Latest / The Money Part / Ep 2 | The One Number Most Small Business Owners Ignore

Transcript

Ep 2 | The One Number Most Small Business Owners Ignore · The Money Part

• 0:00
  SPEAKER_01: Hello, I'm Barb Fisher.
• 0:01
  SPEAKER_01: I'm you're with Juliana, who's our operations manager.
• 0:05
  SPEAKER_01: I am the host of the money part.
• 0:06
  SPEAKER_01: Our goal is to meet with you once a week and talk about parts of the business they never taught you about in school, which is the money part and how to really make that asset of your business perform for you as the owner.
• 0:18
  SPEAKER_00: Hello, Juliana.
• 0:19
  SPEAKER_00: Hi.
• 0:19
  SPEAKER_00: Uh today I think we're going to talk about numbers.
• 0:22
  SPEAKER_00: That's a good place to start.
• 0:24
  SPEAKER_00: What's the one number that you wish everyone would watch?
• 0:28
  SPEAKER_00: I know people typically focus on revenue, but that's not always the most telling number for business owners.
• 0:34
  SPEAKER_01: Yeah, I want to start by talking about revenue.
• 0:36
  SPEAKER_01: I mean, what's interesting about it is so many clients, we have a really dialed-in way to really know their top line revenue number.
• 0:44
  SPEAKER_01: So this might be at a restaurant, it's like their POS system, like they know exactly what sales are.
• 0:49
  SPEAKER_01: When we have dance studios, they have some pretty sophisticated software they use to communicate with their families and build them.
• 0:55
  SPEAKER_01: So they are very clear on their top line revenue once we put together like the ticket suppliers and other things.
• 1:00
  SPEAKER_01: And while while top-line revenue is useful, it is not indicative of the health of your business unless everything below that is going with a formula, which it doesn't.
• 1:12
  SPEAKER_01: So in our world, which is the profit first world and the CFOing world, it really has to do with profit and owner's comp and even the tax.
• 1:20
  SPEAKER_01: Like Profit First is a very popular book that's out there for businesses.
• 1:23
  SPEAKER_01: I have a picture of it right there if you're watching on YouTube.
• 1:27
  SPEAKER_01: Written by Mike McAllowitz, and the three accounts that really speak to owner benefit are your tax account, your owner comp account, and your profit account.
• 1:34
  SPEAKER_01: And Profit First recognizes that you should make money because you work in the business, that's your owner comp, but you should also make money as the shareholder, the key owner of the business, which is your profit.
• 1:44
  SPEAKER_01: So I I would say that one of those numbers or those put together should be what you're watching is you want to understand how that asset is performing for you as the owner.
• 1:53
  SPEAKER_01: I I real well, I look at all three put together.
• 1:57
  SPEAKER_01: Like are they all growing and sustaining?
• 1:59
  SPEAKER_01: And then what are they?
• 2:00
  SPEAKER_01: Are we are we fully running the business without needing to take any of that money back into the business?
• 2:06
  SPEAKER_01: So when I get a new client, a lot of times they are having some profit and they're just not sure how to organize themselves to make sure they can take home what they think is profit.
• 2:17
  SPEAKER_01: Like that's kind of what's often happening.
• 2:19
  SPEAKER_01: And uh so we do some allocations to put some money in owner comp, some money in the tax account, some money in the profit account.
• 2:25
  SPEAKER_01: And then we come up with their allocation percentages.
• 2:28
  SPEAKER_01: And if those continue to work, meaning the amount we've put in the operating expenses and then the ongoing owner comp for payroll for the owner, if that is covering the business to go in an ongoing way and we don't have to make further adjustments, then we let it ride or we press.
• 2:42
  SPEAKER_01: I mean, there's other things we do to drive those numbers higher, but that's what we watch is I want you to look at at your bank account, which I know you're looking at because every business owner looks at their bank account.
• 2:52
  SPEAKER_01: The goal is that you can look at your bank accounts and know what is your money and what is not your money.
