Get Your Financials in Good Shape
Get ready to hear me answer your burning questions as we wrap up this season on money, metrics and measurements! Stephanie Rainey is here again and she’s got the questions you’ve been sending in all queued up and ready to go.
When it comes to business finances there are a lot of variables that can affect your bottom line, like who is managing your money and how much money you have available to risk in order to grow your revenue. It can leave you with questions like, is my accountant the one who should be managing the books? What is the best software to track our expenses?
Listen in to hear why you need to take charge of how your finances are reported, not by doing your books yourself necessarily, but by taking the lead on how you want your bookkeeper and accountant to prepare your reports (like your profit and loss statement). If you’ve been letting your accountant run the show, this is a great opportunity to hear how you can empower yourself and become intimate with your financial statements to exponentially grow your business and avoid end-of-the-year tax surprises.
Are you considering working with a co-production company for your digital products? A co-producer is basically a company that will create a strategy for you, the expert and then build sales funnels, copy, ads and design to help you sell your digital products. In this episode, I share what I think of co-production and tell you the story of what happened when I put another person in charge of my marketing.
What’s in This Episode
- Who should manage your bookkeeping—a bookkeeper or accountant?
- How to repay Covid relief funding without penalty
- How to tell if your bookkeeper is right for you
- Different levels in profitability and how this affects your taxes
- Why I’m not using Freshbooks as my accounting software
- Bookkeeping with different currencies
- Protecting the money that you have vs. risking for revenue growth
What To Do Next
- Join The Strategy Lab, Lisa’s insider entrepreneurial community that is learning, tackling, and coming together to support and challenge each other on all things business. Click here to join!
- Join Thought Readers and connect with other like-minded entrepreneurs in this popular book club for business owners.
- Subscribe to receive this podcast and regular weekly strategies to grow and shape your business. You’ll also be the first to know about upcoming courses, programs and exclusive LIVE training.
- Join the conversation on Instagram, Facebook or LinkedIn and share your insights from the show.
Next week for our 41st episode, author Roberta Matuson joins us to discuss how to approach difficult conversations, shifting your role from entrepreneur to leader and her latest book Can We Talk?
Books Mentioned in This Episode
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Lisa Larter (00:01):
Welcome to, She Talks Business. If you’re an entrepreneur, business owner or aspiring mogul, chances are you want to learn more about marketing and mastering and monetizing your business. She Talks Business is where you’ll learn all of that and more. My name is Lisa Larter and I’m an entrepreneur, high school dropout, wiener dog enthusiast and your host. Let’s get started.
Lisa Larter (00:24):
Hello and welcome to another episode of She Talks Business. Can you believe it? This is episode number 40. It is the last in our series on money, metrics and measurements. And like we have done on other seasons where we have a specific topic, I have asked Stephanie Rainey to join me. She has curated a list of questions that have been submitted by our listeners. Some of those questions came by email, some of them came through Instagram. We’re going to tackle them all today.
Lisa Larter (00:58):
But before we do that, can I just not shout out Myoshia? Is she not an inspirational, incredible woman? If you did not listen to last week’s show, Myoshia is just spectacular. She is spectacular because she really did come from nothing. If you are someone that’s listened to this whole season on money, metrics and measurements and thought, “Oh, well, it’s easy for you to say things like that because you have a business and your business is already making money and yada, yada, yada, yada.” If you’re buying into all that rationalization, you need to go back and listen to Myoshia’s story. Because being a single mom who just lost her job who has no money is not an easy place to start from. So if you find yourself ever making excuses about what you are capable of when it comes to money, go listen to Myoshia, she will set you straight in a heartbeat. Stephanie, welcome.
Stephanie Rainey (02:02):
Thank you. I’m happy to be here.
Lisa Larter (02:04):
It’s good to have you here. Can you believe we got to episode number 40? Can you believe we have recorded 40 episodes? I feel like we should be popping some champagne. Maybe I need to wait to 50 for that, but 40 episodes. Honestly, a year ago we didn’t even have a podcast and now to me it’s surreal that this has happened, which is just fantastic.
