Dashboard: Margins, Metrics, and Cash Flow

[Music] welcome to another 21 hats dashboard I'm Lauren Feldman and I'm here with Tracy Beck who is co-author of the 60-minute CFO and host the brand new 60-minute CFO podcast welcome back Tracy hi Lauren thanks for having me always a pleasure uh Tracy you have a brand new podcast tell us about it I do so it is a podcast miniseries is what I'm calling it and in true 60-minute CFO fashion it's meant to be short and sweet so I haven't added it up exactly but really truly uh all of the episodes combined aren't much more than 60 Minutes um but it's meant to be just short actionable primers in in the various topics that we teach at 60 Minute CFO and it's aimed at it is aimed at small business owners and um and really helping small business owners become more financially fluent so um more beginners or the whole range or anybody who feels a little unconfident in their financial knowledge which is a lot of business owners yeah it's that it's the last piece you mentioned there and it's really meant to be um we always try to foster a no judgment Zone and so many of us as small businesses small business owners myself included do not go in to business because we're excellent at business finance so um but yet the stats show that most businesses fail because of poor financial management not because of a great product or service so it's really aimed at all of us right and if we can you know even if you consider yourself Advanced um I also always say no one person knows everything there is to know a business business finance and it's also a muscle right and the more you use it the stronger it is so um yeah I think it's I if I do say so myself I think it could benefit almost everyone so you're telling me you think there's a market for a podcast aimed at business owners where the host actually knows what they're talking about is that what you're saying yes if only if only that existed Lauren oh I think it does Tracy we've spoken before uh but it sounds like a risky proposition to me I I'll let you in a little secret it's a lot easier to ask questions than it is to try to answer them so be careful about that I hear you um so let's if you are okay with it I'd love to talk a little bit about a a couple of episodes that I listened to um including the first one which is about cash flow and financial management um give us a quick overview of what that one's about yeah so really we're just highlighting the fact that um most businesses fail um period right and um so by year 10 only 30% of businesses that started 10 years ago are still standing and the main reason isn't like I said before bad ideas or a lack of customers it's really just basically in simple simple terms running out of cash right cash flow and financial management so um the problem is we oftentimes confuse the difference between profits and cash and they are different and the other problem is that our financial statements don't really tell us what our cash position is unless we can read between the lines so we talk about the importance of taking a look a if we're not paying attention uh the first piece is to pay attention to our financial statements right and then uh at 60-minute CFO and I'm sure I've we've chatted about this before but we're really talking about not just looking at numbers but the relationship between numbers on your financial statements and this is going to start getting you closer to understanding what's really going on um because numbers can be deceiving um let me stop you for a second there I know some listeners are panicking at this moment you're talking about ratios and math and there are a lot of people listening who have probably used the phrase I'm not a numbers person uh in in the podcast you use a good analogy you you you compare it to driving a car uh where to drive a car you don't actually have to understand how the engine works can can you reassure people that this is not Beyond them oh my gosh exactly so the anal ology is that you drive your car but you probably don't understand how the engine works necessarily unless that's your you know profession or hobby however you do understand how to read the gauges you know how fast you're going you know how much fuel is in the tank you probably know how many more miles you can go before you run out of fuel you know uh if the engine's overheating or not there's all of these indicators on that dashboard that over time you've learned to read right and so even just miles per hour that's that's a ratio right it's a ratio of how many miles you're going over time so if we were just to tell you how many miles you went in your car that wouldn't necessarily give you all the information that you need and if we told you how long you've been in the car that wouldn't necessarily give you all the information that you need right um and that's but yet that's kind of the information we get from our financial statements um your dashboard on your car is giving you a ratio of miles per hour right and that's a lot of what we do at 60 Minute CFOs is we make more meaning out of your numbers by comparing numbers against each other that exist in your financial statements but not until we go in and calculate the ratios right so yes if you are not a numbers person please don't be scared by the word ratio you've got this if you can drive a car you can do this you mentioned the confusion between profit and cash flow many of us have heard that it's possible to have a profitable business go out of business because of cash flow problems have you actually seen that happen oh yeah what I like to explain is that there are um there only two drivers of cash on your income statement right and and if