Latest / Millennial Masters / You can’t run a business you don’t understand 📊 Lauren Pearl

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You can’t run a business you don’t understand 📊 Lauren Pearl · Millennial Masters

0:00
SPEAKER_01: He turned to me and he goes, Lauren, this business has to shut down.
0:03
SPEAKER_01: Brian knew more about my company in two minutes than I ever did.
0:07
SPEAKER_01: If you look at it and you just say, oh, that's 100K, great, I can afford 100K, good.
0:12
SPEAKER_01: You're going to be very disappointed when you discover actually
0:14
SPEAKER_01: for your This week's Millennial Master is Lauren Pearl,
0:17
SPEAKER_01: a startup finance advisor who also teaches financial modeling at NYU Stern.
0:44
SPEAKER_00: She grew up inside her family's retail business and learned finance the hard way
0:49
SPEAKER_00: after the numbers exposed problems she hadn't spotted.
0:53
SPEAKER_00: In this episode,
0:55
SPEAKER_00: we talk about how to test if the business actually works,
0:59
SPEAKER_00: the key numbers founders need to know, and where growth forecasts go wrong.
1:06
SPEAKER_00: Let's get down to business, Lauren,
1:08
SPEAKER_00: because you talk quite openly about your family's shoe business being
1:13
SPEAKER_00: where finance became real for you.
1:15
SPEAKER_00: And before we get into what happened,
1:18
SPEAKER_00: I'm wondering what were you actually responsible for in the business at the time?
1:23
SPEAKER_01: Sure.
1:23
SPEAKER_01: Actually, so throughout my life, I've worked alongside this business sort of since I was born.
1:28
SPEAKER_01: My father purchased the business.
1:30
SPEAKER_01: It was going under.
1:31
SPEAKER_01: It was one of the oldest shoe companies in the United States.
1:34
SPEAKER_01: He bought it when I was a little baby for $4,000 for very much money and grew it
1:39
SPEAKER_01: from what was essentially just a brand name into
1:41
SPEAKER_01: a seven location retail chain throughout the Northeast.
1:46
SPEAKER_01: My jobs over the years included sales I was a salesperson, shipping and receiving, inventory.
1:53
SPEAKER_01: I did purchasing.
1:55
SPEAKER_01: I worked in the accounting department.
1:57
SPEAKER_01: I helped open stores.
1:58
SPEAKER_01: I helped close stores.
1:59
SPEAKER_01: I was really just kind of all over the place,
2:02
SPEAKER_01: kind of preparing to eventually one day potentially take it over.
2:06
SPEAKER_01: And turns out as the last of five siblings,
2:08
SPEAKER_01: I got the short straw and ended up being the one slotted to do so.
2:11
SPEAKER_01: So eventually training to be the CEO.
2:14
SPEAKER_00: So you had a baptism through all the areas of the business, pretty much.
2:19
SPEAKER_01: I did.
2:19
SPEAKER_01: I did.
2:20
SPEAKER_01: I still remember I have these great memories of sitting with all of my siblings.
2:23
SPEAKER_01: I'm the youngest by at least 10 years, 10 to 20 years older.
2:27
SPEAKER_01: And so we would sit in the back room, gluing in inner soles.
2:30
SPEAKER_01: The company had a little manufacturing arm as well,
2:33
SPEAKER_01: but they came without inner soles,
2:35
SPEAKER_01: which is the lining at the footbed where your foot sits.
2:38
SPEAKER_01: And so I remember sitting in a little assembly line with all of my siblings
2:42
SPEAKER_01: and they were teaching me how to write my name in shoe glue.
2:45
SPEAKER_01: And then we'd cover it over in glue and stick it in the shoe.
2:47
SPEAKER_01: So really, truly, yeah, grew up very much in the business doing all the weird jobs.
2:53
SPEAKER_00: And at that time,
2:55
SPEAKER_00: how much did you understand about how healthy or unhealthy the business really was?
2:59
SPEAKER_01: Great question.
3:00
SPEAKER_01: I think growing up in the family business,
3:04
SPEAKER_01: The things you grow up with, you just assume everything's normal.
3:07
SPEAKER_01: I remember growing up thinking that every person's dad ran a business,
3:13
SPEAKER_01: and that's just how everyone made money.
3:15
SPEAKER_01: Eventually, I realized that wasn't always the case.
3:18
SPEAKER_01: In my purview, I heard about the day-to-day issues going on, but I assumed everything was fine.
3:24
SPEAKER_01: Quite honestly,
3:24
SPEAKER_01: I had that right in the early days because we had a lot of success in the business.
3:29
SPEAKER_01: My father was able to grow location after location.
3:32
SPEAKER_01: At the time,
3:33
SPEAKER_01: he was picking areas that didn't have a lot of competition and
3:35
SPEAKER_01: the shoe business was doing well.
3:37
SPEAKER_01: And, you know, eventually that would change.
3:40
SPEAKER_01: But for most of my growing up, things were generally going okay.
3:44
SPEAKER_00: And you worked with the CFO on one of the struggling shops, if I'm correct.
3:50
SPEAKER_00: Yes.
3:51
SPEAKER_00: What did the numbers actually show you at the time?
3:55
SPEAKER_00: Or what did you understand from those numbers?
3:58
SPEAKER_01: Yeah, so that was later on in my experience with the business.
4:01
SPEAKER_01: Growing up in the business,
4:02
SPEAKER_01: it was sort of almost just the typical kid job where you're low on the ladder
4:06
SPEAKER_01: and you don't have much to do with the big decision making.
4:09
SPEAKER_01: But after college,
4:10
SPEAKER_01: after being a developer for a couple of years,
4:12
SPEAKER_01: I rebelled and went into software and then very quickly realized,
4:15
SPEAKER_01: okay, I actually do really like business and came back.
4:19
SPEAKER_01: And in that moment as an adult,
4:22
SPEAKER_01: I was working on more high-level things,
4:25
SPEAKER_01: working alongside the CFO,
4:27
SPEAKER_01: watching the CMO,
4:29
SPEAKER_01: going to shows and really picking product lines,
4:31
SPEAKER_01: figuring out how to optimize inventory.
4:33
SPEAKER_01: So with the CFO, I recall...
4:36
SPEAKER_01: Mm-hmm.
5:02
SPEAKER_01: I became part of that decision,
5:03
SPEAKER_01: I think,
5:03
SPEAKER_01: in part because we needed to not just close down the store,
5:08
SPEAKER_01: but convince my father at the time that it's worth closing down.
5:11
SPEAKER_01: And it was one of my first lessons,
5:13
SPEAKER_01: actually,
5:13
SPEAKER_01: in understanding how emotional business can be and how working alongside CEOs,
5:19
SPEAKER_01: you really need to be sort of the steward of the truth.
5:22
SPEAKER_01: You can't just tell the persons what's necessary.
5:24
SPEAKER_01: You have to I'm going to say, I'm going to say, I'm going to say,
5:48
SPEAKER_01: It was very much about, let's see what we could do with the money.
5:51
SPEAKER_01: If we close the store, how much more inventory we could buy for the others.
5:54
SPEAKER_01: Here's the new product lines we wanted to build that we couldn't afford before,
5:59
SPEAKER_01: but we could afford if we shut down this store.
6:01
SPEAKER_01: And that was the trigger that allowed us to actually take action quickly and close
6:04
SPEAKER_01: the store before it really dragged us down.
6:06
SPEAKER_00: Yeah.
6:08
SPEAKER_00: If my research is correct,
6:10
SPEAKER_00: we're looking at about half a million dollars in inventory elsewhere released.
6:15
SPEAKER_00: So that was an easy to convince figure, right?
6:18
SPEAKER_01: It was.
6:19
SPEAKER_01: But again,
6:19
SPEAKER_01: the other challenge of working with CEOs,
6:21
SPEAKER_01: and again, it was one of my first lessons in this, is the numbers aren't everything.
6:25
SPEAKER_01: Even if it sounds like a lot of money, it still can...
6:29
SPEAKER_01: Sometimes not be the language that a founder speaks, right?
6:32
SPEAKER_01: Some founders will hear half a million dollars in inventory and get really excited, right?
6:37
SPEAKER_01: Other founders And we're possibly going to touch on a few types of people
6:42
SPEAKER_01: and how they operate mentally,
6:43
SPEAKER_01: because I liked what you said there about you can't give them the facts and
6:47
SPEAKER_01: the truth straight on.
6:47
SPEAKER_00: But I wanted to come back to the family business and
7:05
SPEAKER_00: I'm curious when the wider family business eventually closed,
7:10
SPEAKER_00: why did you realize you hadn't understood early enough even
7:14
SPEAKER_00: when you took those decisions with the shop closure?
7:18
SPEAKER_01: Yeah, so this really pulls back to my sort of arc story with the company.
7:23
SPEAKER_01: So kind of sequence of events.
7:25
SPEAKER_01: I grew up alongside the business.
7:26
SPEAKER_01: I leave, go to college.
7:27
SPEAKER_01: I decide I want to rebel,
7:29
SPEAKER_01: become a budding software engineer,
7:31
SPEAKER_01: realize, okay, fine, I do want to do the business, come back.
7:34
SPEAKER_01: And when I came back and sort of had this adult role in the company,
7:38
SPEAKER_01: I was realizing, okay, things aren't going great here.
7:41
SPEAKER_01: Like we're shutting down this store.
7:43
SPEAKER_01: We have like unpaid bills.
7:45
SPEAKER_01: We don't have all the inventory we want.
7:46
SPEAKER_01: Things seem to be not going smoothly.
7:50
SPEAKER_01: And I don't understand how to fix it because I came in as a developer.
7:54
SPEAKER_01: I don't have a business education.
7:56
SPEAKER_01: So I went to business school because I wanted to kind of learn the language
8:00
SPEAKER_01: of business and understand how to fix it.
8:02
SPEAKER_01: I thought, okay,
8:02
SPEAKER_01: I'll go to a big fancy business school and I'll learn all the things you need
8:05
SPEAKER_01: to know and then I'll come back and then everything will be better.
8:08
SPEAKER_01: And in fact,
8:09
SPEAKER_01: what happened was I went to a big fancy business school and I sat down alongside one
8:13
SPEAKER_01: of my classmates.
8:14
SPEAKER_01: I remember the room we were in.
8:16
SPEAKER_01: His name was Brian and he had worked in finance already for years before business school.
