EP201: How to build a profitable business with CFO Teresa Wagonseller

Right. Good question. So CFO stands for Chief Financial Officer. They're one of the leaders or experts in most large corporations.

They handle all the money matters, all the financial strategies to align with the company's, you know, goals, direction.

That's correct. There's a big difference between, you know, bookkeepers, accountants or tax preparers, even CPAs. They mostly focus on recording the past, if you will, compliance work, you know, for tax reporting, that sort of thing, which is very important, obviously. However, the CFO is focused on going forward with the company. The CFO comes up with strategies, financial strategies to align with the company's, you know, business goals. So it's more a forward driven.

Correct. So as opposed to like, you know, large corporations that have in-house direct full-time, if you will, chief financial officers, most small companies or small businesses can't afford. you know, a full-time CFO, nor do they warrant one, to be honest. You know, they're on a different level playing field, if you will. So what I'm offering is fractional CFO services at a fraction of the cost for the small businesses to make, you know, the CFO services more accessible and affordable to small business owners.

It is part-time, except I think my fractional CFO services are differentiated from the norm in that, you know, I have 25 years of experience in working with multi-million, billion-dollar corporations, you know, as a CFO. And so basically what I did was I took the 25 years and I condensed it down into a system, like I said, that's affordable and accessible to small CFOs, but they're still getting the same level. of service and comprehensive services that you would get as a large corporation. A large corporation would get from a full-time, a small business gets the same level of services on a smaller level, if you will. So there's strategic planning and that kind of service isn't as high level or intense or that you would encounter with a large corporation. So it's fitting, but they still get all of the same. CFO services that they're getting from a full-time CFO. Oh,

Yeah. So if you don't mind, I want to take just a step back for context purposes, but. You know, one thing that drove me back to working with small business owners was, you know, there's a lot of statistics out there and SBA or Small Business Association will tell you that 50% of most small businesses fail today within five years, which is, that's crazy. That's one in two businesses that are out of the game by year five. And 80% of those, it's due to lack of cash or they run out of money. So it's a cash flow. issue for most small businesses and so i've come up with the concept if you will of comparing a business to a machine or a money-making machine most people you know most business owners go into business to make money obviously that's first and foremost so and you have to have cash or money for your business to be successful that's number one and so I like to give the analogy, if you will, of a money-making machine, which is your business. So for example, if you think of a washing machine, the purpose of a washing machine is to clean clothes, right? The washing machine has multiple parts and systems that run that machine automatically to clean clothes. It has a purpose. One of those parts fail, the machine doesn't work. It doesn't produce clean clothes and it's, you know, it's not operating like you want it to, right? So your business is kind of the same as a machine, except the purpose of your business is to make money. So the business as a machine also has moving parts. systems. And it's all about managing those parts of that money-making machine so that it does what it's supposed to do, which is to make money. generate money. You want to generate money out of your business from operations. And that's what the money-making machine concept is about. Yeah.

Okay, so that's a great question. I think I like to keep things simple. And I think first and foremost, businesses are, while they're focused on profits and while yes, profits are important, I think the number one most important item to focus on is cash you know cash is king we've always we always hear cash is king and i've even heard it said cash is king and there ain't no queen and that's exactly right when you focus on cash and cash flow inadvertently you are also focused on profits and revenue and i say that because Profits and revenue are part of cash flow focus. So they're part of the equation of focusing on cash flow. So you're focusing on three, all three. However, being done wrong or the wrong thought process is businesses can stay in business as long as they have cash. Even if they have loss, losses, they can have negative profits, losses, and still stay in business as long as they have cash. Cash is the bloodline of the company. However, they cannot stay in business if they don't have cash or run out of cash. They can have profits. You can have profits, but not have no cash and you will go out of business. So the focus has to be on cashflow first. And I'll give you an example of that. Think about Amazon. Amazon had losses the first five, six, seven years in business. They sustained and stayed in operations because they had cash. So if you have cash, then you can stay in business. So I think that's the number one concept or thought process that is missing with most business owners.

