Profit with a Plan

Better Financial Decisions

Transcript 

Marcia (host):

Hey entrepreneurs, are you trying to make bigger profits in your small business? Like many of us, I'm sure you're feeling it. Business is hard and now more than ever, you need to have a plan to help you not just survive, but thrive. I'm Marcia Reiner. I'm a profit and business strategist on a mission. I've helped tons of small business owners to establish and implement a tangible plan that guarantees increased profitability and guide your growth. I want to share some strategies that I have earned and learned with you on today's Profit With A Plan Podcast. But before we get started, I wanted to share something to help you listeners. I've put together six easy tips to implement that you will help you improve your profitability right now, you can go pick those up on my website at trajectorybiz.com. That's B-I-Z.

Marcia (host):

I'm super excited to have my guest on today, Kathy Svetina. Kathy knows the importance of financial information and has been firsthand on how to make it or, excuse me, how it can make or break a company. She is the founder of NewCastle Finance, a company offering fractional CFO services to women owned businesses. For nearly 14 years she did senior level financial planning and analysis for Fortune 500 companies. She saw firsthand how big companies use financial information to drive those companies forward. She started NewCastle Finance because she wanted to offer those same powerful financial insights to small businesses. Now she helps women business owners make great financial decisions that result in healthy, sustainable, and thriving businesses. Wow. This is exciting. Welcome to the podcast, Kathy.

 

Kathy (guest):

Thanks so much for having me Marcia. I'm super excited to be here.

Marcia (host):

Yeah. This is great information and especially after tax season. So I know businesses are starting to think, what could I have done better? So this is a wonderful conversation to have get going. So tell me, you mentioned that you were in Fortune 500 companies and you saw the challenges or you saw how these financial instruments, the information you got help businesses go forward. Tell me a little bit more about what information was helpful.

 

Kathy (guest):

Yeah, when you think about the large companies, the one that I was in they were a billion dollar companies and they literally have armies of people taking care of the finances. They have specialized tax people, they have specialized financial planners, they have treasury people that take care of their cash, just cash. So there's so much that goes into running a healthy business. And moving that into the small business environment, no one's really doing for that them. Yes. They have the bookkeeper, they have the accountant, but when it comes to the overall strategy of the business, the financial planning, the strategy of it, no one's really doing that for them. And it's really sad to see is because small businesses really, really need that expertise. And they're just not getting it unfortunately,

 

Marcia (host):

That is so true. I think most small business owners drive blind. They really don't know what the company is doing financially and what can be improved. They know they've got certain income and they've got certain expenses, but they don't utilize that data in a way that can help them make great decisions. Don't you agree?

 

Kathy (guest):

Yes. That's true. And the other thing, I always said, you cannot make good decisions on bad data.

 

Marcia (host):

That's true.

 

Kathy (guest):

And what I'm seeing with the businesses that I work with, even though they're multimillion dollar businesses, I work with businesses at between $1 million and $10 million. They could be making $6, $7 million in sales annually, but they're still using their office admins to actually take care of their books. And one of the main things that I do when I come into a business like that, I make sure that they have someone on their staff who really knows how to put that data in accurately like a bookkeeper, because if you don't have the transactions happening in your business, the financial transaction, if you don't have them reflected correctly on your income statement, on your balance sheet and on your cashflow, when you read those type of reports, they're not going to give you accurate information.

 

Kathy (guest):

And just starting with that type of foundation, making sure that you have the right information so that you can actually build on top of that, looking at the financial reports that you're getting, that's the first step that I usually do when I work with them. And it's so important to have someone who really knows what they're doing, updating those books for you.

 

Marcia (host):

So true, you know that phrase, garbage in, it's garbage out.

 

Kathy (guest):

Yeah.

 

Marcia (host):

So yeah, having the accurate line items and the amount reflected correctly in all of the columns and what categories they belong in. That's definitely true. So working with small business owners, they tend to be afraid of looking at those statements because they don't understand what it means. Describe to me some of those statements and what information they're going to get from reviewing the statements.

 

Kathy (guest):

Sure. I like to call them the three Musketeers of the financial statement.

 

Marcia (host):

That's good.

 

Kathy (guest):

And there's three of them and they're all for one one for your business. They're all helpful with the business.

 

Marcia (host):

Love it.

