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Finance Expert: Plan for Sales Promotions and Discounts with Andrew Marianski · Budget Your Business

• 0:00
  Scott: Hello, and welcome to Budget Your Business, the podcast for small business owners who are looking to budget every aspect of their business.
• 0:10
  Scott: I'm your host, Scott Geller, and today I'm joined by Andrew Mariansky to talk about budgeting for sales promotions and discounts in your business.
• 0:24
  Scott: Welcome to the show, Andrew.
• 0:26
  Scott: Thanks for having me, Scott.
• 0:27
  Scott: Absolutely.
• 0:28
  Scott: So I've known you for a few years.
• 0:31
  Scott: I'll leave it at that.
• 0:33
  Scott: But our audience might not.
• 0:36
  Scott: So for folks who are just meeting you, could you share a little bit about who you are and what you do?
• 0:43
  SPEAKER_01: Sure, yeah.
• 0:44
  SPEAKER_01: So uh quick background I've danced around a little bit in my career.
• 0:48
  SPEAKER_01: I started off uh doing investment banking and then um moved into corporate finance after a few years doing investment banking.
• 0:55
  SPEAKER_01: Uh worked for um a few retailers, uh a large multi-billion dollar apparel retailer, and then uh a grocery and uh convenience store uh company as well, another large one.
• 1:07
  SPEAKER_01: And all along the side, I've I've dabbled on the small business side of things.
• 1:11
  SPEAKER_01: I've owned a few businesses myself.
• 1:13
  SPEAKER_01: I've um done fractional CFO work for a number of companies and um done angel investing, lots of you know, lots of fingers into lots of different uh lots of different uh uh opportunities um around the small business world.
• 1:27
  SPEAKER_01: And um and then most recently I started teaching at the University of Maine.
• 1:31
  SPEAKER_01: I live up here in Maine.
• 1:32
  SPEAKER_01: Uh something I've always wanted to do.
• 1:33
  SPEAKER_01: I'm teaching a class on issues with small business, and it's it's been so much fun, and boy, there are a lot of issues with small business.
• 1:40
  SPEAKER_01: Um and it's just been great.
• 1:42
  SPEAKER_01: Um getting fresh eyes, fresh minds, questions, and really had to sharpen my thinking on the topic.
• 1:47
  SPEAKER_01: But anyway, so that's that's sort of me in a nutshell, and I'm still involved in uh uh what three or four small businesses today.
• 1:53
  SPEAKER_01: Um and um I think is that kind of what you're looking for, Scott.
• 1:58
  Scott: Absolutely, yeah, thanks.
• 1:59
  Scott: So it sounds like you you you have your hands in a little bit of everything, but most of it is in one aspect or another, finance related.
• 2:08
  Scott: That's correct.
• 2:09
  Scott: So, what brings you back to the finance rate?
• 2:11
  Scott: Like what what keeps you intrigued?
• 2:13
  Scott: What says, you know, this this is finance related and this this kind of keeps me interested and and moving?
• 2:20
  SPEAKER_01: Yeah, sure.
• 2:21
  SPEAKER_01: So um I had a mentor early on that said to me that you know the great thing about finance, um, and he was talking about like being in in the business, is it's a it's the backdoor or gives you backdoor access to the whole business.
• 2:34
  SPEAKER_01: Because as as we all know, money is the sort of the lifeblood of a business.
• 2:38
  SPEAKER_01: And when you're in finance, um you get to see all how all the pieces interconnect, and you need to make sure the whole body of a business is healthy.
• 2:46
  SPEAKER_01: And finance is um the way or a way to to you know to make sure that the business is healthy.
• 2:52
  SPEAKER_01: So it's it's great.
• 2:53
  SPEAKER_01: I love the interconnectedness and the sort of systems thinking of um that finance lets you or forces you to look at, and and naturally then it also leads into planning and strategic planning and budgeting, and I love all that stuff as well.
• 3:06
  SPEAKER_01: Um, so it's uh I I can't say I uh deliberately um sought out this path, but the more I did it, and I just sort of, as you do through your career, um follow the things that give you energy, and finance was always something.
• 3:19
  SPEAKER_01: And I like numbers too, and I like the analytics, but um it's funny I get um I have like young employees or people right out of college and like say, Oh, I finance must be so good because it's so black and white, and I just laugh because it is there's it's probably especially the more senior you get, the more time it's like 80% art and 20% science.