Stephanie Rainey (02:27):
And I love that it works like clockwork.
Lisa Larter (02:29):
Stephanie Rainey (02:30):
It’s working so well now.
Lisa Larter (02:31):
It does. But that’s because you worm your way into my schedule and make me show up for appointments so that I record when I’m supposed to record, so thank you for that.
Stephanie Rainey (02:39):
Lisa Larter (02:41):
All right, so I know we have a ton of questions and they’re not all money specific, some of them are accounting and bookkeeper. We’ve even got questions about co-production market for digital products. We’ve got some really interesting questions here and I am excited to riff and talk to you about this. I am going to tee this up and hand it over to you. But the first thing I’m going to ask you is what has been your most favorite part of this season?
Stephanie Rainey (03:11):
Oh my goodness, my favorite part? I have [crosstalk 00:03:15].
Lisa Larter (03:14):
Don’t you love it when I ask you questions that I didn’t tell you I was going to ask you?
Stephanie Rainey (03:17):
I thought I was asking the questions. My favorite part of this season, I think is really drilling into KPIs and just getting super clear on what I should be measuring in my own business as I start it. Because I mean, that’s a key question. And so often it’s easy to just put things aside when you’re creating everything that goes into the business. So I think that’s what’s really stuck in my mind, is what should I be measuring coming into this new year so that I can have a good pulse on what I’m doing and then I can move forward.
Lisa Larter (03:49):
Cool, yeah. It’s interesting because one of my favorite expressions from Keith Cunningham is “a business is not a bathrobe”. And so while you have experience measuring KPIs from your swim school, this new business is completely different and so it requires a different set of KPIs and a different way of thinking. It’s exciting.
Stephanie Rainey (04:10):
It is exciting. I know all about measuring swim schools, statistics, and measurements and metrics. But you’re right, this is like a whole new bathrobe for me for sure.
Lisa Larter (04:19):
Stephanie Rainey (04:20):
Great, shall we get into question number one?
Lisa Larter (04:22):
Stephanie Rainey (04:23):
Okay, a big shout out to everyone who dropped questions. Thank you so much. That makes it so great and so tailored to exactly what your audience wants to hear, so I’m excited for these questions. All right, number one. What exactly is the role of a bookkeeper in a business?
Lisa Larter (04:39):
That’s a great, great, great question. I think that it really, the answer to this is going to be, it depends. It depends on you as a business owner. For me, the role of a bookkeeper in a business is to ensure that the books are kept up to date. It is to ensure that the books are accurate. It is to ensure that the business owner has reporting on a monthly basis that shows how their profit and loss or their income statement is doing, not only for the previous month, but year to date and same month versus same year, last year. And so to the bookkeeper needs to be somebody who can operate the books with a certain amount of laser precision. I say that because you cannot get true value and benefits from the reports in your financial reports if your bookkeeper isn’t measuring apples like apples and oranges like oranges.
Lisa Larter (05:43):
I recently had a situation with my own bookkeeper where I changed companies and I have someone who is a client of mine, who is a referral partner, and I do reconciliation on referral fees. In the past, my bookkeeper has always added the top line sales to the top line sales and the full amount of the referral to the expense line so that I can manage both independently. This new person just arbitrarily decided to just put the net into the expenditure line. That was problematic for me because you’re changing the comparison state. Now you’re not looking at apples to apples. You’re looking at apples and oranges. And so the role of a bookkeeper is to ensure that you’re measuring apples to apples all the time and that there is precision in the way that your books are managed for you, the business owner.
Lisa Larter (06:39):
But I will say this. A lot of times, bookkeepers are hamstrung by business owners. Business owners say they want great reporting, but they don’t get the information to the bookkeeper that the bookkeeper needs to do a good job. So your bookkeeper is, if you’re a small business owner, your bookkeeper is almost like your interim CFO. If you don’t get them the information, they can’t help you manage the financial side of your business.