 

Kathy (guest):

So the first one is the one that people are very familiar with is the P&L, the profit and loss statement or the income statement. So that essentially tells you how much money, how much revenue, sales have you gotten into your business, and what are some of the expenses that supported that particular sale activity that came in and of course the taxes as well. So you have the sales coming in and the expenses coming out. And how much is your net profit after the taxes. That's the P&L, the profit and loss statement. Then the second one is called a balance sheet. The balance sheet is a little bit more complicated, and that's when people get, oh, I don't know if I should be looking at that, but that's-

 

Marcia (host):

Dirty numbers.

 

Kathy (guest):

Yes. But that's very important because P&L is going to tell you monthly, for example, monthly, how you are doing versus sales versus your expenses, but with the balance sheet-

 

Marcia (host):

And big picture, right?

 

Kathy (guest):

Yeah. But with the balance sheet what you're getting is like a frozen statement. So by that particular day, let's say that we ran it today, you will know exactly how much cash you have in your business and what are your other assets, if you have any inventory, if you have any equipment and any of the assets that you have in your business. What are your liabilities, meaning how much you actually owe and what is the net worth? So the equity of your business is essentially the remaining piece of the balance sheet.

 

Kathy (guest):

So in the balance sheet, the reason why it's called the balance sheet is because it has to balance. So your assets always have to equal your liability and your owner's equity. So if something, even if there's a cent off or a dollar off, or however much it's off, that should be a trigger for you knowing that something is going on wrong with your financial statements and you should be looking at it, your bookkeeper, your accountant should be looking at it what is it that something went wrong, wasn't recorded correctly and needs to be rebalanced, because if there's $1000 in assets, there should be $1000 in liabilities and owner's equity.

 

Marcia (host):

Yes. So that difference, that $1000 in asset versus the liability, which would be what would be owed against it and then the owner equity is what value is left over, right?

 

Kathy (guest):

Yeah. So it could be that you have $1000 let's say in equipment and $500 of that you put yourself in, that would be your owner's equity and $500-

 

Marcia (host):

Down payment.

 

Kathy (guest):

Yeah. And $500 of that you would get it from, let's say a bank. So the $500, $500 make $1000 which comes out to your equipment, which is $1000. So that is a balanced balance sheet. And you know that that's correct.

 

Marcia (host):

And that you said is looked at monthly and the values change frequently. So if you pay down your debt and your owner value goes up, if the asset appreciates, then your owner equity also could go up. If it depreciates, then your owner equity goes down. So that's a moving target, correct?

 

Kathy (guest):

Yeah. It depends. If it appreciates, then you'll have to make what we call the journal entries. If something appreciates in value, doesn't just magically happen in books, right? Yeah. So that someone has to go into and actually update their numbers. And when it comes to appreciation on the books, which we call the, we have the net book value and all that stuff, and that goes more into the technical accounting is the accountant has to, or someone who is doing the valuation has to go into your books. And that doesn't happen, oh, I thought something was $1000 last month and now it's $2000. There has to be a process of it, how you doing it. So if someone's actually looking at your books, if investors are looking at you books, if the banks are looking at your books, so they know how you're doing and how you're evaluating these assets so you're not just, plugging the numbers in. It has to be done in an order and in a way that makes sense for the business and that it's consistent throughout your continuation of the business as well.

 

Marcia (host):

And there are rules in accounting, right?

 

Kathy (guest):

Yes.

 

Marcia (host):

Most of them go towards the gap rules and making sure that you're following those rules along the way. So, good, good, good point. That's why I always encourage my listeners, whether you're $100,0000 business, $1 million business, a $10 million business, don't do your own accounting, let someone else do it for you that understands the rules and regulations for it because these financial statements are the reflection of how good your business is doing. And you mentioned that earlier, and I love that. It's so important that you have these. So before we go on to my next question, I'm ready to fire up. What's the third musketeer?

 

Kathy (guest):

Yes. The third one is called a cashflow statement. So the cashflow statement is essentially what it's going to give you the information of the cash coming into your business and the cash coming out of your business. And a lot of people get really confused between the revenue, profit, and cash.

 

Marcia (host):

All right. Tell us.