Yes. The way I would word it or state it is you want to create a positive, consistent cash flow. So you want to have more money coming in your business than going out. Okay. And that's, what's key. And once you start generating that cashflow from the operations of your business, then you, it's a matter of, you know, what matters the most is what you keep. And what that means is. you know you have to manage all the other parts you know the spending the cost factors all of that you know and so it's what you keep that matters and yes to your point ultimately you will build up some cash reserves or excess cash positive cash flow and then there's so much you can do with that you know that cash obviously i mean any problem you have in your business can be resolved with cash If you think about it, if you have a marketing issue, you need to spend more money on marketing or you need to hire another manager or, you know, whatever the problem is in your business can usually be resolved with cash. And then, you know, also you build up those cash reserves or build up that excess cash or positive cash flow. and you can do more things with your business you can put the money back into your business you can grow your business you can take the money out if you want you know use it for you know personal uh retirement college funding you know whatever the owner wants to use it for and you can also get some freedom out of your business with you know cash by hiring some people to manage some other areas in your company to give you a break or a relief from the business. You know, because most small business owners wear all the hats in the business, right? And they can't ever, you know, like you said, they're working 80 hours a week and not making any headway. So there's a lot you can do with cash. But I think... Yes, it's important to focus on the cash flow first and foremost.

Right. So this is where I talk about the money making machine. And this machine has 16 specific parts to it. All 16 parts contribute to cash flow. It encompasses what I like to call three buckets, if you will. You have a revenue bucket that has five parts. You have a profit bucket that has five parts. And then you have a cash flow bucket that has six parts to it. All of these parts are focused on increasing revenue, profit, and cash flow. And they're the drivers of your business, if you will. So the five parts that drive revenue, for example, are your leads, conversion rate, your retention rate, your number of sales transactions, volume, and then the average sales price. Those are the five drivers of your business that drive the revenue. And then the profit bucket has five drivers as well. These are all the machine parts that I was referring to. And so the five drivers of profit are going to be your cost of goods sold, you know, the money it takes to generate those sales, and then your labor costs or payroll, marketing costs, and overhead. And then you have other expenses and income that are not. operational type. So those are the drivers that drive the profits of your business. There are six drivers of cashflow. Now these cashflow drivers are where most small business owners don't, aren't aware of, I guess I should say. You know, influx and outflow or inflow and outflow of your cash. That's hard for most small business owners to understand. And there are things that you don't see on your income statement. Like you don't see them in the, you know the profits of your income statement or the revenue side of your income statement and they're things like number one is you know days sales outstanding how many days does it take for you to convert sales to cash you don't see that on your income statement number two inventory inventory days outstanding how many days does it take to convert inventory to cash You don't see that on your income statement. And then number three is your accounts payable days outstanding. In other words, how many days does it take you to pay most of your vendors? You know, most of us have 30 day terms or whatever. You don't see that on the income statement. Number four, your purchase and sales of equipment or assets. You know, when you purchase a piece of equipment that's cashed out the door, when you sell a piece of equipment that's cashed in the door, you know, you don't see that on the income statement. And then you have number five, I think I'm on number five, is debt service. So you take out a loan, you borrow funds, you get cash in the door. You pay or service that debt, you know, that's cash out the door. That's not on the income statement. And then the last one is owner investments or draws, you know, distributions like owner putting money in or taking money out. None of those are you see in the income statement or in the operations of the business, but they affect your cash flow. So when we go back to saying, you know, you want more cash coming in versus cash going out, it encompasses all of those 16 parts.

I think, especially in this industry, you know, construction, I've had a few construction industry-related clients' accounts. And the biggest problem I saw is exactly right. You know, they... They bid a job or do an estimate on a job and let's say it's $5,000 and the customer agrees to that $5,000, great. So they get started on the project and they put $3,000 out there to get their labor, to pay for their labor, materials, supplies. They put $3,000 out to begin with to start the project, right? And then they complete the project and they're thinking, great, I just made a $2,000 profit. Right. You did make a 2000 profit. However, the customer, say the customer pays in 90 days. You don't have that $5,000 from that customer yet, but you put 3000 out so that you have a negative cash flow of $3,000, you know, that came out of your bank balance. Right. And what if the customer never pays? And if you take that, if you take that one job estimate, that one job and say, you've got 40 of those in the works. you know, like that, you've got a huge, multiply that times 40, you've got a huge negative, you know, cashflow, which is...

that's okay. I'm just saying that's detrimental. And that's what happens a lot of times, you know, in these businesses that, you know, where the business owners don't understand the concept of cashflow.

