When it comes to business finances, financial statements are misleading. According to Jeff Prager, entrepreneurs should be focusing on cash flow.
In this episode, Jeff Prager — nicknamed the “King of Cash Flow” — gives his Seven-Figure Funnel System that helps businesses get a handle on their financials.
Founder of Cash Flow Engineering, Jeff helps small businesses maximize their cash flow in 90 days or less. Following his three-decade-long career as a CPA, Jeff is now an expert business consultant who has helped over 1000 companies with his linchpin system.
- The Seven-Figure Funnel System for creating cash flow
- How your numbers can determine your short- and long-term actions
- Financial planning for a downturned market
Host: Josh Fonger
Guest: Jeff Prager
Please Note: The following is a computer auto-generated transcript and will include some inaccuracies.
Welcome to The Work The System podcast where we help entrepreneurs make more and work less using systems. And I'm your host, Josh Fonger. And today we have a special guest. We have Jeff Prager, Jeff Moore, affectionately known as the cashflow King is the founder of Cash Flow Engineering, a training and advisory company that helps small businesses maximize their cash flow in 90 days or less. After nearly 30 years as a CPA, Jeff has now become a top spokesperson, author, and business consultant over 1000 companies, basically his work on his linchpin system that requires less than 30 minutes per week. Jeff's methods enhance value to scale growth, by simplifying cash flow. Alright, Jeff, welcome to the show. Why don't you tell us the backstory? How'd you become the Cash Flow King?
Hey, Thanks, Josh. It's great to be here. Long story. But I'm a CPA by training, an economist, an economist by education actually taught at the University of Colorado economics, which is arts and parties. It's not Business School. So at any rate, I had a pretty good career starting some major companies, I've always been focused on growth, not taxes, not accounting, growth of companies. And one of the companies I took public was Ashworth Golf Clothing, which if you're a golfer, you probably know that brand. So I kinda was on top of the world, sold my accounting practice, sold my stock and Ashworth, and did pretty well. And a bunch of my clients came back. A couple of them in particular said, Hey, would you help us get restarted, and one was a home building business. And within two years, we were upside down a million dollars, that means you are out a million dollars that you don't have. And it's not a good place to be in. And so it was kind of like a reinvention. And I realized my skills as an accountant weren't the same skills, you need to run a business. And so I started investigating. Luckily, as a CPA, I've been exposed to many, many, many businesses, trying to take an inventory of what's made some successful and what not. And I came across two truths, if you will, financial statements are misleading. You're geared toward either top line growth or profit. Both of those are fictitious benchmarks, you should be focused on cash. And number two is financial statements. Don't cover five of your seven key numbers, which we'll get into Okay, Josh. But once I realized how to create this system, which you're the king of systems, you understand the importance of that. We were able to turn it around and became the second largest privately owned home builder in Colorado. Pretty good, huh? from going upside down. So it's, it's been an interesting journey. And I was able to retire when I was 57. And that was 13 years ago, just just as a point of reference. And since then, that time I was retired seven months, that's the longest I've been retired, my shortest is 24 hours, which was last January 15, when I sold my last business, and then we're on a plane and I said to my wife, I've got another idea for another business. But what I've devoted my last years for is helping other people's people create the systems notice I use that word twice, Josh, to to really drive positive cash flow, because you could stay in business without profit, but you can't without cash. And let me give you a prime example. Amazon. I think it was Amazon that went for six years before they showed their first profit. How do you do it? If profitably, profit wise, you're losing money every year? How do you stay in business? And it's because you're really really working your cash flow?
Well, I'm really curious. I'm sure those listening want to get right to the meat of it. So tell us these seven key numbers because, most people that get their income statement, say, Well, I'm gonna review that. And they think they're in good shape once they look at that. So what are they missing? What are these seven key numbers?