 

Kathy (guest):

And we can go into that as well. So for example, if I give you an example, let's say that I sold you a service. Let's say I'm doing a website for you, right? And the website is $10,000. So that would be the sale on my part. However, because I'm not going to invoice you immediately, it's going to be in stages because let's say that it's going to take three months. I could not be recognizing the revenue for the next... I'm going to be recognizing based on the percentage of completion. And that goes into more into the technical accounting, but I'm going to recognize that revenue, that sale, over the next three months and on the other hands, that's going to affect my profit in those three months, how I'm going to recognize it. So that's different.

 

Kathy (guest):

And then the amount of cash that you're going to pay to me when the invoices come in is going to be also different. So I can send you an invoice, let's say today, but you're not going to pay it 30 days later, 60 days later. So the difference between when I send you an invoice and when the cash comes in is also the difference of what's going to look like on my revenue and profit and loss statement and what is going to look like on my cash statement. So those are three different things that you should be thinking about when you think about your business, that your revenue, your profit and your cash are three different, very different things.

 

Marcia (host):

Love it. Love it. And cash cash is king, right? Cash flow is king. You want to constantly think about how these things affect your business, because if you're running a 30 day or a 60 day time for you to receive the money from your client you're basically floating them that service. So that could have some costs affecting you, because your pain for your vendors and the services that are being done, your employees, you're paying for your rent, you're paying for everything that's involved in your business, but you're not accepting that money yet. So that's a good thing for you to understand whether it's right or wrong, or good for your business or not. It's something that if you don't recognize it and you don't look at it, you can't make good decisions.

 

Kathy (guest):

Exactly. Yeah. And don't turn into a bank. You're not a bank.

 

Marcia (host):

Right. Well, or if you're offering a longer accounts receivable such as 60 days, then you tack on a fee for it because yeah, you're not a bank. Your bank charges you every month for money that you borrow out. So it's something to consider the same or you offer pay in 10 days and you offer them a little bit of a discount. So there are little tricks and things that you can do, but I think you can't do any of that unless you understand the cashflow statement and the other two musketeers, the P&L and the balance statement, which is really, really important. So since you've given us the three musketeers, and I love that little tag, that's such an easy way to remember them. So when you're looking at these statements, we just talked about some of the decisions you can make off of the cashflow statement. What are some of the other decisions that you can look at when looking at these statements?

 

Kathy (guest):

So these statements are going to give you a good financial representation of your company, and there's many, many, many things that you can do. For example, you can look in... It also depends on how you're getting the data into these statements as well. So usually when you just look at your financial statement, there are going to be a summary. And then depending on how you're feeding the data into these statements, you can look into these reports from a different angle. So essentially you're looking at the same numbers, but you're looking at from different view. It's like a Rubik's Cube, right? You turn it around, it's still the cube but you see different angles of it. And these are called the management reports and the management reports are, for example, if you're a construction company and you want to see job costing is a really huge thing there.

 

Kathy (guest):

What you want to see for example is, how much a specific job costs you, right? How much was your sale? How much was your cost? How much was your margin? How much was your actual profit there? For example, you can go and look at specific customers segments, are there some segments of the customers that you're selling to, are they're more profitable for you than the other segments? The other pieces that you can look at, your cost as well, how is your cost throughout the year? You can also look at the trending of the cost, the trending of your revenue. Maybe actually when you look at these financial statements, you realize that you might have a seasonal business, and you didn't know that before.

 

Kathy (guest):

So there's some spikes and valleys in your business. So for example, every July you have a really good month and every January, it's a really bad month for you. So looking at that from a more view of why am I seeing these patterns and what's actually driving them behind it, but you have to have that data, of course, to have it. And when you look at that, you're looking at it from your business from a different angle versus just, oh, I have money or I don't have money, but looking at it from a perspective of, what can I do to smooth those peaks and valleys, and actually make decisions that are going to really reflect well in my business.

 

Marcia (host):

Fantastic. There's so much that data can represent to you if how to pull it apart and stack it up the right way. Like you said, it's all the same numbers, but it's just the angles that you're looking at that showcase that. And I think that's fantastic. So here's a question for you. When we're looking at these statements, I had a friend that said that there were the good, the bad and the ugly. So you had the statements that you prepare if you're looking for financing, right? So you package the statements to make your company look really good. Then you package your statements that look for taxes, right? That's the bad. And then you've got your journal entries that are the ugly, because there's just such a mess that are going on. When packaging these statements up for different uses, what are some of the uses that people would want to see your financial statements?

