if someone has the discipline and the time to go through this, it's not rocket science because this is what people are thinking about anyways. And at some point, I find it therapeutic to just put all your thoughts on a piece of paper and go, like, am I insane or not?
[00:38:43] Speaker B: Right?
[00:38:43] Speaker A: Like, I don't know, like, I just find the therapy worth.
That's why I go to the gym, right? Otherwise I'm an insane person. Like, I just need to beat all of that, you know, monkey mind out of me in order to, like, actually be peaceful. And this is, I think the peace and the, the clarity is so worth the effort.
The way we project out a balance sheet is by. I don't know if it's on here, the drivers are in different part of the spreadsheet. But we forecast out a balance sheet because the way the balance sheet works, if you're looking here, we got April's balance sheet.
We then go do stuff in May, which is the income statement. And then we have May's balance sheet at the end.
That's the bookends, right? So bookend one, April balance sheet income statement, then bookend two, May balance sheet.
The way we can project that out is because we're going to do all that stuff in May. Operationally, we can project out the balance sheet by looking at our. And this is where all the CFO has to do all this stuff. The amortization schedule, debt understanding, then the owner's levers of distributions and cash or distributions, reinvestment.
The most important levers for the balance sheet forecast that roll it forward is working capital, meaning receivables payable as an inventory.
So it's called days sales outstanding, days inventory outstanding, and days payable outstanding. Because if we sold.
If you think about how important this is, and like, I. I think it's really interesting because equipment, there's a certain working capital attribute of like, hey, do we. For a distributor, like distribution, it's like you're the bank for everybody. You buy the shit, you sell the shit. No one pays you for 30 days and you're just sitting with nothing while you're paying payroll. It's like, we have to pay attention to this Stuff. Otherwise we're going to go cash, you know, we're going to go belly up because we're broke, cash poor. Even though we had a net income of 800 grand, we have so much in receivables and so much in inventory, we have no cash.
So we are looking at those KPIs, the DSO, DPO and DIO to say what's on average, how fast do we collect? If we sold 216 grand, how much we got left?
I mean, how much of that is going to be in receivables? And how are we collecting at 30 days or 60 days? That'll have a huge impact on cash.
And same thing with payables. If we're paying our payables really fast, then, and we are turning our inventory slow. Those three Kim can like literally suck up all the cash out of a company.
So I've watched where like, I mean, literally I had a client, we pulled in a million dollars in cash over the first like 30 to 90 days. It's like, focus on your receivables, pull those from 60 days down to 40, push your payables from 18 to 25 and turn some inventory. Next thing you know, you got a million bucks in cash.
That's how we can project out that balance sheet. And there's just KPIs and formulas. That's saying, well, if we did this in May for the income statement, line by line by line, month by month, you know, like we actually had all that data, we can then say like, here's the formula for those three KPIs to then get that next balance sheet. So we can project out all three statements. Because then when we come down to the cash flow statement, the May cash flow statement is just the difference between the balance sheet in April and May.
It's the story.
That's all. I like, like when, when our clients finally get the three statement model, it's the first thing I do is go straight down here because I finally get to see distributions, taxes and cash.
You got your debt pay, you know, your debt payments. So in the cash flow statement, you're just seeing the changes.
Do receivables go up or down?
Where am I at? Right here. So if you're here, you can see here, Kim, receivables are negative.
But in April they were 85 grand and in May they're negative 7,7000 bucks.
So in April we collected an extra 84,000 bucks. So we brought in 84 or 85 grand in cash and inventory is 61 because we turned inventory into cash and payables is negative 54 because we paid 54 grand in payables.
And so it's the opposite of what people might think. So the positive means you're bringing in cash. The negative means cash is going away.
And the cash flow provided by operating activities is the bridge between operations and ownership. That's the CEO's metric right there. So when we get end up getting into like the CEO comp plan and stuff like that, that's going to be like one of the most important numbers. So, okay, because the CEO is responsible for the whole income statement and then working capital, the decisions after that. So for example, here we've got 53 grand in May in cash flow provided by operating activities and net income was 48. So there's a tighter correlation. But you can see, look at, in April, net income was 28 grand and cash flow from operating activities was 129,000 bucks.