• 3:39
  SPEAKER_01: Like the the math part is like the easy part, and it's all about the yeah, the the art of it.
• 3:43
  SPEAKER_01: But um, so I like that balance too, is the reason I bring that up.
• 3:46
  SPEAKER_01: I love the art and the science, and um, so it's it's just uh yes, it's been where my energy's um following my energy.
• 3:51
  SPEAKER_01: That's where it's where it's taken me over time.
• 3:54
  Scott: Great.
• 3:55
  Scott: And and I'm I'm with you with that, is there's so much gray when it comes to finance.
• 4:00
  Scott: You know what my yeah, my my dad used to always say that um liars always figures, but figures never lie.
• 4:09
  Scott: But yeah, it's you can kind of come up with with with you can use numbers in a whole lot of different ways.
• 4:15
  Scott: So uh there's a whole lot of gray.
• 4:18
  SPEAKER_01: Lies, damn lies, and statistics, right?
• 4:20
  SPEAKER_01: Exactly.
• 4:21
  SPEAKER_01: Yeah.
• 4:21
  Scott: Exactly.
• 4:22
  Scott: Yeah.
• 4:23
  Scott: Well, thanks.
• 4:24
  Scott: So what um what we wanted to talk about today, you know, part of the the the focus of the of this podcast is we bring on one of three different guests.
• 4:32
  Scott: One are finance experts, so that would be yourself.
• 4:37
  Scott: Um the second are subject matter experts, people that are experts in a particular aspect of business, let's say insurance, outsourced IT, managed services, um, sales, you name it, right?
• 4:53
  Scott: Just those types of experts that can come in and do a deep dive.
• 4:57
  Scott: And then we bring in business owners as well to provide their aspect around how they budgeted in the past.
• 5:05
  Scott: And you sound like you could probably uh you know weigh in on both the finance and the business owner side, but we're we're gonna focus a little bit more on the on the finance.
• 5:17
  Scott: And one of the, you know, given your background, particularly in the in the e-commerce area, and which is a big piece, are sales discounts and sales promotions.
• 5:33
  Scott: It sounds great to say, hey, I'm gonna sell more because I'm gonna cut my prices by 30% or 50%.
• 5:40
  Scott: But when you start doing the math and when you start putting structure around it, there's it it gets uh a little bit more complicated.
• 5:50
  SPEAKER_01: Absolutely.
• 5:51
  Scott: And that's what I'd like to maybe focus on, that's what I'd like to focus on today.
• 5:54
  Scott: So maybe you just kind of kick us off and maybe give us a little bit of background around how you look at sales promotions and and discounts.
• 6:04
  SPEAKER_01: Yeah, that's great.
• 6:05
  SPEAKER_01: And one of the things you said made me kind of smirk a little bit when you're saying um around planning for discounts and promotions and how when you look deeper, and that's when I started smiling, because in my experience, so many companies and and business owners they don't look deep into their discounts.
• 6:21
  SPEAKER_01: It's almost a uh it's a off the off the hip or from the hip, shooting from the hip kind of thing where uh maybe sales aren't doing as well as planned.
• 6:30
  SPEAKER_01: So what do we do?
• 6:31
  SPEAKER_01: Oh, let's just let's offer a discount and and go through, you know, and drive some sales up.
• 6:35
  SPEAKER_01: And it's an easy thing, it's a logical thing to do, um, but it's also can be extremely damaging to your business.
• 6:43
  SPEAKER_01: Um, and so the the thing to do is you want to think through all these, in my experience anyway, you want to think through promotions and discounts way before you're in the situation where you might want to pull that trigger to do that, and you want to be deliberate about them.
• 6:58
  SPEAKER_01: That's not to say you can't uh be reactionary if sales come if sales are lower than you need and you want to pull the promotional trigger, but you just want to do it with your eyes wide open and have done the scenario planning ahead of time.
• 7:10
  SPEAKER_01: Um, because there's um like you say, when you do the math, it's it gets really interesting.
• 7:16
  SPEAKER_01: And having worked with companies that sell apparel, um both online and in stores, um food, you know, in grocery stores and gas and convenience stores, and like you know, all these kind of high-moving ticket or high moving, lower ticket items that people are used to seeing.
• 7:32
  SPEAKER_01: So we're all you know, we're all uh trained to say, oh, this you know, this is on 30% off or 10% off.
