Are you working hard in your business, but not finding much cash at the end of the month? Do you know what to look for in your financial statements to gauge the health of your business? On this episode Adam Lean of The CFO Project will go through exactly what a small business owner should be paying attention to if they want to turn a profit and hit their goals. Make sure to check this out so that you can master your money and have the confidence to make the right decisions to drive your business forward, instead of being paralyzed by lack of financial clarity.
Josh Fonger: [00:00:00] Welcome to the Work the System podcast where we help entrepreneurs make more and work less using systems. And I’m your host, Josh Fonger. And today we have a special guest, Adam Lean. Adam is a former accountant which he hated turns small business owner, which he loves. And he started his first business 13 years ago and things turned out great. However, things are not going so great. And he was working a ton of hours, his business, which I think we can all relate to and it was not making progress. The problem was he lacked a plan. You’re like a solid strategy to have a growing and profitable business. He was working a lot, but on the wrong things. Fast forward a decade. Adam and his team helped hardworking business create a solid strategy so that they can have a growing and more profitable business. All right, Adam, I’m looking forward to having this interview. I think your story and what you do relates exactly to what this audience needs. Before we get into the details, how did you get into this line of work of being a business strategist?
Adam Lean: [00:00:59] Yeah. So just like you mentioned, I graduated college with an accounting degree and I thought, hey, I’ll become an accountant. And I got a job, started working for the first couple months. I was OK. And then it got to be incredibly boring because I’m the type of person that likes to get my hands dirty and work in the business and help the business. As you know, accountants, I love accountants out there, but all they do is record what happened in the past. That’s their job. They record what happened in the past. I wanted to help a business or the company I was working for improve, but I was sort of stuck in a box. So at night and on the weekends, I started my own business. And there was an e-commerce store. And within probably the first 12, 24 months, it grew very rapidly, actually. In fact, for the first four years, it grew really rapidly sales wise. But and which is great. The problem was profit-wise. I was my profit margin every single year was getting smaller and smaller and smaller. Well, being in accounting and having accounting background, being an accountant, I knew that was a problem. The problem was I had nobody to turn to to help me figure this out. It’s frustrating because I had nobody to turn to. Second thing, I was frustrated because I was an accountant. I should be able to figure this out. But regardless, I knew what the main problems were. So I was able to dig in and and figure it out over, you know, over the course of a couple of years, it was really difficult. It was an uphill climb. But I felt like I was doing it by myself. In fact, I was doing it by myself. I tried getting my bookkeeper to help, accountant to help. They were largely useless because that’s not what they’re getting paid for. I mean, I just simply not you know, I tried to get advice from friends and family. And even though they wanted to help, they just weren’t in the business. You know, they really didn’t have great advice. So because I was able to somewhat overcome my hurdles, I started coaching and consulting with other businesses that owned small businesses at the time and realized they were having the exact same types of problems. The difference was they didn’t have the accounting or financial background to figure it out. And so the way I was showing them how I figured it out, it was it was an eye opener for them because I was approaching things from a profit standpoint. And the whole point of a business is to make a profit, which turns into cash, cash which you get to keep. You could give it away. You could give it all go away. It doesn’t matter. The hope is still that the fact remains that the whole point of a business is to generate cash. The best way to do that is to make a profit. And that’s what I was walking these business owners through sort of a plan to make more profit. Year after year after year. So anyways, that morphed into what I’m doing now, which is I call it the CFO project, chief financial officer. And the idea is that every business needs somebody to help guide the owner or the leader on how to make more of a profit. That’s what CFO was do for big businesses. Big businesses have CFO knows for one reason. That’s to make sure that the business stays in business and has a growing profit bottom line, whatever you want, call it every single year. But big businesses need that, obviously. But every business needs something like that. So we make it really, really easy for a small business owner to have somebody like that. Without giving them one of our CFO is to create a plan for them and we guide them every single month in having a growing and more profitable business.
