The Importance of Knowing Your Numbers | Ep. #24

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While it is important to be running your business, it is just as important to know your numbers. We go over 7 key fundamental numbers you will need to know when running your business.

Beer of the Episode

Sierra Nevada Otra Vez

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Transcription of the Episode

Errors courtesy of automation

00:08 Hello,

00:09 thank you for listening. This is craft thinking. I’m BGC and I’m Nealey and today we’re talking about the importance of knowing your numbers as a business owner. I’m excited about this episode for a couple of reasons. A 24 is actually one of my favorite shows of all. Time is great for me. I see what you did there. Jack Bauer, if we can get an interview with Jack Bauer, not Kiefer Sutherland, but actually him and characters, Jack Bauer, that’d be amazing. I’m, uh, I’m down. I wasn’t as big of a [inaudible] fan. I watched it. I’m probably not like religiously as you didn’t, but a, every single episode, every single episode. Well before we do that and maybe will make me feel more positive about possibly getting Jack Bauer on here is if we crack open a beer. Cool. And so what, what are we drinking today? Uh, this is a ghost. I called it goes to go say it’s a, it’s a ghost style ale.

01:07 I say go say it sounds fancy ghosts. It’s, I’m scared of this one. I’m not a fan of. Ghost is. This is necessarily a very respectable brewery. This is by Sierra Nevada. Uh, they are out of Colorado, California. Chico value. See Colorado, California. Same thing. Really. I have a lot of respect for Sierra Nevada. I’ve been him for. I don’t even know how long. Probably since before I can actually drink legally. Oh really? Because they were big for their ips. Ips have their, what’s it called? Actually have a picture right here. They’re autumn Brown Ale was delicious. I dug it. Yeah. It’s been awhile though. Throughout the festival was phenomenal. It was partnering with this like really little bridge or I’m going to do it. It’s phenomenal. Let’s go ahead and give us a taste of it, right?

02:01 Yeah. There’s that sour. That’s weird. This is a mild sour for sure. That I have are a lot more sour than this to where after a couple sips it’s like you’re drinking human bio. So it reminds me of like a very, like a weirdly watered down club Soda Club Soda. Sour Club Soda. Like a sour. Yeah. Interesting. I mean, yeah, you can kind of taste like little bit of lemon. Yeah, yeah, yeah. This is, you know, what I like about this is I didn’t go too crazy with it. Typically any sour beers that brewery small breweries come up with are just so brutal. So many people that were Ipa fans now are the, are sour fans, just gets worse and worse and enjoying some iph. Changed, has changed, kind of. He kind of got where I am to where I am too now is, you know, when I first started drinking beers I wasn’t a fan of AICPA.

03:03 It can typically tolerate them down and there’s some really good ones out there. Um, but indicators of thing like sours are for the original EPA people, you know, the people that drink when it was just super benches by default to lighting because no one else liked it. And it made them feel special. Hipsters maybe. Yeah. That and home and home brewers. And I’m a home brewer to. But I was getting funny looks when I said I’m not a big fan of [inaudible] as a home brewer. But then once they found that everyone liked ipa is like, well I need to like something that no one else would. And they tasted a sound like, oh, this is disgusting. No one else will like this, so I will drink it. And that’s how sour started. They’re the hipsters have the brewers. Um, but just like ips sours and beginning were a little too intense.

03:53 Now you have ones that are starting to bring it back a little bit. What I really enjoy more than one of these, know what I enjoy. Just this one. Know by the time we get halfway through, I’m going to be hating this beer. I can guarantee you that w we had to expand. We had to try some different ones out of our comfort zone for sure. It’s starting to creep up and starting to. Oh yeah, that’s the thing, you know, I do it on like sours. But when I, when I was up in Wisconsin, I stopped at a brewery called new glarus. I had one of their, their sours and I actually liked it and I was like, you know, I might be able to get three fourths the way through this, which is more higher than normal. So I really, I only had a sampler there.

