Blue Collar Culture

Business Results the Old Fashioned Way

Jeff Prager | Cashflow Makeover: Don’t Focus On Revenue. Don’t Focus On Profit.

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On this week’s episode of The Blue Collar Culture Podcast, we speak with special guest Jeff Prager, a founding partner of The CFO Project. Money is something we don’t always talk about, but love to have, and when it comes to business, there are sometimes things that keep us from making the kind of money that we should be making. Jeff is a CPA who has been involved in cash flow engineering for many years, and has grown companies to eight and even nine figures. He joins us today to have an in-depth conversation about cash flow.

“The idea behind cash flow engineering and The CFO Project is every dollar you invest in your business, you want a buck and a quarter back. How many of you would invest $1 in the stock market if you thought you were going to get 87 cents back? And we don’t apply that same theory to our own businesses. We’re leaking cash in places that your accountants, your bookkeepers, your CPAs are not telling you. As business owners, we only have to think about cash in versus cash out. Cash coming in has got to be greater than cash going out. It’s really simple,” says Jeff.

We chat about letting go of the ideas of revenue and profit, as well as:

  • The seven key numbers to drive business growth
  • Calculating the right speed for your business’ growth
  • Business’ most common “cash drips”
  • Helping clients overcome the barrier of talking about finances
  • And more

Listen now…

Mentioned in this episode:

Transcript

Ryan Englin: Welcome back to another episode of the Blue Collar Culture Podcast. I'm your co-host, Ryan, Englin. I'm here with Jeremy Macliver.

Jeremy Macliver: Welcome back, everybody.

Ryan: I'm excited to speak to today's guest. Money is one of those things that we don't always like to talk about, but we love to have. And when it comes to our business, sometimes things get in the way that keep us from making the kind of money we should be making. In fact, we're going to dig in today talking about cash flow because, at the end of the day, cash is king. And our guest today has been doing cash flow engineering for years. In fact, he's a CPA. He's grown companies to eight and nine figures. So this guy knows what he's doing. So I want to welcome today's guest, Jeff Prager with The CFO Project. Jeff, thank you for joining us today.

Jeff Prager: It's my pleasure.

Ryan: So there are a lot of things that, a lot of beliefs people have about money, especially when it comes to their business. But there are some things that a lot of business owners believe that aren't true. What's one of the biggest myths you see when working with business owners?

Cash is Still King

Jeff: There's actually two. One is striving for gross revenue, which is really not important. And then they go for profit, and profit is an accounting term. What I want them to go for is more money, more cash in the bank. I want them to have more cash tomorrow than they do today. And if you drive your business toward positive cash flow, profit and revenue will happen automatically.

Jeremy: So don't go after revenue, don't go after profit, go after cash.

Jeff: That's the bottom line. And keep your eye on the long term, where you're going over the long term versus the immediate or short term. So you kind of got to keep making decisions based on where do you want to end up over, let's say, three, five years from now. And that's really a key component to financial management is knowing where you want to end up.

Jeremy: Now, Jeff, I'm sure you're aware that you just told us all to do something that's completely different than what we've all been focusing on. We've all been trying to grow top line, we've all been trying to, some of us have to at least realize the top line is eluding us and it really doesn't matter, we start focusing on that profit. So share with us how do we do this? Like, I mean, or how do we let go of revenue or profit? Or why should we?

Jeff: Well, number one is profit. Let's, we're always looking for cash leakages. So the idea behind cash flow engineering in The CFO Project is every dollar you invest in your business, you want to buck in a quarter back. How many of you would invest in the stock market, put $1 in it if you thought you were going to get 87 cents back? And we don't apply that same theory to our own businesses. And we're leaking cash. We're leaking it in places that your accountants, your bookkeepers, your CPAs are not telling you. Number one, you're buying machinery and equipment, you're investing in your business.