• 7:38
  SPEAKER_01: When you do the math, um, just take a typical retailer, um, like one of the apparel one I can I can speak to just to give you a sense of magnitude.
• 7:46
  SPEAKER_01: If um, if your sales are a bit soft, you're like, oh, let's let's offer a 10% discount.
• 7:51
  SPEAKER_01: And the first thing is when you say that, everyone's like, nobody cares about a 10% discount, right?
• 7:56
  SPEAKER_01: So then, because as consumers, you don't really, right?
• 7:58
  SPEAKER_01: Like, oh, that's that's almost like nothing.
• 8:01
  SPEAKER_01: So then, like, okay, let's say a 33% discount.
• 8:03
  SPEAKER_01: That gets people's eyes moving, right?
• 8:04
  SPEAKER_01: It's like, okay, yeah, let's let's take a look at that.
• 8:06
  SPEAKER_01: And then people and then typically, my experience, they just say, okay, put it on the website, put a banner, 30% off or 33% off, and any full price item, that kind of thing, and you do it.
• 8:17
  SPEAKER_01: What people don't realize, they assume that they're gonna get more sales, which you generally do.
• 8:21
  SPEAKER_01: They don't necessarily do the math to see how much more sales you need to do.
• 8:25
  SPEAKER_01: Um looking at my notes here, I did a couple quick little calculations.
• 8:29
  SPEAKER_01: And if you did a 10%, I've got a bunch of assumptions here, but if you did 10% uh promotion for a typical retailer, um, you have to get 20% more sales, which that doesn't seem like a lot, but again, like we said, 10% 10% discount is like meh, like nobody really cares about that.
• 8:46
  SPEAKER_01: You jack that up to a 33% discount to break even to the bottom line, you have to more than double your unit sales.
• 8:53
  SPEAKER_01: So if you sold 100 widgets, now you gotta sell over 200.
• 8:57
  SPEAKER_01: Um, and that's I mean, most businesses aren't gonna get that kind of uh price elasticity where you if you give somebody a 33% discount, all of a sudden you're gonna sell more than twice what you were before.
• 9:08
  SPEAKER_01: Uh and it gets even worse if you if you crank it up to 50% off, um, which is I mean, that is a big discount, and that will move sales, but you have to have more than five times as much sales.
• 9:18
  SPEAKER_01: So if you sold a hundred units before, now you have to sell like six hundred.
• 9:22
  SPEAKER_01: And like that's you know, that is I almost never see that happen in real life.
• 9:28
  SPEAKER_01: So what ends up happening is you maybe you sell 30% or 50% more unit more units, but then your profit has just been crushed and you would have been way better off just holding a line and stomaching a you know a little bit of a dip in sales and just keeping to your plan.
• 9:41
  SPEAKER_01: So sorry, I rambled on a little bit there, but it's a topic I'm passionate about.
• 9:45
  SPEAKER_01: Absolutely.
• 9:45
  Scott: Yeah, absolutely.
• 9:46
  Scott: So one clarifying question.
• 9:48
  Scott: When you say, you know, if if you're selling, you know, you cut, I think you the numbers you're using, if you're cutting it by 50%, you have to sell five times.
• 9:57
  Scott: Now that's that's not, you know, you're you have to sell five times at the lower price, right?
• 10:03
  Scott: Correct.
• 10:04
  Scott: Just to make sure if people are trying to wrap their heads around this, or maybe do a little bit of math on their own, it's five times that lower price.
• 10:11
  Scott: And that's what's causing, even though you're selling more, you've got to sell that much higher volume in it uh of additional goods.
• 10:20
  SPEAKER_01: Yeah, and it's it just seems so um it almost seems impossible.
• 10:26
  SPEAKER_01: It's so counterintuitive when you tell that to people.
• 10:28
  SPEAKER_01: And I've talked to people like or more people in marketing, you know, because they're just looking at the top line, they're looking at how many units are how many sales am I getting, right?
• 10:35
  SPEAKER_01: And it just absolutely crushes uh crushes your profitability.
• 10:39
  SPEAKER_01: Now, the other interesting thing though, that math works, you can invert the math, and uh the opposite happens.
• 10:46
  SPEAKER_01: So if you are thinking about raising prices and you raise prices, say 10%, uh you can lose, I did the math on that too.