Well, first of all, the bottom line is not the bottom line. There are things that aren't showing, like asset purchases. Like buying equipment, furniture, buildings on increasing your inventory. Increasing your receivables doesn't show in a profit loss statement. Get repayment doesn't show. Owner's withdrawals don't show. So there's a lot of missing pieces in those financial statements. And that's where I started coming across this Josh, even though intuitively, I was supposed to know it as a CPA, most of us don't understand the true implications of what I just said. But the seven numbers, what, think about your business, everybody talks about a marketing funnel. Think about your business is a big funnel, you start with leads, and you end with cash in the bank. All right, so the first number is your leads, are you generating quality leads? The second number is conversion rate, you get the leads in the door, are you selling them and getting them to sign and become a customer? Which then starts the customer journey? So the third number is customer retention, which really focuses on customer service, customer communication. Did you really keep your promise to the customer? That's more about service, which ties very closely to the number of transactions per customer. Are you continually meeting their needs? Are you thinking about what they're going to need? Next, you have a process, so that once they're in your funnel, so to speak, they go from product to product to product, because it's a natural progression? And so there we're talking about customer lifetime value. Now, let me give you an example. If you don't mind, Josh, is we're a home builder. How many homes Do you sell? We were production builders, dealing with the first time buyer market? How many homes in a given year, do you sell to one of those people? One, right? And that's where builders stop? Well, we found out we had a certain demographic that we would go three years later to their houses with a bouquet of flowers. And we'd say, Hey, thank you for living in a Straus home. And we, you know, we appreciate it. Um, but by the way, when you bought this home, you had X amount of children, your spouse is making this, you were making that, have your circumstances changed. They go, you know what they have? And they go, Well, what if you bought a move up house? And, yeah, we were selling about 137 homes a year at our peak. And if we could sell three to five of those a year, we were able to get an extra $15,000 of profit. That buys a nice steak dinner. Right? So you got to adjust your time horizons, depending on your industry. Okay, so that was number four. Number five is pricing. And there's a whole theory, believe it or not, I did not learn it as an accountant. I learned it as an economist, that there's a whole theory of pricing. And the way you value and price, your product is integral to your success. And everybody goes, Oh, the common way is based on your competition. You do that? And you must realize 50 to 80% of businesses you see today won't be here in five years. Why would you price your competition? So instead of building up your value, your proposition, your perceived value, let's face it, you got to have a certain price to cover your overhead and a certain minimum price profit. But you want more based on the value you're giving? And how do you get into prestige prices instead of discounting at discounted prices? So those five numbers drive revenue. And that's what you see as the top line of your financial statement. So you miss five numbers, the numbers that actually drive revenue. Now you get into cost. And you get your variable cost. And really, it comes down to three things, your inputs, how much stuff, whether it be labor hours, materials, stuff is going into your product. How can you make that more efficient? Secondly, is on the cost of those raw inputs. And a lot of especially solopreneurs. and small businesses, forget about the owner's time when they're pricing. And then the third one is how do you become more efficient, your throughput? How do you get it to happen faster? And once again, Josh, here's where we overlap our systems. Can you get it down to a system, so you can repeat the customer experience, the positive one I might add over and over again. So that's your variable cost. And then you get to your fixed cost, which is overhead. Now, accountants and almost everybody said, I got to cut my cost. Well, there are three major areas of cost, payroll, marketing, and overhead, like rent and stuff. payroll is usually the number one cost and who should be the first name of people that are going to be paid? You? How many of you really want to cut your pay? Not many. Yeah, no one. So I take a different look and say, let's look at our cost and see what is causing those costs. And a lot of times, it's customer complaints, quality of your product. There's all kinds of things that increase your overhead and look to what's causing that overhead. And then make shifts in terms of efficiency, see what you could eliminate, delegate, consolidate, and automate. And that then leads to the final number, which is cash flow. long answer, but I thought, I'm at the point where I don't mind telling the answers, Josh, because I'm about to help you.
This is great. So let's say you have seven different numbers, and people hearing this like, wow, I don't know what any of those numbers are. Where do they begin? They just begin on what feels like it's the worst? Or is there actually a process you should actually start with? Six or seven or so processes?