And that may be showing up on your balance sheet which is irrelevant where it shows up. Because we as business owners only have to think about cash in versus cash out. Cash coming in has got to be greater than cash going out. It's really simple. But financial statements aren't talking about your investment in your business, machinery, cars, equipment. They're not talking about your debt repayment. Your interest shows up on your p&l, but not your debt repayment, or your equity withdrawals, how much you're paying yourself as an owner withdrawal.

And the fourth thing it's not showing you is how much cash you need to leave in your business so you could grow it. So one of the things an established business does that's usually wrong is they grow too fast. Not that they run out of business. That's not what, once you're established, the biggest component of bankruptcy is growing faster than you can. And that's part of the myths we're trying to solve.

Jeremy: If we grow too fast, what happens? What's going to, why does that hurt us?

Jeff: Because you outstrip your cash. You've heard the saying you've got to put in money to make money, right? So you need money to grow your business. You need to invest in your business, your people, your overhead, and your inventory, whatever it may be. You have to invest. So there's a real simple formula, actually, it's called breakeven, to figure out how much money you need to get to the next level. And using that, a permutation of that formula within, literally on the back of a napkin, we could figure out how much cash you need to get to the next level. And we store that cash before we make the leap so that we ensure our success.

Jeremy: Wow. So, you know, we all are, have been challenged with the chicken or the egg when it comes to do I grow, do I invest, do I build the infrastructure? And so you're saying you have a formula for how fast we can grow, and make sure we have the cash in the bank to make it to that next growth spot.

Jeff: Number one, but number two is, there was a point in my career where one of my businesses we got upside-down a lot of money. And upside-down means we owed more money than we could pay back. And that's when I came up with the seven key numbers. And I was trying to figure out from other businesses, that being a CPA, I had seen hundreds of businesses of all sizes, including up to a billion dollars. And I started saying what made them successful? And I found by just watching these seven key numbers and knowing how to use that to drive my growth, I could succeed. And five of the numbers have nothing to do with accounting.

Jeremy: Says our CFO being recorded right here. We're gonna watch five numbers and they have nothing to do with accounting. I'm excited to hear these seven numbers. Can you just give us an overview of these seven numbers? And we'll dive in. We'll begin unpacking them.

The Seven Major Drivers of Cash Flow

Jeff: Sure, because most accountants only follow your revenue, your cost of goods sold and your overhead. So let's go through it. Our numbers follow the whole business funnel from lead generation to cash in the bank. So here's how they go. Number one, how many qualified, here's the word qualified, how many qualified leads are you generating per month, per year, per quarter, whatever your measurement timeframe is? Second is how many are you converting? That measures the efficiency of your sales force.

So the first one measures the efficiency of your marketing, the second one, your sales force. The third is customer retention, which really is an indication of how will you fulfill your promise to those clients. Will the customers stay with you? The fourth one is your customer journey, number of transactions per customer. Do you have a way to seamlessly bring them from one transaction to another so that you increase their lifetime value? The fifth number is your pricing.

And by the way, a lot of companies, if not the majority of the companies I've dealt with, are not pricing correctly. So are you pricing to get the right gross margin, net profit and productivity per employee? I just threw out a term that is not an accounting term. Now those five numbers generate revenue. That's where your accountants start popping in, okay?

They can measure your revenue, how much came in. Now there are two types of costs associated with that. There's variable costs, the costs that only incur are incurred when you deliver your product or service. And that's the only time they were incurred. And then there's your overhead. Of the overhead, your three biggest components are payroll, marketing and other overhead. Rent, stuff like that. But we look at that it's one great big number. So those seven numbers drive your cash flow, and that, it's really that simple.

And getting the right target, and that's where the CFO comes in, is helping you target the right profit so that you could cover all your cash out leakages, such as your owner's salary, such as debt repayment, such as buying more assets for your business, or funding the receivables and inventory you need to get to the next level. But those seven numbers will tell you the whole story. And I've applied it even, I've done it for United Way, where for their sister organizations, we changed the terminology a little, but it was the same seven numbers that drive nonprofits. So that's kind of it. It's fairly simple once you understand it.