• 2:56
  SPEAKER_01: Like what do you need to have set aside for tax and what do you have in operating expenses to cover bills and payroll that are coming along?
• 3:03
  SPEAKER_01: So it's really soothing to be able to look and have a healthy bank account to know like that owner comp and profit, those are those are yours.
• 3:10
  SPEAKER_01: Those those belong to your spouse, they belong to you, they are their their shareholder money, they're the owner money.
• 3:15
  SPEAKER_00: So you are saying that owner comp and even the tax accounts can be good indicators of your business's health overall.
• 3:25
  SPEAKER_00: If you're not if you're not running profit first and you don't have allocations to set aside that money in those buckets, how do you find those numbers?
• 3:35
  SPEAKER_01: Are we assuming that you have financials and you look at them and read them, or are we kind of assuming that you probably don't?
• 3:40
  SPEAKER_00: I guess let's uh let's approach it first from the easier side.
• 3:44
  SPEAKER_00: The I do get financials.
• 3:46
  SPEAKER_00: But you have financials, yeah.
• 3:48
  SPEAKER_01: So if you're paying yourself and you're paying yourself a wage you're happy with, and you notice your account is going up and you know you need to put some money aside in savings, I would say you're probably running in a healthy way.
• 4:00
  SPEAKER_01: And that is the condition that happens with a lot of people that come in for profit first coaching, is that they're putting this money in savings, but they're the question becomes like, can I have any of that?
• 4:08
  SPEAKER_01: Or is that all tax money?
• 4:10
  SPEAKER_01: Like those kinds of questions.
• 4:11
  SPEAKER_01: And so what Profit First helps you do is kind of organize your savings accounts in a way to understand what you're saving for the business and what you're saving for you as the owner.
• 4:20
  SPEAKER_01: So Profit First is not a complex system to set up.
• 4:23
  SPEAKER_01: And I would suggest doing it.
• 4:25
  SPEAKER_01: And it can be as simple as setting up a couple of savings accounts.
• 4:29
  SPEAKER_01: If you're doing true DIY and you don't want to have help with it, you can set up a couple of savings accounts and when you have spare money, throw it over there and see if it can just sit there.
• 4:37
  SPEAKER_01: I mean, I think that's what people do at home also.
• 4:39
  SPEAKER_01: What the full Profit First will do is run a lot more like, you know, a Dave Ramsey plan where you get money in and you put some aside for this and some aside for that.
• 4:49
  SPEAKER_01: And as if your business can run without needing to dip into the profit account to run or doesn't need to dip into tax to run, you just have a very keen sense of awareness of the health of the business at that point, which is soothing.
• 5:02
  SPEAKER_00: It's wonderful.
• 5:02
  SPEAKER_00: If you're not there yet and you're not even doing the light version that you described, where you just shove money into a new account, it seems like even before that, you have to get really clear as a business owner on what your priorities are.
• 5:15
  SPEAKER_00: Can you give some other examples of other priorities that might be for a business owner to think about in terms of how much they or what they should be saving for?
• 5:24
  SPEAKER_00: I helped people do budgets.
• 5:26
  SPEAKER_01: I mean, the truth is profit first just simplifies the budgeting process immensely.
• 5:30
  SPEAKER_01: So I think you could be sort of OG about the whole thing and you could do a budget so that you're saying that this is what we're gonna spend on materials or inventory, this is what we're gonna spend on rent and cell phones, this is our budget to spend on travel or trade shows.
• 5:45
  SPEAKER_01: Now, when you do that and you leave all of it in the same account, it's really important to have your financials done all the time, up to date, because what the envelope system does and what Profit First does is help you understand if you can or cannot do a thing.
• 6:00
  SPEAKER_01: We set up an account that we call a growth account, that that's the owner's mad money to do what they want when it comes to the idea of growing the business.
