Sometimes you’re so used to putting out fires in your business that you inadvertently put out your own! According to Semay Rashad, entrepreneurs are often bursting with motivation when they start their businesses, but get rundown with day-to-day operations over time.
In this podcast,
motivational speaker and entrepreneur
provides motivational tools for entrepreneurs
to reignite your inner fire so that you can inject life into your business from the top down.
In this episode we discuss:
- Empowering yourself to transition to the next level
- How to ask better questions to get better answers
- The power of passive income and diversifying your portfolio
Welcome to the Work The System podcast where we help entrepreneurs make more and work less managing their systems. And I'm your host, Josh Fonger. Today we have a special guest, we have Stephen King, from startup to working with fortune 500 executives, Stephen King brings a unique combination of vision, foresight and experience to help small businesses run better, grow faster and make more money. Regardless, one of the accounting industry's top thought leaders, he's currently serving as president and CEO of Growth Force, one of the nation's largest cloud based accounting services. So why don't you give us the backstory? How'd you get into this position? What brought you here today?
Well, thanks, Josh, for having me. Um, growth force does outsourced bookkeeping, accounting and controller services for small and medium sized business, they use QuickBooks Zero or NetSuite. And what we're passionate about, my whole life's work has been how do you eliminate the manual processes in the accounting world? And I know that's what you guys are all about. Now, what's the way you help us accounting to make decisions that increase your profits? I've been a CPA for 35 years. This is my sixth recession I'm going through as a CPA. And what I found is the companies that come out of it stronger, make data driven decisions, right? They use any downtime, they've got to, to automate manual processes. So they sharpen the saw. And then they take those systems, the ones that I've seen, be successful, take those systems that time when you've got some management downtime, if it's slow at all, to to work backwards from the decision to try to make a look at what's the drivers of those decisions. And then what data do your decision makers need: your managers, your business owners, even if you're self employed, what do you need to have your fingertips when you try to make the decisions, and we studied, I've been doing this since 1995. We've studied thousands of small businesses, and what's the difference between ones that are wildly successful living the dream and the ones that struggle to survive. And it's two things, the winners keep score. They have actionable financial intelligence at their fingertips, and the market leaders. All studies show that when decision makers make decisions, not just from your gut, but from data to back up your gut, that they have outperformed the market. And it doesn't matter if you're one person or $100 million company. And the second thing is, they know that you need both the financial management system and a human capital strategy, because it's people that drive profits. And so so when you can connect your people with the goals of the company, and then keep track of who's contributing the most to profits, and then recognize and reward them, and you bring it all together, you run better, grow faster and make more money.
That's a great summation. And I think that I will know that they should be doing this, but even more don't do it. So. So what would be the advice if someone wants to get started? Are there some steps where they can actually do some of this on their own? Like, what are some key numbers they should probably start to measure?
Yeah, so you know, what's nice is there are certain things that everybody has to have. And there are five drivers that are the most important drivers of every business. And we've got a company scorecard, a one page scorecard that puts this on one report for every manager in the company to look at when you look at the trend of your top line, gross revenue, your gross profit dollars, your gross profit percent, which to me is the most important number on any financial statement, your net income dollars and your net income percent, you want to be looking at the trends of those five data points. And you want to look, we suggest you should measure everything in trailing 12 months. Why? Because every business has seasonality. and small businesses in particular, don't have a CFO and a controller that's doing a month then closing and shutting the books down and making sure that the revenue got recorded in the right month in the payroll was matched to the period that the revenue was earned. So your p&l on a monthly basis can go up and go down, go up and go go down. You know, especially if you're really not doing full accruals it's like you got a big deposit from a client. Okay, yay. And it shows up as revenue. Not but no work got done. And then you got to do all the work and you got you know, three payrolls. You're like, Oh my god, we're losing money. But next month, we'll get to fill the 50% tomorrow. it back and then we'll make a lot of why you can't tell how you're doing from month to month. Right? It's shark teeth, it's up, it's down. It's up and down. And so what we do is we take a trailing 12 months TTM two year trend to track everything. How many webs? How many hits on your website, how many proposals came out? How many new clients came on? Where do they come from all the way through to, you know, how many clients did you lose? What's your trailing 12 months of your employee retention, because what it does is trailing 12 months eliminates all the seasonality and all the bumps in the road, if you have a biweekly