I was at one of our new client calls yesterday. He's like, I had been asking forever, why did my net income look like this? And it doesn't tie to my checking account. No one can tell me.
This is why. Jason. Mike, there's math going on and the working capital and debt and taxes are impacting cash, but not the income statement.
[00:44:38] Speaker B: Yeah. Well, you were just actually earlier when you said this is kind of like your therapy because you'd like to prove it all out, get all the answers, this and that. It's not just you. I mean, you've had plenty of clients on calls recently that like, this is life changing. I now finally have a plan.
Right. So I think it's just people don't know what they don't know, and they might just keep operating the day to day, doing the best that they can without taking time to see if there's a better way to do it. I remember a conversation you and I had a couple months ago. You asked me, like, are you the type of person that would just keep walking with the tack in their shoe or would you stop and take the tack out? And I was like, I'd probably just keep walking with the tack in my shoe to get to the destination.
[00:45:15] Speaker A: Life is supposed to be hard, Ryan,
[00:45:19] Speaker B: instead of looking for better. So I think that's just a good thing to call out to.
[00:45:25] Speaker A: Yeah. And like, what I'm looking at here is like, we have, we can see the cash. I mean, oh, I was on one of our clients where you're the CRO of and you were on the call. I don't know if you Were in the car or not, we were within. So it said 0% because we were within $800. $800 of cash on a multi million dollar business. Like that is next level shit. Like that is so cool. And it was like, yeah, like that, that. Because what that means is we're thinking, well, right, we're thinking, well, which means we have more confidence in the future.
Doesn't mean it's not going to be hard. But if we, you know, right here we have 263 grand in cash in May.
If that is 20,000, I would have to. If you were the owner, I'd be going, Kim, do you, do you need the distributions?
You, you cool tap in the line of credit. If it was negative in the way this model works because it's the plug, right? It's all, it's a closed loop system. If cash is negative, that means we're tapping the line of credit which by the way is a. Okay deal.
Like if you can see like, I mean there, there.
When we can look at a budget, I mean if we see like, hey, we're going to have four or five months of negative cash, our line of credit's a million bucks. We're going to be into it the, at the height, 300 grand. But like I feel so confident about everything else. Like whatever you mean like, like isn't that just like. And you can still take your distribution, right? So you can like I can, I literally can still take my distribution, pay my taxes, pay my debt and we could just, we would know like, hey, we're going to creep into the line of credit, but it's seasonal, not a big deal.
Like.
Or if you see no line of sight to the cash burn like problem Mayday Houston.
[00:47:11] Speaker B: Yeah.
[00:47:13] Speaker A: So how do you think I did on like walking through like kind of like topped about an income statement, balance sheet, cash flow statement, they're all tied together. Every month they're rolling forward the line items that need the levers that need to be thought through.
I, again, I think to your earlier point, the model becomes like the safety blanket. So then the thinking can be done.
Right? Like I think that is. And it's just, I, I've just found it like I've never seen other people with this. So if you have it more power to you like, like this, then the, then the approach that we're talking about should be pretty straightforward and maybe that's a good way to kind of bifurcate like quit thinking about the model. Pat even said, I don't want to talk about the model anymore. I want to talk about business.
So we're trying to just get people to the point where then we can say, okay, now we're going to start the budgeting process and we're going to start with Kim, the CRO, then we're going to go to the coo, then we're going to go to the cfo. So let's, I'm going to stop sharing here. If we were going through that model with you, let's say we did the trailing 12 months, we put some growth rates, we have the months, you know, to a starting block.
What I would want to know, I'll start with what I want to want to know of data from you and then you maybe give a little bit of further explanation of how you would go about doing that.
I would want to know the user journey and the conversion rates if I was the CEO, if I'm the board,
[00:48:43] Speaker B: I don't care about what.
[00:48:47] Speaker A: Yeah, like you're off Kim only do that a few times. I would want to know like, hey, do you have a CRM with the different stages for each of those product lines?