Okay, so we recently merged with a company called the CFO project. And we have figured out, first of all, let me let me go back a little because people do not a lot of people I found out don't understand this. Almost every big company, if not every big company has a CFO, a chief financial officer, and chief financial officer has one objective, to help you make more money. And this service, what I've been trying to do is provide that kind of service for small to medium sized businesses. So we have a process where we come in, and we don't expect you as an owner to understand finance and accounting. All right, number one, you have a skill set that's different than mine. And this is where I excel. But running a business is hard enough and you have something you're really really good at becoming an accountant and a financial executive is probably not in your wheelhouse. So we go through your books. We don't do bookkeeping, but we go through your books, grab the numbers for you, and put it on your own dashboard that literally flashes red, green, and yellow. Now, I'm going to go back a step. At my peak, I owned and operated 156 companies at the same time. I could manage them all in less than 10 minutes a day. Alright, 10 minutes per company. And I was teaching at the university, and still working less than 40 hours a week. And I call it my thumbs up thumbs down management. If you have the right numbers in front of you. And that's not your obligation to get them. It's your obligation to interpret them and go forward. All right, then you can look at your numbers and say here was my benchmark, here's where I am. Thumbs up, thumbs down. And I could go through all my companies and put them into my management reports. And it took me about 10 minutes, literally, and go, this pile is doing great. And here's my problem: companies. Here's what I forgot to focus my attention on. And that's all there is to it. Everybody makes this so difficult. But what we've done is we show you those numbers and tell you what you have to do in three time frames, like right now, short term, and then the things you need to do to get to your long term goals. It's pretty damn cool. And that takes that's an hour meeting a month. Now we've gone in and done, reviewed your numbers. We've looked at everything before we have this meeting so that you can point your thumbs.
Now it sounds great, and I think simple means it's actually doable. Now. Let's say you have the seven key numbers and you're reviewing them once a month, how do you? How do you know what a good number is? And what a bad number is?
A very good question. First of all, the key is not trying to think like an accountant. It's trying to think in terms of common sense. And that was one of the big things I learned when I ran my own businesses versus my own accounting firm. We as business owners think differently than accountants, we think in terms of cash in and cash out. So really, what we do is the first thing we do when we start working with a client is set up those targets for profit, and cash flow is two different things. Profit is not cash flow. And we come up with your determinants of all seven numbers. So now you have your benchmarks. And then we monitor that and say, here's where we thought we were going to be. Here's where we actually are. What do we need to adjust to hit our target if we can? Now the positive part is by the time you get doing this a couple of months, it's how can we exceed our target? Once we get everything under control, then it becomes Okay. How do we accelerate our growth? But it's all it's all very, very predictable. And it requires just common sense. But you need to be led, you need to have a guide.
Yep, I totally agree. And this is an area where a lot of entrepreneurs struggle, they might be good at selling, maybe marketing, or maybe their product or service. But the numbers get a little fuzzy. And they don't often reach out for help, maybe until it's too late. So I think probably what happens well,
Unknown Speaker 16:53
and another thing and I don't mean to belittle belabor this point is a lot of numbers, people are focused on the past. Like for instance, tax, people are focused on saving you taxes, not making you money. So I remember giving a lecture and there were 500 people in the room. And I go, how many of you would like to pay no taxes? How many hands do you think went up?
Everybody. I said, you know, my goal is to pay a billion dollars in taxes. What does that mean?
You're making the most?
Yeah, yeah. And so what I want to do is minimize taxes. But the only way you really get for the average person, the only way you don't pay taxes, is if you don't make money. It's really that simple.
Yeah, it makes total sense. Now, where do you see? Because you've worked with a lot of people, where do you see the biggest disaster out of the seven numbers? Maybe there's no correlation. But are there a couple numbers? We're like, wow, that people always seem to forget this one number.