Josh Fonger: [00:04:49] I love this. I love this concept. And I think that. My wife knows I’m a meat. And of course, they’re they’re usually strong people, a lot of skill sets. All of them have a good ability and maybe sales or good ability in marketing or, you know, delivering their particular service. But understand the financials and our saying how to get to that on my profit is a little bit elusive for them. So let’s what. What is your process? Let’s say you’ve got a deal working with a dental office. Right. And so they just they’re working hard. They’re working for years. They got their clients help for whatever reason they never can. You’ll make more than a few percent profit in the year. What would you do with that?
Adam Lean: [00:05:28] So that’s a great question. I like how you mentioned dentists. That’s a prime example. Most businesses that start in this country are service based businesses. And it’s because somebody who’s an expert at a craft like a dentist, that person is trained in an industry. They start a dental practice, a chef or a cook starts or buys a restaurant. Marketing guru starts and agency, etc. And so all these people are great at their craft of their business, which means they spend most of their time, if not all their time, working in the business. A dentist is working pretty much solely in operations on dentistry. But that person still owns a business and that person still has to make a profit. So there’s I mean, to answer your question is really just what we do; the plan that we give business owners boils down to one thing, and that’s to help the business owner focus every day, week and month on that three to five things that matter the most.
Josh Fonger: [00:06:31] How would you pick out those three to five things? So, I mean, I’m assuming as are like KPI is or kind of dashboard or a scorecard they’re trying to create. How do you know what things to measure?
Adam Lean: [00:06:42] Yeah. So that’s a quick question, because most businesses think they have when something is wrong in their business, they think it’s sales problem and it could be a sales problem. Who knows? But you have a company in south Florida. One of my clients, when they came to me a couple of years ago, they thought they had a sales problem after digging into their business. It’s not a sales problem. They had a gross gross profit problem or one of their services. Their sales were great, actually, but they were they were just working more and more hours in the business on sales, because that’s just what most business owners think is more sales solves everything. So to answer your question, that figure out the most important things to work on, I sort of have four, four steps to do that. And the first step is really just to dig in and do an assessment on the current state of the business. What are the red flags? What are the opportunities for growth? What what are the financial trends, if you will, for the past two years for sales, for gross profit, for net profit, for cash flow and just see what sticks out. What are the red flags? What are the problems? So once we have once we understand where the business is now. Then we’ll set sort of where we want the business to go. And a lot of people, a lot of businesses call this process a budget setting or whatnot. We don’t we don’t really like to use those terms just because it’s, you know, even though a business has to know where they’re going. A budget sounds very restrictive. We turn it in. We tend to think of it as pur; here’s our our target. Here’s what we want to aim for. And because we’re financial people and because business, the whole point of a business is to make a profit. We define all this these these goals, if you will, in financial terms and numbers. So either dollar amounts, percentages, quantities, it doesn’t matter. We just quantify it so that we know. Is the business on track? Did they hit the goal that the number not black and white. So anyways, so the first step was to figure out where the business is now. The second step is to understand where we want the business to go. And then the third step is to figure out the first thing that the business owner needs to do right now. The feed to the one giant domino that if you knock it over, it’ll help everything, all the other dominoes all over. We help them do that. Because, you know, any business owner listening to this will know that there’s a million things on there on your plate. I mean, they’re just kids. And if you give if we give a business owner 20 things to do, they’re not going to do any of it. So we need to focus on one thing. And then the you know, step three is really just. Every single month will analyze the financials and the business performance as those KPIs, as you talked about, are the other metrics to see if they’re on track. And then the next month we tell the visit, we will give the business owner a plan of another. The very next thing, the most important thing that they need to work on right now. And we try to go no more than five things. We we keep it around two to five. Most important things that the smaller the number, the better. And, you know, but the key is once we give a business owner their plan for the month, there’s three to five things that they need to work on that we call them objectives. I don’t know if you’ve heard the term. OKRs. Yeah. It’s a very popular business type type term. It stands for objectives and key results. A lot of big businesses use them like Google from the inception 99 and started using these these things and they credit it to the group scaling their business as much as they did. But all it is, is every business, the every key employee of the business and every department, each has their own objectives. And those are the three to five things. And when we use the same terminology, we get the business owner three to five objectives every single month. And these are the most important things that they need to work on to stay on track, to hit their their financial goals. And if once we get into this and once the business owner gets used to these objectives, then we’ll break it down and have them in their entire works that their entire team give them their own objectives, which helped meet the company objectives. And so the the idea is that there we track and measure every single month whether or not they’re on track to hit their yearly goals.