Stephanie Rainey (07:08):
Hmm. What type of credentials should a bookkeeper have? Does experience matter? Is there a difference between service-based and product-based bookkeeping?
Lisa Larter (07:19):
Well, those are a lot of questions, so let me just break them down. I mean, credentials that a bookkeeper should have are really specific to what you want your bookkeeper to do. And so a bookkeeper is a bookkeeper is a bookkeeper until they’re not. And so what I mean by that is you have QuickBooks, you have Simply Accounting, you have QuickBooks Online, you have Xero, you have all of these different types of software out there that can be used for managing your financials. So the number one credential a bookkeeper should have is a knowledge around using the technology that you want to use to keep your books up to date.
Lisa Larter (08:00):
A lot of people follow the Mike Michalowicz Profit First methodology for bookkeeping. If you are going to do that, you need a bookkeeper that actually understands what that means. What I have found is even when I have sent bookkeepers and accountants copies of that book, because I have wanted to in incorporate not all aspects, but some aspects into my business, I have found that they tend to be very rigid in terms of doing things differently from the way they do things. The credentials and experience that matters should be in alignment with what it is that you need, and you’re looking for.
Lisa Larter (08:40):
Is there a difference between a service-based and a product-based bookkeeping? There is. There are different nuances. When you are a service-based business, you don’t have the same cost of goods associated with running your business, like a retail store that sells products does. And so it’s important that your bookkeeper understands how to manage inventory and how to advise you on cash flow things when it comes to buying inventory. I know when I ran my retail store and I couldn’t understand why, I was always in my line of credit and it was because I was investing way too much money in inventory. And so if your bookkeeper is just filling in the boxes, but they don’t actually understand the nuances of how inventory works inside of a product-based business, and they can’t give you advice and recommendations, then they may not have enough experience.
Lisa Larter (09:43):
The other thing, and I mean, I speak as a Canadian. If you have a retail-based store, there is a requirement that you do inventory once a year. The reason that you do inventory once a year is to adjust your books to the actual proper amount of inventory that you have, because you might think you have $100,000 worth of inventory, but when you actually do an inventory and count everything that you have, you may only have $80,000 and you may only have $80,000 because somebody in your store is stealing from you. So bookkeepers need to understand these nuances that are different in a product-based business versus a service-based business if you want to really manage the books the right way.
Stephanie Rainey (10:25):
It sounds like every point that you mentioned really makes that bookkeeper your partner, so maybe making sure that that partnership works up with works in line with what you want from your bookkeeper.
Lisa Larter (10:37):
Absolutely, they should work in partnership. But what I have found is a lot of times your bookkeeper doesn’t work in partnership. Their behavior is more tactical than strategic, which is where an accountant comes into play. And so if you are the type of person that only sees your accountant once a year, when it comes time to file the taxes, then it’s important that you have a more experienced bookkeeper who can have informed conversations with you about what the books mean. A lot of times, at least in the decade plus that I’ve been working with small business owners, what I see happen is business owners get the reports and they don’t understand the numbers and they don’t ask questions because they have this perception that the bookkeeper knows better than they do. I will tell you, I have found a lot of mistakes that bookkeepers and accountants have made over the years, so you need to have a relationship where you can ask questions and drill down in the numbers, and most importantly, you need to be able to inspect what you expect.
Lisa Larter (11:37):
And so that’s why in the work that I do in coaching and advisory services, I often look at P&Ls, income statements, balance sheets with my clients, and I send them away with a list of questions when I see certain things that don’t make sense to me and I help them to interpret the numbers so that they can be informed and educated about what it means because you don’t know what you don’t know until you know. Most business owners didn’t go to school for accounting, so you don’t look at these financial statements and automatically know what mean. And so if you don’t ask and interpret the information, you can literally have books that are not helpful to you. They should be helpful. The only way that they will be helpful is if you are courageous enough to ask the questions that inform you.