04:35 I’m like, I tried it, I enjoyed it. I’m going to leave it at that makeup to try new new brew. So. So what’s, what’s your rating for this beer reading? I’m going to have to put like an a to a two point two five. Oh yeah. It’s still still on a btc. A tactic. They’re gonna have the [inaudible] it’s not good. It’s just weird to the. Just an average. I’m a little bit further than you. Just get that next sip in and see what you think. Now please hold. This just keeps getting worse, man. I just still tastes that. Lending. Club soda. OK, so back to the, uh, the issue at hand, knowing your numbers. Now we’ve talked about this in previous podcasts episodes. You go to target business, really passionate about it. So let’s just skip the boring stuff. And knowing your numbers is typically seen as the boring stuff.

05:32 Just nerd alert, right? You gotta understand the impact to your business. If you want this to be successful, you need to be patched about knowing your numbers. Just watch an episode of shark tank when there’s investors are talking to a solopreneur that doesn’t know their numbers, they rip them to shreds like, this is your business and your, uh, know your, you don’t even know you’re freaking numbers. That is ridiculous. And a lot of them, there’s been ones where they haven’t done business with a viable business just because they didn’t know the numbers around their business. This also will tell you if you can quit your full time job, this will tell you if you can expand, you know, every business owner or everyone thinks that, oh, he’s business owners want to come in and they want to grow this to this massive company. Open as many stores as possible of employees as possible. No, it’s typically just getting to a point, and Justin was talking about this earlier, I’m kind of stealing your firm on this one.

06:21 This is your time to shine.

06:24 It’s first about making the company viable and profitable so you can scale it and grow it. Because if you aren’t focusing on numbers and you have that goal of making it big and massive, you’re gonna massively failed very early on. When we talk about the impact of this, there are a lot of businesses that fail and Justin’s got a really good statistics. We got this from [inaudible] since we’re business [inaudible] a phenomenal site for small business owners. What’s setup on there?

06:53 So first off, be plans.com. If you haven’t gotten to it, just go there right now. Pause this episode, check it out. You’ll be immersed in information for hours and it’s information overload for sure, but it’s pretty cool. But the statistic statistics, we both love him. Twenty eight percent of businesses fail due to problems with the financial structure of the company. This includes keeping poor accounting records, the nerd stuff. It’s, it’s incredible to think of that that large of a large percentage of businesses fail just because of financials. This is the structure of knowing their shit.

07:29 And I, you know, I see that’s a very narrow definition,

07:34 very narrow

07:34 there no definition. So we can easily say that more than 20 percent fail from just in general, knowing the numbers of the business, generalized it, that number would be a lot higher. There’s a lot of people that run their businesses when they choose to do their, their business taxes yearly rather than quarterly and they send the information to the CPA and the CPA was like, well, you’re like, don’t have the money in the first place. Things are really bad. Yeah. Like good news is you don’t know anybody in the government, but the reason why is because you aren’t such a bad state. Zero profits. I’m in profit isn’t the only thing we’re going to get to. Profit itself. Got a little story around that, but let’s go ahead and talk about the seven metrics. By the way, this is the most basic article that I found. It’s a good one to start with. There is one by intuit, which you can bring you to a more, a higher level once you get these down for those is a good one as well. We’ll post on the site. So as far as [inaudible], I really grew with where it started,

08:36 cashflow basics of knowing what’s coming in and what’s coming out, exactly how much basic level blowing in or flowing out, right? At the very, very least, you should know this somewhat, at least what you’re getting in.

08:52 Yeah, know where money is coming from and know where it’s going and how much this doesn’t mean that you’re looking at profit. Profit has a more detailed meaning to it. So first of all, just folks out in my pa or my cashflow positive on my cashflow negative, do I have more money flowing out of the business or flowing into the business and start there?

09:15 And, uh, having money flowing out of business doesn’t necessarily mean it’s paying unnecessary things. This can be you guys investing in your business or investing back in your business that’s negative cash flow, but it’s positive for your business

09:29 and it’s usually a tax write off as well. So you should get with your, um, you should get with your CPA or accountant and you should figure out what that should look like for your business and what’s right off the [inaudible] by the way. Remember, I think if my dad told the story, I had this girlfriend who said, who decided to open a tutoring business, uh, and it was a great idea and she went in thinking about what her profits should be, which really should be how much you wanted to, to your employees versus your services. And in that, I sat in on that one hour of just sitting with that CPA and listening to what they were discussing. I learned more in that one hour that I did four years of college when it came to use the business admin financial stuff. So the next one we have is something that I think people are a little too optimistic on and you have to be very careful about that. And this is accounts payable. What does that brandon. Well, it’s basically the total bills that you have to pay, but you haven’t paid yet, right? So this goes into your short term. Uh, your short term debt, basically that must be paid and here’s the reason why it kill small business owners because you’re going to that yet and you forget about the key thing here is short term, you need to have a schedule as far as when to pay this off. It even shows up in your balance sheet as a liability.

