Blue Collar Culture

Business Results the Old Fashioned Way

Judi Otton | Understanding Your Financials — Building A Fiscally-Fit Business

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On this week’s episode of the Blue Collar Culture Podcast, we speak with special guest Judi Otton. Judi is the Founder and CEO of GrowthCast, a company dedicated to helping small business owners manage their cash flow, maximize their profits, and ensure that the financial aspects of their business are all in order. She is also a “CFO for hire” dedicated to teaching business owners how to build fiscally-fit businesses. 

“Many business owners will only look at one or a couple of things. They may only look at the balance in their bank account, or maybe they’ll look at a P&L periodically, but there are a few things that should be worth looking at. First of all, their P&L, you want to know if you’re running profitably. But, I also want them to be able to drill down into that and understand what kinds of customers, or what kinds of jobs, or what industry is really giving them the most profit, not the most revenue, which is the most money in the door, the most profit, which is how much money you keep at the end of the day,” says Judi.

We chat about common money myths faced by business owners, as well as: 

  • What to look for in on a balance sheet
  • Why being debt-averse could prevent your business from growing
  • Cash flow statements and forecasts
  • And more

Listen now…

Mentioned in this episode:

Transcript

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

Jeremy Macliver: Welcome back.

Ryan: I'm just going to cut right to it. Today we're going to talk about money again. It seems to be one of the biggest challenges for a lot of business owners right now. And it's not just particularly do we have enough money, can we make those decisions, but really the way we think about money. And today's guest is a fractional CFO, and she loves teaching business owners what they need to do and know to build fiscally fit businesses. So Judi Otton, welcome to the show. Judi Otton: Thanks, Ryan. Thanks, Jeremy. I'm happy to be here.

Ryan: So what are one or two myths about money or your industry that you want to break down for our listeners today?

Money Myths

Judi: Great question. One of the first myths that I think I run across a lot is that I'm just a cost-cutter, I'm gonna come in and slash costs and pinch every penny and watch everything you spend. And that's a little bit of what I do. Frankly, to me, it's the least interesting part of what I do. I'm much more interested in helping you earn more money and more, even more importantly, keep more of your money. The second myth that I run across is that what I do is very complicated. And it can be. I've met a lot of people who do what I do who have come out of very large corporations, have been CFOs of, you know, fortune 100 corporations. And they do sometimes tend to look at things in a very complicated, very, I don't want to use the word sophisticated, but very big company kind of manner. It doesn't have to be that way. It can be very straightforward. It can be very appropriate to the size of your business. And then the third myth that I see a lot is that what I do is only for big companies. And that's not true at all. Any company could benefit from having some financial expertise available to them and growing it within their company.

Jeremy: Love that. The size thing, you hit a nerve right there with me because when I first started my first business, we fumbled through all those numbers, tried to manage, make sense of it for some time. Then when we got some national opportunity to go big, then we thought, Whoa, we should probably hire an outsourced CFO. And at that point, we dug into it. I sure wish I'd have known a lot of that prior. So you're exactly right with that. So when we talk about the business owner getting savvy with their numbers, help us understand what are some of the numbers, maybe where, you know, we got 30 employees, we're doing a couple million dollars in revenue right now and we're trying to just get a grasp of it. Can you maybe teach us a little bit, dive a little bit deeper into what should we be looking for right out the gate?

Judi: Yeah. Absolutely. many business owners will only look at one or a couple of things. They may only look at the balance in their bank account. Or maybe they'll look at a p&l periodically. But there are a few things that they should be working at. First of all, their p&l. Absolutely. You want to know if you're running profitably, but I also want them to be able to drill down into to that and understand what kinds of customers or what kinds of jobs or what industry is really giving them the most profit. Not the most revenue, which is the most money in the door, the most profit, which is how much money you keep at the end of the day. So that's something that's important that I think a lot of business owners miss. The second one is, I think everyone will say, cash flow. We've all heard the saying cash is king. But you've really, really got to manage your cash flow. You can be very profitable on paper but if you're not getting the money in the door and minding what goes out the door, you're going to be in big trouble regardless of your profitability. And then the third thing that I think a lot of business owners miss is their balance sheet. They're not really paying attention to their balance sheet and this is the assets in the liability of a company. If you have a lot of debt, or if you have a lot of accounts payable, or old accounts receivable that you're not collecting, that you're not bringing in. Those are important things to be paying attention to and really critical for the health of your business.