Stephanie Rainey (12:28):
Mm-hmm (affirmative) and co influence how the books are kept based on the fact of what you need to know and be how you’re able to pull information from bookkeeping.
Lisa Larter (12:37):
Yeah. I mean, I actually say not co-influence, but demand. It is your right as a business owner to instruct your bookkeeper on how you want your books to be managed. I just recently looked at the books with a private client of mind for the first time. When I looked at their books, I said, “Okay, this is good, but this is all over the place because you’ve got freelancer costs on one line, you’ve got payroll costs on another line.” You’ve got all of these things related to labor costs were interspersed with non-labor costs. And so typically what you want to do as a business owner is you want to be able to look at what is my labor cost versus my non-labor cost. But the way this bookkeeper had done the books, they were just all willy nilly. And so here I am sending this person off with marching orders, “Tell your bookkeeper, they need to group things and categorize things and do this and that.” So that’s not influencing them. That is directing them. That is setting expectations and managing exactly how you want your books to be run.
Stephanie Rainey (13:45):
Mm, well said. I remember doing that after your marching orders to me. This leads into question number three, which is accountant versus bookkeeper, should they be one in the same? Do they work in the same firm or can one be a freelancer? How should they work together, your bookkeeper and your accountant?
Lisa Larter (14:06):
Well, I’m going to say that it depends on A, the size of your business and what your goals and objectives are. So I have a bookkeeper that is separate from an accountant. The reason being is what I am focused on at this stage of my business with my accountant is really tax advice. I want strategic advice in terms of how I run the business so that I am managing my tax implication the right way, because the bigger your business gets, the bigger your tax implications can get.
Lisa Larter (14:43):
So people are always like, “Oh, tax the rich. Tax the rich.” Well, what a lot of small business owners don’t understand is that there are different levels in terms of profitability. When you reach certain levels in profitability, your taxes jump. Let’s just say that $500,000 in profit is one of those levels where your taxes jump by a few percentage points. You want your accountant to be advising you of when you are on the cusp of hitting against one of those levels so that you can make smart decisions.
Lisa Larter (15:16):
Now, having said this, if you’re a brand new business in startup mode, you may hire a bookkeeper that is going to file your taxes because there’s really not a lot of risk. You’re a sole proprietor, depends on the structure of your company. But for the most part, I would recommend that they are two different people, because an accountant, a CPA who is also a bookkeeper is probably not a very good CPA because CPAs charge a lot more than bookkeepers charge. I don’t think they should be the same, but I do know that when I first started my very first business, I had a bookkeeper who was a CPA, so I know that sometimes people end up doing that.
Lisa Larter (15:58):
They don’t need to work in the same firm, but it is helpful when they work in the same firm, because then the accountant can give the bookkeeper marching orders. You can hold your accountant responsible for the performance of your bookkeeper. While you can have a freelance bookkeeper, they can be two different people in two different companies, it’s more challenging for them to work well together if they’re not invested in the outcomes that you want as a business owner together.
Lisa Larter (16:35):
Again, if you’re that person that only has your bookkeeper send the books to your accountant once a year, and then you ask for input, well that’s not an accountant or a bookkeeper problem. That’s a business owner problem. Because I talk to my accountant on a regular basis. I talk to my accountant every month, if not every week. So I think that it’s important that you think about the type of company you want to run and how much wealth you want to accumulate as a result of running this company and that you structure a financial team that can help you to get there.
Stephanie Rainey (17:07):
Hmm. I would add, I had a bookkeeper and an accountant, one was a freelancer and the accountant was a firm. When I brought the bookkeeping in house with the accountant, the bookkeeping was really slow and it was done by multiple people. I found that for myself, it was really helpful to look at them as separate entities. I really liked the accountant. And when I found the bookkeeping wasn’t keeping up, I pulled that from the firm, went back to my freelance bookkeeper and then had that sent to the accountant. So I don’t know. What do you think about that?