10:50 Now with the, uh, the accounts payable, is this stuff like rent and employee stuff or is this something else?

10:56 Well, it can be all of the above. Really. I mean it’s, Randy’s usually something you have to pay on the month, but this is usually debt. This is something like, for example, maybe I couldn’t afford a certain system, so maybe I put that like on a credit card and I’m financing that. That would be accounts payable or a loan or something like that. So it’s the debt that you have to your company. So that’s why I usually rent wouldn’t be in this. It’s usually not into debt, but if you are financing your, your rent, then yeah, that would go into your, your accounts payable. So you need to, you need to be able to manage your debt so that you don’t default and that’s what it comes down to. Make payment plans on and there’s interest on anything you’re paying off over time. That definitely goes into accounts payable as far as the gray around it. You’re going to want to check with your CPA to get more information on that

11:51 and we might go into a more in depth of each of these sections and really how to plan around it. A, is this the, the, just the very basic foundation. So you understand what kind of those next steps are a accounts payable to be one of them. The next one, accounts receivable, um, essentially the exact opposite, the amount of money that’s owed to you by your customers for products or services that you sold. This is a big one with service based companies such as like designers or consultants, things like that. You typically invoice your clients and not all of them pay on time or pay right away. And that’s that accounts receivable that open open money. That’s not necessarily yours yet. You still kind of have on the books.

12:34 No, it’s true and that’s why accounts payable, accounts receivable, those hurt your business so badly when you don’t focus on these numbers because if you’re not one, if you’re not focusing on your debt, even if you’re talking to running a profitable company, you might be paying more in late fees and interest and stuff like that and then default and maybe serious ramifications happened. Getting approved for a future loan. Right? But accounts receivable, the problem is a lot of companies, a lot of small business owners go, this is guaranteed money. Well, no, it’s not. It’s money owed to you and people don’t always pay the bill as as Justin said, so you’re going to need to make sure you stay on top of your customers in a professional way so that you don’t end up in a sticky situation because you were. You were thinking those guaranteed. Let that friend money. I can trust them. They’ll pay me less money in the bank and then you went through some financial problems yourself and you call up your friend. They’re going, you don’t have the money. You can’t run your business strictly off of and go and go off of your projections strictly on that. This is going to be paid back to you 100 percent of the time that you believe would be in.

13:41 So something I kind of always keep in mind whenever I bill clients or or, or do anything like that, I always do. What is the amount that I, that I can afford to lose. So whatever that is, I do that at the end. So I’m like, cool. So this is really costing me x number, so I’m gonna collect that upfront and then what I can afford to lose, that’s on the backend. That’s the completed job. That way case whatever happens, I don’t get the full bill. I at least have that initial amount of money that I need up front versus the back end of maybe this client just, I don’t know, something happens and they don’t go out of business. They don’t pay me. Something happens. I’m still OK because I, I planned for that. I made sure that if this client didn’t pay me, it was not the end of the world. I still got what I needed up front.

14:26 Yeah, and one of the basic rules that you will ever learn economics class is that a dollar today is more valuable than a dollar promised tomorrow. So if they pay up front, it’s actually more worth it for you that way because you can actually do some of that money now. And then you factor in if it’s tomorrow. What about inflation? Like you didn’t get to increase the cost of your services because of inflation, depending, depending on when they paid, if inflation goes up and then you get paid. Well now that throws off your books as well. That’s why a lot of companies if you pay up front or something like that, they’ll give you a discount on it rather than doing the monthly cost because then it doesn’t go into accounts receivable. It’s cash on hand that they have.