8:21
SPEAKER_01: And I sat down with our profit and loss statement,
8:24
SPEAKER_01: one of the income statements that the income statement,
8:27
SPEAKER_01: one of the financial statements that you review to understand the health of
8:30
SPEAKER_01: the business.
8:31
SPEAKER_01: And I figured this would just be a fun exercise in learning how to read financial statements.
8:36
SPEAKER_00: Dummy, I don't know how to,
8:37
SPEAKER_00: I'm a
8:37
SPEAKER_01: software engineer, I don't know how to read a financial statement.
8:40
SPEAKER_01: So I'm all excited.
8:41
SPEAKER_01: I go sit next to Brian, and he's all excited.
8:43
SPEAKER_01: He's going to show me something cool and fun.
8:46
SPEAKER_01: And I just remember his face went white.
8:48
SPEAKER_01: Like his expression totally changed.
8:51
SPEAKER_01: He turned to me and he goes, Lauren, this business has to shut down.
8:54
SPEAKER_01: And it was this gutting,
8:56
SPEAKER_01: scary moment because what he saw in those numbers was that this business was
9:01
SPEAKER_01: beyond repair.
9:02
SPEAKER_01: These unit economics weren't working.
9:04
SPEAKER_01: The cash wasn't working.
9:06
SPEAKER_01: The debt wasn't working.
9:07
SPEAKER_01: We can talk about what those things mean,
9:08
SPEAKER_01: but it just wasn't going to work, which is a sad story.
9:12
SPEAKER_01: We shut down within the year.
9:14
SPEAKER_01: But there was also kind of a hope side to that story because that moment became
9:19
SPEAKER_01: the inspiration for why I then got interested in finance.
9:22
SPEAKER_01: Because I had worked in the business for 27 years up to that point.
9:26
SPEAKER_01: And Brian knew more about my company in two minutes than I ever did.
9:31
SPEAKER_00: From glancing at the piano.
9:32
SPEAKER_01: And so I realized that, wow, like this is where the answers are.
9:37
SPEAKER_01: If I want to be a skilled business person or if I want to help someone else run a business...
9:42
SPEAKER_01: This is the language I have to learn how to speak to understand what's really going on.
9:46
SPEAKER_01: And so that's really kind of been my inspiration for what I've done ever since.
9:50
SPEAKER_00: So fast forwarding then to today and your experience you had with founders.
9:55
SPEAKER_00: Why do you think smart founders hand the numbers to an accountant or finance person
10:01
SPEAKER_00: and mentally go, right, that's handled?
10:04
SPEAKER_01: I think...
10:05
SPEAKER_01: It may be different for everyone, but there's...
10:08
SPEAKER_01: So a range of reasons that I see often.
10:10
SPEAKER_01: One, they don't understand the numbers.
10:12
SPEAKER_01: They're scary.
10:13
SPEAKER_01: They intimidate them.
10:14
SPEAKER_01: So they just want to get rid of them.
10:16
SPEAKER_01: That is definitely one thing that happens.
10:18
SPEAKER_01: Oh, that's not my job.
10:19
SPEAKER_01: Pass it elsewhere.
10:21
SPEAKER_01: The other thing that can happen is, yeah, I kind of like this, but it's annoying.
10:25
SPEAKER_01: I'm not passionate about it.
10:27
SPEAKER_01: It's all...
10:28
SPEAKER_01: This is bean counting.
10:29
SPEAKER_01: This is the details.
10:30
SPEAKER_01: This is the administration.
10:32
SPEAKER_00: And usually the founders are builders, makers.
10:35
SPEAKER_01: I make stuff.
10:36
SPEAKER_01: I build stuff.
10:37
SPEAKER_01: I don't want to be bothered with all of this administration in the background.
10:41
SPEAKER_01: But honestly, I will tell you, most times, reason number two is reason number one in disguise.
10:48
SPEAKER_01: Most times, people who are feeling like, oh, this is not my job.
10:52
SPEAKER_01: It's too tedious.
10:53
SPEAKER_01: It's
10:57
SPEAKER_01: I'm a rather clever cookie,
11:00
SPEAKER_01: and I've worked in finance exclusively for the past 10 years, and it is riveting.
11:04
SPEAKER_01: It is super interesting.
11:05
SPEAKER_01: It's really weird.
11:07
SPEAKER_01: It's really nuanced.
11:08
SPEAKER_01: There's so much data analysis.
11:10
SPEAKER_01: There's so much precision.
11:11
SPEAKER_01: It can really just break your brain.
11:13
SPEAKER_01: It's a really fascinating topic.
11:15
SPEAKER_01: And if you're working in any kind of business,
11:17
SPEAKER_01: it's a really easy thing to kind of toggle up and down between
11:20
SPEAKER_01: the financial implications of something and the business strategy of something.
11:24
SPEAKER_01: It's a really interesting exercise.
11:25
SPEAKER_01: So I actually think really smart people who have that like finance is just annoying.
11:31
SPEAKER_01: It's probably because they don't get it.
11:33
SPEAKER_01: And annoying is another way of saying I don't understand or I'm kind of nervous about it.
11:38
SPEAKER_01: I'm kind of intimidated by it.
11:40
SPEAKER_00: And that was one of the main lessons that I pulled from my episode with Melissa,
11:46
SPEAKER_00: who introduced us.
11:47
SPEAKER_00: And the specific line was that you can't manage what you don't understand.
11:52
SPEAKER_01: Totally.
11:53
SPEAKER_01: It's so true because...
11:55
SPEAKER_01: When you're running the business,
11:57
SPEAKER_01: you can often see symptoms of financial issues,
12:02
SPEAKER_01: but you can't really get at the crux without looking at the numbers, right?
12:05
SPEAKER_01: At the end of the day, like it or not, business is numbers.
12:09
SPEAKER_01: Even if you don't look at them, they're happening in the background.
12:12
SPEAKER_01: So if you don't understand how to read those numbers,
12:14
SPEAKER_01: you're basically choosing to run your business
12:17
SPEAKER_01: without knowing what actually is going on.
12:18
SPEAKER_00: So say you don't know what's going on,
12:21
SPEAKER_00: your business grows, and you've hired someone really good.
12:25
SPEAKER_00: Who still has to stay in the business and make sure that things are running properly.
12:30
SPEAKER_00: What should a founder be able to explain about their business without ringing
12:36
SPEAKER_00: the finance person?
12:37
SPEAKER_01: I would say two things.
12:38
SPEAKER_01: First, we want to think about the business fundamentals, which I can discuss.
12:44
SPEAKER_01: And then the second thing would be, on an ongoing basis, understanding key metrics.
12:52
SPEAKER_01: So the foundation of the business,
12:54
SPEAKER_01: I like to describe this as Stepping back,
12:58
SPEAKER_01: there is an equation called the profitability equation.
13:01
SPEAKER_01: It's how you calculate profit, right?
13:04
SPEAKER_01: And profit is revenue minus costs equals profit, right?
13:10
SPEAKER_01: Sometimes you can break it up into revenue minus costs,
13:14
SPEAKER_01: fixed costs minus variable costs and this sort of thing.
13:20
SPEAKER_01: Taxes.
13:20
SPEAKER_01: Right.
13:21
SPEAKER_01: At the end of the day,
13:22
SPEAKER_01: the most minimum way to describe it is profit is always revenue minus cost.
13:27
SPEAKER_01: In every single business, this is the same.
13:29
SPEAKER_01: And understanding the fundamentals of the business is knowing how
13:33
SPEAKER_01: that formula gets calculated for your particular business.
13:37
SPEAKER_01: Because it breaks down, right?
13:38
SPEAKER_01: Revenue isn't just revenue.
13:40
SPEAKER_01: Revenue is the different sales that you have for different kinds of products.
13:44
SPEAKER_01: Some of the products are sold on a per product basis.
13:47
SPEAKER_01: Some are usage basis.
13:49
SPEAKER_01: Some are ongoing retainer or services basis, right?
13:51
SPEAKER_01: And you add all of those up to get after revenue.
13:55
SPEAKER_01: Costs are all over the place.
13:56
SPEAKER_01: You have fixed costs from rent,
13:58
SPEAKER_01: you have employee costs,
14:00
SPEAKER_01: you have variable costs,
14:01
SPEAKER_01: like the cost to produce the thing you're selling that go up when you own more
14:07
SPEAKER_01: of those things or sell more of those things.
14:10
SPEAKER_01: So all these things for different businesses,
14:12
SPEAKER_01: the detailed version of that equation is different.
14:15
SPEAKER_00: For your business, you should know your equation.
14:18
SPEAKER_01: What it gets after is knowing your equation means you'll understand the connection
14:23
SPEAKER_01: between the things you do in the business and what happens on the number side,
14:28
SPEAKER_01: such that you can take an action in the business,
14:32
SPEAKER_01: look at your financial statements and say, I know where that is, right?
14:36
SPEAKER_01: I know if I sell another product that belongs on the revenue side,
14:40
SPEAKER_01: but also there's a cost there from commissions, right?
14:44
SPEAKER_01: And also there's a cost there from my salary, right?
14:48
SPEAKER_01: I know that if I increase my rent, it belongs in the rent column, right?
14:53
SPEAKER_01: And if you're not seeing the actions you're taking in the business,
14:56
SPEAKER_01: if on an everyday basis you're thinking, okay,
14:59
SPEAKER_01: I'm ordering this much more inventory,
15:01
SPEAKER_01: this much,
15:02
SPEAKER_01: this month,
15:03
SPEAKER_01: and I know some cash is going to go away, but I have goods in the warehouse.
15:07
SPEAKER_01: And you look at your financial statements and you don't see the impact of that.
15:10
SPEAKER_01: You know that you have to change up your reports, right?
15:14
SPEAKER_01: You're not seeing the way you think about your business in your reports.
15:17
SPEAKER_01: So that's sort of the first piece is understanding the foundation of your business
15:23
SPEAKER_01: and how it mechanically works in the numbers, even if it's just in theory.
15:27
SPEAKER_01: The second piece I said was key metrics.
15:30
SPEAKER_01: Key metrics sounds like a buzzword.
15:32
SPEAKER_01: It's not.
15:34
SPEAKER_01: I would narrow in on key metrics as being the numbers you watch to understand
15:39
SPEAKER_01: if your specific business is doing well or going off the rails.
15:45
SPEAKER_01: Basically, this means you are going to pick a small subset of things to track.
15:50
SPEAKER_01: For a lot of businesses, that's sales, right?
15:54
SPEAKER_01: That's total employee costs, maybe.
15:57
SPEAKER_01: That's conversion rate,
15:59
SPEAKER_01: the number of folks that decide to buy your product after hearing your sales pitch.