Jeremy: Love each one of those. Those are all, you know, the checkbook balance is pretty easy for all of us to follow, right?

JudI: It's worth so little, though. It's so little information compared to what's out there.

Jeremy: Maybe you can help us today pull apart one of these other reports. And because you're exactly right, you know, one day I had the revelation as I was sitting across from a banker, trying to get another loan. We were growing a steel company that I was running there. So, and I noticed that every banker that we interviewed, the first thing they would go to is the balance sheet, like right away, click flip through the papers, whereas the balance sheet, I want to go to that. They're just look at that. I never looked at that thing. I look at the p&l. But, you know, and then that's when I started learning, you know, the value of the balance sheet and how it really shows the health today. That's where I'm going every time. I want to see that. So why don't, we can you boil that down for us? What are we looking for in a balance sheet? And why would, maybe let's go even a little bit deeper because I know you're really good with mindset. Why would we even want to look at a balance sheet?

Why Keep Track of Your Balance Sheet?

Judi: Great question. I love to tell you why the bankers want to look at the balance sheet. They want to know what your debt is and what your assets are. If you have a lot more, if you have a lot of debt on the books already and you don't have a lot of assets, you're probably not going to be able to pay it all effectively and they're not going to want to loan you money if you can't pay it. So the balance sheet really shows you the net value, the net worth of your company. There's two different ways to look at money. One is income, that's the money that comes in the door. And then the other is net worth. And that's the value that you have, the intrinsic value. Now, this is not the same as the valuation of a company. There's a lot more involved in that. But it shows you basically, you have these assets, you have these liabilities, hopefully, you have more assets than liabilities. Otherwise, you're what's called underwater. It happens sometimes. It's not the end of the world, but it's certainly not ideal. One thing I'd like business owners to take away from this is a really quick thing to look at and it's actually called the quick ratio or the current ratio. And it's the ratio of your current assets and those are the assets that you expect to get paid to you within a year, over your current liabilities and that are, those are the liabilities that you need to pay in a year. And that should always be over one. You should always have more current assets than current liabilities. Again, you know, sometimes you get upside down and it's fixable.

But ideally, you want that, the higher the better. So that's a pretty easy thing to take a look at on your balance sheet. So keep that in mind. The other thing that you're going to want to look at is trend. If your accounts payable, for example, is going up month after month after month, maybe you're growing and, you know, you're you need more supplies, services, whatever. But if you're not growing, it probably means you're not keeping up with your bills, which is going to cause a lot of problems in the future. So keeping an eye on things like that. Same thing with accounts receivable. If that's growing and growing and your sales aren't increasing, you're not collecting your money. So that's a problem. So keep an eye on the direction that these things are going. That quick ratio is a really easy thing to look at. And if you are upside down, meaning you have more liabilities than assets, it's not the end of the world. Obviously, it's not ideal, but you want to start working on a plan to get yourself righted. You won't get a lone if you're upside down on your balance sheet. And you'll be in a much better position with your company when you can right that ship.

Jeremy: So one thing that I've learned in growing several businesses is that the bank's ability to repay, and, you know, that was one of the first things I had, you know, I asked the bankers Well, why do you always look at the balance sheet? Well, it shows are your ability to repay. What I've learned is that's also our ability to sustain because that's the health of it. And so we're able, if the banker look says you have the ability to repay, it means I have the ability to overcome the dot com, bubble, the 08, whatever those crises are that they come. And sometimes it comes just to an industry. They don't come worldwide. And your ability to manage this, you know, we teach a tool called IDS. And we learned the quick ratio and really started beating it up every single month, like, Okay, how do we make that number a little bit better, a little bit better?