You're exactly right. And a lot of small business owners, like I said before, because they're wearing all the hats of the business, they spend all day, you know, putting out. fires you know working in the day-to-day operations and in the in the weeds of the things if you have the business if you will and and so they're not looking at it from a bird's eye view and they don't have time like they you know they have this huge past due receivable balance right that's all money that you haven't received yet in other words you're the bank for those customers you know they're and that's extremely harmful to your business. So you have to definitely have somebody that has the time to manage those receivables. Or one thing I like to, what I like to do with businesses that I've found successful is in this line of industry, you know, when you do your estimate, I think there's two critical things that need to be on that estimate. Obviously, first and foremost, the estimate needs to be as accurate as possible. We all know that because you can, you know, you can't, it's hard to recoup. you know, misestimated costs, you know, as you're going along with the project. But two important things I think are critical on an estimate is the first one is you need to have margin of error, margin of safety, you know, built into that estimate. Thing is you need to have payment terms for your customers that they agree to. And I like to use phase billing, which basically means, you know, the customer pays you a third upfront, a third of the total cost upfront. you know, to get started and you invoice them that at the beginning of the project, they pay that before you even start. And then two thirds into the project, they pay you invoice, you pay the next third. And then the final third is paid at the end of the project. And in doing that, you align your cash in with the cash going out so that you don't have this huge negative cash flow. you know, going on in your business. Absolutely.

correct. And you can generate a positive cash flow in doing that if you have vendor terms. So in other words, if your customer is paying you. at the beginning of each phase of your business and you're purchasing materials or supplies for your vendors as you go along, but you have a 30 day payment term with them, then you've got a positive cashflow there of 30 days. That's an ideal situation. Yeah.

Yeah. You're not upside down. So basically what you did was break even, right?

That's right.

That's exactly right. That's why cash flow is so critical. You just made the point. Without it, you'll go out of business. Ideally, what you want to do is hopefully, you know, there's this thing of having all your eggs in one basket. Obviously, that was a huge, you know, job or project. But hopefully you don't have. Too many of those. You know, the other thing you can do if a business is healthy, financially healthy in this industry is get a line of credit. You know, if you can get a line of credit that kind of eases the, you know, cash flow, especially when you get in a situation like this where you can draw down on that line, you know, to help fund your. timing difference there with the cash. And then of course, when you collect or when you get over that huge speed bump, then you can pay it back. You know, not every business has access to line of credits, but that's obviously a good backup, you know, backup plan for cash. Cause I mean, you basically, you can get cash from three sources and that's, you know, debt, you know, by borrowing or some people use credit cards, which isn't. advised, but, uh, borrowing funds, you know, the second way is you can, you know, owner investments, um, whether it's the business owners own savings that they put into the company or they get outside investors that come in. I mean, the only hesitation there is you're diluting your business, you know, the ownership of your business, but in, in a third way, in the best way is obviously to generate the cash through the operations of your business. And so I think, To your point, you have to consider all of that and the what-ifs. And if you can focus on building your positive, you know, consistent positive cash flow so that if you get in a situation like that, you're okay. You know, you've got enough reserves there or excess cash, you know, positive cash flow coming in from other projects that will cover it. You know, that's the situation you want to be in. That's why cash is so important.

That's correct. I think, you know, it's important for business owners to understand, you know, that they can't simply just go look at their bank balance. And if it's positive, they're like, okay, great. We're good to go. And off to work they go, putting out fires and doing whatever. So there's this, there's a financial statement that's called statement of cash flows. And what that measures is it doesn't, it measures. how much cash you really have at the end of the day, after all of the cashflow drivers are taken care of. So in other words, it accounts for all of those machine parts or drivers that I just mentioned that you don't see through the operations of your business. You know, if you're thinking just on a profit, you know, profit level, it's not, you know, revenues minus expenses. gives you your profit, right? But then there's other things you have to pay for out of that. You have to pay for, you know, taxes, debt service, you know, and the days that we talked about, you know, how long the terms, how long it takes to collect money from your customers. And if you don't collect it, that's lost money. That's lost money you'll never get. You know, how long it takes if you have any kind of inventory to turn that inventory to cash. You know, all of those are factors that, like you said, are pulling and going against, you know, coming and going in your cash flow that you have to keep tabs on. And most, I think most small business owners don't know how to monitor those, you know, manage those. They could be difficult, you know, for the small business owner to manage those.