you're a business owner you you might also call that your profit and loss and it's uh you know you and again there's some metrics on there that we all know and love right we track our Revenue everyone's excited to report back on their revenue and we're excited to talk about our profits but a profitable business can run out of cash because cash and profits aren't the same and yes we get cash from having profits but we also need to use cash to do things on the balance sheet that would not show up at all on our income statement or that profit and loss statement so for example um you might have an inventory based business so if you're in retail and you have to buy inventory right so if you're buying goods that you're going to then sell those are bought with cash but it doesn't actually deplete the profits it's shown as an asset on your inventory uh in your inventory on your balance sheet so you might see a lot of profits but that cash in your bank account will not be there because you spent it to go buy T-shirts or Widgets or whatever it is that you sell so if for example you're only looking at profits and you're thinking my goodness we're super profitable but then you you know you click over to the bank account balance and it's not what you need it to be um we're looking at what's you know a more a deeper uh analysis that we need to do which is going to pull in the balance sheet which uh you know I myself have a whole story about almost growing broke in my inventory based business because of this exact situation and uh entrepreneurs were not excited about looking at the balance sheet so it can the balance sheet can hide a lot of uh ways that we're using our cash and the income SC statement can make it look like we H might have a lot because we do have profits and then the other piece that can really um affect our cash is we might be showing revenue and profits but our cash might be tied up in accounts receivable right so the timing can make a big difference as well so if we're not collecting as fast as we should we would have money due to us but it is not in our bank account now that's an issue when it comes time to pay our staff and pay our bills right the money is technically ours but we don't have it so it can create a cash crisis and if that goes unchecked for a long time uh that's when we can see a real struggle right and businesses that are technically profitable and doing just fine just noten aligned on the timing of the cash so um yes th those are just two two ways to have that happen I think you mentioned in the podcast that there are some signs you red flags that you can look for if you are in a difficult cash flow situation and maybe haven't realized it yet yes uh you definitely can start doing things to uh give yourself a little bit more um visibility into what might be going in going on with your cash so we can um you know we can look at our profits and then we can start to talk about really okay now uh where you what has been our cash balances I think I I recommended really actually pulling your balance sheet if you haven't looked at it in a while and when you start to do that if you pull a balance sheet let's say you pull out pull one from today's date and then you pull one from a month ago um and maybe then you pulled one from a year ago and you can look at the cash cash is listed on your balance sheet as one of your current assets right you can start to see what your cash balance looks like in your company um you could do it month over month for a whole year and you could really start to see what that looks like and you'll notice variations right once you've learned that you're probably going to be able to see maybe a pattern maybe you have a bit of a cycle or a season a seasonality to your business um and you could you might be able to say like every June we run out of cash for whatever reason that might be you know there might be a myriad of reasons um and we then want to start anticipating running out of cash right we want to start building up and understanding um without going into you know too many jargony words but like what's the appropriate amount amount of working capital that we need to keep and sustain in the bank um in order to sustain periods of low cash and then um and then let's start to analyze from there you know how we got there like why is the cash lagging is there a way we can speed up our um accounts receivable is there a way we can get vendors on a better or our um our clients on a better payment schedule you know what are some of the things that we need to do to really Shore that up so um takes a little bit and cash flow when we teach this it's usually after we've done an in-depth income statement and um balance sheet uh Deep dive so you can really understand what's going on there but I think intuitively that resonates right we can start to predict oh yeah there is a bit of a cycle here and there's going to need to be a bigger emphasis on looking at what really is going on with the cash so we can anticipate shortfalls to some extent I think you're talking about kind of projecting the future here a little bit you're by looking at your past experience seeing the E and flow uh understanding when you may be likely to fall short and preparing for it um that that projection is another thing that I think a lot of business owners um struggle with they just don't know where to start can you offer any guidance on getting started in projecting your future finances yeah so I I get this a lot when um again when we teach um in our live cohorts or when we you know whenever I really meet with clients um we always talk about the three steps to becoming financially fluent and the first one is learning