• 10:55
  SPEAKER_01: Um you can lose roughly 15% of your sales and still be breakeven.
• 10:59
  SPEAKER_01: If you raise your prices and um like 20%, you can lose a quarter of your sales and still be breakeven at the bottom line.
• 11:06
  SPEAKER_01: So if you're in a business that's maybe not as price sensitive and you raise your prices 20%, um maybe you only lose 10% of your of your sales at the bottom line, you might double or triple the output.
• 11:19
  SPEAKER_01: So I mean it it's just such a sensitive um mechanism that that's why when I was at the very beginning when I start started talking about this, like you just it's um do yourself a favor and plan it all out, do the math, see how what the break-even number of units is on both raising prices and offering discounts, and just do it what you know eyes wide open because uh it is again in my experience very counterintuitive what the numbers show versus what people think in their head.
• 11:45
  SPEAKER_01: Uh because we're just so whatever sensitized or desensitized rather to um seeing discounts and promotions everywhere in the world, right?
• 11:51
  SPEAKER_01: And so we just assume, oh, it must be fine, and it's not.
• 11:53
  Scott: It's usually and it and it goes back to the you know, the the mindset is oh my gosh, I'm losing sales.
• 12:01
  Scott: Like my unit sales are going down.
• 12:03
  Scott: Well, but it's not always a bad store if your unit sales are going down, if the total revenue is outpacing that, right?
• 12:12
  Scott: That that's that's the end that that's the end benefit of if you raise your prices.
• 12:17
  Scott: Now I'm sure you have there's that that critical point where you can't go too far because then you're gonna you're gonna lose too many of sales.
• 12:24
  SPEAKER_01: Yeah, yeah, you're right.
• 12:25
  SPEAKER_01: Your prices go up, and then obviously your margin rate goes up.
• 12:28
  SPEAKER_01: If you just if all you've done is raise your prices a little bit, your margin rate goes up.
• 12:31
  SPEAKER_01: And and that's a c I mean, that's my time in investment banking, I've dealt a lot with private equity groups that were buying businesses, and that was a classic strategy by them was they buy, find a business that's you know pretty healthy, doing well, and they would um take it over and just raise prices a bit.
• 12:49
  SPEAKER_01: And generally with entrepreneurs, they were so afraid of losing sales or losing customers that they would they were like raising prices was a last resort.
• 12:57
  SPEAKER_01: And then when you get a bit more of a um Machiavellian private equity group, and they're like, I don't care about losing some customers, and they'll go in, and it's just classic, they come in, raise prices 20%, lose 10% of the customers, and triple the bottom line.
• 13:07
  SPEAKER_01: It was like like clockwork, they would do it over and over again.
• 13:11
  SPEAKER_01: So it's um, and you know, that's an emotional thing if you are the the business owner and you're the founder, like, oh, I don't want to lose customers, you know, I'm building this thing, I don't want to alienate people, and that's a very valid point, but just know it might be costing you by not raising prices.
• 13:24
  SPEAKER_01: And it's been proven over and over again.
• 13:25
  SPEAKER_01: It's like again, a classic private equity move about uh coming in, raising prices, losing a few customers, and tripling the bottom line.
• 13:32
  Scott: Absolutely.
• 13:32
  Scott: And and you know, um our our this podcast is is dedicated towards those small business owners, but what you're saying is take with the private equity groups, right?
• 13:43
  Scott: Like they're supposedly this you know, geniuses in the cloud, right?
• 13:48
  Scott: Everybody kind of holds them up on a pedestal of, oh, it's private equity, they're smarter than everybody else.
• 13:53
  Scott: But a business owner could do that, right?
• 13:54
  Scott: They could take these strategies that private equity groups come in and institute in these businesses, apply them to their business, and see the same um benefits, right?
• 14:07
  SPEAKER_01: Yeah, absolutely.
• 14:08
  SPEAKER_01: Absolutely.
• 14:09
  Scott: Okay.
• 14:10
  Scott: So you you mentioned a few times, Andrew, about scenario planning.
• 14:18
  Scott: I love scenario planning.
• 14:19
  Scott: It's as as you know, uh it's always been one of my areas one of the areas that I've always loved doing is is okay, let's map out where where the what the future could look like, right?
• 14:30
  Scott: What what what could happen?
• 14:32
  Scott: At the same time, not everybody has I'll say 20-ish, 20 plus years in finance like you and I, you and I do.