16:05
SPEAKER_01: You'll pick a couple of numbers.
16:07
SPEAKER_01: Subscribers, exactly.
16:09
SPEAKER_01: That can be a great leading metric, maybe.
16:11
SPEAKER_01: Sitting down with your financial pro
16:13
SPEAKER_01: and helping them decide what those metrics should be that you want to watch is
16:19
SPEAKER_01: the other piece where you really want to be engaged to ensure you're watching
16:23
SPEAKER_01: the right stuff.
16:24
SPEAKER_01: So I'd say focusing on those two areas will get you pretty set.
16:27
SPEAKER_00: So Lauren,
16:28
SPEAKER_00: have you seen a founder then become less capable of running the business
16:32
SPEAKER_00: after they hired a more sophisticated finance person?
16:36
SPEAKER_01: I think it can happen.
16:39
SPEAKER_01: I do think that when you've done finance once
16:41
SPEAKER_01: and you've figured these things out once,
16:43
SPEAKER_01: there's kind of a lucky thing about it, which is that you never really lose it.
16:48
SPEAKER_01: I feel like learning some foundational lessons about finance as a business owner,
16:51
SPEAKER_01: if you do that first, it just kind of sticks with you.
16:54
SPEAKER_01: It doesn't really degrade.
16:56
SPEAKER_01: So if they have gotten that foundation If they have gotten those fundamentals once,
17:03
SPEAKER_01: they're not really at risk of losing them with a bad finance support.
17:08
SPEAKER_01: They're more likely to just realize that the support they're getting isn't what they want.
17:13
SPEAKER_01: What I would say can happen is if they don't have the foundation at the beginning
17:16
SPEAKER_01: and they get someone who is a bad support in the finance function,
17:21
SPEAKER_01: things are going to go wrong, right?
17:23
SPEAKER_01: They're going to feel like they aren't getting the answers they seek
17:28
SPEAKER_01: or they thought they were making decisions based on information,
17:31
SPEAKER_01: but the information ended up not being very good information.
17:35
SPEAKER_01: It's not that their knowledge will atrophy.
17:39
SPEAKER_00: Yes, and you can't manage what you don't understand.
17:43
SPEAKER_01: That's right.
17:43
SPEAKER_01: That's right.
17:45
SPEAKER_00: We circle back to that.
17:47
SPEAKER_01: You can't manage what you don't understand,
17:50
SPEAKER_01: but as someone passing off the finance function,
17:53
SPEAKER_01: your role as a CEO doesn't need to be to do, it just needs to be to understand.
17:58
SPEAKER_01: So as long as you understand...
18:00
SPEAKER_01: Good or bad finance manager,
18:02
SPEAKER_01: your own development should be fine, but your business might not be fine.
18:08
SPEAKER_00: So have you seen a financial model say that became too clever for
18:14
SPEAKER_00: the business it was supposed to help?
18:16
SPEAKER_01: For sure.
18:17
SPEAKER_01: When I'm looking at models,
18:19
SPEAKER_01: I'm often thinking about it just like someone would look at like a presentation of
18:23
SPEAKER_01: who is this for?
18:24
SPEAKER_01: Because Excel is both a The differences are a bit nuanced actually.
18:30
SPEAKER_01: It's not just over complicated versus not complicated because
18:54
SPEAKER_01: Yes, it's often the case that models for founders can be a little simpler,
18:58
SPEAKER_01: a little smaller, not as extreme.
19:01
SPEAKER_01: But at the same time,
19:02
SPEAKER_01: there's cases where models for founders are actually bigger
19:05
SPEAKER_01: because Founders will more likely want to see the work,
19:09
SPEAKER_01: whereas a finance person doesn't need to see the work to see what's being calculated
19:13
SPEAKER_01: because they get it already.
19:15
SPEAKER_01: So it's less about the level of complexity and it's more just about
19:19
SPEAKER_01: the configuration matching the thought pattern of the person who's supposed
19:23
SPEAKER_00: to be using the model.
19:24
SPEAKER_01: So you're not just building a tool that works for the finance professional,
19:28
SPEAKER_01: you're building a piece of software for you to use.
19:31
SPEAKER_01: It just happens to be built in Excel.
19:33
SPEAKER_01: So the same things you'd think about If you are building an intranet site
19:38
SPEAKER_01: for your team, it's like, what forms do you want in here?
19:41
SPEAKER_01: What do you want the login to look like?
19:43
SPEAKER_01: When you want data updated, where does that go?
19:46
SPEAKER_01: How do you make sure that people know what they're entering?
19:49
SPEAKER_01: Where are they going to look at this report or that report or this resource of information?
19:54
SPEAKER_01: It's the exact same thing,
19:55
SPEAKER_01: designing the way your Excel spreadsheet should look for the people who are going to
20:01
SPEAKER_00: So speaking of that, Lauren, you use this phrase, growth without work.
20:07
SPEAKER_00: Explain what you mean by that.
20:09
SPEAKER_01: So this comes from my financial modeling course.
20:11
SPEAKER_01: So I teach a financial modeling class most semesters at NYU for their entrepreneurship program.
20:17
SPEAKER_01: And this term came up because of a thing I was seeing in many models that were being built.
20:23
SPEAKER_01: What I was seeing was in a financial model,
20:26
SPEAKER_01: okay, stepping back, what is the financial model that I was teaching?
20:30
SPEAKER_01: The financial model I was teaching was for a startup that probably doesn't exist yet.
20:35
SPEAKER_01: So in this case,
20:36
SPEAKER_01: we're basically showing the nuts and bolts of how money will move through
20:39
SPEAKER_01: the business,
20:40
SPEAKER_01: how much revenue will come in,
20:42
SPEAKER_01: what kind of costs will incur,
20:44
SPEAKER_01: how much profit will eventually make, so on and so forth.
20:47
SPEAKER_01: And so the business doesn't exist yet.
20:50
SPEAKER_01: So we have to make a lot of guesses about all of these things.
20:52
SPEAKER_01: We have no idea how much sales will be or how high costs will actually be.
20:57
SPEAKER_01: All we can do is research and make educated guesses.
21:01
SPEAKER_01: So this tends to be a little easier on the cost side of things
21:04
SPEAKER_01: because you can go out and see how much things cost.
21:06
SPEAKER_01: How much does it cost to hire an engineer?
21:08
SPEAKER_01: How much does rent cost?
21:09
SPEAKER_01: So on.
21:10
SPEAKER_01: For revenue,
21:11
SPEAKER_01: this is really hard to do because who knows how many of these things I'm going
21:15
SPEAKER_01: to sell.
21:15
SPEAKER_01: The business doesn't exist yet.
21:17
SPEAKER_01: I'll see when I open up shop, right?
21:19
SPEAKER_00: And it's not dependent on how much you invest in marketing either.
21:23
SPEAKER_01: Well, here's the thing.
21:25
SPEAKER_01: It might be.
21:26
SPEAKER_01: That kind of gets down to the sales without work versus with work.
21:31
SPEAKER_01: In the business, the wrong way to do this in the model is to say,
21:41
SPEAKER_01: 100,000 in sales in our first month.
21:43
SPEAKER_01: And then each month after that, we're going to increase sales by 5%.
21:48
SPEAKER_01: Why?
21:48
SPEAKER_01: I don't know.
21:49
SPEAKER_01: I don't have a better guess, right?
21:51
SPEAKER_01: That's the wrong way to do this.
21:52
SPEAKER_01: This is called sales without work or revenue without work because we're just putting
21:57
SPEAKER_01: in a random amount of money and The growth rate is really the sales without work.
22:03
SPEAKER_01: We're planning on increasing our sales, increasing our revenue.
22:07
SPEAKER_01: But how?
22:08
SPEAKER_01: I think the thing that breaks in people's brains before they've run
22:11
SPEAKER_01: a business is thinking that growth just happens.
22:15
SPEAKER_01: And it doesn't.
22:16
SPEAKER_01: At baseline, if you do nothing in a business, sales tend to be flat or decline.
22:24
SPEAKER_01: You have to do something for them to grow.
22:27
SPEAKER_01: And that's the point.
22:28
SPEAKER_01: That's the work.
22:32
SPEAKER_01: I'm going to spend on marketing and sales will increase.
22:49
SPEAKER_01: That is true.
22:50
SPEAKER_01: And we say that in a context of describing why we have
22:52
SPEAKER_01: to make these investment decisions strategically and the fact that they're high risk
22:56
SPEAKER_01: and don't always work out.
22:58
SPEAKER_01: But en masse,
22:59
SPEAKER_01: when we're modeling probabilities for the future,
23:01
SPEAKER_01: it is probable if we spend more money We will probably get more sales.
23:09
SPEAKER_01: That's why we spend marketing dollars in the first place, right?
23:13
SPEAKER_01: It doesn't always work, but that's a thing we can do.
23:16
SPEAKER_01: And so it is reasonable to say if we spend X amount on marketing,
23:19
SPEAKER_01: we're going to expect to see this much more in sales, right?
23:24
SPEAKER_01: It's just connecting some costs,
23:26
SPEAKER_01: some effort to that increase in sales because at the end of the day,
23:32
SPEAKER_01: We will be spending that money and hopefully getting sales.
23:37
SPEAKER_01: But if we make a model where growth just happens and there's no work involved,
23:41
SPEAKER_01: what it sets us up to do is never question that false assumption of
23:45
SPEAKER_01: if we just open up shop, growth just happens.
23:49
SPEAKER_00: Build it and they still won't come.
23:51
SPEAKER_00: That's another line that many have shared.
23:56
SPEAKER_00: So which one of these points,
23:59
SPEAKER_00: Lauren, do some of the founders you've met tend to forget or not consider?
24:06
SPEAKER_00: Where the sales are coming from?
24:07
SPEAKER_00: Is it the marketing?
24:09
SPEAKER_00: Is it the cost of the extra production?
24:12
SPEAKER_00: What's the most overlooked part when people are considering growth without work?
24:18
SPEAKER_01: I have to think about it a bit in just terms of having reviewed models,
24:21
SPEAKER_01: what people tend to leave out.
24:23
SPEAKER_01: There are probably some trends.
24:25
SPEAKER_01: So definitely marketing spend is one that people forget about or just assume
24:29
SPEAKER_01: that they won't spend because for them...
24:32
SPEAKER_01: We talk so often about startups will brandish almost the fact
24:36
SPEAKER_01: that they really haven't spent on marketing.