Jeremy: So, I love these questions. I want to go back to something you said just right before these questions, and then I'm sure they're gonna come into these questions somehow. When you said you could in a napkin at a restaurant, at a coffee table, we could figure out how fast we could grow and how to store, like how much cash we needed in the bank per se, to go to the next level. How would we do that?

Jeff: We start with your financial statements. Do not kid yourself, okay? But what we look for is your average days receivable, average days payable, average days inventory, and then we look at all your fixed commitments. That includes stuff that isn't showing up on your profit and loss. The leakages like your debt payments, the owner's withdrawals and any kind of investment and assets we have to make.

Now, all we need is really two numbers, is once we determine how far you want to grow, okay, we figure out what you're going to have to do in terms of increased inventory receivables offset by your payables. And believe it or not, with those couple of numbers, all we have to do is the division problem and we can solve how much money you need to get to the level you're trying to get to. Now, it's a little harder to explain, but when I do it on a back of a napkin, it is intuitive. So

Jeremy: Got it. You know, if I'm following along here, and obviously, explaining it versus just drawing it out and understanding some specifics, you know, it gets a little bit more complicated there. So this is great, though. I mean, so you said accounts receivable, give me those three numbers again that you started with.

Jeff: So the biggest leakages are accounts receivable, you're funding, your clients' purchases, inventory, you usually have to buy it before you sell it. And accounts payable, how long does it take you to pay for that inventory?

Jeremy: Okay, make sense. I like the way you put that AR is funding the client and then buying the stuff to sell, and then how long it is to get the money. And that makes sense because that's where we're, those are the constrictors on us growing to the next level. So you use those seven questions and this to determine a financial picture for the organization?

Jeff: Yeah, yeah. In fact, that's what we do at CFO Project is, we go into your books, we look at them, and we correlate those numbers to those seven indicators. And actually, there's a few more when we're working one on one with our clients. But those are the seven major drivers of cash flow.

Jeremy: I love this because, you know, I've said so many times to my clients if you look at your p&l for five minutes, and you don't know what you should start doing, stop doing or keep doing, p&l is a big waste of paper.

CPAs and Bookkeepers Keep You in the Past, a CFO Takes You Into the Future

Jeff: Right. And that's the difference between a CFO. We take you into the future, versus CPAs and bookkeepers and accountants who are keeping you in the past. And most people don't know how to read this stuff. Because it's written in a different language. It's written in generally accepted accounting principles, GAP. No one's teaching you what to look at, when to look at it, how to interpret it, and if you don't like the number, what to do about it. And that's what a CFO does, or should do for you. We're the guys who take you into the future.

Jeremy: Very cool. So I love the analogy used about leaking cash. I remember a buddy of mine, I used to own some body shops, and a buddy of mine that owns some body shops came. And we were standing out there looking at the yard. There was a bunch of wrecked cars out there. And, you know, some of them are dripping oil on the parking lot and those tires hanging off and all that stuff. And he goes, you know, one day I realized, every day those cars sit there, it's like they're, you see him dripping, but they're just dripping money.

Like it's just dripping and going away. And so the faster we can turn this car, faster we can turn our AR or the inventory, the parts that we have sitting here, the faster we can get paid. We'll quit dripping the cash out of this car. So I love that leaking cash thing. That was such a visual, it was, we stood there that day that I'll never forget it.

Jeff: That's a great story, Jeremy. Most people don't know where their oil drip is.

Jeremy: So where are some of this, maybe share a fun story or an interesting story about some cash drips that you've encountered over the years.

Jeff: I mean, some of it's so obvious, you'd laugh. But we just ran into a client just the other day, where they kept telling us, they should be making a lot more money and they should be, they should be. And then we found out they were selling their product less than their cost. And it took us a little bit of time to figure it out, I gotta be honest with you. But we had to convert everything to their standard metric, which was square feet.

And once we did that, we could prove to them and their accountants never ever thought about converting their numbers into the language the client understood, which was square feet. For other people, it's jobs for other people. It's linear feet. Or it could, you know, we, every business differs on the metric. But when you boil it down to that one key metric, boom, sticks out like a sore thumb where it's leaking. So that's one interesting story, but like I said, when I was going through the seven numbers, pricing is the biggest problem I see out there.