But do is your client acquisition cost within an appropriate range for the gross profit? So you're not spending like crazy to get the revenue?
Because if I need to understand that you're going to have that information. So if we're on track or off track and I wanted to double click on your information, I just want to know that it's thought through.
That's all I would want to know from the CEO if I've actually handed off to the CRO the actual process. But maybe explain a little bit more within this whole context now, like, because everything has to start with you, which is why you're talking about, hey, Summer, Q3 is very normal. Because if we're going to slide right into Q4 budgeting, so much of that weight is going to be on your shoulders as the CRO. Because everything else becomes a lot more straightforward if we believe the predictable revenue engine.
[00:49:54] Speaker B: Yeah, I would say, I mean the items that you, the metrics that you mentioned, super important. And then things that I mentioned in the beginning, looking at upstream, downstream, outside, inside. And when you say user journey, they're not just marketing. A lot of people think that's just marketing. But as you and I know, there are no walls between sales and marketing. They don't operate in silos. So it's very applicable for sales. So when you say conversion rates, a lot of people think very specifically that's conversion and marketing as well, not just Sales.
So it's funny, when you hear user journey, a lot of people are like, oh, that's marketing and that's social media and websites. And then when they hear conversion, they think just sales. It's no, there is a through line, it's through the entire womb to tomb, if you will, of conversion rates that you need to be tracking and be able to understand all of those metrics and be tracking them. What are norms? And then even all the way down. Again, it depends on how big the company is. So if you're a CRO of a larger company, you're gonna have people underneath you to do this. But understanding your team and who's operating at a good level and who's not, who's on your marketing team, that's getting you the right metrics, Are they applying your funds in the right spot? It might be a team member that's all about paid ads, but paid ads aren't really the trend for next year. So as a CRO, I need to know the trends of the following year and be able to make sure that I can have the right team members in place to know where to allocate those funds or if Trade shows used to be a big thing. But they're not going to be a huge thing, a huge focus for us knowing why. So it's just, it's just that months of just preparing and analyzing, looking at norms, looking at the data, looking outside and inside, and then you as a CEO aren't going to want to know all that. Right. And then above you, I want to
[00:51:34] Speaker A: know that you're doing that. So you and I have a problem. Yeah, yeah.
[00:51:38] Speaker B: You can be like, Kim, where's the problem? Like it's right there.
[00:51:42] Speaker A: Exactly.
[00:51:43] Speaker B: And here's my plan to fix it here. This is my solution.
[00:51:47] Speaker A: Can you give us like a story about that, like on how, how you went through? Because like I can tell just on how you said that you've seen that you've done that a lot of times, but like put some color to like what, what maybe was a problem and then how did you identify it and then how did you overcome it?
[00:52:03] Speaker B: I'm sure. And it's going to be less of an overcome because the one that popped into my head and I'll try to be simultaneously thinking of one further back recently helping a client and they weren't getting contact forms filled out on their website. They weren't. So looking at the analytics, they were having, not they're having really good social media traffic, but they weren't having very Good website analytics traffic. So it means people were engaging on their social platforms, but their calls to action weren't the right calls to action to drive traffic to the website. So we made a couple of adjustments, changed the calls to action. Next thing you know, they're getting people, their website traffic is pulling up. And so then it's like, well, they're still not converting into forms. Why aren't they converting into forms? Ended up identifying that their website loading time was too slow, so their bounce rate was high. So while we were driving traffic successfully, they were no longer staying long enough on their website. So it's just the data can tell the story of what's broken, and then it's the team's job to fix me. Like, that's the problem right there. That's not working correctly.
And tweak it and you can continue to maximize the results all the way down.
[00:53:11] Speaker A: And what I'm thinking too, just to highlight what you had said earlier, is because I'm literally pitching, you know, we use go high level or it's ActiveCampaign or HubSpot or Salesforce, it doesn't matter. Is like five columns of stages. Like the awareness. Then it's like the, you know, marketing qualifiedly. Because each one of those things that you said are point in the journey. And after that contact form, it could be, I don't know about the client that you're talking about.