There's a couple of things I'm the one I find the most is a problem in pricing. All right. It's usually not cost. Believe it or not, it's pricing. And, and I mean, like, I just started with a new client yesterday. And he was selling his product for $57 a square foot. Okay, I'm not gonna say what he was making or anything. And its cost was 70. Okay, that's a problem. And I had no, no idea. And he kept saying, I just got to sell more, I gotta sell more, I got no, you got a different problem, the more you sell, the faster it is that you're gonna go out of business. So that was the first thing we had to do, which then changes who the target clients are to see every number impacts another number, whether you know it or not, nobody's looking at the impact of one number on another. So that means we had to change his marketing message and the way he was presenting his product. And that changed the sales funnel. And so we have to look at all the ingredients to figure out the right one to correct. So pricing. It's really funny once you get used to using these seven numbers, and it's so simple, is you go Oh, if this changes, like if I want more leads, it's obvious you're going to have to spend more money on marketing. And it's fairly obvious. All right, if you want more efficiency, you got to spend money on systems. And what you have to do is weigh the cost and ROI return on investment. And no one's looking at the full picture. Very few people out there. are looking at the full umbrella of the business as an engine, think of your business as a car, there are a lot of moving pieces, you don't have to be an expert, I don't know how the engine in my car works for all practical purposes. Now, when I started, I used to get my own spark plugs and change my carburetor filter and all that stuff, no more, I can't. I can't figure out what's under the hood. Okay. But I don't need to, all I need to do is know when my car is having a problem. And then bring it to the mechanic and have them fix it. So there are a lot of moving pieces. But if let's say your gas filter or your air filter isn't working, right, that could be symptomatic of a bigger problem. And, and you got to think of your business like a car if you got to keep the whole thing in alignment, the wheels have to be aligned, otherwise, you're going to go to your left or to your right. And if you're not in alignment, you've got a problem. And unfortunately, a lot of people out there sell siloed solutions, which is Oh, if we increase your SEO that will fix your whole business, it's not true. You've got to look at the business as a vehicle to get you from point A to point B. And then figure out what little tweaks. And usually it is a lot of little tweaks that make your business very, very successful. It's not just one thing.
Let's jump into kind of a tangential topic. But I think because of your background, as an economist amphis, Otis will really be helpful. But we're in a down market right now. And we probably will be for a while here. And I suspect a lot of people are having their cash calculation getting tighter, right, even little leaner, and they don't know what to do. Are there strategies that are different? With these seven numbers in a time of decreasing? Or, you know, markets going down as opposed to marks going up? Is there a different way to approach these numbers?
Wow, that's a funny question you should ask. I just ran a bunch of courses on how to run your business for economic uncertainty. Um, there's, again, no easy answer. But believe it or not, in a down market, you position for the up market. And in an up market, you stash cash for the next down market. And that's the big picture. And so right now is when you should be building your credibility, your reputation, your brand. It's contrary to what you think. All right, everything is contrary. But right now, a lot of people are very either burying their head in the sand or waiting for this to get over. If you're aggressive. You're saying, Okay, this is an opportunity. How can I come out of this so much stronger? Like my business has actually been growing over the last three months, and not just a little bit a lot. And, and I learned this when I was a controller for a home builder, I was their controller during a bad period of time. This is early, early in my career. I was 29, I think. And I went to the owners who are much older than me. And I said, I don't understand what you're doing here. Would you explain it? And I remember one, there were three brothers. And Ted said, he just started laughing. And he goes, Jeff, here's what we found is that in a bad market, you structure your business for the next up market. And then I've taken it one step further. In an upmarket you stash away cash to get through the next transition. But from an economic standpoint, screw who's ever the politician in charge of the country at the time? All right. There's about a seven year cycle. And that's been going on for centuries, not decades, not centuries, even millennia. And it's not seven years to the day, seven years, good seven years. Bad seven good, but it goes and there's a cycle. It's always in the long term. It's always going up. But in the short term, you have these fluctuations. It's like if you have a seasonal business, and what you have to do is I call it the ebbs and flows of a business. You have to anticipate the ebbs and flows when things are bad. They're probably not as bad as you think. And when things are good, they're probably not as good as you think. And how do you write those out? So long story I, but believe it or not, we analyze the seven numbers. And we look at it and we say, okay, what's going to change in this environment? And how do we compensate? I don't know if I answered your question, but that was...