Yeah. And you just. told the life story of my daughter, one of my daughters. Oh,

She's had a, she's very proprietary mindset in doing businesses, but she doesn't, you know, the cash or money matters. It's not, you know, her. And I've learned that. Most small business owners are like most small business owners go into business because they're, you know, they're good at a craft or, I mean, they have a marketable skill or a product, right? And that's why they go into business. And then, but obviously you want your business to make money, but they're not the numbers people. They don't, you know, they don't look at, I have, most of my clients don't even look at their financial statements, you know? So they look at their bank balance, like I said, and that's it. And if they got money in the bank, they're good to go. then again a lot of them are you know sweating it out or they have trouble sleeping at night because they're worried about making next payroll yeah you know and indoor they're they're making profits they're making money but Where is all the money? You know, where did it go? It's not in my bank account. Where did it go? You know, and so it's, it can be stressful, very stressful.

Put money in their bank account.

That's exactly right. So like these 16 moving parts that I was talking about, you have to, first of all, you know, there's all the parts of your machine. You have to make sure they're all working. Right. You know, they're all monitor them, you know, and if one's not working right, you've got to dive in and find out what's which part's not working, you know, tweak that part, you know, and fix that part. So your money making machine keeps making money, you know, keeps working. If you can keep all the parts working like they're supposed to, which involves monitoring and measuring and tracking, I mean, there's a lot involved in it. But if you can do that on a consistent basis so that you're generating consistent cash flow, it helps. You get that going and that momentum going. It takes you out of, you know, the day-to-day operations of your business. It gives you some freedom, you know, because you've got these moving parts working and you're not, you know, killing yourself in trying to manage all of that. That's the main reason why most companies have a financial matters person handling that for them.

Right. So that's a great question. So the way I like to work it or my process is I like to meet with the business owner, you know, for about 20 minutes. And I call it more of a right fit. a meeting or call, you know, I want to talk to them and make sure we're a good fit for each other. You know, first of all, tell me a little bit about your business, you know, which, which entails what your challenges are, you know, what your goals are. I think first and foremost, what there is, every business owner has personal and business goals, right? And what are you trying to achieve? Why did you, why did you go into business? You know, what are you wanting out of this business? And then tell me what your, you know, a few challenges are. And then I usually offer a, financial assessment. I'll do a financial assessment on their business. No, no cost, no charge, because I have learned it's much better for me to show. the business owner, how I can help them as opposed to telling them how I can help them. And so I'll do a financial assessment on their business. And what I'm looking for, any red flags, any opportunities, I analyze the strengths and weaknesses of their business. And then I come back and based on their personal business goals that they told me about, I show them a strategic plan, you know, of how we can get there. So for example, just give you an example. Say a business owner is they're wanting to, you know, maybe they want to grow their business and they want to be at this level, you know, take it to the next level within the next five years. Or maybe they want to sell their business. You know, to sell a business, you want top dollar for it if you want to sell a business, obviously. And usually that's a multiple of cash. So, for example. If you have $100,000 in your bank account and you want to sell it, it usually sells on average two to four times whatever you have in the bank. So you might get two to 400,000, you know, on the sale of that business. But if their goal is to maximize their... you know, pay out on the sale of their business, then that is the strategy that I come up with. And then I meet with them, you know, once every month. We have a meeting once every month. And I go through a six-step process with them on a monthly basis to make sure we stay on track to hit those. targets those goals and that usually looks like first thing we do is obviously create the targets based on those goals and then i take their actual numbers or their financials and do an assessment on it i do a forecast as to where i think they're going to be at some point in the future six months a year from now whatever it is and from there i compare the basically the forecast with our target the goals we're trying to hit um and come up with a scorecard so it's like a dashboard scorecard you know and that's what i present to the clients so the clients never have to look at financials financials were not are not made for they're made for the accountants and the tax repairs they're not management reports business owners So I show them a simple scorecard of here's where we're hitting our targets and here's where we're not. And those are the 16 drivers that I was talking about earlier, the 16 parts of your machine. So we track and measure those. And here's where we're hitting and here's where we're not. I take the top three. You may have 10 drivers that we're missing on, but I'm going to take the top three and we're going to focus on those because they're going to have the largest impact on. you know, your business if we focus on these three. And then we may come up with an action plan. We come up with an action plan that we execute for the next 30 days. And we focus on these three drivers to improve, you know, your business. And then we meet again at the end of the end of the month, the next month. And we look at, go through that same process again and see, you know, did we improve or where are we hitting it and where are we missing it? And then we Realign again, new action plan, and basically just measure and monitor those metrics to make sure that we're on track to hit those targets. And if we're not, then I provide corrective actions each month to help these owners stay on track.