payroll, that means twice a year, you've got three payrolls. And your business didn't change, you didn't hire any more people. But a lot of people come to us and they show big losses or less profit in those two months, their p&l was wrong in those two months, because payroll is 50% higher than reality. And then the other 10 months, their p&l was wrong, because their p&l was lower than reality. So what the trailing 12 months does, it smooths all that out. It tells you the true economic results. And if you look at your there's one page company scorecard, as you can see, do I have a top line problem? And this is decision number one, right? There's five core decisions that every business has to make in order to maximize profitability. Number one is where do you spend your time? It's our most valuable possession. And you need to make a data driven decision as the business owner about what is the priority by looking at the top grid, your true gross revenue trend you can see, over the two years, I'm like, Do I have a top line problem? Do I need to focus on sales? Most business owners that I see, they aren't living the American dream. They're not getting 15 to 20% net income. Right? They're getting five to 10%. And you know what, that's not horrible. You know, if you're a million dollar business, and $2 million business is where we typically start. And you're giving yourself a nice six figure salary, you know, and you still have 5% profit after that you got another $100,000- $200,000 to share with your management team. But it's not worth all the time and the energy, right? You're not making minimum wage, but you should be making a lot more. Well run companies make 12 to 15% profit. And there's just a couple of decisions that you have to make to get there. So that's the first one you have? Where do you spend your time? Do you have a top line problem that involves your gross revenue? Do you have an above the line problem above the line means all the direct costs that your customer paid for? That's your cost of goods sold. We do service businesses and nonprofits. So I prefer to say the cost of services delivered. And there's only two things in cost of goods sold or cost of services delivered. It's direct labor, it's the labor the customer directly paid for the labor that you put on the invoice or that was used to support whatever went on the invoice. And then direct materials, the direct stuff that you had to buy in order to earn the income, direct labor and direct materials is your cost of goods sold. And the second biggest metric to look at is gross profit, which is your gross revenue minus that cost a good soul? I strongly recommend that people look at gross profit, not just in dollars, but in percent. And I mentioned that's the most important metric of all numbers on any financial report. Why? Well, it's the reason why the Shark Tanks always ask the same questions. Right after How did you start this business? How much does it cost you to make fully landed? And how much do you sell it for? Because then you can quickly do math to see okay, if it's a $10 item and it costs $5 to make. They're thinking that's 50%. They're not thinking that's $5. They're thinking what is the unit economics of the business? And that's where management is, that's what management accounting is all about right? data driven decisions, guys about moving from financial statements that your traditional CPA delivers and sends you in an email says here they are. What management reporting is about is looking at unit economics, how much the revenue and the cost of goods sold on the stuff that you do on your unit. And it can be a unit is whatever you put on an invoice. It can be your widget, if you're manufacturing something it's a billable hour, if you're doing services. It's you know, I did a liquid natural gas company in Austin recently. That was per gallon delivered, whatever you put on the invoice. That's your Unit what's the gross profit percentage on that unit? And it starts there. Because once you know that, and then the last two, of course, our net income dollars and net income percentage, that's important because you're in business to make money. It's not it doesn't matter how much top line you make, it's how much you keep. And most business owners make the mistake of thinking they can sell their way to profits. And and and you usually can't unless you get the decision number two, right, which is pricing. Okay, this, this changes everything. And what I love about pricing is its pricing is hard, especially smaller businesses where you are the widget, you are delivering the service. You know, it's hard to get over your own insecurities and your own foibles and your frailties and say, I'm not sure it's worth 2500 or 25,000. And what the way to get over the emotional part of that is to have data. And the data for pricing is really relatively simple. You need to look at how much profit you want to make at the end of the year? Again, we don't try to make data driven decisions to make more money. And it's, you know, usually I like to suggest to people that we look at this in percentage goals. I'm dealing with a company right now. It's a big one, they have two and a half percent profits. They can't just because they have cash flow problems, they thought that we'd solve the cash flow problems by automating the billing and the collections and integrating all the back offices, which is exactly what we're going to do. But the root cause of the cash flow problems is they're not pricing to generate, where they want to get to, which is a 10% profit. And then what we're doing is you go and you say okay, here's how much dollars in profit you want, then how much overhead costs Do you have a year, trailing 12 months, that's all the below the line costs. Right above the line is direct with the customer paid for below the line is indirect. It's not