No, I think for anyone who's in the downturn right now, they're wishing that they had done the saving stocking away and preparing maybe six months ago.
Yeah, and I was telling anybody who will listen is the cycle. I don't know what's going to cause the economic downturn, nor can I predict it. But I know the further you are in the seven year cycle, like this one went 10 years, there's bound to be something that is going to change that trajectory. And you can't predict it. It's called the Black Swan. I think it was. He got Kathy Gladwell, who came up with that he didn't come up with the name, but he made it famous. But the Black Swan, there's always a black swan. That outlier that nobody anticipated. When we were taken to the Ashworth golf clothing public. We were supposed to go public on October 19 1987. Now, that date may not ring a bell with you, because you're kind of young. But that was Black Monday. And that was our black swan. And we almost didn't make it through it.
Yeah, well, that's true. You can't can't know the future, especially if you can know the cycles. And I think that that's reassuring to prepare for that. Now, because our time is short, you've done a huge body of work over the years. I did want to ask you, are there any big highlights from the peddler son? And we want to make sure we get into our audience's ears? And then follow up the question you have, again, a new book coming out called make more money. So any highlights or quick tips for me on those books?
Well, the pedalers son, there's a little more to my system than just the seven numbers. It's how do you correct your trajectory? And how do you plan for the long term? So we go through the eight PS, which is the leverage your poll to change the direction of your business? And the six success factors, which is how do you build long term value in your business. So there are a lot of moving parts and running a business just like a car. And you can't, as a business owner, keep the pulse on all of them at the same time, you just feel whether the ride is smooth or not. So that's in the peddler son. And I'll give you a place to go and a way to contact me directly. Okay. And then the new one makes more money. We're in the finishing touches of writing that Adam, my new partner and I are writing it. And we're going to catch on touch on the seven numbers. But that's going to be geared for how you actually implement what I've been talking about. So that's going to be more of an implementation guide. And I can't wait for that book to come out. The first couple of drafts are damn good, but we haven't perfected it yet. We're not ready to publish it yet. But we're looking to publish it in the next 60 days.
Awesome. All right. Well, that's that's great. So what to do? And then how to do it. Perfect. Bye. Bye. Get both those books. If you're serious about this.
I thought I sent you the Peddler Son. I'll get one out to you tonight.
I don't think so. But I definitely want to read it. No, that sounds that sounds great. Well, because of time, as a couple of standard questions, I want to make sure everyone comes to the show. I get to the first one being systems and you kind of describe some systems. But can you think of a particular system in your life, a client's business, your business where you developed a system? You know, what did it do for you? So can you think of one of those?
Well, first of all, I'm a believer in systems, you manage 156 businesses with a system that's integral to building value in your business and getting the freedom you dreamed out of your business. So by all measures, but if you want to run a company, without being there all the time, you've got to have systems period. That's it. That's the key to wealth building through your business. And I'm not sure I answered that question. there was a part B to that question? And I didn't catch it.
Oh, it's an A in particular. So like, you know, you so you kind of already went through it and you know, what you did to manage all those businesses. So thank you. You kind of nailed it with a great, great story. And I would add a caveat that Sam always reminds me is that the systems are there. You just never knew they were there. You never manage them. You Never to control them. So, there was a way of managing those companies. But it probably started off as just organic, haphazard, and then you documented and refined and controlled.
Right, and documenting your systems, even if it's on the back of a napkin is better than no system at all. And that's how you could find a lot of inefficiency in your cost and delivery process. Notice that I'm focused on the revenue side as well as the cost side. There's a Ying Ying Yang to this.