24:38
SPEAKER_01: Oh, we've hit this number.
24:39
SPEAKER_01: We've barely even spent on marketing as if it's a good thing.
24:42
SPEAKER_01: And it's funny because from an investor perspective or consultant perspective,
24:45
SPEAKER_01: what I hear in that is, oh, so you don't have a growth engine yet.
24:50
SPEAKER_01: I want you to spend money and have it result in sales so that if I want you
24:53
SPEAKER_01: to have more sales, we could spend more money and they happen.
24:56
SPEAKER_01: If you aren't spending anything on marketing and sales are just coming, I don't like that.
25:00
SPEAKER_01: Sales are Sales are random.
25:02
SPEAKER_01: And I have no idea if I could scale your company, right?
25:04
SPEAKER_01: So it's not actually that much of a badge of honor to say you can do.
25:08
SPEAKER_01: But so this broken understanding of the best of the best don't have to spend on marketing.
25:13
SPEAKER_01: They'll forget to put in marketing or they just won't because they won't think they need it.
25:16
SPEAKER_01: So that's a big trend.
25:17
SPEAKER_01: I would say when putting together a model, Founders forget all sorts of other different things.
25:23
SPEAKER_01: Marketing is probably the big one they forget.
25:26
SPEAKER_01: Returns for retail businesses are a big one.
25:29
SPEAKER_01: Taxes, if you plan on being a profitable business, is a big one.
25:33
SPEAKER_01: In my modeling course,
25:35
SPEAKER_01: I used to have this sheet of paper where it's just a list of all of the common costs
25:40
SPEAKER_01: that businesses had to serve as your checklist against your own model to see,
25:45
SPEAKER_01: am I leaving anything out?
25:47
SPEAKER_01: At the end of the day, though, you should be fine.
25:50
SPEAKER_01: With your model,
25:52
SPEAKER_01: the best way to check it at the end of the day will be once you actually start
25:55
SPEAKER_01: the business,
25:56
SPEAKER_01: you're just going to go look at your financial statements and see,
25:59
SPEAKER_01: okay, what did I miss, right?
26:00
SPEAKER_01: Because you'll be able to open up your P&L, your profit and loss statement.
26:03
SPEAKER_00: And you'll be able to see a breakdown of what everything costs you.
26:06
SPEAKER_01: Right.
26:07
SPEAKER_01: Because in your financial model,
26:08
SPEAKER_01: you're actually trying to replicate that same profit and loss and guess
26:12
SPEAKER_01: at what it will be.
26:13
SPEAKER_01: So if your financial statement profit and loss doesn't match the financial statement
26:17
SPEAKER_01: of your business when you actually create one,
26:19
SPEAKER_01: then you want to bring them back to parity.
26:21
SPEAKER_00: And that's what I was going to ask you next,
26:24
SPEAKER_00: because a forecast is going to be wrong anyway,
26:28
SPEAKER_00: by a small margin or by a large margin.
26:32
SPEAKER_00: So what makes a forecast genuinely useful?
26:37
SPEAKER_01: The forecast,
26:38
SPEAKER_01: I think something helpful when you're trying to do forecasting well,
26:44
SPEAKER_01: a step that people will often miss is defining what the forecasted number is
26:49
SPEAKER_01: as distinct from other numbers.
26:51
SPEAKER_01: And let's talk about revenue.
26:53
SPEAKER_01: Let's kind of isolate talking about revenue for a second because quite honestly,
26:56
SPEAKER_01: costs are a little more predictable.
26:58
SPEAKER_01: I mean, there's Cloud Compute and there's like AI,
27:01
SPEAKER_01: you know,
27:02
SPEAKER_01: token spend is now like a big exception,
27:04
SPEAKER_01: but eventually we'll be able to predict that too.
27:06
SPEAKER_00: But otherwise rent and staff would be a fixed cost to a certain extent.
27:11
SPEAKER_01: That's right.
27:12
SPEAKER_01: Pretty predictable.
27:12
SPEAKER_01: So let's think about revenue because that truly feels like,
27:15
SPEAKER_01: oh my gosh, how am I going to calculate that?
27:17
SPEAKER_01: It doesn't feel like it's in your control.
27:19
SPEAKER_01: So first we want to talk about what are we saying when we say forecast?
27:24
SPEAKER_01: Sometimes I think people confuse forecast with target.
27:28
SPEAKER_01: And they are two different numbers often.
27:30
SPEAKER_01: So your target is the number you give to your sales team.
27:33
SPEAKER_01: This is the amount of revenue you want to do, right?
27:36
SPEAKER_01: I want to hit 5 million in deals.
27:39
SPEAKER_01: Terima kasih.
28:03
SPEAKER_01: Because what are you using your forecast to do?
28:06
SPEAKER_01: You're using your forecast to budget and make sure that your spending in
28:10
SPEAKER_01: the business doesn't ruin the business,
28:13
SPEAKER_01: given how much money you'll be making into the future.
28:15
SPEAKER_01: That's its point, right?
28:17
SPEAKER_01: It's how much money will be coming in tomorrow.
28:19
SPEAKER_00: And that's why you want the forecast to be below the actual forecast.
28:23
SPEAKER_01: Just a little, right?
28:24
SPEAKER_01: I mean, you would like it to just be accurate.
28:27
SPEAKER_01: But given the choice,
28:28
SPEAKER_01: especially in a small business,
28:30
SPEAKER_01: I'd rather it be a little under than a little over, right?
28:33
SPEAKER_01: Because I want to make sure that I'm not outspending my sales.
28:38
SPEAKER_01: How do you calculate this?
28:39
SPEAKER_01: Again, it kind of goes back to the discussion about sales without work.
28:44
SPEAKER_01: The way you calculate it is to look at the work.
28:46
SPEAKER_01: You look at what do I control in that whole sales chain.
28:51
SPEAKER_01: I can't necessarily control who buys from me,
28:53
SPEAKER_01: but there's a lot of things I do in creating those sales.
28:58
SPEAKER_01: I hire salespeople.
28:59
SPEAKER_01: I have a certain pitch that has a certain conversion rate.
29:02
SPEAKER_01: I call a certain number of leads.
29:05
SPEAKER_01: So what we can say is, We can set some kind of benchmarks.
29:10
SPEAKER_01: Let's say right now we are making a million a quarter and we have
29:14
SPEAKER_01: a single salesperson and they're calling maybe 10 leads a week and 1% of those leads
29:22
SPEAKER_01: over time typically results in a customer.
29:25
SPEAKER_01: It doesn't sound like a great conversion rate or very many customers,
29:28
SPEAKER_01: but let's say that's what happens.
29:30
SPEAKER_01: If we want to increase sales,
29:32
SPEAKER_01: we can theorize about, okay, well, that's how much work we're doing now.
29:38
SPEAKER_01: How could we increase our work?
29:40
SPEAKER_01: If we call 20 leads every week instead,
29:44
SPEAKER_01: Keeping everything the same, we should probably get double the sales, right?
29:49
SPEAKER_00: But do you simply multiply it?
29:51
SPEAKER_00: Or, for example, if you have two salespeople instead of just one, it won't be 2%.
29:58
SPEAKER_00: It will maybe be 1.5 or 1.7.
30:02
SPEAKER_01: Right.
30:02
SPEAKER_01: So this is about testing assumptions.
30:05
SPEAKER_01: Because again,
30:06
SPEAKER_01: as we're moving through the business,
30:08
SPEAKER_01: what we're trying to do is do the best with the numbers that we currently have
30:12
SPEAKER_01: and continuously redefine our assumptions and the way
30:17
SPEAKER_01: that we're calculating these things.
30:18
SPEAKER_01: So you might in the outset with your current salespeople say,
30:24
SPEAKER_01: I think getting two salespeople, we're going to double this.
30:27
SPEAKER_01: What are the things that would make me think we're going to double this?
30:29
SPEAKER_01: One would be there's so many customers that are like in this pool,
30:34
SPEAKER_01: there's way more than enough for two salespeople.
30:37
SPEAKER_01: And so there's no reason why they should step on each other's toes.
30:40
SPEAKER_01: Conversion should be the same, right?
30:42
SPEAKER_01: But if instead you're in a highly competitive industry,
30:46
SPEAKER_01: You might say,
30:47
SPEAKER_01: you know what,
30:48
SPEAKER_01: it might mean that there's fewer customers,
30:50
SPEAKER_01: they're kind of splitting sales, we want them to collaborate.
30:52
SPEAKER_01: We don't actually think this is going to double sales because of that effect.
30:56
SPEAKER_01: So we're going to have a more conservative projection on what's going to happen, right?
31:02
SPEAKER_01: It's not that you're always going to get it exactly right.
31:05
SPEAKER_01: It's that you're trying as hard as you can to think about it all the way through.
31:09
SPEAKER_01: You're trying to break these situations into their metrics
31:14
SPEAKER_01: because you see what we're talking about now,
31:16
SPEAKER_01: even talking about these two scenarios with the salespeople.
31:20
SPEAKER_01: We're talking in numbers right now.
31:22
SPEAKER_01: We're talking about salespeople.
31:23
SPEAKER_01: You know, we're talking about their deals.
31:26
SPEAKER_00: But the same can be about content output and so many other parts of any business.
31:31
SPEAKER_01: Right.
31:32
SPEAKER_01: But you see that we're having kind of a strategic conversation that now is based in
31:35
SPEAKER_01: the numbers and both of us are thinking about the same math in our heads.
31:39
SPEAKER_01: Is conversion going to go flat or actually does conversion go down
31:43
SPEAKER_01: because two people is crowded and so their conversion will be less high?
31:47
SPEAKER_00: And the same can apply for marketing.
31:48
SPEAKER_00: You can double your marketing spend, but it doesn't mean that your sales will double.
31:52
SPEAKER_01: That's right.
31:53
SPEAKER_01: It might not.
31:53
SPEAKER_01: There may be diminishing returns.
31:55
SPEAKER_01: But we're trying to understand all through like why that's the case, right?
31:59
SPEAKER_01: And there's a lot of do it and test.
32:02
SPEAKER_01: I talk a lot in small businesses and startups how everything should be an experiment.
32:08
SPEAKER_01: I used to teach this course at NYU called Test Everything,
32:11
SPEAKER_01: where it was basically a product market fit class for very,
32:15
SPEAKER_01: very early stage startups.
32:16
SPEAKER_01: And it was about taking your business idea and breaking it down into all of
32:21
SPEAKER_01: the like tens of like almost a hundred different assumptions that are inherent in
32:26
SPEAKER_01: that that you could be testing for.