Josh Fonger: [00:11:21] So it seems it seems basic like I could just do some my own people probably thinking to well I can do this on my own, I can my own write down my own goals. Why is it that when people try to do it on their own, they usually fail? I’m looking at your site and you quote the popular saying that most companies have a and I am going to make it to their fifth birthday. I mean, my art and our business, I always tell my clients if an average company, then just plan to go out of business, because that’s what the vast majority do. So how is it different working with someone like you as opposed to just trying to do it on their own?
Adam Lean: [00:11:52] Yeah, it’s a great question. So that, you know, they have you’re absolutely right. Half of all small businesses never see their fifth birthday. And that’s that’s. We didn’t make that up. That’s a quarter of the Small Business Administration. Half of all small businesses never see their fifth birthday. And it’s because it all boils down to the fact that these business owners were not working on what matters the most to stay in business. And here’s the problem. You would think that an accountant or a bookkeeper might be somebody that you could go to, which they are. And if they’re if you have a bookkeeper or an accountant that can help you do this, great. The problem is every single one of those 50 percent of businesses fail. They all had bookkeepers and accountants. Their job is to record what happened in the past. That’s that’s what they’re getting paid for. The second place that most business owners turn to for help is their employees, and they’re just not in a position to help you. You know, the business owners could theoretically do this on their own, but they it’s so much better to have some sort of. Accountability, partner, if you will, like a guide, I mean, Serena Williams, one of the best tennis players in the world, has a coach. I mean, think about that. She you know, like I could barely play tennis if I wanted to hit. I wanted to play somewhat seriously. I would definitely have to have a coach. But she’s already at the top and she still works with a coach because she wants to get better. And if you’re a business owner. I mean, what’s more important than making sure your business survives? And we tell our clients, if we’re not helping you at least cover our fee and more profit, then we would fire ourselves. I mean, is that what’s more important than making sure your business not only survives, but actually grows in profitability? But the key to it. But the bonus to all this is that the business owner can then still stay focused on what they do best, which is what got them in the business in the first place. The dentist doesn’t have to just all of a sudden stop stopping a dentist just to focus on numbers and finance all the time. They can still focus on being a dentist while knowing that the part of their day that they’re working on their business, they’re working on the most important things that will make sure that they have an ongoing profit or growing problem.
Josh Fonger: [00:14:11] Yeah, I totally agree with this philosophy and I have seen it firsthand again and again and again. So what is you mentioned this idea of bookkeepers, guys kind of getting be the lagging indicators. Right. So things have happened over the last few months. You can look back in history. Are there any kind of numbers, leading indicators that you think people should be aware of and trying to measure?