 

Kathy (guest):

And you bring a great point because the numbers are numbers, do not ever fudge the numbers by the way. Don't do that. But it all comes down to how you look at it. And yes, you're right. There are tax statements that are completely different from the management reports, because what IRS needs to know, they need to know how much money you're making they don't need to know your job costing and your other profitability per job or whatever you're doing, they don't need to know that.

 

Marcia (host):

Right, then you've got depreciation and things that you're going to reduce that income, right?

 

Kathy (guest):

Yeah, the tax statements are completely different. This is something your accountant does and they do it based on how the government wants to see it, how your state wants to see it, it's all different. And then the other ones are the regular statements like we talked about the cash flow, the balance sheet and the income statement that people are used to seeing. And then the third one is the manager reports. And this is where we were talking about looking at these numbers and peeling them out and seeing the views that actually make sense for your business and how you should be putting these manager reports together. The good way is by starting as, what do I want to know about my business? What data do I need to see, that's going to give me value when I'm trying to make the decisions about the business?

 

Kathy (guest):

And that's when you can say, okay, I need to see, let's say this particular customer or this particular line of inventory that I have. I want to track that, and you can track it by the lines of inventory. You can track it by the customers. You can track it by the revenue streams. For example, you might have a subscription business, you might have a consulting business and you want to see that separated and you have expenses that are specific to those particular revenue streams and you want to track that. So looking from your business, from our perspective, what do I want to know that is going to give me the most information on how I make decisions? That's how you should be looking about your management reporting. It should be valuable to you and how you're looking at the business so that you can make decisions and that's different for every business based on your business model and what industry you're in.

 

Marcia (host):

Right. So here's another question for you. What statements are you going to provide when you're looking for investments? So say that you're going to get an SBA loan, or you're going to go get some financing, versus if you're going to want to maybe get an investment from a partner or something like that. I'm sure there's two different areas of statements or types of statements or types of information that you would provide either of them.

 

Kathy (guest):

So it depends on, when it comes to the SBA, they tell you what they want to see, and the lenders tell you what they want to see. And like I said, you-

 

Marcia (host):

How do you make it look good?

 

Kathy (guest):

You cannot make it look good if it doesn't look good, unfortunately we're not magicians, you're taking the numbers-

 

Marcia (host):

Right, but if you're going to the SBA lender with your tax documents, you really don't want to showcase your business off your tax return. You'd like to showcase your business off of your financial reports, right?

 

Kathy (guest):

Yeah. So what you could do is, and a lot of times what they also ask is projections for your business, where are you going to be six months to a year from now. And that's when you put the projections in, do you have any, for example, one interesting point what I want to make is what you have in your business right now is just what happened in the past.

 

Kathy (guest):

So let's say for example, you just landed a completely new client, and they're going to bring you $50,000 a month in revenue. That's not going to be reflected in your financials, but that's why having those projections when you're asking for the loan, when you're asking for an investment, it's really important to have those because that's where you're actually going to be putting in those things that are not in your financials right now, because you haven't received that payment, but you've made the contract already or you know that the contract is very close to closing. You're going to reflect that in your projections are for, so that's going to look really good in your statements because now you have this extra client or contract that you did not have before, and it's making your business look a lot better than it did.

 

Marcia (host):

Fantastic. And that's really what we want to focus on is that, like you said, we're looking from different ways of the Rubik's Cube whether we're looking at it from just the management reports or we're looking at it for taxes or investment purposes, or maybe you want to sell your business coming up, there are things that you can do to make your books look better and practices that you can do. We're not talking fudge. We're not saying let's adjust this number, but there are things as simple as the way that you depreciate an asset that would affect how the value of your company looks today versus the value of your company tomorrow or 10 years from now. There are things that you can do to improve your company and make it look more attractive.

 

Kathy (guest):

Yeah. Exactly. And like I said, a lot of that too comes from how you're forecasting your future. Obviously, everything that you forecast has to has a reason why you're forecasting a good reason for it, not just putting the numbers in, but if you have contracts, if you have, let's say intellectual property, if you have a brand, your brand could be really valuable and that's intangible asset. And we were talking about, that can appreciate over years. And if you haven't done evaluation of your brands for a long time, it might be a time to take a look at it and say, well, my brand has grown. I've grown my business. My brand is more valuable in the market than it was three, five years from now. I'm going to reevaluate that and make sure that it's seen properly on my balance sheet so that when I'm showing it to my investors, when I'm showing it to my lenders, that they can see that accurate representation of how much is my brand worth.