15:13 So the next one as Justin burps is a perfect segway to talk and then handed over to me. I was like, yeah, his um, his direct costs. And I really liked this one because you basically are just focusing on, you’re focusing on what it costs to make it and nothing else like the parts and the Labor to make the actual product itself. So this doesn’t factor in things like the remarketing, your rent, your electricity bill, just on what it is, what you would. It’s also known as cost of goods sold when I make it without factoring anything else in how much does it cost to me, this is gonna really help out when it comes to your projections and as far as then focusing on, well, what do I need to get this down to? At the most basic level to scale the business, to get to that, to get to the next level or to become more profitable.

16:09 And again, you’re going to hear this in shark tank all the time. They’re going to ask the direct costs or the costs of good sold every single time. They’re going to want to know k without any other factors. What’s the cost? And you’ll end dean to know what, what that should be based on an industry and you’ll see them sometimes a person goes, oh, I’m actually making this for only $5 and sixty cents. And the charts go, Ooh, that’s supposed to be about 20 if you want to ever make any profit on it. So knowing what’s your profits could be starts with first removing all the other stuff, removing the marketing and remove the rent, movies, electricity bill. How much does it cost me to make this product or to perform this service?

16:50 Forget about too is especially if they sell 10 some type of product or service. So they had the cost of goods sold and then they, they increased their, they set their profits for a certain amount, but that’s direct to consumer. They don’t think about once. They actually get wholesalers and resellers and affiliates and do it to where now they want 70 percent off of whatever that is. And now you’re not making shit like you’re not making any money. So take that into account when you have your cost of goods sold versus what you’re actually going to sell it for because once you do expand and start to get wholesalers and they’re going to want an even cheaper price and then your profit goes down even more. A distributor, they’re going to charge you on top of that.

17:32 Should we just have very different contracts that basically they’re going to take a piece of the pie and then it gets sold at wholesale costs are going to say, well I want to, you know, basically it’s going to cost you a dollar a unit and then I have to sell it at wholesale, which is, you know, for this industry is 60 percent off of the regular rate and now you’re going, oh crap, I did not. I, you know, I didn’t shop around to get the best of the breast direct costs while maintaining the quality of my product. I’ve seen deals last over that all the time.

18:05 To kind of a tangent here. If once you guys do start to kind of expand and a few different distributors try not to overwhelm and get a ton of distributors to sell your product or service because what they’re going to essentially start doing is competing over each other to get the lowest possible rate and now you’re really not making anything because one company, one distributor trying to sell it for this and then another district sees, cool, I’m going to make it fifty cents cheaper and it’s just a battle back and forth. Keep it exclusive to one or two dealers. That way you keep your profits.

18:39 I didn’t think of that. I mean it’s something that, uh, when you, when you take a look at direct cost, it’s also something you need to know because it’s also been your profit and loss statement. So you basically, it can be subtracted from revenue and like a calculate your gross margin basically, which brings us to the next time your operating margin, you’ve got to know this or I just, you got this one.

19:06 So your operating margin basically it shows how good your company is at generating income from normal operation. Of the business, so that’s money after you spend some marketing, sales, product development, everything that goes into it. It’s how good are you actually generating the income base. That’s just the basics of it.

19:24 Yeah. So you know, once you know the direct costs and now it’s time to find out all the other costs that go into that. And this actually is going to cover all costs. That’s going to next week, our next one. But it’s really gonna be an all right. So how much did I spend on marketing? If I use sales team, um, then you can also factor in the electric bill and once you’ve hit on rent and with that you’re going to have your operating margin. Unfortunately, that’s still not your total margin. Total profit. We’re not there yet, but I think that pretty much cover, I don’t think anybody to spend much more time on this. It’s pretty straightforward. Keyword here is operating how much it costs me to operate the business and then I can so I can then subtract that all out. Now, beyond that, there are taxes and interests you at the bottom out of the business. And that is where we look at net profit. So this is the money you make that doesn’t go back into expenses, taxes, interest. Is that what is left over at the complete end of the entire. When it’s all said and done, right.