And dig into all the causes of it, you start saying, well, this is why our liabilities here, this is why this, and we began positioning the company in a way that within about six months, it was so much more resilient to the future. You know, because we had protected the cash, we understood where that was. And so that's what you're saying here is let's really dive into this and make sure we're building something that's strong.

Judi: Yes. I love that so much for so many reasons. I love how quickly you were able to make an impact in your business. And you're right. We will have these crises. There will always be another crisis whether it's industry-specific, regional, global, they come and they go and the strong businesses will weather them.

Jeremy: And the balance sheet is going to tell you that one. So yeah, I love how you pull that in there. Let's jump over to unless there's, is there anything else you feel like we should have as a takeaway on the balance sheet?

Debt Shouldn’t be a Dirty Word

Judi: You know, the other thing I want to mention is if you don't have a lot of debt on your books, don't be afraid of taking out a loan if it's going to help you grow your business. Some business owners are so debt averse that they're struggling to grow their business, where really, when used properly, debt is just leverage. It's just a tool. It's not anything to be scared about if you're using it responsibly. And if you want to grow your business, especially if you want to get your business big, it's really necessary to get comfortable with having reasonable amounts of debt for the appropriate reasons. Now, you don't want to fund operating losses, but you probably will need to fund growth or it will suffocate your growth. Not having the cash can suffocate your growth. So don't be afraid of debt.

Jeremy: So you had several things packed in there. So I'm gonna pick on one little area that you said, it may be necessary. Which necessary, that's a pretty strong word when we're talking about debt. So give us an example. Do you have a story or something that you could share with us of a company that had the wrong mindset or maybe they had the right mindset about debt and how they, how the debt actually helped or hurt them, their mindset with it?

Judi: Yeah, I do. I do. My previous company that I owned, we did custom software and hardware development. And we were about, at our peak, we were about 25 people, software developers, engineers, all very senior, all very highly paid. You know, all making six figures. We, they were W2 employees, so they got paid every week. We had great clients, big companies like Pitney Bowes, Canberra, ASML, who had payment terms. ASML, for example, their payment terms were 75 days. So two and a half months. So as this company grew, we would bring people on the payroll, we'd start paying them every two weeks, but we wouldn't start to get paid until two and a half months. So the more we grew and the faster we grew, the more working capital we needed, the more money we needed to grow. Otherwise, we just wouldn't have been able to pay them. And we did. We had a small line of credit when I started and we had some gangbuster sales and started bouncing up at the top of our line of credit, you know, every time we added a new project with three or four engineers making 100 K or more a year, we've maxed out our line of credit. And my partner was a little nervous because for a small businesses, it's all personal guarantees. Mostly there are ways around that.

He was a little bit nervous about upping our line of credit, but it was really strangling our growth. We couldn't take on another project because we didn't have the room to pay the people to float that payroll until we got paid. And then once we started getting paid, you know, things evened out. But I finally convinced him to up our line of credit from 250 to a million dollars and we grew the company nicely. We didn't default. We made a lot of money. It was good. It was fun. It was a lot of fun.

Jeremy: Well, what this is always a fun question that we ask, what is the best mistake that you've ever made?

Judi: The best mistake Oh, haha. So many. You know what? One of the best mistakes I've ever made was not paying enough attention to accounts receivable. Same company, a consulting firm, we had a big client and there was, it wasn't that they weren't paying. There was a mess up on a PO and it was with a big company and if you don't get the PO, the numbers on the PO right, things get gummed up in the works and can go on forever. So I think our invoices for them were probably two to $300,000 a week.