32:29
SPEAKER_01: So for situations like this where we're not sure the impact of this work,
32:33
SPEAKER_01: if we're And that's how you continually get better.
32:35
SPEAKER_01: And how or where would a founder find this bandwidth?
32:54
SPEAKER_00: In between coming up with the product idea or the service idea,
32:59
SPEAKER_00: delivering it if it's the service and all the other moving parts of a business.
33:04
SPEAKER_00: Granted,
33:05
SPEAKER_00: this is one of the most important parts of the business
33:08
SPEAKER_00: that one should pay attention to,
33:10
SPEAKER_00: but because it sometimes or very often it doesn't have immediate implications.
33:16
SPEAKER_00: It's two, three months down the line where you start noticing things going wrong.
33:22
SPEAKER_00: And by that point, it would be too late.
33:24
SPEAKER_00: How can you make sure that you pay enough attention to those numbers from the beginning?
33:29
SPEAKER_00: Is it building it into your business plan?
33:32
SPEAKER_00: Because I know if you seek investment,
33:34
SPEAKER_00: that is what Money Wise Investor will ask you from the cost of acquisition of
33:41
SPEAKER_00: a new customer to your unit economics and so forth.
33:46
SPEAKER_01: So you asked about time.
33:48
SPEAKER_01: When does a founder find time for this?
33:50
SPEAKER_01: I would find the time in the earliest stage that you can,
33:55
SPEAKER_01: quite honestly, because what are you actually doing, right?
33:58
SPEAKER_01: The practice of having an ongoing finance function does not necessarily have to be
34:02
SPEAKER_01: the task of the founder.
34:03
SPEAKER_01: You don't have to sit there modeling all of your numbers in Excel and doing that day
34:07
SPEAKER_01: in and day out.
34:08
SPEAKER_01: You can hire that to do it for you.
34:10
SPEAKER_01: As we've already said, that's not the founder's job.
34:12
SPEAKER_01: The founder's job is to understand what's actually happening.
34:16
SPEAKER_01: And that understanding is resilient.
34:18
SPEAKER_01: You can learn it once and you'll kind of always know it as long
34:21
SPEAKER_01: as you keep integrating it into the way you think about the business.
34:24
SPEAKER_01: So what I encourage founders to do, if they can, is to build their very first financial model.
34:32
SPEAKER_01: It's the perfect time to do it.
34:33
SPEAKER_01: It's really early in the business.
34:34
SPEAKER_01: The business isn't complicated yet.
34:36
SPEAKER_01: It's the simplest it's ever going to be.
34:38
SPEAKER_01: The stakes are the lowest because you can be wildly wrong and have plenty of time to pivot.
34:43
SPEAKER_01: It's kind of like this perfect learning experience to do it like
34:47
SPEAKER_01: when you very first start to go for like pre-seed or seed funding
34:51
SPEAKER_01: to build your first model.
34:52
SPEAKER_01: I would get into it there.
34:54
SPEAKER_01: I wouldn't use AI.
34:55
SPEAKER_01: I wouldn't use someone else to build the business.
34:57
SPEAKER_01: I wouldn't use a software program.
34:59
SPEAKER_01: I'd sit down in Excel and just do it yourself,
35:01
SPEAKER_01: which is what I've encouraged founders that I bump into to do.
35:08
SPEAKER_01: Roost, I started a bit as an experiment.
35:12
SPEAKER_01: I rage quit a previous job and decided that I wanted to prove
35:18
SPEAKER_01: that I could raise funding for something.
35:20
SPEAKER_01: My partner in Roost Homes was an And he had this idea
35:25
SPEAKER_01: that these prefabricated home designs that they had built could potentially be
35:29
SPEAKER_01: a startup.
35:30
SPEAKER_01: And so I sat down and studied it and studied home construction and looked at
35:33
SPEAKER_01: the market and decided,
35:35
SPEAKER_01: you know what,
35:36
SPEAKER_01: I've been looking for a business idea that I could go and get funded and start
35:39
SPEAKER_01: and be a founder.
35:40
SPEAKER_01: This one seems pretty good.
35:42
SPEAKER_01: Let's go do it.
35:43
SPEAKER_01: I think probably,
35:44
SPEAKER_01: you know,
35:45
SPEAKER_01: I'm a numbers focused person,
35:46
SPEAKER_01: but also this was a really unique situation where I was evaluating the deal myself,
35:51
SPEAKER_01: almost as if an investor, right?
35:52
SPEAKER_01: Thinking about like, is this business likely to make it?
35:55
SPEAKER_00: That's something that you did yourself, isn't it, Lauren?
35:58
SPEAKER_00: Because I want to get into Roost,
36:00
SPEAKER_00: because there you did something that a lot of founders talk about,
36:04
SPEAKER_00: but rarely actually do,
36:06
SPEAKER_00: which is deciding beforehand what could be success and what could be failure.
36:13
SPEAKER_00: Was that to have an exact amount of time in which you can decide and spend on this?
36:19
SPEAKER_01: So with Roost, I was really in a unique situation.
36:22
SPEAKER_01: I was just coming off of another full-time role and really feeling like I wanted
36:27
SPEAKER_01: to run my own business for the first time.
36:30
SPEAKER_01: But in doing so,
36:31
SPEAKER_01: I was pretty clear on my definition of what that would be,
36:36
SPEAKER_01: the kind of business I would be happy to run.
36:38
SPEAKER_01: I wanted it to be either highly profitable or VC backed.
36:41
SPEAKER_01: I wanted to be doing something that made the world a better place.
36:45
SPEAKER_01: And I wanted it to be in an area that I could feel passionate about and excited about.
36:50
SPEAKER_01: And so I had that kind of image in mind.
36:53
SPEAKER_01: I happened upon a partner and a business idea in the home construction industry,
36:58
SPEAKER_01: prefabricated homes to the Passive House standard,
37:01
SPEAKER_01: which meant they were very energy efficient and good for the environment.
37:04
SPEAKER_01: So in theory, it checked all three of my boxes.
37:08
SPEAKER_00: Mm-hmm.
37:09
SPEAKER_01: And I continued to push it forward.
37:11
SPEAKER_01: We got it a little bit of funding.
37:12
SPEAKER_01: We got the initial designs done.
37:14
SPEAKER_01: We seemed to have our first early customers that were excited to take on the project.
37:19
SPEAKER_01: We were getting great reviews for the design because the architect I worked with was very good.
37:23
SPEAKER_01: So all these things kind of were clicking into place.
37:25
SPEAKER_01: But then slowly, I was realizing it wasn't really hitting the notes that I knew I wanted to hit.
37:33
SPEAKER_01: My partner was not so interested in taking on more venture money,
37:39
SPEAKER_01: which makes the VC path tough.
37:41
SPEAKER_01: The cash cycles for the construction industry are very long and very risky.
37:47
SPEAKER_01: I also, in terms of passion, I loved the building science behind it.
37:51
SPEAKER_01: You can't tell already I'm a huge nerd.
37:52
SPEAKER_01: So I loved kind of learning about building science and how buildings heat and cool
37:56
SPEAKER_01: and all this sort of thing.
37:57
SPEAKER_01: But that wasn't my job.
37:59
SPEAKER_01: My job was selling houses and I've never been interested in selling real estate
38:03
SPEAKER_01: or being a real estate agent.
38:04
SPEAKER_01: So that really wasn't my thing.
38:07
SPEAKER_01: And then the nail in the coffin was realizing that the customer sentiment and
38:12
SPEAKER_01: the kind of product market fit what people wanted.
38:16
SPEAKER_01: Wasn't environmentally friendly homes.
38:19
SPEAKER_01: People said they wanted environmentally friendly homes and high efficiency homes.
38:23
SPEAKER_01: But in fact, when it came to spending their dollars, they didn't.
38:26
SPEAKER_01: They just wanted an ADU on their property.
38:28
SPEAKER_00: And that's a trap so many founders can fall into in so many areas.
38:33
SPEAKER_00: People say one thing, but they actually do something totally different.
38:37
SPEAKER_01: Exactly, exactly.
38:39
SPEAKER_01: And so, you know,
38:40
SPEAKER_01: for some folks,
38:41
SPEAKER_01: and actually for me, I could have decided, you know what, that's okay.
38:44
SPEAKER_01: I'll just pivot into what customers do want.
38:46
SPEAKER_01: All the other pieces are kind of in place.
38:48
SPEAKER_01: I'll hire someone else to sell the homes and we'll just pivot into doing ADUs
38:52
SPEAKER_01: or big, beautiful custom homes or what have you.
38:55
SPEAKER_01: But were I to do so, I wouldn't be hitting the points, the checklist that I had in mind.
39:00
SPEAKER_01: This wasn't the business that I wanted to run.
39:02
SPEAKER_01: And so that was really what caused me to shut it down and focus on
39:06
SPEAKER_01: the business I run now,
39:07
SPEAKER_01: where I really have all of the aspects that I wanted in the beginning from
39:10
SPEAKER_01: that business in my own business doing education and consulting,
39:14
SPEAKER_01: which is what I do now.
39:15
SPEAKER_00: So did you immediately accept it at the end of that summer?
39:19
SPEAKER_00: Or did you start looking for maybe some reasons to keep it going?
39:24
SPEAKER_00: Because
39:26
SPEAKER_00: In my experience,
39:28
SPEAKER_00: that has been something that tore me internally,
39:32
SPEAKER_00: and I'm sure that many founders wrestle with it.
39:35
SPEAKER_00: You'll find a bit more money here,
39:37
SPEAKER_00: you'll beg,
39:37
SPEAKER_00: borrow and steal from there,
39:39
SPEAKER_00: and you'll be able to buy yourself a bit more time until things start looking
39:44
SPEAKER_00: the way you hoped they would.
39:46
SPEAKER_01: Yes, it's always a really hard decision to shut down a business.
39:50
SPEAKER_01: Roost is just the first business I shut down.
39:52
SPEAKER_01: I shut down another business later on in the past seven years.
39:55
SPEAKER_01: So it's always hard.
39:59
SPEAKER_00: Hmm.
40:00
SPEAKER_01: I took not too much longer,
40:02
SPEAKER_01: I think,
40:02
SPEAKER_01: than I needed to,
40:03
SPEAKER_01: but I definitely knew the business needed to close a month or two
40:08
SPEAKER_01: before I actually closed it.
40:11
SPEAKER_01: And it's exactly the process that you describe.