• 6:08
  SPEAKER_01: But it's a helpful way for office managers to be able to not have to constantly deal with telling the business owner no, which is a flick of the relationship and hard to do.
• 6:17
  SPEAKER_01: So if you set up an account that is kind of their their wild hair account, their growth account, then they can look at the account and say, do I have this$10,000 going to this trade show?
• 6:26
  SPEAKER_00: People want to do either the full version of Profit First or the light version of Profit First, or even the other version, which you're talking about budgeting, to even get a sense of what historically businesses have spent on different line items on the PL.
• 6:41
  SPEAKER_00: What are some benchmarks or how can they find out what generally should be their percentages for these different types of accounts?
• 6:49
  SPEAKER_01: Well, I think most owners and people who run businesses know what they would what they could make if they didn't work here.
• 6:57
  SPEAKER_01: And I think that's a great benchmark for what should your owner comp be is what what would you insist on making if you work somewhere else?
• 7:04
  SPEAKER_01: And we won't even start by counting the freedom of time.
• 7:07
  SPEAKER_01: Like, you know, as a a lot of business owners pick their kids from school, go to every soccer game, all these different things that are priorities they have in their life.
• 7:14
  SPEAKER_01: And they also should be making what they would make anywhere else.
• 7:17
  SPEAKER_01: I think that's a really easy benchmark to know.
• 7:20
  SPEAKER_01: And if you're not yet making it, then we challenge your owner comp upward.
• 7:24
  SPEAKER_01: And that means we're doing a lot of expense analysis to figure out how to make expense cuts that don't also cut your client experience or your employee retention.
• 7:35
  SPEAKER_01: So there's a lot that goes into it, but I think your owner comp is a really important one to watch.
• 7:39
  SPEAKER_01: If you're not making what you deserve to be making, then something's got to change.
• 7:44
  SPEAKER_00: Let's talk about that a little bit.
• 7:45
  SPEAKER_00: So if you start to dig into the numbers and you start to see things that aren't matching what they should be, what what does the next step look like?
• 7:54
  SPEAKER_00: How do you dig into that further?
• 7:56
  SPEAKER_01: It sort of depends.
• 7:57
  SPEAKER_01: Like I think a lot of times the financials with the client base I've always had, I think the financials end up verifying the gut check the owner has.
• 8:06
  SPEAKER_01: So I think the owner is gonna know or have a sense of where things are going awry.
• 8:11
  SPEAKER_01: Like they just know they've lost that big customer, they had that thing go really south last December and they haven't dug out from it.
• 8:18
  SPEAKER_01: They gathered this debt at this event, they had a death in the family and they took the eye off the ball for half a year.
• 8:24
  SPEAKER_01: You know, a lot of things could have been happening.
• 8:26
  SPEAKER_01: It it will come down to doing an expense analysis, meaning, what are we buying that we don't need to buy?
• 8:33
  SPEAKER_01: I mean, you know, if if we all had a nickel for every time there was a subscription that someone did and they thought that was gone, like we'd all have a lot of nickels.
• 8:42
  SPEAKER_01: So I think part of it is doing that expense analysis and and just looking at all the expenses that exist in the business and what we can get rid of by maintaining client and customer employee and customer experience.
• 8:54
  SPEAKER_01: And then we ask ourselves about pricing.
• 8:56
  SPEAKER_01: So there might be asking yourself and your doing a competitive analysis to see if you're charging what you should be charging to your clients and you know, figuring out if you're paying everybody the right wage.
• 9:09
  SPEAKER_01: So sometimes there might be a legacy employee that's been there for a very long time and is making a pile of money, maybe more than the owner, because they just always have.
• 9:17
  SPEAKER_01: And sometimes we discuss making hard decisions and it's the money that's driving those, really.
• 9:23
  SPEAKER_01: And I think as we help people get to know their financials and their money better, it helps these really hard decisions become less hard because the money will make things obvious.
• 9:32
  SPEAKER_00: How often do you recommend business owners look at their books?