Adam Lean: [00:14:34] Yeah. So there’s four main ones. I mean, if you don’t, regardless of the type of business that you’re in, there’s four main ones. Obviously, sales. And honestly, if you can break it down into two sales, what I call revenue streams or or departments, divisions, categories, whatever you want to call it, just the different areas of revenue. So measure total dollar sales. But then also measure your average transaction. So like the dentist. Well, she’s as an example. That person should measure their overall sales, but they should also measure sales per patient, if you will. And then the second thing they should measure is the number of transactions you have. So the number of patients. So if you’re a retail store, you should measure the number of orders that you know, the number of orders at the cash register. And then you should also measure the average order value. If you’re an e-commerce store, number of orders, number of transactions you’re at. If you own a pest, a pest control exterminating company, the number of invoices, the average invoice by anyways regardless, you should measure sales, which is made up of the number of transactions, the average transaction value, that’s sales. That’s number one. The second thing, you have to measure your gross profit. For each of those revenue streams, because they’re not all equal. If you own a heating and air company, you have one revenue stream for repairs and maintenance. Then you have another revenue stream for new heating and air equipment sales. The cost to service those sales, those two different types of sales are vastly different. And so you’ve got to measure your gross profit, the amount it’s costing you to make that sale for you. So you have to measure that for every single one of your revenue streams. What that company was telling you about earlier, that in South Florida, they had several different revenue streams, but only one was was the vast majority of their problem. They didn’t have a sales problem. They had very small gross profit margins on one of their services, one of their largest services. And so we zoned in on that. They had no idea. I identified that and that’s what we zoned in on. And that all of a sudden, that I had almost a two hundred fifty thousand dollar impact to their bottom line by just focusing on that one. Without without in, you know, and I’m not saying where, you know, because somebody else kind of came in and saw the same things was just us, but the fact is they had somebody else come in and point this out and that’s where they focus their talent without having somebody else come in. They want to focus all their time on growing sales. Well, they were just losing money on every sale. So that wouldn’t solve the problem. They would’ve just been more stressed out and overwhelmed. First thing, sales to focus on. The second thing is gross profit. The third thing is your net profit. The net profit ,if you take your sales manager gross profit minus your expenses, that equals your net profit. So net profit is a large part of that is your expenses. And I tell clients all the time there’s if if you do not know what the return on investment is. So every time you spend money, regardless if you’re spending money on a new stapler or a five hundred thousand dollar building, regardless, you have to know how much or have a good idea of how much return that expense is going to have because it is not going to give you. So if is not going to pay for itself, you might as well not spend the money. The rules will keep the money in your bank account. I mean, why spend it if it’s not? Going to give you a return. Same with insurance. Same with employees. Same with marketing. Why spend the money if you’re not going to get a return? I know this is it is really hard to measure some of these things, but do please have the conversation with yourself. Like, are you buying it because you think it’s going to help you improve your business or are you buying it because you think because for some other vanity reason or whatnot. So anyways, so the first is sales. Second is gross profit. Third is net profit. The fourth and the most important is cash flow. The end of the day, at the end of the year, your business has to have more cash coming in the door than leaving. Bottom line, if if you are operating in a negative cash flow, you have a couple of options. They’re not really great options, but you have a couple of options. You can get debt. You take on debt, credit cards, loans, venture capitalists, whatever, or you can get investors. But with debt, obviously, to pay that money back with investors, you have to give away a piece of your company. So the best way to do all of this to get cash is to make a profit.
Josh Fonger: [00:19:23] Yeah.
Adam Lean: [00:19:23] So those are the four main I mean, I at a high level. Those are the four main things that every business has to know where they’re at at all times.
Josh Fonger: [00:19:32] Ok. So not just once a month, but trying to understand what what got you there and then maybe you predict the future. So maybe if your sales is a let’s say it’s a million dollars next year, you want it to be two million or gross profits at 30 percent and you want to lower to 20 percent of what it is. You’re trying to make some adjustments in those areas. Now, the thing I think all people, kind of get the standard things from their bookkeeper is, you know, sales, gross profit, net profit, cash flow is a little bit more elusive for measuring what people don’t know. Measure that. So what how do you go about helping companies understand?