• 14:41
  Scott: So for some of these small business owners that maybe they don't have the experience where they can whip up a quick calculations, but what would you recommend for for business owners that are in e-commerce or or retail and they're like, look, I I want I want to see what this does, but how do I kind of put math to that?
• 15:02
  SPEAKER_01: Yeah, so I guess there's two options that are coming to mind.
• 15:06
  SPEAKER_01: One is go get some help, you know, find uh you know someone that does have experience and and ask them to come help you.
• 15:12
  SPEAKER_01: Um the other the other uh practice you can do is, and it takes longer, but if you just sit down and with an Excel spreadsheet, and business owners they know their business, right?
• 15:24
  SPEAKER_01: I mean, they know what happens, but just get very granular and start listing all these rows of things, all the cash inflows and outflows, and just build your own little model and and um of like I know when I spend this much, and we pick with an e-comm uh site.
• 15:39
  SPEAKER_01: I know when I spend this much on Google advertising, I usually get this amount in sales.
• 15:42
  SPEAKER_01: So you start there, okay.
• 15:43
  SPEAKER_01: This is my sales, and then I know how much product product costs, and you just you know, and you subtract that out, and then but the important thing, um, and you sorry, you go all the way down with all your expenses, and then once you if you you'll get a sense for this and you can build your own models, and again, it's it's helpful if you got someone there to kind of guide you as you as you do it, but um and then you just do different once you have the base one, then you just do a different version.
• 16:04
  SPEAKER_01: You copy that tab.
• 16:05
  SPEAKER_01: That's the beauty about Excel.
• 16:06
  SPEAKER_01: The the individual sales are really cheap, right?
• 16:09
  SPEAKER_01: You can just like you just make a whole bunch of tabs of the same thing and then start changing your assumptions.
• 16:13
  SPEAKER_01: Like, okay, what happens if my sales only come in at half the rate I think they are?
• 16:16
  SPEAKER_01: What happens then?
• 16:17
  SPEAKER_01: Or if they come in double, what happens then?
• 16:20
  SPEAKER_01: Or if my uh I'm a big fan of uh telling folks to plan for the worst.
• 16:26
  SPEAKER_01: So um you know, I my employees have to cost more than I expect, or I have to repair the roof on my building, or you know, whatever they might be, these things that um probably aren't gonna happen, but what would happen if they did?
• 16:38
  SPEAKER_01: It's better to get that um you know, get that out before that happens, at least have it in the back of your mind.
• 16:44
  Scott: Right.
• 16:44
  Scott: COVID, right?
• 16:45
  Scott: What happens if COVID happens?
• 16:46
  Scott: No, nobody thought COVID would happen.
• 16:48
  Scott: That never would the entire world be shut down and stuck in their house and and you know never be able to leave.
• 16:56
  SPEAKER_01: I'm and I'm a huge fan of having a bunch of cash, like having excess cash, and people talk about oh, it's an inefficient use of cash, you should be redeploying it, blah, blah, blah.
• 17:04
  SPEAKER_01: And um, I remember you know, like talking to business, like, you you should have six months worth of expenses in cash, if assuming no sales, like you need to be to cover that.
• 17:12
  SPEAKER_01: And they're like, well, we'll always have some sales, and I'm sure every restaurant thought that before COVID.
• 17:16
  SPEAKER_01: And then, oh, just kidding, you don't have any sales, and then poof, you know, like you're gone.
• 17:20
  SPEAKER_01: It's it's incredible.
• 17:21
  SPEAKER_01: And that's the you know, the thing I'm a big fan of is like what's the what are the practices that'll let you succeed in the long run?
• 17:30
  SPEAKER_01: Like, not not easier one hit wonders about like, oh, they did great, did I PO and all that kind of thing, but who's done what's a what are the steps you can take over and over again that'll lead to success?
• 17:39
  SPEAKER_01: And I love pointing to Berkshire Hathaway, who's currently sitting on 168 billion dollars of cash, you know.
• 17:44
  SPEAKER_01: I mean, like that's that's more than six months, I think, right?
• 17:47
  SPEAKER_01: Yeah, that's so much cash.
• 17:49
  SPEAKER_01: Like, what are you doing?
• 17:49
  SPEAKER_01: It's like, well, they can weather any storm and they can be opportunistic, and they're never in a squeeze, they're never like having to do something they don't want to do.