40:14
SPEAKER_01: You really are sifting through all the options of things that you could do
40:18
SPEAKER_01: to not shut it down because- It's only human.
40:22
SPEAKER_01: If you spend so much time putting something together,
40:24
SPEAKER_01: building the dream, you have to get excited about an idea like this to do it.
40:29
SPEAKER_01: I mean, if you think about what we do as founders to get a business going, it's kind of crazy.
40:34
SPEAKER_01: It's kind of like having kids.
40:35
SPEAKER_01: There's so much work involved that if an alien zoomed down and looked
40:39
SPEAKER_01: at us doing what we're doing from outside,
40:41
SPEAKER_01: they would probably say like, These are irrational, crazy people.
40:45
SPEAKER_01: They're doing not the right thing.
40:47
SPEAKER_01: They should just go get a job.
40:48
SPEAKER_01: The money's here.
40:49
SPEAKER_01: Why wouldn't you just do that?
40:50
SPEAKER_01: You have to be in love with it.
40:52
SPEAKER_01: It's the only rational reason to keep doing what you're doing.
40:54
SPEAKER_01: And that same love can make you continue to do it beyond the point where it's working.
41:01
SPEAKER_00: And be in denial, yeah.
41:02
SPEAKER_01: And be in denial.
41:04
SPEAKER_01: But I think that's okay.
41:06
SPEAKER_01: That's understandable.
41:07
SPEAKER_01: I do think that being tuned into the numbers can speed up the process
41:11
SPEAKER_01: because you can see the writing on the wall as opposed to closing your eyes
41:15
SPEAKER_01: and ignoring the writing on the wall.
41:16
SPEAKER_01: But I think it's not just the numbers.
41:18
SPEAKER_01: I think it's also your support system.
41:20
SPEAKER_01: The kinds of things that can help you not just run down the rabbit hole are mentors
41:24
SPEAKER_01: who will tell you the truth.
41:26
SPEAKER_01: Friend groups who are peers,
41:28
SPEAKER_01: who are kind of in the same business and understand what you're going through.
41:32
SPEAKER_01: Having those external touch points kept alive,
41:35
SPEAKER_01: which is a tall order when you're starting a business.
41:37
SPEAKER_01: It's hard to have a social life.
41:39
SPEAKER_01: But that social life, I think, becomes your mental lifeline.
41:42
SPEAKER_00: So you now sit on the other side of this as the finance person, founders hire.
41:48
SPEAKER_00: So I'm wondering, Lauren,
41:50
SPEAKER_00: how do you stop yourself becoming the person they depend on
41:53
SPEAKER_00: to understand their own company?
41:55
SPEAKER_00: That's a great question.
41:57
SPEAKER_01: Actually...
41:58
SPEAKER_01: It speaks to a shift I've made in my own practice over the years where, again, nerd.
42:05
SPEAKER_01: So I'm always kind of observing, experimenting, and refining how I do things that I do.
42:11
SPEAKER_01: And early on in the business,
42:12
SPEAKER_01: I was taking on more of what people call now a fractional CFO role,
42:15
SPEAKER_01: which basically just means part-time CFO.
42:18
SPEAKER_01: And so for 20 hours a week or 10 hours a week...
42:21
SPEAKER_01: You're working as a part-time employee,
42:24
SPEAKER_01: basically, doing what a CFO would do or a finance department would do.
42:28
SPEAKER_01: Not all fractional CFOs do CFO work.
42:30
SPEAKER_01: Some of them do more accounting or more bookkeeping or what have you,
42:32
SPEAKER_01: but that's great as long as they're helping the business.
42:35
SPEAKER_00: And so that's how I started too.
42:37
SPEAKER_00: And what I realized was,
42:39
SPEAKER_00: you know,
42:40
SPEAKER_01: this execution stuff that I'm doing,
42:42
SPEAKER_01: this running the reports,
42:44
SPEAKER_01: this like managing the accounting team, you know, putting together the...
42:50
SPEAKER_01: The dashboard every week.
42:52
SPEAKER_01: It's not really where the value is.
42:54
SPEAKER_01: The value seems to be in the conversations that I'm having.
42:57
SPEAKER_01: That's really where the things are hitting because I've been a CFO for four years at that point.
43:03
SPEAKER_01: And so I slowly started to morph my practice into thinking about like,
43:07
SPEAKER_01: what are the really high value touch points I'm having with these folks?
43:11
SPEAKER_01: Teaching them how to model was a very high value touch point
43:13
SPEAKER_01: because it's something that's really hard to teach and can be frustrating
43:16
SPEAKER_01: for some folks, but I just love it.
43:17
SPEAKER_01: So that was really working well.
43:19
SPEAKER_00: You can tell.
43:21
SPEAKER_01: Yeah.
43:22
SPEAKER_01: Cool.
43:22
SPEAKER_01: I'm going to start blushing now.
43:24
SPEAKER_01: Helping them make strategic decisions while pulling in numbers was really valuable.
43:28
SPEAKER_01: A little bit on building financial reports and picking
43:31
SPEAKER_01: which metrics we should be using and kind of focusing attention.
43:34
SPEAKER_01: All of those areas were really high value.
43:37
SPEAKER_01: But I was realizing I can really kind of either outsource
43:40
SPEAKER_01: or help them find someone else to do a lot of the other things,
43:43
SPEAKER_01: the bookkeeping, the report writing, the accounting, all of these things.
43:47
SPEAKER_01: There's armies of folks who are really talented in those areas,
43:50
SPEAKER_01: and I can pull them in and get us a little more action.
43:53
SPEAKER_01: So now I really focus on advising and education.
43:57
SPEAKER_00: I know you've been testing AI on financial work,
44:00
SPEAKER_00: and as it is with writing and reporting,
44:05
SPEAKER_00: The scary bit seems that it can give you something that looks completely believable
44:10
SPEAKER_00: or trustworthy or totally fine, but it's either logically or factually wrong.
44:17
SPEAKER_00: What's one of the most dangerous examples you've caught?
44:20
SPEAKER_01: I have a whole saga that's ongoing trying to work with Excel using AI.
44:25
SPEAKER_01: Actually,
44:25
SPEAKER_01: it's funny,
44:26
SPEAKER_01: this exploration of the efficacy of AI and the safety around it is an area
44:31
SPEAKER_01: that I've started to study a lot recently.
44:34
SPEAKER_01: My first CFO role actually I was four years with a security research company
44:38
SPEAKER_01: and having a programmer background.
44:39
SPEAKER_01: I've even run a security research team.
44:42
SPEAKER_01: So I'm really interested in kind of the guts of this thing
44:45
SPEAKER_01: and seeing how it's changing the quality of our work and changing our exposure
44:50
SPEAKER_01: to risk, specifically in
44:53
SPEAKER_00: the numbers game.
44:54
SPEAKER_01: I think I have,
44:56
SPEAKER_01: someone recently gave me a great quote,
44:58
SPEAKER_01: and I'm trying to remember what it was,
44:59
SPEAKER_01: but Dia Sagar,
45:00
SPEAKER_01: who is the CFO of a company that produces comic books that turn into films,
45:05
SPEAKER_01: had this great line,
45:06
SPEAKER_01: we did a podcast earlier,
45:08
SPEAKER_01: We did a panel with her and a lot of other media CFOs,
45:11
SPEAKER_01: and she was talking about how tough it was working with AI and finance.
45:15
SPEAKER_01: And what she said was, you know, where finance, 80% isn't good enough for us.
45:21
SPEAKER_01: AI is a probabilistic function where it's right some of the time.
45:26
SPEAKER_01: And in finance, we cannot afford to be right some of the time.
45:28
SPEAKER_01: We have to be right all of the time.
45:30
SPEAKER_01: So 99%, 80%, it's a failing grade for us.
45:34
SPEAKER_01: So AI can help speed up our work somewhat,
45:37
SPEAKER_01: but because accuracy and quality is so important in what we do,
45:42
SPEAKER_01: we have to check every single output.
45:45
SPEAKER_01: So it can maybe save us some time in getting better recommendations.
46:09
SPEAKER_01: But in a lot of the other function,
46:11
SPEAKER_01: it introduces this layer of untrustworthiness in all of our outputs that
46:17
SPEAKER_01: as finance folks really can get in the way because something isn't done
46:22
SPEAKER_01: when it's done to 80% in the finance function.
46:24
SPEAKER_01: It's not done until it's 100%.
46:26
SPEAKER_01: So I think we are struggling a lot in that finance function,
46:29
SPEAKER_01: knowing if we're actually saving that time that we think we are,
46:32
SPEAKER_01: if it's the case we have to go back and redo work.
46:36
SPEAKER_00: And that could be one of the false economies,
46:39
SPEAKER_00: which maybe it should make it on the balance sheet.
46:43
SPEAKER_01: At the same time, you know, there is progress being made.
46:45
SPEAKER_01: It's ongoing.
46:46
SPEAKER_01: And finance is one of the really big areas of focus.
46:48
SPEAKER_00: AI is so much better at counting now and basic addition, much better.
46:54
SPEAKER_00: A couple of years ago, even adding 10 numbers would yield incorrect result.
47:00
SPEAKER_00: So let's say, though,
47:01
SPEAKER_00: that AI gives you a beautiful forecast in 30 seconds or a minute
47:05
SPEAKER_00: and you use whichever is the latest model.
47:08
SPEAKER_00: Claude, GPT, by the way, which one do you use?
47:12
SPEAKER_01: Depends on the task.
47:13
SPEAKER_00: Okay, quick breakdown so we can have some useful tips for people.
47:18
SPEAKER_01: I think first off, it is going to evolve over time.
47:21
SPEAKER_01: So these aren't hard and fast rules.
47:23
SPEAKER_01: It's just who happens to have the most development at any one time.
47:26
SPEAKER_01: I tend to use the quad plugin to work in Excel.
47:29
SPEAKER_01: That said, it's still not great and it can be very tricky to work with.
47:34
SPEAKER_01: So I'd proceed with caution,
47:36
SPEAKER_01: but I would say it's the best one for working in the spreadsheet so far.
47:40
SPEAKER_00: But back to my main question was you trained your AI to know everything
47:46
SPEAKER_00: about your business or as much as it can.
47:50
SPEAKER_00: What would be the first thing you'd make me change or test before I trusted it?
47:54
SPEAKER_01: The first thing I would probably do would to be build tests in it manually.
48:01
SPEAKER_01: Oftentimes in finance, what's really lovely is there's multiple ways of calculating stuff.
48:07
SPEAKER_01: We'll calculate something, let's say profit, for example.