 

Marcia (host):

Great. This is really valuable information, Kathy. So most business owners think that they just go to their CPA and the CPA knows everything. You and I both know that that's a little off on the projection. Many business owners, whether you're super small or even growing to the next level, you need to have a strategist on board that understands the numbers and the projections, and really thinking on how we can showcase your business in such a great way, and to help you make really good decisions. So how do you compare yourself, a financial business strategist and a fractional CFO versus the traditional CPA or accounting team.

 

Kathy (guest):

Yeah. And that's a great question because people get really confused. It's like well, I have a bookkeeper, I have accountant. Now you're telling me I have to have a strategist, how many numbers of people do I need?

 

Marcia (host):

The more me merrier, right?

 

Kathy (guest):

And this goes back into this, the finances of the business are a complex entity. So it takes a lot of people to take care of it and take care of it well and it takes your participation as a business owner as well. So the bookkeepers are the transactional people. Those are the ones that are going to make sure that your invoices are in correctly, that your bills are paid on time, that everything runs smoothly when it comes to the data coming into your business and reflecting that into the numbers. The accountants are the ones that are really going to strategize when it comes to your taxes and your tax strategy. And those are the people that are experts in it, hopefully you're working with people that are experts in it.

 

Marcia (host):

Hopefully.

 

Kathy (guest):

Yes, because the tax code can get super complex. And especially based on the state, you are, it gets really complicated. And then there's the third part of the financial team that you have, which are your fractional CFOs. So the fractional CFOs, the best way to think about it is your accountants and your bookkeepers are the people that deal with the past and what's happening currently in your business. And the fractional CFOs are people that are dealing with the future of your business, making sure that the projections that you have in are correct, making sure that, for example, you're paying your people, let let's say, example that you have salespeople and you don't know what type of commissions you want to put them in. How is that going to reflect in your business, in your financials? You want to, let's say, for example, put it on a tiered commission plan, or do you want to give them profit sharing? How's that going to affect your business and your bottom line.

 

Kathy (guest):

Those are the type of people that are going to be able to help you figure out these scenarios and projections, what is healthy and sustainable for your business. And they're going to be able to look at your business from a 10,000 foot view and really help you plan and look at your business strategically and holistically, how you're operating it and how each of these puzzles are coming together and how you can really run your business well.

 

Marcia (host):

Fantastic. Fantastic description. And please listeners don't rely CPAs and accountants are an essential part of your business, but very, very, very, very few look forward and say, let's plan on what we can do to improve the situation. They are often just looking at the numbers and saying, this is what you did, this is how we can reduce the current tax load on it. So it is super important to have that third component which is the CFO. And because a full-time CFO in your business will run you upwards of $200,000, it's important to have a fractional one until you're ready to hire one on board.

 

Marcia (host):

Even if you're a young company, having that strategist come in is super important. So that's why folks like Kathy and even myself are so important to have in your business. So this is why we are talking about it today. So Kathy, this was wonderful information, super valuable, really getting in those things that I know business owners just push to the side and go, yeah, my gal does that for me and they got blinders on and they don't really look at it. So you've really shed that idea that they should be looking at it and with the right person to walk them through such as yourself, where can listeners find out more about you?

 

Kathy (guest):

So you can find me on my website, newcastlefinance.us, or you can connect me on LinkedIn on there, Kathy Svetina. I'm the only one there.

 

Marcia (host):

You're the only, Kathy Svetina. I love it. So you're one of a kind. Fantastic. So that's good. Thank you so much. I know that this was super valuable and listeners, I hope you found an idea or two to put into your business that'll help you be more profitable. And now more than ever, it's important that you build your own profit plan. So don't forget to pick up my six tips that will help you improve your profitability right now, go to my website, trajectorybiz that's B-I-Z.com. So Kathy and I would love to hear your questions, feedback, or, "Hey, I'd even love some ideas for future shows." So please subscribe and comment on today's podcast. And as always, you can catch Profit With A Plan on any of your favorite podcast players. We're looking forward to more great, comfortable information on next week show. So until then make your plans and profit with them. Thanks, Kathy.

 

Kathy (guest):

Thanks so much.