• 17:57
  Scott: Um I want I wanted to thank you, thank you.
• 17:59
  Scott: That that's uh great explanation.
• 18:02
  Scott: I want to step take one step back a little bit before we we can move on.
• 18:06
  Scott: And you you mentioned once or twice uh asking for help.
• 18:09
  Scott: As a small business owner, who do they go for?
• 18:12
  Scott: Who do they go to for help then?
• 18:14
  SPEAKER_01: Yeah.
• 18:14
  SPEAKER_01: Um well, I mean, the people like you, Scott, obviously like freshable CFO.
• 18:21
  SPEAKER_01: I mean, that's just to name that there, like that's a it's a in my experience, an extremely efficient model for smaller businesses because they don't want to spend or can't spend whatever 300 grand a year, 400 grand a year for a full-time CFO.
• 18:36
  SPEAKER_01: But you can I think the 80-20 rule really applies there.
• 18:39
  SPEAKER_01: You can um you can if you pay for say 20% of a fractional CFO's time, you tend to get the 80% of their best thinking.
• 18:47
  SPEAKER_01: Um of the of that's in I mean, I don't mean their best thinking, but the thinking that's gonna most move your business forward.
• 18:52
  SPEAKER_01: And having been um you know, senior exec in businesses as an employee and as a fractional, um, as an employee, like there's a lot of downtime when you're you're kind of just doing administrative stuff.
• 19:04
  SPEAKER_01: And whereas if you could when you're coming in the fractional and you're talking to the business owner and they're like, here's my big problem, then you get right to the big problems and you can solve it.
• 19:11
  SPEAKER_01: And you again, if it's a scenario like this, which budgeting is huge in scenario planning, they can get right in and like add a ton of value right away.
• 19:19
  SPEAKER_01: Um, so I'd say that's one.
• 19:22
  SPEAKER_01: Second one is just talking to other business owners in like mastermind groups that are similar industries, or I mean, people in my experience have been super helpful.
• 19:31
  SPEAKER_01: Um, I'm happy to chat as long as you're not direct competitors.
• 19:33
  SPEAKER_01: But if you're in a geographically based business, finding someone in another geography is like is a home run in my experience.
• 19:39
  SPEAKER_01: I'm like, what do you do?
• 19:40
  SPEAKER_01: Someone that's successful.
• 19:41
  SPEAKER_01: And so those are the two that really uh quickly come to my mind.
• 19:45
  SPEAKER_01: Um, accountants are helpful as well, but uh nothing against accountants, it's just a different mindset than then finance and accounting are very different um practices or or um yeah, fields of study, in my experience.
• 19:56
  Scott: Agreed.
• 19:58
  Scott: What you know, a lot of small business owners, what they they had, they might have a CPA that they talk to once a year.
• 20:04
  Scott: Now, hopefully they're not doing a lot of their own bookkeeping themselves.
• 20:08
  Scott: So let's just assume that you know they they have a bookkeeper.
• 20:12
  Scott: In your experience, do you think bookkeepers can can provide these this kind of analysis for them?
• 20:20
  SPEAKER_01: No, that's not it's not what they're trained to do.
• 20:22
  SPEAKER_01: It's right, it's um recording transactions, making sure they're cataloged, and it tends to be it's very useful work backwards looking.
• 20:30
  SPEAKER_01: So it's like if you want to, they'll they'll get all the information categorized and set aside.
• 20:35
  SPEAKER_01: So if you want to say, what was my what's my payroll trend been for the last 18 months?
• 20:40
  SPEAKER_01: Easy, you can look at that, that's perfect.
• 20:42
  SPEAKER_01: But if you want to look forward and again do things like scenario planning or sensitivity analysis or um, you know, these like planning for the worst or planning for a merger or planning to you know grow organically or buy a you know uh a new business.
• 20:56
  SPEAKER_01: I mean, all that kind of stuff is a completely different um set of skills.
• 21:00
  SPEAKER_01: And going back to our uh art and science, the forward-looking stuff is the 80% art.
• 21:06
  SPEAKER_01: Um and the backwards-looking stuff tends to be more science.
• 21:09
  SPEAKER_01: It's it's I mean, there's a little bit of like I don't know what you call it, revenue recognition or accrual methodology.