And the other one, the other black hole, which everybody knows, is marketing. Nobody's measuring the ROI return on investment of their marketing dollars. They're buying SEO, they're buying all this silo crap, instead of focusing on the whole picture as it relates. And that's what the seven numbers are cool for is it relates the whole business funnel and shows you how a decision at one end of the funnel can affect another end of the funnel.

Ryan: Jeff, I love that. And pricing and marketing like, all of a sudden my ears perked up and I was like marketing, that's my language. And I agree with you. I see way too often, whether it's just generalized marketing, or they're actually marketing to recruit people, like we do today. They're just never looking for the ROI. So here's the big question for you. You've given the seven numbers we've got to look at. You've given some examples, you've given some stories. And I will say that I'm, I've been in this boat, so I get it.

A lot of business owners that I know, and I guess that I was in this boat for a long, long time, you say financial statements and we cringe. And we're like, Ah, it's so detailed. It's so much stuff. That's not fun for me. Like, I started this business because I'm passionate about the work I do. But now I got to manage all these numbers and all this theoretical stuff that, as you said, because GAP is difficult to understand. So how do we get that owner that's listening going, Yeah, I get it, but I don't like this stuff? Like, how do you get them on board? How do you get them excited? How do you get them to start looking at these things?

Turning Your Numbers Into a Story

Jeff: Yeah, this is almost gonna be a selfless plug. But we're your hands-on CFO. You as an owner are probably very accomplished that what you do. We're very accomplished at what we do, okay? And for you to learn what we've learned over 45 years isn't practical. So what we do is we grab those numbers, we turn them and burn them, and we put them into a dashboard, sort of like your dashboard on the car, where you have a tachometer that's flashing red, green and yellow, literally, and you don't have to understand the numbers. What we do is we translate those into a story you understand.

And that's the key. Is, somebody has got to be a translator. You're in Paris, France. You're in a restaurant. All you want is a cup of coffee, but you don't know a word for coffee. You just need a translator, and that's it. Once you boil it down into these seven numbers, I guarantee you, regardless of your level of sophistication, you will understand it. Or they'll get rid of us. It's that simple. But no one is translating it for you. And that's the key. It's just get a translator.

Ryan: I love that. As business owners, we are experts at what we do. And usually managing the financial statements is not what we got into business to do. So bring in the expert to help with that. So here's a follow-up question. I know a lot of business owners that don't get excited about talking to accountants, bookkeepers, CFOs controllers, those types of outsourced experts, because they've had a horrible experience. Maybe their CPA took a look at their books and go What have you been doing all year? And they're like, Oh, it's my bookkeeper. Like they messed everything up.

And so there's some barriers now to get people to say, Hey, I really need this expert to help me see through the windshield of my business versus looking in the rearview mirror, which is where most of us are when we talk about financial stuff. We send our financials to the CPA at the end of the year, and he goes, oh, we got a mess to clean up. Clean up the mess and then we move forward and we just keep doing what we're doing. How do you work with clients to get them to overcome that fear or that barrier that's been created because there are other people in your industry that haven't taken care of them?

Jeff: Well, first of all, there are two things. Most people think that CFOs are very, very expensive. And we are, okay? But because we've been doing it so long, we've got it down to a system so that we can make it very affordable for the average business. So that's number one. The second thing is, hey, we don't know if we can help you all the time. So what we do is we offer a conversation where we figure out whether or not we can help you.

And then for free, we do what we call a cash flow makeover, where we help you identify where you're leaking cash before you even hire us. Because we don't want to, there's more than money involved. If we can't help you, we want to identify that right off the bat and say, we can't help you. And there could be a whole variety of reasons.

We're not a good mix, we don't get along with you, or your business is not one where we have the right expertise. So we actually do a cash flow makeover so that we could determine A, what your seven numbers are, what your key indicators are, and get it, make sure we can translate your business into something where we could help you go forward. And by going forward is we look at your, where you are, right now, We look at where you want to go, We figure out that gap and figure out whether or not We could close that gap. It's really that simple.