what the customers pay for it's your rent, it's accounting, it's it, it's HR, we recommend you should outsource as much of that as possible, because it's not generating you any income. And if you want to lower your overhead as much as possible. But what you gotta do is you got to look at that overhead dollars, and you got to divide it by the number of units that you're going to have in a year, the number of billable hours. The number of widgets. You're going to ship the number of gallons delivered, and do the same thing with your profit. If you want to make a million dollars in profit, and you're going to have 1000 billable hours. You need to bill out at $100 an hour. Right? Yeah, that Sorry, sorry, I'll do my math, right. If you want to make a million dollars, and you've got $100,000 of widgets, then you have to build into your pricing $10 of profit on every job. If you have $50 worth of overhead per unit, your gross profit percentage has to cover $50 of overhead plus the $10 of profit. So then you back into your pricing based on what you need, what your goal is, to make a profit. It's why we learned math. Right? It's the and most people don't do pricing that way. They sit there and think, what's it worth, you know, alright, I'm going to take my salary, and I'm going to double my salary. And that'll be a 50% profit margin. The first mistake is you have to have the taxes and the health insurance and the 401k contributions and the recruiting costs and the training costs, you have to look at the fully loaded labor costs, it's typically I usually see 25 to 35% of additional burden rate on top of the salary. So if you're paying somebody $100,000, you got at least $130,000, you don't have $50 an hour, you've got $65 an hour and costs. So you look at that above the line costs, calculate your real gross profit, and then just do the math. Is that going to generate enough to give me 10%? To the bottom line? Does that make sense? Josh?
Yeah, definitely. No, I like that way of doing it as opposed to dreaming up a number you think they're going to pay for or looking at what the competitors are doing, just work your way up from true costs. And the profit that you actually are shooting to make makes a whole lot of sense.
I think I think that actually becomes the floor. Right? That's the minimum. You like to look and say, what's this worth to them? What is what is what is the most I think they'll pay, you know what, why where's my return on investment? How can I demonstrate that this is a great opportunity for both of us. But you can't go below a 10% profit or whatever your minimum goal is. Otherwise, that creates cash flow problems.
Okay, so that no, that makes total sense. So the decisions that we talked about you said, we're going to spend your time pricing with or some other decision making friends.
Yeah, yeah, yeah. The third decision is, is where you once you figure out your pricing, then you decide which clients and products do you need to fire? Well we recommend it, you look at the profitability by customer and by job. And QuickBooks has this automated. I mean, it's just, if you use Intuit payroll for QuickBooks desktop, or insperity, which is an outsourced HR company, for either QuickBooks desktop, or online, any version of QuickBooks. You can automate the allocation of the labor costs every time to run payroll. Just take the fully loaded labor costs divided by the hours worked. And if you don't have timesheets, you can just say it's 40 hours, and just work. You know, even if you do a back of the envelope 8020 rule, it's better than nothing at all. And it'll automatically allocate the labor cost above the line below the line to each department door, if you have timesheets to a customer and by job. But either way you can replace your low margin clients by either increasing their pricing or addition through subtraction. By bringing on a proper price, guys, let me walk you through how that works. So once you have the labor costs above the line separated, you then can go to your client and say, here's all the value that we're delivering. And compare that against how you bid the job if your bottom 15% profit margin clients is what we're talking about, right? Do it, you're trying to increase profits, you start with the worst ones, and you give them an option. You can show them the labor costs, you know, and the time leakage. It's usually project managers, quality assurance, client interaction, project management, I've mentioned that travel, right? There's a lot of time leakage that kills businesses. And if you can recapture that, by going back to the clients and say, Hey, I can either give you one of three choices, I either have to charge you for all this additional value that we've got out of scope work that you're getting that wasn't included in our original bid. Or I can reduce our scope to what we originally agreed on or what your budget is, you can be your own project managers. Or I need to transition you to another service provider because I have to hit certain numbers in order for us to have a successful business. And right now you're in the bottom 15%. And I don't want to lose this relationship. But that's why I've kind of laid this out to give you choices. And what I have found is that over 90%, the majority of them are going to be happy to give you the additional fees because you can show them the value they're getting from the stuff that they're not paying for. I've had countless clients big and small. Tell me, you know, you made it easy. I mean, yeah, of course, I need the project manager. Then, what happens is when you either increase their fees, or lower the scope, or swap them out with a new client that's been priced properly. The difference goes right to the bottom line, I got an IT company in Brooklyn, Queens, actually, that was, you know, had Apple as their biggest account. And that was 