• 21:14
  SPEAKER_01: You could you get this in the gray area looking backwards, but it's mostly pretty well defined.
• 21:18
  SPEAKER_01: But it's the forward-looking stuff that needs all the creativity.
• 21:21
  Scott: Well, one P one one more question here for you around this is so if I'm thinking about these this promotion, the discount, you know, going down this path, and and and you touched on it a bit on the cash side.
• 21:34
  Scott: Like how how do I, without going down a rabbit hole here, but how do I kind of line up that cash management piece with this promotional and discount?
• 21:45
  SPEAKER_01: Yeah, yeah.
• 21:45
  SPEAKER_01: And that's a it's a great topic, and I I'll do my best not to go into the whole cash versus accrual accounting.
• 21:51
  SPEAKER_01: Um because I I I was just talking about this a lot over the last few weeks with uh at the course I'm teaching at the University of Maine.
• 21:58
  SPEAKER_01: Um, because somebody uh uh entrepreneurs and business they're so interested in like what are my sales and what's my profit and profit is not the same as your cash necessarily because there's different like with again without I won't go into too much detail with revenue recognition but like according to um certain in some businesses with gap like you record the sale as soon as the customer takes possession now if you don't bill that customer they don't pay for another like 90 days you don't get the cash for 90 days right so you've recorded the sale today but you're not getting paid for another 90 days which um you know it's like okay well so what well so it matters a lot and we can go back to that you know talking about promotions so say you run this promotion and you've done the math and it does make sense and you do a let me look at my sheet here you do a uh 50% promotion and it did work you got five times as many sales and you're super happy about that right but if you're not gonna get paid say for another 30 days or 60 days you've got to replenish five times as much inventory because you just sold through it all.
• 22:58
  SPEAKER_01: So now all of a sudden your cost of goods sold or the the cash laying out for inventory is like gone up by five and like where's that cash coming from it's because it's not coming from your customers because they're not paying you for another 60 days.
• 23:09
  SPEAKER_01: So it like these little new I hope that kind of makes sense but like absolutely these um these nuances are why I am especially looking forward I'm a complete proponent of cash modeling especially for smaller businesses.
• 23:23
  SPEAKER_01: I mean you can your accountants can do the conversion to accrual and everything but as the business owner you need to be like okay how I'll be very clear on every single cash inflow and outflow and capturing things like how long does it take me to pay to get paid by my customers?
• 23:37
  SPEAKER_01: How long can I wait to pay my vendors on the payable side?
• 23:41
  SPEAKER_01: Yeah and then you know like if sales go up what happens to the inventory I've got to buy all these things you've got to map it out and you know if your sales go up another thing that often happens like everyone's like oh this is great um which it is but as I said your inventory outflows go up a ton usually there's some I mean often if you're like if you're a retailer you got to hire more salespeople so then your monthly expenses go up as well.
• 24:04
  SPEAKER_01: So then all of a sudden you're paying again like more staff more inventory and you still haven't been paid by your customers yet and anyway you can quickly run out of cash despite the fact you're PL from a accrual standpoint the sales are great profits are great you don't have any cash you don't make payroll you're out of business and like poof and it's just that quick it can happen.
• 24:24
  Scott: It can absolutely Andrew and and I mean the the bottom line here what if I kind of wrap up what what you're saying here is be just be prepared for if if your sales do hit five times then that's a great thing but you've got to have the cash to support that.
• 24:41
  Scott: Absolutely and and and be think about think about what that means for your business uh if if you drop your prices and sales skyrocket or you do or you increase your your your sales and sky and or increase your prices and sales still skyrocket you're still having to deal with that cash crunch and figuring out what does that mean for your business right?
• 25:03
  SPEAKER_01: Absolutely and there's so much it and it kind of annoys me actually in in academia bit because there's so much talk about um the learning the accounting statement like the profit and the uh sales and everything like that and and that's all kind of looking outwards like if you want to share how your business is doing with outside investors but it in my experience if you focus on cash and if you have got a business that is generating healthy cash cash flows all the other financial statements will take care of themselves and they'll be great.
• 25:31
  SPEAKER_01: Like you can't have a business that's spitting off cash with bad financial statements.
• 25:36
  SPEAKER_01: It just won't happen like so if you as the business center if you focus on how is my cash going, how are the cash flows is it spitting off more and more cash you're gonna be just fine.