those key ratios that are really going to help you out so really understanding uh your dashboard of your of your car right what are the what are the you know gas gauge and the speedometers of your business and then we talk about the difference between cash and profits and so that's really appreciating the differ between uh or the interplay between how money shows up on the income statement and how it shows up on the balance sheet and then the third piece is learning how to forecast and people go well I don't know what's going to happen you know and I and why bother because we're really kind of too busy to do this we don't really know how to do it and it's going to change anyways so what's the point and this is where I always like to remind them that failing to plan is planning to fail so just like if we're going to stick to the car and now we are going to not get in the car and say Hey you know we're going from like we're I always use the example of you know I live in the Northwest and if I'm trying to get to Texas I'm going to plug that into the GPS right so the first step of planning is figuring out where you'd like to go right and kind of like figuring out like I like that yeah what are we going to do and you wouldn't certainly get in the car and try to get to Texas without plugging in that endpoint so kind of you give yourself a little bit of some guard rails you know like we're trying to get here and then it's not really that hard or glamorous it's just guessing we don't know what's going to happen so we but we can guess and especially once you've start to understand kind of how I said you can point out patterns in your business you can kind of understand history you're going to be able to get a little bit better at understanding the future as to what's likely and we have templates you know if you go to 60min cfo.com there's a a downloadable Excel sheet there that actually has forecasting templates on it and you can you can just literally kind of create what what we call a pro forma income statement and a pro forma balance sheet just guessing at what these Revenue buckets might be what your expenses are going to be and then that'll give you your profits and then same thing on the balance sheet how are you going to allocate your assets what kind of liabilities might you have and that's going to the two combined are going to give you your cash flow that's actually derived from those two and before you know it you kind of have a plan and really I always also tell people like this is not a um like this perfect Masterpiece that you're going to hang on the wall and gaze at lovingly it's a working organic document right you're going to revisit it and you're oh my God what was I thinking this is wrong okay you know let's take it you know like if we're on the Google Maps metaphor we ran into construction you know take a detour here's where we're going now right like you're going to change this the second you the second second the ink dries it's going to change so we got to let go of that desire for Perfection when we make a plan and we just have to get our hands dirty and walk around in it and believe me it is it is worth the the mental exercise because you will unknowingly have prepared yourself to for all kinds of scenarios so that if and when those happen in the coming 12 months rather than coming up with strategies from scratch you're going to fall back on some things you've already thought through so um it's a it's a really great exercise and um I I definitely recommend it's definitely the third step right of becoming financially fluent you did another episode I think it was your episode four where you talk about misunderstood metrics and you have an example in it that um that I liked you talked about how o owners tend to focus understandably on the bottom line their net profit and that if it's not what they were hoping for their usual reaction is to try to improve it by increasing the Top Line increasing Revenue tell us what's wrong with that well the this this Topline bottom line method of management is all too common right it's exactly um those are I was gon to say I think everybody I talk to does that it is it's it's if you are listening and you're thinking what the heck is wrong with it well there's nothing wrong with it but the problem is those are they can be misleading and the trap we can set ourselves up for is ignoring the other two levels of profitability that are in the income statement so uh the net profit which we you know refer to as the bottom line is actually the third level of profitability the first level of profitability is our gross profit margin and the second level is our operating profit margin so there's three there's gross operating and net now if we're just trying to become more profitable and we're only ever looking at the top and the bottom the only two things that we're really thinking are you know how can we cut quote unquote some expenses right and we're not being strategic about which ones and or we're thinking how can I increase the Top Line how can I make more money which hopefully we'll you know we'll make more at the bottom line if if we do stuff right at the Top Line right and yeah sure that works but it's going to be the least efficient way to go about increasing our profits because if we come in strategically and we analyze the two other levels and also if we can add in a little bit of knowledge about maybe what how our industry performs um we're going to get a a lot more insight right so for so for example gross profit margin is the margin that we make on the cost of doing our work right so if you're a service based business that's your cost of sales it's how much you pay people