• 9:36
  SPEAKER_01: Well, we put people on a monthly closing pattern for the most part.
• 9:41
  SPEAKER_01: Very small ones or ones where there's no employees and the owner knows everything.
• 9:44
  SPEAKER_01: They might be on quarterly to save them a little bit of money.
• 9:47
  SPEAKER_01: But if if an owner's not looking at their books at least a couple of times a year, even if things are flat, meaning they're selling about the same and have about the same customers, stuff sneaks in.
• 9:57
  SPEAKER_01: Like things just sneak in in the same way that you have to look at your own budget at home every once in a while.
• 10:02
  SPEAKER_01: It's it's very similar.
• 10:03
  SPEAKER_01: Like I think both deserve attention.
• 10:05
  SPEAKER_01: And even if it's the same as it's always been, you need to look at it sometimes.
• 10:11
  SPEAKER_01: If you don't want it to be the same as it's always been, you need to be looking monthly so that you can remember what these things were when we ask you, what'd you buy at Amazon?
• 10:19
  SPEAKER_01: This is our nemesis in a bookkeeping firm, what'd you buy at Amazon?
• 10:22
  SPEAKER_01: What'd you buy at Venmo?
• 10:23
  SPEAKER_01: And also you'll you'll remember things better.
• 10:25
  SPEAKER_01: And also you'll remember like what went wrong or like why did you make that decision in a sloppy way, so that we can set up a system so that next time it's not made in a sloppy way.
• 10:34
  SPEAKER_00: So what's one thing that people can do after this episode?
• 10:37
  SPEAKER_00: What would you really like them to take away from this conversation?
• 10:40
  SPEAKER_01: I think it I mean, I feel like this has been uh a bit of a pitch about profit first, which of course is a system we really like.
• 10:47
  SPEAKER_01: And I think if it resonates, like if if something about what you and I have just talked about resonates with people that I wish it wasn't like that, I think they could set a time.
• 10:55
  SPEAKER_01: It could be with me.
• 10:56
  SPEAKER_01: There are a lot of profit first professionals.
• 10:58
  SPEAKER_01: Some are niched in really highly niched areas, but we definitely know how to look at books and we know how to make you more profitable.
• 11:05
  SPEAKER_01: And all the profit first professionals I know are very quick to yield when something is outside their their talent level.
• 11:14
  SPEAKER_01: So if if you were to come to me and we talk and your business is, I'm just gonna say like trucking, and I don't know trucking, I would send you to another profit first professional who does know trucking.
• 11:24
  SPEAKER_01: So it's we'd love to talk to you.
• 11:26
  SPEAKER_01: I mean, that's our whole point is to get to know you and to see if what we say means something to you.
• 11:30
  SPEAKER_01: So if it does, let me know.
• 11:32
  SPEAKER_00: How can listeners get in touch with you?
• 11:34
  SPEAKER_01: Through the podcast.
• 11:35
  SPEAKER_01: I think, well, we're we're kind of new to podcasting, so they could try commenting through podcasting, but we can also be reached fisherbookkeeping.com and we have there's big buttons on there about set an appointment.
• 11:45
  SPEAKER_01: So uh once you get there, it's not hard to find us.
• 11:47
  SPEAKER_01: And they could probably Google my name.
• 11:49
  SPEAKER_01: I'm Barb Fisher and I own Fisher Business, and they could find it that way too.
• 11:52
  SPEAKER_00: So just to recap, the critical numbers we talked about not only include top line revenue, but also profit or net net income would be another one to look at.
• 12:03
  SPEAKER_00: Owners I actually know.
• 12:04
  SPEAKER_01: I I think even net income less.
• 12:06
  SPEAKER_01: No, I think the number we talked about really looking at is what's the benefit to the owners, right?
• 12:10
  SPEAKER_01: So what's your profit?
• 12:11
  SPEAKER_01: What's your owner comp, which is not necessarily your number in the financials.