• 25:45
  Scott: 100% agree with that love love kind of wrapping up on on that statement.
• 25:52
  Scott: So I as we so I like to wrap up all of our shows with one to three immediate or practical takeaways that listeners could literally as soon as they're done with this podcast they can turn it off they can step step away from their their phone or however they're listening and take action um so in in this you know today as we talked about promotions and discounts what are you know one to three immediate steps or or practical uh actions that they could take yeah um and if you've already mentioned it that's fine too so just just you know just remind us what that might be like we just said a second ago focus on cash and get in the habit of frequently forecasting cash or get someone to help you to do that.
• 26:43
  SPEAKER_01: And I mean especially if you're newer or even if you're not new that is it's good to have a rolling like 52 week cash forecast and that you can see like you know that you just know like you can see your cash balance so that you're never worried about like not being able to make payroll that kind of thing and just getting in the habit of understanding the key drivers and then things like it's like okay it's coming up on Christmas time and I'm gonna do some promotions and discounts you put that in as well to your cash and then you can you know what I mean just get in the habit of always seeing staying 12 months ahead and look if you look at it weekly it seems maybe seems a bit onerous um at first but once you get in the group it take it'll take you like five minutes and it'll let you sleep at night you'll say so much better because you'll feel like oh my god like I I know I'm good I can make payroll I can pay myself my salary and there's excess profits and all this kind of stuff I can button so it's that will be my one thing is just to get in the habit of focusing on cash and constantly updating your you know your forecast and just get really good at that.
• 27:43
  SPEAKER_01: Like I said it it takes a bit of a it's a bit of a muscle to build but once you have it it's so easy so easy to keep going.
• 27:50
  Scott: Perfect.
• 27:51
  Scott: So our takeaways are every week and the way I like to I I I tell people is just give yourself put something on your calendar right put a half hour meeting of 15 minutes on your calendar just to look at it.
• 28:04
  Scott: So look at your look at your cash weekly try to roll it out to 52 weeks um and freak and just focus on the cash.
• 28:14
  SPEAKER_01: Yeah honestly I mean that's if you get that right so much else will be right.
• 28:18
  SPEAKER_01: You'll have all these good problems if you end up with a bunch of cash I promise you.
• 28:21
  Scott: That is a good problem to have too much cash.
• 28:23
  SPEAKER_01: Yeah and if you need in and you know I'll just say to you Scott like if if that seems daunting just get someone to help you.
• 28:29
  SPEAKER_01: It's there's you know like Scott that I mean that can you come and sit get you set up and then you can just check in monthly and it like until you build that muscle.
• 28:37
  SPEAKER_01: Absolutely so um I know just I know you personally I know you uh enjoy good podcasts as well as a good book from time to time so my last question was going to be uh do you have any recommendations a podcast or or book recommendations for hosters I've got so many books um I know it's hard in here to do one but yeah um I would say um um you know what I'm gonna go with this one this is a bit more esoteric because I don't know if this is gonna be backwards on the podcast it's backwards on my screen but hopefully it'll be the right way around um it's called Seeking Wisdom and it's it's a big uh it says from Darwin to Munger and Munger's Charlie Munger and it goes through all these uh just life wisdom and a lot of it does tie in with money and finances and things like having cash surpluses so you can afford down times and things like that.
• 29:31
  SPEAKER_01: It's a wonderful book and it costs so many um fields of study so I'd recommend it to anyone.
• 29:37
  SPEAKER_01: I mean you don't have to be a finance person.
• 29:38
  SPEAKER_01: I mean it's it's for anybody it's a great great book.
• 29:41
  Scott: Great thank you this the this this this has been great.
• 29:44
  Scott: Where can people find find out more about you online?
• 29:49
  SPEAKER_01: LinkedIn I guess right now on my own website or anything like that.
• 29:53
  SPEAKER_01: But um yeah I'm happy to chat with anybody I just I love the topic.
• 29:56
  SPEAKER_01: I love small business and uh which is again part of the reason I wanted to start teaching it to kind of give back.
• 30:00
  SPEAKER_01: It's been a lot of fun and um yeah happy to chat with anyone anytime.
• 30:04
  Scott: Great.
• 30:05
  Scott: Well perfect thank thanks for joining me today Andrew really enjoyed it.
• 30:10
  Scott: All right folks that's it for today I'm Scott Keller and I hope you join me next time for budget your business