Yeah, definitely. And I used to try to find hidden cash in companies when they were nearing bankruptcy or whatever. And, and there's always money there, you just got to sharpen the pencil. And it's there. Yep. Now, one other question, which is, what's something I didn't ask you about? that you want to share with the audience? So you think I probably should have asked you about it?
The first one is how to get in contact with us. So we'll catch that one at the very end. Um, what's the one question? What is the real key to success? And what I found, and now I'm at the other end of it, where I am the guide. But when I was younger, getting the right guys who have been in your shoes that you could really talk to about your business. Like with my spouse, I knew I couldn't tell her everything that was going on. Because if she knew she'd be as neurotic as I was underneath the surface, so who you can't talk to your employees, and even your friends will say, I have faith in you, you'll work it out. What you need is people to guide you to help you to really solve the problems for you. And the second thing, I would say in terms of maybe it's advice, and not the question, you haven't asked me, I'm caught, I lost my train of thought. Running a business is a learned skill. And so, here I am a CPA, we're considered business advisors. And when I started running my own businesses, they started getting bigger. And I'm talking about, you know, mall, over 10 million, my home building business got to 26 million, which was a lot of money back then Ashworth golf, we got into the hundreds of millions, and we grew them all from zero. Running a business is a learned skill, and at various levels, usually a half million, 1 million, 2 million, 5 million, 25 million 100 million. The things that got you to that place, will hinder you when you get to that goal. And so you've got to make sure that you're letting go and getting the right management team in place. Whether it's literally working for you and or you're outsourcing it, I look at both. That's my team, you got to get the right team in place to get you through each tranche or step of your business growth. But as you get bigger, you got to let more and more go, you gotta trust the people. And the only way you could do that. And I'm going to preach to the choir, because it's about systems as the only way you can ensure the quality you envisioned throughout the growth of your organization. And that's where the wheels fall off the car. And I've been using the car analogy all throughout this interview as the wheels fall off, if you don't have the right team to help you where you're weak, because you cannot be an expert at everything. There are too many facets to running a business.
Yeah, totally agree. No, that's great advice. wise counsel from someone who's been there and done it for many years. And so all the young entrepreneurs, including myself, listen up. Take notes on all of this. Well, Jeff, where can people find out more about you, all your ventures and to get your books and to get some help? Where do they go?
Okay, so well, what I'd like you to do is go to theCfoproject.com. TheCfoproject.com. And we'll be doing a notice of when we're going to release the book. When we release it, we'll let you know. But get on our mailing list, but there's also a video to watch and it's no obligation where we tell you about our process. Okay. And then if you want to get in touch with me directly. I'm Jeff at theCFOproject.com. So any way you get ahold of us, we have a whole team of people to help you. And we, again, I want to make sure you understand this, we have an affordable solution to provide CFO services for small to medium businesses. And you need this advice. Whether you one way or another, you can't survive without this kind of knowledge. And that's a self plug. But if you don't hire us, hire somebody to fill this role. Otherwise, you're just shooting in the dark. Without benchmarks.
I totally agree, Jeff. Thank you. And that was a good plug. And, yeah, I mean, most companies go out of business. So if you're not checking these numbers, it's just a matter of time, because you don't you don't have the dashboard to tell you what's happening. So great advice, Jeff. Again, everyone who's watching this live stream. Thanks for joining us on Facebook. And if you watch the recording, we do these things live on Facebook every week, every Friday. Stay tuned. Next week, we'll be sharing another guest and an expert like Jeff who's going to help you with your business so you can make more and work less, or I'll be sharing with one of my certified consultants or coaches I shared about how they're fixing companies right there in the fields right now. If you want a copy of the book right there behind me work the system, you can get it at workthesystem.com for free, or you can leave a review, wherever you're watching and listening to this leave us review, take a screenshot and email it to info, at workthesystem.com. And we've got one book a week for every lucky winner so leave us a review, and we'll catch you next week. Thanks again, Jeff.