• 12:16
  SPEAKER_01: It can be, but I want to see profit hitting an account, like the actual cash to take home, or that you have set aside for your benefit, because a lot of times that net income, you might make money, but we're paying down debt or we're changing how we collect money.
• 12:31
  SPEAKER_01: There could be a lot of reasons that net income goes up and you don't have money.
• 12:35
  SPEAKER_01: So I want you to have the money.
• 12:36
  SPEAKER_00: So net income doesn't always mean more owner comp.
• 12:39
  SPEAKER_00: It does not.
• 12:40
  SPEAKER_00: I'm sorry.
• 12:41
  SPEAKER_01: It does mean a higher tax bill, but it doesn't necessarily mean a more owner comp.
• 12:45
  SPEAKER_00: Okay.
• 12:46
  SPEAKER_00: And then you were also saying that tax if you have, I I think if nothing else, you should have maybe you would disagree with is a tax account to hold that ob that liability that you know you're gonna owe no matter what.
• 13:01
  SPEAKER_00: And so seeing the health of that tax account can also be an indicator.
• 13:05
  SPEAKER_00: So the numbers to look at would include the owner comp and the tax.
• 13:10
  SPEAKER_01: Owner comp, tax, profit, those three accounts.
• 13:12
  SPEAKER_01: If if you have profit first setup.
• 13:15
  SPEAKER_01: Right.
• 13:15
  SPEAKER_01: So to your point about we were talking a lot about if you don't have profit first setup, then right, you're looking at owner comp, which you're gonna know, and you're gonna look at that net income line, I think.
• 13:24
  SPEAKER_01: And then then it's about understanding the health of the balance sheet, which is a much more complex problem.
• 13:29
  SPEAKER_01: That's one thing that profit first helps you shortcut is you don't have to know as much about the balance sheet to understand the health of your business.
• 13:36
  SPEAKER_00: And you were saying earlier, if you're not taking owner comp, that's a red flag.
• 13:40
  SPEAKER_00: That's an indicator of the health of the business.
• 13:42
  SPEAKER_01: We need to fix that.
• 13:43
  SPEAKER_01: You deserve to be paid for your time.
• 13:45
  SPEAKER_01: You really do.
• 13:46
  SPEAKER_01: Every owner does.
• 13:47
  SPEAKER_01: You've taken so much risk, you're providing other people jobs.
• 13:49
  SPEAKER_01: If you're not making money, I I just want to send up a red flag to say there are people to help you.
• 13:54
  SPEAKER_01: I'm one of them, that we the American economy wants you making money and wants you to be sustainable in the business you have.
• 14:00
  SPEAKER_01: So you'd certainly need to make money.
• 14:02
  SPEAKER_01: First earn a dollar, then let's get you earning market rate dollars for sure.
• 14:06
  SPEAKER_01: Yeah, there's a huge difference for most people between paying themselves zero.
• 14:10
  SPEAKER_01: And then you get to these a a band of people that pay themselves two or three thousand dollars a month.
• 14:14
  SPEAKER_01: And then you need to start getting into something lower than market rate because people feel like, well, I don't work fully full time.
• 14:20
  SPEAKER_01: And then we need to get up to paying you what you should make elsewhere because you deserve to have the time and the money.
• 14:24
  SPEAKER_01: You've taken a lot of risk here.
• 14:26
  SPEAKER_00: Yeah.
• 14:26
  SPEAKER_00: Those are some good takeaways.
• 14:27
  SPEAKER_00: Do you have any final thoughts you want to share?
• 14:30
  SPEAKER_01: No, thank you for listening.
• 14:32
  SPEAKER_01: And I I do hope owner comp is a powerful number that we can drive upward for you.
• 14:38
  SPEAKER_01: And we'll be talking more about there's no way we're not talking more about owner comp as the podcast continues.
• 14:42
  SPEAKER_00: All right.
• 14:42
  SPEAKER_00: Thank you so much.
• 14:43
  SPEAKER_00: I'll talk soon.