Salesperson calls them and then at some point there's proposals and closes. But every one of those milestones is what leads to the $701,000 in April.
And then there's 200 for equipment. So you would be able to see between across all of sales and marketing because it's one user journey, the conversion rates between each of those.
Because we can literally build an entire sales pipeline that reverse engineers at $701,000.
[00:54:10] Speaker B: Yes. And if it doesn't. And that's a conversation that I would need to be having with you say, Ryan Blake. I know we worked on these numbers together. We put in this escalator. I'm putting in our actual conversion rates, our pipeline information, our activity on the Internet right now, so on and so forth, and I'm only coming up to 659,000.
However, on the flip side, on the services side of the business, I'm coming up with $50,000 more than I had on the computer side. And all of that can be explained because of the trends going on within the industry.
So it just allows having the information, allows the process for you and I to have Those conversations of CRO CEO. And again, all of that should be done before the finalized budget for the next year. I would have all of those conversations leading up to.
So there's the research phase, the discussion phase, and the finalization phase.
[00:54:58] Speaker A: And if you do that work and I'll put on the COO hat right for a minute. The operations, if I know out of the five, five product and service lines, what percentage is equipment versus services?
I have to like my old business was like, how much crap from Canon are we going to buy?
Right? And that would impact our rebates.
Because if I, if I could, if I could prepay, I could have some cash with order discounts, I could have some. I mean, I mean, we were very similar to the copier business or the copier was very similar to the car business. It's all about rebates because the equipment doesn't make any money. So it's all about rebates and cash flow management, which I didn't know how to do any of this stuff. It was just juggling. But like that's the sophistication where you start to win.
And then if it's service, how many people do we need and do we have to hire ahead?
Right? So that's why it has to start with you, then move on to operations. So then the operations can build out their products, their services, their capacity planning.
So that way we can anticipate the 37.6% margin blended.
But equipment's 20 services are 48. You know, I mean, like we can, like what you do is so important that it's hard to describe. And I think everybody knows how important important it is, but they struggle getting. I mean, if you literally came to someone said, we're not gonna have 701, we're gonna have 659. Oh my God. Like, I don't know how many people have that experience from people similar to, like, I don't know how many people have the experience of the three statement model. And that's what we're trying to do here. I know we gotta get going here on the timeline, but for the call. But what does good look like?
This doesn't have to be daunting. It just, I think that the amount of energy, if it were me, Kim, the amount of energy I would spend finding who's going to do this is where I would spend most of my time not doing it.
And whether it's a fractional service provider or it's an actual person or whoever or just someone you want to level up it's going to be very difficult to grow if the person that's listening in, who owns and runs the company is also doing this stuff. They should be guiding and leading 100%.
[00:57:16] Speaker B: And that's why IVD is here to help with that.
[00:57:20] Speaker A: What's your conversion rates, Kim?
[00:57:23] Speaker B: I think some major takeaways for me in all of this getting back to the budget is that there is groundwork that needs to be done before you get to the budget season. At each tier, whether you're one of the three staple leaders, you're the CEO, CEO or you're the owner, there is legwork that needs to be done before you sit down and be like, let's put together a budget.
There's groundwork that needs to be done, and then there's conversations that need to be had and it needs to be collaborative and not done in silos where cfo, coo, CRO are all working together on building all of this out. Because while I might say we can do this, production might say, we can't do that, we can only do this. So I think that's another major takeaway from the conversation is there's groundwork and then it needs to be collaborative.
[00:58:10] Speaker A: Yeah. Last note on that. I got a client that's in the distribution and services business. Like, if we sell more services, like, we don't have the people. So we're trying to figure out different product, you know, lower margin, but things we can actually use or use this, like, to fill in the budget. I mean, it's. It has to be done collaboratively.
How do you think we did before we wrap up here? Like, how do you think we did for the, like, just your assessment of, like, making this not daunting? I get so excited about it. Just like, I do other things and I.
Because I want other people to know what good looks like, because it's just baby steps. I said that to Jason yesterday. I'm like, dude, we just gotta start.