um to do the billable work in your company and if you are a uh like an inventory based company or you have Goods it's your cost of goods right and if there's if there's a broken um link there if we're not making enough money at the gross profit margin level we don't have enough to operate with right so we're kind of screwed you know from the top right like we can't it's going to be very hard for us to cut all those operating expenses is like you know how many paper clips we're buying and how much our office rent is and how much the managers are getting paid if every time we sell a good or service we're not making enough money and that makes it even harder if our instinct is to go out and earn more money because the same problem will exist in perpetuity just to make sure everyone's clear uh you you told us about uh net profit you told us about uh gross profit what what's the difference between gross profit and operating profit right so operating profit margin is our second level of profitability so after you have paid for your cost of goods and and or Services what's left is your gross profits from that we pay for all of our operating expenses and operating expenses are sometimes you can also just think of them as like everything else or um General an admin um it's it's anything that you need to pay for to keep the lights on at your business but does not uh go towards providing your goods or services and yes we still want to optimize all of these line items um but if the gross profit margin is too low it's going to be very hard right to operate our business with not enough operating uh profit so um that's but we can still nonetheless optimize it and then what's left after uh we've paid for our operating expenses um now comes out anything that is non-operational in nature so um those are things like um interest expenses maybe um interest earned um if you have a sale of an asset that isn't really you know in line with what you're business actually does you would you would recognize that as non-operating income so there's just a little bit usually that comes in below that line that then contributes to our net so you can see that if we Skip and we're only ever talking about net which is bottom line and Top Line which is revenue and we glance over what's between gross and operating we might we might really miss um some levels of detail here that especially if the gross profit margin is off it's it's going to be so hard to out earn that loss and we could just work it's we could work we could overwork ourselves for still not the right amount of profit and uh so in that way we we really talk about like that might be the wrong level of profitability for you to focus on right it it just could be very misleading that's very helpful as I listen to you it occurs to me that I know as as you said before there there are a lot of owners out there who this is not why they went into business and they just struggle with diving in and accepting that they have to deal with this is there um what what have you seen work best for someone who's really lacking in confidence and hesitant to take that leap what can get somebody over that hurdle well um certainly read our book and listen to your shess plug listen to the podcast sign up for a live training if you want that accountability piece and you know just people really walking you through it but it's a mindset thing right like so many things in business are and it's really uh just a decision that you get to make that no matter what uh you are going to start adopting that mindset that this is a topic that you can understand and one of the things that I think is really important is to give yourself that beginner's mindset right like it's it's a journey you're not going to come out after reading our book one time you know a financial expert at your business but maybe you did gain two nuggets that are really going to help you and those are two things that you didn't understand at all before and so it's a it's an iterative step-by-step thing it's a um it's a we always say I I think I I end almost all my trainings with it this is a journey it is not a destination right so just hop on and see what you see what resonates for you see what little aha moments you can uncover that are going to really help drive your business forward um detach from any kind of this like whoa is me or why didn't I do this sooner or I can't believe this is the way it is and I didn't you pay attention none of that serves you right and you're actually in the majority right most people aren't doing this so just join you know join the small percentage of people who do and and and also then take yourself out of that stat where you know most businesses fail because of this it's just the thing that I always find really INSP iring about that stat is they aren't going out of business because of a lack of product a viable product a viable service or customers which you know I think it looms large in our mind when we go out and launch our businesses that those things will be scarce right so if you've gotten this far you're doing great just don't let this small piece of learning really ultimately uh take you down right it's it's there's no need for that and the smallest little simplest things you know you know if we can you know go from understanding miles and hours to miles per hour you're doing great right it's little learnings that make a big difference Tracy Beck is co-author of the 60-minute CFO and host of the brand new 60-minute CFO podcast if for some reason you want to try a podcast where the host knows what they're talking about you might want to check it out thank you Tracy thank you Lauren have a great week everybody [Music]