48:11
SPEAKER_01: We could calculate profit by looking at all of the different revenue sources.
48:16
SPEAKER_01: And subtracting all of the different cost sources in your model
48:21
SPEAKER_01: as you have modeled them with all of the drivers and assumptions
48:24
SPEAKER_01: that we've described.
48:25
SPEAKER_01: Or you could look for the same month that your totals in your financial statement
48:29
SPEAKER_01: that match all of those assumptions and just pulling them in.
48:33
SPEAKER_01: Let's say in your model you've built a model where those two things should equal each other.
48:38
SPEAKER_01: A test would test do these equal each other as a way of checking that all
48:42
SPEAKER_01: that driver logic was correct, right?
48:45
SPEAKER_01: This is just one example, but writing tests is a little hard.
48:47
SPEAKER_01: You have to look at what the sheet is calculating and say,
48:51
SPEAKER_01: what are two totals that should match or what should this do
48:54
SPEAKER_01: if it's working properly?
48:56
SPEAKER_00: So it's hard to be specific here.
48:57
SPEAKER_01: So you'd either build a test,
49:01
SPEAKER_01: you'd look at the spreadsheet and say, what is a test I can build here?
49:06
SPEAKER_01: Otherwise,
49:07
SPEAKER_01: you could look through and simply click around to see,
49:10
SPEAKER_01: do I believe all of the ways it's calculated?
49:13
SPEAKER_01: So as a manual auditor who does this more on a casual basis,
49:16
SPEAKER_01: not as a cell-by-cell basis,
49:18
SPEAKER_01: when someone's built a model, I cannot just follow their cells.
49:22
SPEAKER_01: I'm also kind of following their brain.
49:24
SPEAKER_01: I see how they're calculating something,
49:25
SPEAKER_01: and because I've been doing this for years,
49:26
SPEAKER_01: I can say, oh,
49:27
SPEAKER_00: I kind of see what they're doing.
49:28
SPEAKER_00: If they're doing it this way, I bet they made this mistake over here.
49:31
SPEAKER_00: Oh, yep, they did make this mistake over here.
49:32
SPEAKER_01: This is a conversation we need to have.
49:34
SPEAKER_01: So I have this sort of...
49:36
SPEAKER_01: Extra sense of what's going on that can help me work with a modeler and ensure
49:41
SPEAKER_01: that there's fewer mistakes and then pair it with tests.
49:45
SPEAKER_01: But with AI, they don't have that reasonable human logic to follow.
49:50
SPEAKER_01: And so it can make mistakes in totally weird places you would never predict,
49:57
SPEAKER_01: which again makes it really hard to find all
50:00
SPEAKER_01: the potential mistakes it might be making.
50:02
SPEAKER_01: Pair this with Excel models are a tough problem for it to solve because
50:08
SPEAKER_01: the context required for that AI to do things properly is really big
50:15
SPEAKER_01: because models are huge.
50:19
SPEAKER_01: It's the numbers, it's the display, it's the colors, it's the position.
50:22
SPEAKER_01: There's a lot of factors.
50:23
SPEAKER_01: And they have fewer Excel models to build into their training data
50:29
SPEAKER_01: than they do software programs.
50:30
SPEAKER_01: So they also don't have as much data to do their pattern matching on.
50:34
SPEAKER_01: So it's just a tough area as well for the AI to consistently do well.
50:39
SPEAKER_01: Despite that, it's continuing to get better, but it's still not perfect.
50:43
SPEAKER_01: And if it's not perfect and it's not predictable where it's going to go wrong,
50:46
SPEAKER_01: it's really hard to use.
50:49
SPEAKER_00: And you need to know what you're doing because that's my next question.
50:54
SPEAKER_00: Whether it's AI or another person doing the analysis,
50:59
SPEAKER_00: what does the founder still need to understand themselves before making
51:04
SPEAKER_00: the decision?
51:05
SPEAKER_01: I think the most foundational thing that the founder needs to understand
51:08
SPEAKER_01: when they're doing anything in Excel is what is your goal here?
51:13
SPEAKER_01: Like, what are you trying to find out with this thing?
51:17
SPEAKER_01: If you are simply trying to create a report for your investors and it's just
51:21
SPEAKER_01: a run-of-the-mill report that they just always want to see,
51:25
SPEAKER_01: then your goal is to get to that template.
51:28
SPEAKER_01: But if you want to create some kind of financial model to give you an answer,
51:32
SPEAKER_01: then you want to really be thinking about what is this question I'm trying to answer
51:36
SPEAKER_01: and what is the data I need to see that will make me feel satisfied
51:41
SPEAKER_01: in getting there.
51:42
SPEAKER_01: If that's where you start,
51:45
SPEAKER_01: It might be the case that you need to do way less modeling
51:48
SPEAKER_01: than you initially thought in getting there.
51:51
SPEAKER_01: You might say, oh,
51:52
SPEAKER_01: I need to understand the profit of my company and then think you have to build
51:57
SPEAKER_01: a huge model that's going to incorporate all of your business lines and all
52:02
SPEAKER_01: of your costs.
52:03
SPEAKER_01: When in fact,
52:04
SPEAKER_01: if all you want to know is the profit because you want to be able
52:07
SPEAKER_01: to predict your cash next quarter,
52:09
SPEAKER_01: you might be able to just use,
52:11
SPEAKER_01: if you have consistent costs and reasonably consistent revenues,
52:15
SPEAKER_01: And what's the biggest difference between a service-based business versus
52:19
SPEAKER_01: a product-based business?
52:45
SPEAKER_01: So you're constantly trying to figure out, do I have enough work?
53:03
SPEAKER_01: And building models for that business is often about giving you really good fidelity
53:09
SPEAKER_01: in understanding that.
53:11
SPEAKER_01: And if you've got all of your reports set up the way you would in
53:14
SPEAKER_01: a product business,
53:14
SPEAKER_01: you're not going to see any of that information because you're just going to have
53:17
SPEAKER_01: a big salaries total line.
53:20
SPEAKER_01: And that doesn't tell you anything about capacity to serve.
53:23
SPEAKER_01: So you need to have more reports beyond just the income statement talking
53:27
SPEAKER_01: about hours or days available and You might also need to think about things in terms
53:32
SPEAKER_01: of per project if you're wanting to look at different profitability per project
53:36
SPEAKER_01: if that's a thing for you.
53:38
SPEAKER_00: It gives a lot of thinking space there,
53:42
SPEAKER_00: but I'm going to try and wrap up our discussion with a more pointed question,
53:49
SPEAKER_00: Lauren,
53:50
SPEAKER_00: because I'm wondering after everything you've seen,
53:54
SPEAKER_00: what would you say is a decision that founders most often make
53:58
SPEAKER_00: before they properly understand the numbers underneath it?
54:03
SPEAKER_00: It could be a cut, it could be an increase, but that gives you an idea of where I'm angling.
54:08
SPEAKER_01: A decision they make before they understand the numbers.
54:11
SPEAKER_01: They understand the numbers
54:12
SPEAKER_00: underneath it.
54:13
SPEAKER_01: Probably hiring.
54:15
SPEAKER_00: So a basic one, but also with big implications.
54:18
SPEAKER_01: Yeah, so I would say it's hiring.
54:21
SPEAKER_01: Maybe there's two of the most common that I'm seeing.
54:23
SPEAKER_01: Hiring or new products, I'd say, are the two that I see get made wrong most often.
54:31
SPEAKER_01: And it's because of the hidden costs involved.
54:33
SPEAKER_01: So for hiring,
54:34
SPEAKER_01: oftentimes,
54:36
SPEAKER_01: especially if it's early days and you're not used to hiring people,
54:39
SPEAKER_01: you might underappreciate all the costs that come alongside hiring beyond just
54:44
SPEAKER_01: that salary number.
54:46
SPEAKER_00: Yeah.
54:46
SPEAKER_01: And also... Guilty.
54:48
SPEAKER_01: You might...
54:49
SPEAKER_01: Right?
54:49
SPEAKER_01: So it's not just the salary, it's the benefits, it's the computer, it's...
54:53
SPEAKER_00: The tax, the subscriptions, the transport, etc.
54:57
SPEAKER_01: The compliance,
54:58
SPEAKER_01: all of the HR stuff,
55:00
SPEAKER_01: the fact that you're more likely to get sued now,
55:02
SPEAKER_01: there's like all of this stuff, right?
55:04
SPEAKER_01: Exposes, extends your liability, even just in the projects that you do.
55:08
SPEAKER_01: All of these things are extra costs.
55:11
SPEAKER_00: And if you look at it and you just say, oh, that's 100K, great, I can afford 100K.
55:15
SPEAKER_01: Good.
55:15
SPEAKER_01: You're going to be very disappointed when you discover actually for your unique business.
55:19
SPEAKER_01: And especially because it's the first time hire.
55:21
SPEAKER_01: So it's the first time you're doing all of this.
55:23
SPEAKER_01: In total, it ended up being more like 200k.
55:25
SPEAKER_00: Yeah, I was about to say 40% more, but you use the more realistic figure.
55:29
SPEAKER_00: Yes.
55:30
SPEAKER_01: Right.
55:30
SPEAKER_01: So eventually 40% more,
55:32
SPEAKER_01: but the first hire when you're kicking off all these services for the very,
55:34
SPEAKER_01: very first time and you've had to hire an HR consultant for all of it.
55:37
SPEAKER_01: Anyway, so it can be more.
55:39
SPEAKER_01: The other thing that will come into play with hiring decisions often is the cash cycle.
55:44
SPEAKER_01: So if this So this is one of the first big investments you're making.
55:47
SPEAKER_01: You might crash into this idea that often you do the work before you get paid.
55:53
SPEAKER_01: So this is a good example.
55:54
SPEAKER_01: This happens for product businesses too,
55:56
SPEAKER_01: but a good example is in services businesses where let's say you are
55:59
SPEAKER_01: a consulting company.
56:01
SPEAKER_01: You typically will do the work and then submit an invoice and
56:05
SPEAKER_01: then you get paid 30 days after, right?
56:07
SPEAKER_01: So you need the body in the room to do the work on month one.
56:12
SPEAKER_01: You invoice at the end of month one.
56:14
SPEAKER_01: The customer receives the invoice and says, ah, isn't this invoice nice?
56:18
SPEAKER_01: I'm going to take 30 days to pay it.
56:19
SPEAKER_01: So at the end of month two, you finally get paid, right?
56:23
SPEAKER_01: But you had to pay that employee.