And this to snafu went on for enough weeks that it really impacted our cash flow to the point where we got to one payroll cycle and said, Oh, we don't have enough money for payroll and my partner and I drove to their office picked up a check and put it in the bank so we can make payroll. It was scary. It was really scary because we didn't know what we were going to do. We got them, you know, we called and begged and pleaded and got them to cut this check while we were still sorting out this PO mess. But I took my eye off that ball. And it wasn't even long. It was only a month, maybe six weeks. It was long enough to get us to the point where it could have been really disastrous. And I've never done that again.

Jeremy: Yeah. You know, sometimes, though, when you get to learn the lesson and you're actually able to overcome it, it builds that fortitude and that strength so that you never let that guard down because there's a certain point when that issue is just too big and it's going to be a huge, huge problem if we have to go down that road.

Judi: Yeah. And then it gets out of control.

Jeremy: Yep. So let's jump into cash flow statements. I'd like to take a deep dive into this and learn a little bit more. What are we looking for when we look at a cash flow statement? Why would we want to read it? What are we trying to extract out of it? Help us out.

Why Keep Track of Your Cash Flow Statements

Judi: Yeah. Cash flow, I think cash flow statements are one of the least understood financial statements. And all the cash flow statement is telling you is what came in in the time period. This is a report that covers the time period, say a month. What came in from all of your different sources? So we What came in from operations, which means your profit for the month? What came in from financing? Did you hit your line of credit? Did you get a new loan, something like that? And what came in from investments? Did you have dividends? Have you sold stock or other business assets that you might have sold? So what money came in, and then what money went out for operations?

Again, for financing this is important because when we build a budget, our debt payments aren't usually included in the budget. So if you build a budget that shows that you're making $100,000 a month but your debt payments are $120,000 a month, you're actually going to have negative cash flow, which means you're going to have to find that cash somewhere else. So the other important thing about a cash flow statement versus a p&l is that it's on a cash basis. A p&l can be either on a cash basis or what's called an accrual basis. And that has to do with the timing. So you can have an accrual p&l that shows profit when you send out an invoice and an expense when you log a bill. But a cash flow statement really takes into consideration the timing of when the money comes in and out, which is why it's so important.

One thing I want to add even more important than the cash flow statement, which looks backwards, is having a cash flow forecast because you can see those gotcha, those, you know, Oh shoot, I don't have enough money for payroll. You can see those things coming if you have a cash flow forecast that you're getting keeping up to date. It's a little bit of work to get it going initially. But once you've got it put together, it's not that hard to keep it current. And it's a really valuable tool.

Jeremy: That's great. Now do most, let me just ask this, do most of our accounting software like QuickBooks and all that stuff have these cash flow statements?

Judi: They do. QuickBooks does. It's not bad, but again, it's historical. It's going to show you what happened last month, last quarter last year, QuickBooks does have a cash flow forecast, but it's really not great. There are better ways to do it than what QuickBooks does. QuickBooks also has a both, will show you both an accrual and cash-based p&l, and businesses will pick one or the other and that's how they file their taxes. So it's relevant for taxes, but you should be looking at both of them. I like to look at both the accrual-based p&l and the cash-based p&l because they tell me different things.

An accrual-based p&l will tell me what we're billing and what expenses we're incurring. And a cash-based p&l will tell me what money we're bringing in the door and what money we're letting go, what money we're spending each month because it looks at the timing slightly differently. So they're both interesting and good pieces of information. So you should run both if you have software that lets you do that.

Jeremy: Okay. Moving into the cash flow forecast, what are some tips, tricks, things that we should be doing to build that to think about it? What are a couple takeaways there?

Judi: Yeah, great question. Great question. First of all, on the income side, you'll have terms with your clients, you know, maybe your terms are net 30, which means that the client is supposed to pay you 30 days after the invoice has been issued. But clients really tend to operate on their own cycles. So, and most software, will show you something called average days outstanding. So you can see for a client that this client typically pays me 45 days. This client typically pays me on the first week of the month. This client is just really all over the place and I have to keep on them.