20:29 This is not including your salary. The salary was already in the past

20:35 options. Yeah, exactly. After all that profit, you were supposed to deduct your salary out. Exactly. Um, and so this is another something that just kills me. I’ve had, I’ve had really good friends that have launched businesses and their side hustle. And actually I had this, a guy that came to my class and I trained him. He did well, he did well at the company that I trained for. And then the next class his fiance came through and they decided to open a business together and they were using the approximate services that our company offered because I know how to use them now. And it was one of the things, you know, those, those [inaudible] ball things open around that and you can then kind of roll the ball around. Yeah, exactly. Yeah. So I actually got, I actually consulted towards open their business before they even opened a, you know, to typically his fiance, she was one of those usually come to me and ask me these questions.

21:24 And so they finally opened and he in the business boomed so much. So many people were coming in. She goes, oh my gosh, like where we’re rotating shifts and then he quit to go work for the, you know, run the business. She stayed on cause she was making good money. Well she, you know, I was talking to her and she’s like, I don’t know what to do cause he’s telling me that you’re telling me we, you know, I should quit and I should help her in the business because it’s booming so quick. And I said, OK, well what’s your net profit? And she goes, well what’s your, what’s your operating margin? At least you know, what is, how much does it cost? Right. And she had no clue. Said, OK, what’s your competition look like in profits? Um, and she’s like, I’m not really too sure.

22:10 And so we did some research and everything and I was like, you cannot quit your job if you know your profit is. That’s how you get paid. You’ve got to know your profit. And then we looked up the prices of all their competitors and their competitors were charging Gary Dick is more like, we’re talking about five or 10 times and what do I say? This my what you have is a massive problem. And she goes, well, what do you mean? Like you’re undercutting your competitors by so much you are killing your margins. The market will have shown cause these were established business that were successful for years. The market has shown you could be charging more, you can undercut them a little bit, but you’ve undercut them so much. And she goes, yeah, some people have called in and they said they’re really surprised with how low it is.

22:51 When you hit the hardest thing to do, going to increase a price to somebody who’s already used to paying a lower price. You need in Christ, you need to. You need a double your prices now. It’s one of those things where now she had to folk, she had to focus on, do I alienate my existing customers? They wanted to grow, they want to go into a larger space as well because they actually were on the waiting list that I’m like, how can you grow? How can you move to a larger space if you don’t know if you’re profitable at the moment it’s going to, now you’re going to be increasing your operational costs. And had you not had that conversation with them, they probably would have crashed and burned. Maybe, you know, I, you know, that’s one of the things where whenever I consult a map actually consulted on and punch of this seventies, I, I consult and uh, I give, I give Russia free advice.

23:40 I guess that’s my, you know, my, my, my father, I should charge for it. But in the end it’s up to them to make, make that, make that decision. I, you know, what, the first couple times I took it kind of personally, and so when you mentioned my dad, this guy’s just rich in so many ways. He’s happy in life. He, uh, did he suppose to people everyone thinks did everything right, but he worked his ass off to get there and um, he gave my dad some advice in the construction industry and that was to leave the construction industry and the market was good. My Dad didn’t listen and when the market went down, my dad’s company survived, but it was brutal. It was just so brutal. Watch them go through that. And his mentor was told him like, yeah, I, I told him to do this, this and this.

24:20 He did the opposite, this, this, and this. I was like, man, that must suck. Like he’s your best friend and he didn’t go with your advice. He goes, my advice is always free and they don’t take it. I don’t care. He’s like, I, I’m living a phenomenal life. I’ve been to 80 countries now because I followed my own advice and my advice is usually correct. And I was like, that’s actually pretty admirable, right? So it’s one of those things where I always asking that question, what is your, what is your profit is, what’s your margin is what’s your profits? Would that look like and how much are you able to pay yourself? If you can’t answer that you are. You are risking your entire business over that. Usually a daily basis. Have your profit and loss chart updated. Just that plain and simple.

25:04 He has some type of Bu. There’s 30 tons of bookkeeping software out there that helps track that because I mean not everyone’s an excel nerd and I would hope that you’re not doing everything on excel,

25:15 use, excel.

25:16 You’re just wasting so much time and time is money. You cannot get that back. Do some research. Obviously quickbooks is the, the, the number one. This is the most popular, but that does not necessarily mean it’s the best you because it’s super in-depth in it. It’s overwhelming that all of the stuff it does for you to where you basically do nothing with it.