56:24
SPEAKER_01: Everything up front.
56:26
SPEAKER_01: Up front.
56:28
SPEAKER_01: So you need enough cash,
56:29
SPEAKER_01: not just to pay the employee,
56:31
SPEAKER_01: but also to pay them without getting paid for two months.
56:36
SPEAKER_01: So it's also about, they're going to be more expensive.
56:39
SPEAKER_00: Minimum, because larger companies use 90 days.
56:42
SPEAKER_01: Right.
56:43
SPEAKER_01: Or they don't pay on time or they never pay.
56:45
SPEAKER_01: Right.
56:45
SPEAKER_01: You need a bigger cash cushion than you think to support that employee
56:49
SPEAKER_01: while you're waiting for the cash to come in.
56:51
SPEAKER_01: And add to this, you probably can't put them on a project on day one.
56:55
SPEAKER_01: You probably have to train them for a couple of months.
56:58
SPEAKER_01: So you got to think about the timeline for what it's going to take for them
57:01
SPEAKER_01: to translate to cash in the door.
57:03
SPEAKER_01: So that's one of the big ones, I would say.
57:05
SPEAKER_00: Mm hmm.
57:07
SPEAKER_01: That happens again and again.
57:08
SPEAKER_01: With spinning out a new product,
57:09
SPEAKER_01: it's really just about that well-made plans are kind of made to be smashed in half.
57:15
SPEAKER_01: And spinning up anything new is typically going to cost more than you think it does.
57:20
SPEAKER_01: It's in a less predictable way.
57:22
SPEAKER_01: It depends on the project.
57:23
SPEAKER_01: But it's helpful to have some contingency cash for any new investment
57:29
SPEAKER_01: that you don't already have a lot of reps on.
57:31
SPEAKER_00: Okay, then this will be my final question because so many businesses and
57:36
SPEAKER_00: so many startups live hand to mouth every month and pretty much earn what they spend
57:43
SPEAKER_00: that month by the order of a day, if not less, if not hours.
57:48
SPEAKER_00: How can you get to build a good amount of cash reserve two,
57:52
SPEAKER_00: three months in a good scenario,
57:55
SPEAKER_00: especially when you're a startup or a small business?
57:58
SPEAKER_00: And you want to grow and invest in people, products, software, etc.
58:03
SPEAKER_01: It can be so tough to build up a cash cushion.
58:07
SPEAKER_01: I think, you know, there's not a lot of good easy answers here.
58:11
SPEAKER_01: Like people will kind of give you the financial diligence thing.
58:15
SPEAKER_01: But it's funny, you see so many kind of finance influencers for personal finance.
58:19
SPEAKER_01: This is how you save money, right?
58:21
SPEAKER_01: You have to think about like,
58:22
SPEAKER_01: just put the money in the bank up front,
58:24
SPEAKER_01: you know, and then just don't spend it or like, yep, stop buying that coffee.
58:28
SPEAKER_01: At the end of the day,
58:29
SPEAKER_01: you look at it and you're like,
58:30
SPEAKER_01: I mean, if you're just not making enough money to cover the expenses of your life.
58:33
SPEAKER_01: You're just not going to have money.
58:35
SPEAKER_01: Like that's how it is, right?
58:36
SPEAKER_01: It's math.
58:36
SPEAKER_01: They can only skimp and save and do this so much.
58:40
SPEAKER_01: It really comes down to is the thing that you're selling,
58:43
SPEAKER_01: making enough money to support a business, any business, right?
58:47
SPEAKER_01: A business, the smallest unit.
58:48
SPEAKER_01: The unit of a business is still expensive.
58:51
SPEAKER_01: So you need to be making a certain threshold of money for it to work out.
58:55
SPEAKER_01: Otherwise, you're just losing money.
58:56
SPEAKER_01: So I think the first kind of more theoretical thing to do is in the business,
59:03
SPEAKER_01: understanding, is this a business that can make money?
59:07
SPEAKER_01: Which is to say,
59:08
SPEAKER_01: and this can happen building a financial model,
59:10
SPEAKER_01: what is the revenue number I would need to hit for this to be profitable?
59:15
SPEAKER_01: And is that revenue number at all feasible over time to sustain, right?
59:20
SPEAKER_00: And what would that make the price of my product and or service in order to reach that?
59:27
SPEAKER_01: That's right.
59:28
SPEAKER_01: Often we'll talk about,
59:29
SPEAKER_01: I think a lot of people mistake early stage financial models as a forecast when
59:33
SPEAKER_01: in fact the earliest stage model before the business exists yet isn't a forecast.
59:38
SPEAKER_01: It's a feasibility study.
59:40
SPEAKER_01: So doing that feasibility study on your business,
59:43
SPEAKER_01: basically what you're saying is these assumptions,
59:45
SPEAKER_01: they're not wild guesses,
59:47
SPEAKER_01: they're reasonable assumptions of what the revenues and costs will be.
59:50
SPEAKER_01: And at the end of the day, the model's purpose is to tell you, is this a stupid business, right?
59:55
SPEAKER_01: Is this a business that's just never going to make enough money to support itself?
59:59
SPEAKER_01: Or is this a business where, yeah,
1:00:01
SPEAKER_01: the money that it will make will greatly exceed the minimal cost of running it?
1:00:06
SPEAKER_01: If you're in the first bucket where it's just going to be a business
1:00:09
SPEAKER_01: that really would have to really struggle and is only ever going to make
1:00:13
SPEAKER_01: a couple percentage points of profit,
1:00:15
SPEAKER_01: you got to ask yourself, is that a business you want to run?
1:00:19
SPEAKER_01: Rather than thinking about how much I could save or ways to gin up the revenues
1:00:23
SPEAKER_01: or this sort of thing,
1:00:24
SPEAKER_01: at the end of the day,
1:00:25
SPEAKER_01: as a finance person,
1:00:26
SPEAKER_01: the most helpful thing I can say is the very beginning deciding,
1:00:30
SPEAKER_01: is this a business that is set up to make money?
1:00:32
SPEAKER_01: Is there a way that this can be a profitable business?
1:00:35
SPEAKER_00: And there's always the variable of you don't know realistically how much product
1:00:41
SPEAKER_00: or service clients you could have or sell in a particular amount of time.
1:00:47
SPEAKER_01: It's true, but you could design it, right?
1:00:49
SPEAKER_01: I think oftentimes in my modeling classes,
1:00:52
SPEAKER_01: when folks will say something is impossible to forecast,
1:00:56
SPEAKER_01: I can fix that problem by just asking them to try.
1:00:59
SPEAKER_01: Because a lot of times our brain kind of stalks.
1:01:01
SPEAKER_01: We think about trying to forecast something that just doesn't feel like,
1:01:05
SPEAKER_01: well, I couldn't know that exactly.
1:01:07
SPEAKER_01: And you kind of have to adjust and be like, well, no, no, no.
1:01:09
SPEAKER_01: Exactly is too high a bar.
1:01:11
SPEAKER_01: But if you had to, gun to your head, say
1:01:14
SPEAKER_00: a number, how would you come up with it?
1:01:16
SPEAKER_01: What would you do?
1:01:17
SPEAKER_01: We actually,
1:01:17
SPEAKER_01: it comes from,
1:01:18
SPEAKER_01: I was a management consultant for a couple of years for one of
1:01:20
SPEAKER_01: the big consulting companies.
1:01:22
SPEAKER_01: And in those interviews,
1:01:23
SPEAKER_01: you do this market sizing exercise where they ask you to say like,
1:01:28
SPEAKER_01: how many bees are there in Tanzania, right?
1:01:31
SPEAKER_01: And you don't know, but- There's other things you might know to help you come up with it.
1:01:37
SPEAKER_01: And they're not testing you for the actual number.
1:01:39
SPEAKER_01: They're testing you for how you think about the problem.
1:01:41
SPEAKER_01: Thinking about, okay, well, maybe I understand how big that place is.
1:01:46
SPEAKER_01: Maybe I understand where business is.
1:01:48
SPEAKER_01: So it's not a wild guess, it's an educated guess.
1:02:13
SPEAKER_01: Right.
1:02:14
SPEAKER_01: It's a guess based on factors that are knowable.
1:02:18
SPEAKER_00: I think the key lesson then here,
1:02:20
SPEAKER_00: Lauren, would be to leave with people tuning into this episode.
1:02:24
SPEAKER_00: If you haven't started yet,
1:02:26
SPEAKER_00: you need the feasibility study and the financial model, which doubles up as both.
1:02:31
SPEAKER_00: If you just started, then you still need to do that if you haven't done it.
1:02:35
SPEAKER_00: And if you're underway in whatever part of your business you are,
1:02:41
SPEAKER_00: running it again or adjusting it will totally pay off and tell you
1:02:46
SPEAKER_00: which direction you're going.
1:02:47
SPEAKER_01: It always pays off to understand your business.
1:02:50
SPEAKER_01: I think I tell founders who are just getting started who feel annoyed by the fact
1:02:54
SPEAKER_01: that they have to build a model that as a founder,
1:02:57
SPEAKER_01: the thing you have to adjust to when you go from being an employee to
1:03:00
SPEAKER_01: a founder is how much time you're going to waste.
1:03:03
SPEAKER_01: As an employee,
1:03:04
SPEAKER_01: you're being graded on the efficiency of every minute and being really good
1:03:08
SPEAKER_01: at your job.
1:03:09
SPEAKER_01: And if you get something wrong, you get fired.
1:03:11
SPEAKER_01: As a founder, you get everything wrong until you do one thing right.
1:03:15
SPEAKER_01: You're spending all trying to do all these marketing things and nothing will You try
1:03:20
SPEAKER_01: to hire people and you work with those people that don't work,
1:03:23
SPEAKER_01: and then finally you find it.
1:03:24
SPEAKER_01: You waste so much time, you waste so much money.
1:03:26
SPEAKER_01: Learning the finance of your business is never a waste of time.
1:03:31
SPEAKER_01: It is one of the most true ROI, return on investment, Thank you for sharing all these insights.
1:04:04
SPEAKER_01: Thank you so much for having me.
1:04:05
SPEAKER_01: It was a very fun conversation.
1:04:07
SPEAKER_01: I really appreciate it.
1:04:08
SPEAKER_00: Thanks for tuning in all the way to the end of this episode.
1:04:12
SPEAKER_00: That's where you'll get all the latest features and new episodes straight
1:04:15
SPEAKER_00: to your inbox every week.
1:04:16
SPEAKER_00: Catch you next week.