So when you're putting together a cash flow forecast, yes, look at the terms. But really keep in mind, how do those clients actually pay. Then when you're building the expense portion of the cash flow forecast, start with the things that you must pay. Anything that's taken out as an ACH payroll, 401 K, any vendors that are really strict about keeping you on your terms, any loan payments that are really important to pay timely. So put it in order of, you know, must have, need to have, nice to have.

There are things that you'll be able to be flexible with. There are certainly things that are discretionary, that, you know, you can decide whether you want to spend this money this month or next month. So keep that in mind, but layer in the mandatory things first, and then you can put in the nice to have stuff and any discretionary things afterwards.

Jeremy: So it's kind of like building out a budget, but it's taking a look at it. Like, what money is really going to come in? When do I think, that's to do more with the timing than just building.

Judi: It's all about the timing. All about the timing. Yes.

Jeremy: Yes, you can't spend it if you don't have it so.

Judi: And if you know what, you're not going to get it perfect. Don't be afraid to take your best guess. I think that's one of the resistances to budgeting or cash flow forecasting or any kind of forecasting is that the business owners, they don't know exactly what it's going to be. Well, you know what, you're right. You don't know exactly what it's gonna be. But take your best guess.

Jeremy: Absolutely. And I agree with that. So when, you know, when I'm talking to somebody, and they're like, well, we don't know what to build for the budget. You know what? A budget is better than no budget because we will either figure out we gave too much money, not enough money. And the next time we do this, it'll be just a bit better.

Judi: Absolutely. It's all a learning process. Yes.

Jeremy: Yeah. So the next thing I want to talk about is reporting cadences. And we talk a lot about when we're working with clients about how they're structuring their organization so that they're meeting at the right times. Not too much and not enough. So what is the right cadence for everybody, you know, I say, everybody, the leaders to come together and really look at this?

What to Keep Track of When

Judi: Good question. And it depends on the company and it depends on your current condition. I have a client, my biggest client that I'm working with right now, we go over accounts receivable, accounts payable, and new orders weekly. So, you know, there are things that we look at weekly. We look at the p&l and the balance sheet monthly. We look at the budget monthly, and we're just starting to share things with the whole staff, also monthly. Some businesses may do staff line or broader meetings less frequently, maybe quarterly. And we may get to that but because it's new, we want to do it monthly we want to get everybody into this routine.

But there are things to be looking at daily or weekly, which are, you know, weekly again, I like to look at AR, AP. Daily, I like to look at cash in, you know, what's come in, which checks have come in. We only write checks once a week so that's not a big deal. And again, some businesses will be able to go longer, you know, if they're very, I guess, stable, you know, if things are very consistent and there aren't a lot of surprises and they're growing or they haven't been in trouble, you can probably get away with a little bit longer of a cycle.

Jeremy: Yeah, you know, I love that, you know, you have some numbers that are leading numbers, so those are weekly. We definitely are big fans of the weekly driving numbers. And not all of those are financial that really are driving the business. Some of them are marketing or sales-driven. And AR is typically in that weekly drive, you know, because we're monitoring that. But then I found that, you know, monthly, it's time to sit down, look at it clear the air a little bit outside. I like the way that you're placed in that cadence. What about, like, sharing this with, so you brought that up to sharing with the team. How much, where's that comfort zone that's always a scary thing to share even with the leaders? I see a lot of owners will struggle to share with their direct leaders. What are some tips around that to sharing it?

Judi: Yeah. We're sharing just very high-level. We're also explaining things because we don't expect that people have deep financial knowledge in all the different disciplines. You know, I think it probably had It's more to do with culture than it does really have to do with the finances. Some of the things that I've seen in, let's say, less healthy companies is that, well, this group spent this. Why can I spend this? Or, you know, we have all this profit, how come it's not coming back into the company?