25:36 Yeah, exactly. You know the second you get employees, I would definitely look at it, but if you’re a sole proprietor and look for some ones that are meant for sole proprietors, there’s a few of them out there and I’d find one that’s web based on software base. It’s just easier if it’s on the web, it syncs to your smart phone, that type of thing.

25:53 So the, uh, the next, next option, a, the last actually the seven of the basic foundations of what to know your numbers are, is the cash burn rate and what that is the rate at which your company uses of its cash reserves or cash balances. It’s designed to show you how fast you actually burn through your cash if you’re maintaining a healthy balance because you don’t want to be living paycheck to paycheck in a sense. You want to make sure you’re building that, that reserve, and if you have reserved, there’s going to be months where you have to dip into it. But how often are you dipping into it? Yeah,

26:28 and this ties in, this sounds probably familiar. This ties into cash flow, right? And so it’s about maintaining a healthy balanced from a positive cashflow because that’s the goal. So when you, when you build up that balance and you have some money in reserves, you now are able to, you invest in something. It may be something that is a monthly deal, right? It might be something that is one time fee, but in the end you need to know what your cash reserves are, how fast you’re going through it, and then based on your cash flow, are you going to be able to keep building, you know, maintaining that reserve where it’s our growing it, a company that’s phenomenal with this is apple. I think their, their cash hoard has gotten to about $250,000,000,000. That is just ridiculous. I saw on the news, um, like a couple weeks ago.

27:15 It was absolutely insane. The only way that they could know that get it to that level is to know their cash burn rates. All of these things are important and kind of tied together. That’s why I liked this from this front, from [inaudible]. I know this stuff sounds intense in some cases. Boring sounds like it’s an accounting thing. It’s really not too crazy. Especially if you’re using some software that will help you out. And then that software allow you to export to your accountant. They’re more crossing the t’s and dotting your i’s and dotting their I’s. You’re paying them hours of lesson in, in labor fees, you’re saving money, they can still give you some advice, but you already are educated before you go to their CPA. Now, some things that you can do to help all these things is really going to be with your customers because we’ve talked about this before. It’s a tiny, it’s almost off topic, but the same time it’s not. And Justin really know that he wanted to champion this one. So what? What’s one thing they really need to do?

28:16 So obviously knowing your numbers, you need to know your numbers with your customers there. There’s the whole like the [inaudible] 20 for everything, but a eighty percent of your profits come from 20 percent of your customers really want to do is know your top five to 10 customers and know everything about them, what they like, what they don’t like, their average spend with you. Literally everything you can to really understand them and identify with them and empathize with them. And then you’re going to. You’re going to attempt to reproduce them because you want customers like the top five and 10, top five to 10 that are with your business so and then you can start to market to people just like them and attend to acquire more and then that top five to 10 becomes just a little bit more saturated because you have a lot of them and you break it down again.

29:02 What are those top five to 10 of the new ones who’ve gotten and so on and so on, to where now you’re, you’re not marketing to everyone are getting every customer because you really do not want to focus your attention on every single customer. So there’s some that are time-wasters. Sometimes you have to fire customers. It happens. Um, but then you keep going into that five to 10, five to 10 and keep growing what your best customer is. Because at the end of the day, with all, all of knowing your numbers, you have to grow profit. Like having a business is not about getting a new location or by having a bunch of employees or, or buying the newest computers. It’s about having a that’s, that’s the only

29:42 way you’re going to stay in business, but the business become a millionaire. I opened the business to follow my passion where you can only follow that passion and you’re hoping to do it for us to real life. If you’re running a well, well run, well profitable, profitable company and these things are required for you to know on a daily basis what they look like. So when it comes down to it, do your research on your own companies. Stay in touch with these things. Anything that is not looked at will not improve. It’ll only go into k and you are decaying the, the, the bottom line of your business. With all that being said, that’s all we have for you today. I’m DGC and before that is going to cut you off. Oh, we didn’t talk about it today. Um, it’s pretty simple. What is one thing that you took away from this episode? Keeping it super simple and with knowing your numbers, we want to know what you thought of knowing your numbers. Very good. Well, and with that, I’m BGC and I’m Nealey, and this is craft thinking.