Adam Lean: [00:20:07] Yeah, you’re absolutely right. Cash flow is is is really difficult to measure. It’s really difficult to forecast this. It’s really difficult to figure it out. Most business owners want their solution and that is just logging into their banks website to see how much cash they have. That’s just great. At least you’re doing something, you know. Quick books or other accounting software. They’ll have a report called Statement of Cash Flows. I would not recommend anybody looking at that because it’s very confusing unless you, unless you know what you’re doing is very confusing to look at. I would recommend and we do this for our clients. But if you know what, I would recommend anybody just getting an Excel spreadsheet and then at the end of every month, just having five rows, if you will, five, five things that you’re inputting in Excel every month, the first is how much cash is in their bank account. The second thing is how much profit you made for the month. So cash in the bank account, how much profit you have and that you made for the month were lost. And the third thing is accounts receivable balance, because that is one main area that impacts your cash flow to make this really simple. If you had a 10 if you had zero dollars in your bank account at the beginning of the month, the end of the month, if you had a ten thousand dollar profit. And all your customers paid you on time in real time. Then theoretically, then in the month you would have ten thousand dollars in the bank account. Well, that doesn’t work for a lot of businesses because a lot of them are service based businesses, which works on invoicing and customers pay you much later, so you need to know where your cash is. So that’s why I think you should have your bank account balance. Then measure it, put in how much profit you have. The third thing, of course, is accounts receivable. Because if you have five, if you made a profit of ten thousand dollars and you only have five thousand bank account. Where did the other five thousand go? Well, if five thousand dollars worth of customers owe you money. That would be in the accounts receivable balance. So it makes sense. The fourth area. So we have cash in the bank ,profit, accounts receivable. The fourth area is inventory. How much cash do you have tied up in inventory? A lot of people have inventory. On their shelves, that is waste. Essentially, it’s piles of cash on your shelf. If you look at that, if you go to your stock room and look and think, man, there’s seventy five thousand dollars worth of cash sitting on these shelves. They would probably do a better job of managing their inventory because, you know, employees can steal it and they can spoil if you’re a restaurant. You can have a lot of spoilage, but you had to do a better job managing your inventory because that’s literally cash tied up. So if you spent money on inventory, you need to know that that’s where cash went. So that’s why the fourth thing is cash is inventory on that Excel spreadsheet. The last thing is drawers. Owner A some people call it, you know, the owner draws or, you know, just is literally the owner of the business taking money out of the business to fund their personal lives, which of course, its your prerogative, if you own the business. But that’s also where cash is going. So literally the whole the whole point of this exercise is to know where your cash is going. That statement of cash flows that out that I mentioned earlier. All that information’s on there. This is highly confusing. It’s very confusing. But if you just simply keep track of those five things every month and that way you can see where it’s going. So every month, keep track of the cash balance. Keep track of the accounts receivable, etc.
Josh Fonger: [00:23:59] So if you started seeing your account fuel balance creep up and up and up and up, then you might know that you have a problem on your hands. You need to address it. Yes, OK. Or if you see that your inventory is going down or down or down, down, you’re making some good cash. But my inventory is going down. It’s actually going to worse or weaker position. So you can start to really see those trends and then come up with what you’re a I guess, what is the comfort zone of where you want to be like the comfort bands and where you want to be with the cash.
Adam Lean: [00:24:30] Ok. Totally. I mean, if you think about it, if you have a very high accounts receivable balance, I have a client that has a really high I mean, like six figures and for the type of business there. And you’re essentially the bank, you’re loaning money to your to your customers and you’re having to sacrifice your. You’re getting, you know, stressed because you can’t meet payroll. Meanwhile, your customers out here have an interest free loan. So you’ve got to stay on top of your accounts receivable on it. And most, many business owners don’t even know what that is because I just don’t look at it on a monthly basis. They rather have the sale than pay attention to the fact that this person owes me forty thousand dollars.