40% of their revenue. And they're like, they're our best account. But we have cash flow problems. And so we always say, well, cash flow problems, start with pricing. We can, we can definitely automate and integrate and lower the cost of doing all the billing and the collections with the smart back office. But unless we get to the root cause you're not going to materially change your life. And we were able to show them what they needed to go to Apple with an apple not only to increase their fees, they realized how much more they were getting. They added some more of additional value that they had the conversation Well, if we're adding this, why don't we also do that. And then they went from this is about a $6 million business. They went from breakeven struggling and they tried to sell their way to business. They opened up people in Boston, they added new products and services. They got sales people and they just kept cash flow problems. But at the end of the first year of doing this, they had gone to 1.5 million in the bottom line. She was so excited when Apple said yes, they went to every one of their clients and like normal 100% of them said yes. I've got a pipeline services company that said it did the same thing. He sold his business for $10,000,000 3 years later because He only had a high margin business. So he got the highest exit valuation at the end of the day. So that's the third decision. The fourth decision is sales and marketing. How do you spend money to make money? And that's kind of looking at the lifetime value of that customer, all the margins that they give you, versus the cost to acquire it. And then my favorite, which is how do you increase the productivity of your people. That's where the human capital strategy and the financial manager strategy come together. When you create goals. When you recruit the right people, for the behaviors that'll be successful, then you reward those behaviors, and you get people acting like owners all that discretionary time. And it just, it goes right to the bottom line.
Oh, those I could ask you questions all day about those. And but I wanted to hit on another topic, because you said that if someone is struggling, and we said before we started talking live here. You mentioned okay, if someone's struggling with cash flow, right now, because of a down market, there are certain tips. Like maybe quick tips that can boost their cash flow. Are there any of those that you think would be worth sharing? I know, we can't go through all 10 of them.
Yeah, no, right now, cash flow is king, right? What cash flow is about timing, it's the timing of when money flows in and out of the organization. And if you don't have that, right, you're out of business. So tip number one is prepare a cash flow forecast. And we have a great KPI template to help download automatically from QuickBooks, your hjr and your ajp. So you can just type in what week do I expect to collect on these receivables one through 13? What week to expect to pay all these payables one through 13. And then it'll automatically cash flow out your expected collections and payments based on the receivables and payables for 13 weeks, because that's the first thing, you have to have data, you have to have visibility into Am I going to have a cash flow problem 13 weeks from now you can do something about 13 weeks now, you can't do something about two weeks or three weeks ago. And it also lets you enter other sources of funds, like, you know, deposits from customers or other uses of funds that are not in AP like rent. But once you've got the cash flow, then the next thing is to focus on collections. And most people don't give this enough attention. There's some best practices that everybody should do. There's three apps that we like to have. We train our bookkeepers on how to do collections to be firm, to be focused, and to be friendly, because you get a lot more with honey than you do with vinegar. And the firm means you've got to make sure that you don't end the call without getting a payment commitment date, you know exactly when that check is going to arrive. And if not, you're not going to get a check because they can't pay you. When can we have another conversation? The focus is you need to listen to their feedback and address any concerns. And there's three objections that you want to train your staff to overcome. Number one is the check is in the mail. Okay, great, fantastic. Right now, what we strongly recommend when we automate people's back office, on the billing and collection side to improve the cash flow, we implement Intuit payment solutions. It's magic, you can automate the billing, the collections, the built and the cash application. So when somebody says the check is in the mail, we say, Okay, great. Can you just give me the check number, the payee, the date and the bank routing information? Because within two payments, you can make the deposit without the physical check. That makes a big difference, you'll find out if that check really is in the mail. The second is, I can pay you half. Okay, great, thank you for understanding how things are tough. And we When can we get when we can count on that payment? And When can we call back to talk about the other half that you owe us because you got to be firm. And then the next thing, what we recommend here is now's the time to take credit cards. Anybody who's worried about paying three and a half percent to MasterCard or visa is not looking at the cost of having your clients go bankrupt in this recession, and the the costs of having transferred their cash flow problems to you. So that's kind of the top level suggestions that we suggest unless of course, you have really big invoices. You know, if you got $10,000 invoices, then maybe you don't, but there's a lot of other things we could talk about. But I think those are the high points, Josh.