Jeremy: Wow. So I understand that at the end of this, we're going to learn a little bit more about this cash flow makeover and how we can take advantage of discovering that for our businesses. Now, most of us entrepreneurs, and I remember this was my case, I had the numbers when I got to that point of my week, I guess we were saying, I always think of what Grant Cardone says, Well, you know, if you procrastinate, now I forgot it. He says it but if you're not, if you're procrastinating, it means you're not good at it. And I know what I procrastinated at. So, how much time does it really take to manage the numbers on a weekly basis?

How Long Should it Take to Manage Your Numbers?

Jeff: Well, you'll never believe my answer. Five to 10 minutes. If you have the right information if you have the right dashboards, so at my peak, I owned 167 companies. I was managing them in less than 10 hours a week. And I was teaching at the University of Colorado and still working less than 40 hours a week. If you have the right system, managing your business by the numbers takes very, very little time. Because all you got to do is point your thumbs, thumbs up or thumbs down. If you're doing better than you thought, thumbs up, go drink coffee, go play golf. If you're doing worse than you thought, which is easy.

When you have two numbers, you could compare it and you could say, okay, thumbs down. I gotta pay a little attention and clean up this problem. So in my mind, we overcomplicate that which we do not understand. We always overcomplicate what we don't understand. I want to tell you, management is just pointing your thumbs, thumbs up, thumbs down. And if you do that, you can manage any business easily. And you get your employees on metrics if you want, that are just Thumbs up, thumbs down. Yes, no, that's it, period.

Ryan: I love how simple you make that sound. And I know thinking back at my business, I'm like, gosh, I wish it was that easy. But I would imagine having someone like you on my team, or even our listeners, having someone like you on their team, you can show them how easy it can be to have this dashboard, be able to compare these numbers and thumbs up. Thumbs down?

Jeff: Absolutely. Absolutely. Like I said, it flashes in red, green and yellow on our dashboard.

Ryan: I love that. So you have something that you want to offer our listeners to help them get started with this simple process of being able to better manage their business through their numbers. And I would love for you to explain what that is and tell them how to get hold of you so they can take advantage of this offer?

Jeff: Well, like I said, What we'd like to do is have you schedule an appointment with us so we get to know you and understand a little bit about your business. In other words, then if we decide we can help you, we take you to the next level, which is the cash flow makeover where we actually look at your numbers and figure out what you're doing right and what you're doing wrong, okay? What's working, what's not. And then from there, then we finally make a decision of whether or not we go forward.

So you get a lot further in our process than you'll get with most people in our business. But we want to make sure, absolutely sure that we could communicate with you and get you running your business based on thumbs up, thumbs down. And that's it. So my offer is if you'd like to schedule an appointment, go to thecfoproject.com. We even have a video that explains the dashboard to you, if you want to watch it, all right? Then you could schedule an appointment,. And if you want to get a hold of me individually, I'm [email protected].

Ryan: That's great. So what's the cost for getting this initial assessment done before we can make the decision whether or not to move forward?

Jeff: Oh, it's really expensive. It's zero.

Ryan: So you're gonna do a free assessment with our listeners, let them know how you can help them and show them that managing the numbers inside of their business is going to be so much easier if they start working with you. Is that right?

Jeff: Absolutely. Because this is a monthly service. We want you looking at it at least once a month. We have clients that have been with us for 20 years and more. It's a relationship. This isn't a one and done situation. We're going to be standing by you, helping you, your hands-on CFO, taking you through problems that you can't discuss with your spouse, with your employees. We're going to help you through that process.

Ryan: I love that. Well, Jeff, thank you so much for being here today. And for those of you listening that want to learn more about this cashflow makeover, go get that free assessment. It's going to do amazing things for your peace of mind and also being able to run your business. Thanks again for joining us today, Jeff.

Jeff: It's been my pleasure.

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