Like, you go to the gym and you show up. I was.
[00:58:54] Speaker B: I.
[00:58:54] Speaker A: Did I say it on the podcast or was it our training? The Tomic Abbots about the guy. James Clear was on Chris Williams's podcast Modern Wisdom, and the guy just said, I'm not going to go into the gym. I'm going to go to the gym for two months in a row.
Drove to the gym and I don't know if you have one of those beep cards, like, yes, I got my health, health care or health insurance benefits and then turned around and then like, the habit stacking by the end of the night or the 60 days, like, I might as well go in because I'm going there every day. And so that is truly the approach that I have. I get really excited because I like and I understand what good looks like and we've tasted it. But like, I don't know, like, just drive there, show up, have it. I don't know if it has to do with just scheduling the time to think about it or listen to the podcast is like the first step. Any thoughts about that?
[00:59:45] Speaker B: I like that you brought it back to the daunting because from my perspective, everybody that listened to us for the last hour is probably like, holy, that's a lot of work. And I don't have the effing time to get any of that time.
It's probably like a lot.
So I like where you started with the atomic habits. I mean, and just like I was explaining to you, I have fallen off the habit of going to the gym every day. Life gets busy. And so I'm like, you know what? This week I'm going to start walking, doing my neighborhood once, two miles a day. Next week I'm going to go up to doing it twice a day to get up to my four miles that I was previously at. Then I'm going to bake on my military calisthenics, so on and so forth. So it's, it's really true. It's. If so I think that leaves the ownership up to us. Then where we end, Ryan, is where, where should they start? Is it the three state model? Where they should start?
[01:00:31] Speaker A: Like, where, where do you think they should start?
[01:00:32] Speaker B: CRO, I asked you the question first.
[01:00:36] Speaker A: Hot potato.
I. I mean, yeah, I mean, selfishly, I think it's the boardroom blueprint. We've got an executive comp and workshop coming up that people can attend wherever people think that it's most manageable to show up.
You know, I mean, like, something's better than anything. Something's better than nothing. So I mean, I would say like, literally, if I, if I wasn't being selfish, I would say spend like block off 90 minutes once a week to start thinking about this.
And if it's not 90 minutes, go, like, go to what is possible first.
Because everything comes down to a time constraint, Kim. I mean, I literally, like, like I was just listening to Jordan Peterson. Like, it's like things are so daunting to people. He's like, if you know the people that are really super depressed, his old clinic, his old clients, he's like, you know, if it's not. Clean your sock drawer. If it's not, make your bed. And you can't get out of bed, put one arm up.
And I mean, I know it sounds ridiculous, but, like, there are people that are running Ironmans, but, like, if you can't get out of bed, put one. One arm up. And I think that that the. The equivalent to that is block off some time to start thinking about it. And if you have that designated time, then at some point you can start doing. And if you can't start doing, maybe it's just focusing on who should do this and it's just blocking off that time. I mean, I'm inflexible as hell because you and I were talking about I need to start blocking off more time.
Stretch. And it sucks. I hate it, and I'm resisting it. And I've tweaked my back because I avoided it.
[01:02:15] Speaker B: So you can scratch your back in a couple of years after you've been stretching enough.
[01:02:19] Speaker A: Bend down with my kids.
[01:02:22] Speaker B: No, I think it's good advice, and I don't think it was selfishly. With our 90 day boardroom blueprint, I mean, that we say commit two to three hours a week, but there's classes in that and it's guided coaching. So that if you feel like I am blocking off time, but I still feel like I'm just shooting in the dark and don't know what I'm doing, it is a really good program to help people have that guided workout advisor.
[01:02:44] Speaker A: Here's what to work on. We know what to work on. Here's exactly what it looks like.
[01:02:48] Speaker B: Yeah.
[01:02:49] Speaker A: Next week we're going to be doing the five year forecast and evaluation gap, which will be fun. Yep. Cool. All right, everybody, thanks for tuning in.
[01:02:58] Speaker B: Thanks, Ryan.
Foreign.
[01:03:09] Speaker A: This episode is brought to you by Castos Productions.