Exactly. That's exactly right. Yes. So, you know, and a lot, I think a lot of business owners too, or I think they think, you know, if they're running short on money or, you know, uh, business isn't doing as good, they tend to go straight to sales. So I got to increase sales, you know, and that's not always. the issue you could have great sales, like a lot of businesses do have great sales, but a lot of times the problem is the margin, the gross margin, you know, and which is the door, which drives your profit. Right. And affects your cash, you know, your cashflow. But so a lot of times it's tweaking that cost of sale or that labor cost or, you know, whatever it is to get your gross margin, improve your gross margin, you know, So, I mean, it's not always sales oriented. There's other, there's 16 other parts, you know, to the machine that, yeah. Well, yeah, I mean, it's usually, yeah, it's usually a combination of them. Not, it's not just one part that's failing. It's there's. It's usually a combination.

right i actually have a blog that's labeled You know, ignoring your business financials or finances is insanity.

The definition of insanity. And it's because it's amazing to me how many business owners just, and you know, rightfully so, they don't understand what they're looking at, you know. And I like part of what I do as a CFO as well is to try to help educate in simple terms, give the business owner an understanding. you know, of those financials in simple terms. So they understand what's going on in their business. So I'll basically, I can take the financials. I can read the story. Every set of financials tell a story and I can immediately read the story and tell you what's going on in your business. And then just. You know, through these 16 drivers or whatever, I can illustrate with them, like I said, with a scorecard. So they can easily see, you know, which drivers are working, which ones are not, which levers to pull, you know, in the business and which ones are going to have the biggest impact. So I can explain that to them and show it to them. And what's exciting to see is whenever they execute, you know, these action plans and they do it, we get three months down the road and they see a big difference. You know, their cash balance has gone up. Profits have improved, you know, whatever it is. And it's exciting to me. That's the main reason why I've come back to working with small businesses.

Like, you know,

Right. And that's very fulfilling to me. Absolutely. I'll be honest with you. That's what I miss the most. And, you know, in the corporate world. And that's one reason I've decided to recently stepped out, you know, while back and going back to what was exciting, you know, thrilling, you know? So, yeah,

One that I currently have the most connection with that I really appreciate is Alan Carr's Mindfulness. Easy, easy way to mindfulness. I can't think of the exact title, but I love that book. I've read it a few times. I've cornered pages. I go back to certain pages just to remind myself, you know? Yeah. Yeah. I think that's a great book.

That's exactly right.

So I have a website. It's higherupcfoservices. com. And that's higher as in, you know, rising or increasing, you know, higher profits or higher cash.

And I do want to mention as well, if you want a list of the 16 drivers that I spoke about for revenue and profit and cash flow, I have them listed on my website. There's a resource page on my website that has those listed. There's also a quick little 10-page slideshow of the six-step process that I use with my clients every month to help them. monitor and track, watch these drivers like a hawk is how I like to say it. Love it. To keep your business moving forward. So that's on there as well.

Yeah. And if they want to book a call, like I said, it's free, no charge. I love talking, talking to business owners, you know, so even if you just want to book a call and talk about your business, I think that's great.

All right. Thank you, Brad. Appreciate it. I had fun.