Lisa Larter (17:43):
I think that’s fine. I think that a lot of accounting firms don’t want to deal with bookkeeping because they perceive it as low hanging fruit. So I recently changed firms. I now have someone in house in on my team doing the bookkeeping, but I have that bookkeeping inspected by my accountant to ensure that it’s being done properly. I think that it just depends on whether they’re working completely in isolation or whether they’re working in partnership.
Stephanie Rainey (18:14):
Excellent. All right, question four. We’re changing gears. Specifically, what metrics should I be looking at each month for managing money? Should I ask the bookkeeper to put these metrics out for me or bring them in front of me, I guess?
Lisa Larter (18:29):
Well, I think that really, again every one of these answers is it depends. I think the metric that you first need to know is what is the cost of running your business on a monthly basis? Because if the cost of running your business is zero, because you’re not paying yourself anything and it’s a service-based business and you don’t really have any the expenses, well, the metrics that you’re going to be looking at are going to be very different than someone like myself who’s spending more than $50,000 a month in payroll.
Lisa Larter (19:00):
I think that you have to determine what metrics are the most important to you. Then you need to ensure that the cash management part is in support of those metrics. So when I look at my bank balance, I always want to make sure that I’m looking at the runway of how much money I have accessible in the business should something go wrong. And so some people say that I’m crazy. I shouldn’t keep that much money, but I look at it as being responsible for the people who entrust me with their livelihood. I don’t want to have to go to somebody on my team and say, “I don’t have enough money to pay you this week,” and have that person not be able to pay their mortgage. I take the responsibility of ownership and managing money very seriously, because there are other people involved.
Lisa Larter (20:02):
I think it’s important when you’re looking at metrics that you are always looking at sales, you are always looking at profit and you’re always looking at cash because if you’re not looking at sales, you can’t, and sales from a trend perspective, you can’t tell when things are getting better or getting worse and the same with profitability. If you’re not looking at your expenses to see where the outliers are, then you’re not going to be able to ensure that you’re consistently making a profit. If you’re not looking at how much money you have in the bank, then you can’t make smart decisions around what you spend money on without putting the business at risk. Those are things that I think you should look at, but more importantly, I think you should be looking at your P&L and your balance sheet on a monthly basis so that you know exactly where your business stands.
Stephanie Rainey (20:50):
Excellent. Question five, so in Q1 of 2022, I’m transitioning from QuickBooks to FreshBooks. In terms of a CRM tool. What is the role of bookkeeping and CRM tools?
Lisa Larter (21:06):
Well, the first thing I’m going to say is I use FreshBooks for invoicing, but FreshBooks is not, from my perspective, it’s not a reliable accounting software. Yeah, you can input your expenses like when somebody bills you in FreshBooks, because you can add that into your FreshBooks and all that jazz. But QuickBooks Online is a pretty darn sophisticated accounting software. You can log in. They have all kinds of apps that you can use that help with bank record reconciliation, that help with automation of expenses, matching receipts to credit card statements and bank statements. It’s just way more sophisticated than FreshBooks. FreshBooks, I use it for invoicing, but I don’t use it for accounting. I think it’s an invoicing tool first and foremost. The difference is QuickBooks is an accounting tool. First and foremost, that also allows you to send invoices.
Lisa Larter (22:16):
FreshBooks is trying to do the opposite. They were an invoicing tool that’s now trying to be an accounting software. I’m not putting my accounting into FreshBooks for all the money in the world. The only reason that I use FreshBooks is because I invoice in two different currencies. I invoice in Canadian dollars and I invoice in US dollars. I actually have two FreshBooks accounts, and they are connected to, going to two different bank accounts because I want to convert my currency when I want to convert it. When you use QuickBooks, you can only have one bank account. You can charge in two different currencies, but let’s say you’re collecting US dollars, it’s going to go into your Canadian dollar account. You can only have one bank account. And so that’s why I use two different accounts, because I want the money to go into the right place.