So it's important to be able to show where the money's going. So I'm not really showing an actual p&l, I'm showing something that shows just what we spent on every large function, what we're spending servicing debt without really any numbers on the bottom without any profit numbers on the bottom. It's, you know, it's, it's funny because a business that makes, say the business makes $200,000 a year in profit. Maybe that goes into the owner's pocket, but most likely it doesn't. Rarely does that go into the owner's pocket. It goes to service debt, it goes for capital improvements into the company, it goes to growing the business. So I think one of the scary things is showing a p&l with a nice, healthy profit. And then everyone thinks that the owner of the company is crazy rich. And that's not necessarily the case.

Jeremy: It's totally not. I've done the numbers plenty of times with business owners and any healthy growing business that is, you know, doing some form of reinvest in the business, the best I seem to be able to come up with is about 30% of net profit has the potential of ever making it to the owner's pocket.

Judi: Yeah, and what the employees don't see are the times that the owner skips paychecks or the time city owner had to throw in $100,000 and all the gray hair and sleepless nights that you get just for the pleasure of being a business owner. So, you know, it's, you have to be careful how you're presenting that picture and how you're explaining it and how you're framing it so that you're presenting something that's fair to the owner of the business.

Jeremy: Absolutely. So I love how you talked about just giving them numbers that they can affect, numbers that they relate to. And a lot of times you can communicate without actually digging into net profit. So you can communicate, hey, these are numbers we need to improve, or this is how we monitor success and they're driving for it but they can't do all the math. That being said, I

Judi: And when you look at everything as a percent of sales too So, you know, if admin is 8% of sales and delivery is 13% of sales, marketing 10% of sales. So, you know, as sales go, we want to keep or beat those kinds of benchmarks.

Jeremy: And I will say that I have found that teams that do build the high trust and do get to where they actually share that profit, I've seen it several times, I've led several of them myself, that the transparency that goes into it. There's a foundation that's been built over several years. But when they have that trust and they have that foundation, they're way more profitable, way more energized, way more focused. And you see so much waste just go out the window. It's amazing. So but it's a hard one to pull off. One question that we've done a couple of times when we're rolling that out for the first time is we will ask the employees Hey, for every hundred dollars this company makes, what would you feel like would be fair for the owner to take home if you were the owner? And just asked that question. It'll typically be between 25 cents and 50 cents. Or $25 and $50, pardon me, out of 100. 25 to 50%.

And we're like, Look, we're okay if we make $10. Truth be told, that's rare. And so we're asking for your help. So, I found that when you frame it that way, it becomes way more receptive because they will be like, there's no way this, you know, one thing I realized was this when you go to a store and they get to 50% off sales. And people still know that the company is making money so they come to the belief that wow, they probably bought this thing for $1 and they're selling it to me for you know, $12 which you know, is not the case. You've been behind the scenes. So, Judy, this has been wonderful. I have enjoyed it. I know that you've brought tons of great value. I love how you're just very clear with your understanding of these reports. I know you have a gift for our audience. Something to help them take it a little bit further. Share that with us.

Judi: I do. I would love to offer your audience a free profit plan consultation. This is where we can dive into the issues of your particular business and I can point you in the right direction. I can always see something that you can be looking at or doing or moving in a direction to make yourself more fiscally fit. And I would love to do that for free complimentary for any of your listeners.

Jeremy: Wow. So how would they go to get that? Where would they go?

Judi: Great question. Reach out to me. Send me an email at [email protected] and mention that you heard me on the Blue Collar Culture. Podcast.

Jeremy: Perfect. So those will be in the show notes so you can get that. You can click right into the link and take advantage of Judy's wealth of knowledge and get that profit plan. So thank you, Judy, so much for being on. We appreciate it. Judi: Thank you. It was a pleasure.

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