Josh Fonger: [00:25:16] Yeah, and I would say this is probably one of the techniques that when I was working in the company that you do two companies really struggling financially if they have bank accounts receivable and maybe there maybe its average is 60 days or 90 days to get those accounts payable. If I can given them a system where their receivable agent is, you know, average 15 days, then we just get all that cash sooner. And I tell them we can do this once. Once we get it to 15 days on average or five days, whatever it is, they probably can improve it. So you don’t enjoy that influx of cash, but you can’t expect that next month or the next month or next month, it’s gonna be a one time cash influx. And then you got to stay consistent with our system and I can really get over it. Yeah, I agree. That’s interesting. Well, this is so helpful. And I know that liable are not going to purposely educate themselves on, you know, management, managerial finance and accounting, all those things. Thirdly, when I was in my MBA. That was the classes where I had the most coffee just to make it through. But it is so important, is so critical. And if you don’t know where your money is going, then you will you’ll lose it. It’s going to go away. It’s inevitable. So. So with kind of the remaining time we have, what’s one question that I forgot to ask you I should ask you about? You think it’s critical that all business owners know?
Adam Lean: [00:26:33] Hands down their cash flow. They have to know how much cash is coming in and out of their business and you know where it’s going, because cash is literally the oxygen of your of your business. If you have a you’re out of business, it’s really it’s incredibly difficult to go get a loan, especially if you’re service based business, because most bankers don’t want to lend you money unless you have they have an asset that they can hold as collateral. But most business, you know, if you’re starting a roofing company, if you own a roofing company, I mean, you really don’t. You may not have that many assets. So you’ve got to make sure that you are producing cash and you’re doing the things that matter. I would rather have a business owner. Slow sales down if it protects the amount of cash that they have. If they can just build cash a little bit at time rather than increase sales and take a huge risk in their cash flow. Because if you’re good to if you want to go from zero to 60 in sales, you’re gonna have to hire salespeople and ramp up your marketing efforts in all of this. Which costs cash. And. And that’s why a lot of business owners, especially people to start businesses, they just a fail because they ran out of cash. So that’s the number one thing you’ve got. You’ve got a Mr. Wonderful on Shark Tank, he says a best seller. Usually every dollar bills like his kid. He wants to protect his kids. So, I mean, that’s the number one thing.
Josh Fonger: [00:28:14] I couldn’t agree more. I mean, you get a great business, but if you have bad cash flow for a few months, you could be out of business. And it’s quite sad. So I think it’s critical. And I think it’s smart people to build some buffers in there. Plan for rainy days, planned for the fact that you might have bad cash flow and plan ahead for those days because they’re going to come. We’re going to lose that big account, which you’re going to lose something. And you need. You can’t run your business so tight that if one bad thing happens, you’re out of business because bad things will happen. It’s inevitable. This is great. I really learned a lot. I think this is I think what you offer is really I mean, I mean, entrepreneurs can certainly get a huge benefit from. So, speaking of that, where can people find you if they want to learn more?
Adam Lean: [00:28:55] Yeah, so that the website is the CFO project. So the T H E CFO as in chief financial officer project dot com. There’s there’s tons of information there. But also, I create a special page for you guys. The CFO project dot com slash work the system. You go there. There’s a calendar. There’s a link to my calendar. I’d love to speak with anybody to schedule a 15 minute call. There’s also a couple of resources and ways to learn more about what we do and and how we can help you have a growing a more profitable business.
Josh Fonger: [00:29:32] Very good. Well, if you’re having trouble with cash flow or, you know, the idea of studying all this stuff on your own, it’s overwhelming. Definitely. Reach out to Adam and I hope you’ll help you out. And again, I think anybody can join us today, whether you’re live on Facebook or you’re joining us. And where are the other channels? Thanks for joining us today on the work the system podcast. Stay tuned next week with me sharing with you other podcast where the business expert like Adam or my previous clients to help show you how to make more and work less and do it in an efficient and stress free way as much as possible. And also, if you want a copy of the book right there behind me, a copy of Sam Carpenter’s book, the book that really started our business book is called Work The System. You want to copy that, leave us a review on either iTunes or YouTube or any channel you find us. Where do you watch this leave us review and take a screenshot of that review. Email to info at work the system dot com and we’ll be drawing a name out of the hat each week and mailing out a book, hardcover book to someone each week. So make sure to do that and catch us next week. Thanks, buddy.
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