Yeah, those are really good. Really good points. And because I know we're going way over time here, let me see if I can get to some of these final final questions. I like to ask all my guests throughout the show because we are Work The System and what systems you put in place. Can you tell us about a system you put in place into your business or personal life that you saw make a change?
Yeah, this is what we do for a living right. I don't have camping equipment. I have a camping system right my whole life is a system But my favorite system of all would have to be built calm. You know, we have bookkeeping accounting and controller services like for companies and non small nonprofits. I've been doing this since we started virtual growth and raised 43 million in 1995, as the first cloud accounting service, we used to print checks and ship them by FedEx across the country. And even if we had to carry on them to New York, or even if the office was next door, it was expensive to print a check to get a stamp on an envelope and stick that and get the chase the owner down for a signature and put all the supporting documentation and then and then chase them because nobody wants to be separated from their money. By implementing bill comm we got the cost down from $12.35 to $1.65, we ended at 8% reduction in the cost to pay a bill. That's a data driven decision. It's a no brainer. So we recommend everybody do that. And it also gives you a reduce the risk of fraud because you have scan images attached, you can make sure that the person who who's paying the bill is not also submitting their own at&t bill, in addition to the company, at&t bill, as you can see the scan images on your iPhone.
Great. Great example. Very good. And what's one thing, Steven that I didn't ask you, but I but I should have asked you?
What's one thing that you didn't ask? Well, you know, what I think is the most important difference in the companies that are wildly successful is they look at their people as assets. And they invest in them. And I used to look at my people as an expense. I'm an accountant. If you want increased profits, what do you do, you either increase revenue or reduce expenses. And I learned that if you shift your thinking for people. And you have a human capital strategy to attract people with the right behaviors, and cultural fit, and then invest in their career development and their training, they're going to stay with you for a long time. And what happens is when you invest in people, and they're and they're happy to, to at work, they're happy that if you if you give them clear written goals, you're going to get them to start acting like owners, they're going to have active you discretionary effort, because Maslow taught us people need to belong to something bigger than ourselves. People want to belong to something successful. So when you integrate that human capital strategy in the financial management strategy, it's a game changer.
That's great. Coming from an accountant to know that, and I totally agree it's a good way to end this. So where people working will find you Steven, if they need some more help, certainly your team or there are pros at this. So where should they go?
Sure. Email is easiest as [email protected] or our website is growthforce.com. On LinkedI,. It's Steven King CPA, and on Twitter Stephen King Growth Force
Okay, there you go. Hopefully everyone has their pen handy. Otherwise, you can go to the website growthforce.com. Stephen. Again, thanks for making the time here on Friday to share with us your wisdom on cash flow, and how to make decisions based on the numbers very, very useful stuff. And thanks, everybody, for joining us today for the live stream. If you're here on Facebook, or watching this on YouTube, or the podcast players appreciate you watching this show. If you want to get a copy of that book right there behind me, work the system, you can get it at wtsenterprises.com we give that away for free. But if you want to, you want us to mail you a copy in the mail physically for free, then they'll leave us review, leave us review and then send a picture of that review to [email protected] And once a week we pull a name out of the hat and we mail them a free copy of the book that could be you otherwise, thanks again, Steven. Thank you audience and we will see you next week. All right.