Lisa Larter (23:08):
People don’t, if you charge different currencies, you have to remember that there is a profit and loss associated with currency, so a lot of people don’t know that, they don’t think about that. But if you have, let’s say, $100 in a US bank account, what it is worth on the first of the month may not be the same as what it’s worth on the 30th of the month. And so as a business owner, you can time when you convert money so that you make money, but you also have to be aware that on a monthly basis, your accountant is likely right-sizing the money you have based on what the exchange rate is. That’s a whole other sidebar conversation, but I don’t endorse FreshBooks as an accounting tool. I endorse it as an invoicing tool.
Lisa Larter (23:57):
In terms of a CRM, I don’t, I don’t use FreshBooks as a CRM either. I mean, this is going to sound crazy. I know there’s a lot of really sophisticated CRMs out there. I’m actually a fan of LinkedIn Navigator because I can add all kinds of notes into LinkedIn Navigator. I can pay attention to what’s going on with people in LinkedIn Navigator. It’s a really easy way for me to just stay on top of what’s going on with my clients and what’s going on with people that I’ve done business with in the past. I can have different lists. I can organize it all in a place that allows me to connect to them. But I think you have to look at what is a tool designed to do? Is a tool designed to be an accounting software? Is it designed to be an invoicing software? Is it designed to be a CRM? Pick the tool for the function you want, because as soon as you pick one tool to try to do everything, you actually lose functionality somewhere.
Stephanie Rainey (24:55):
Mm-hmm (affirmative). All right, question six. What do you think about the co-production market for digital products?
Lisa Larter (25:05):
That’s people who create the strategy for an expert and then they work with either their own team or other teams to create funnels and copy and ads and design and all that kind of stuff so that you can sell digital products. A lot of times there’s probably an affiliate play at place where somebody will help you with the strategy, but then they take X percentage of sales.
Lisa Larter (25:29):
I will tell you, my experience is it’s never worked for me. Whenever I have hired somebody that I thought knew more about my business and knew more about my buyer than I did, they always disappointed me. I don’t think anybody else, I don’t think other people can formulate strategy in isolation of you. I think it’s great. I mean, I know people work with me on strategy all the time and people tell me all the time that I’m able to help them really crystallize what the steps are to get to the strategy that they want. But I think it’s a unique skillset to be able to reverse engineer an outcome that someone wants unless you have a wide amount of experience.
Lisa Larter (26:09):
And so when I look at these co-production things and I look at all of the different parts, I think, “How can you be an expert on strategy and expert on funnels, an expert on leads, an expert on design? You just can’t be an expert at all those things.” And so while I think that there is definitely value in some affiliate partnerships in terms of referral fees and things like that, I think you have to be careful with abdicating responsibility for the financial success of your business to someone else.
Stephanie Rainey (26:41):
Hmm. All right, this one is from another person. It says I am a solo consultant with extremely low overhead costs. How do you know what risk to take based on the amount of cash you have on hand? How do you take more calculated risks in your business?
Lisa Larter (26:59):
I think that’s a great question. I just finished reading a book that talks about the difference between successful entrepreneurs and mediocre entrepreneurs. The number one criteria for success was risk, risk tolerance. The people that are more successful, take more risks and they take more risks more often. They know that not all risks are going to pay off, but they’re not afraid to take risks.
Lisa Larter (27:28):
And so I think that you have to, I think, that how do you know how much risk to take? I think it depends on how much cash you have. I mean, if you have $100 in the bank, you’re not going to risk all $100. If you have a $100,000 in the bank, you’re probably not going to risk all $100,000. So I think you have to look at what percentage of risk are you comfortable losing?
Lisa Larter (27:52):
And so that sounds kind of contradictory because most people are thinking about the gain and you should be thinking about the gain, but the reality is not every risk will pay off. And so there’s something to be learned from all of the risks that you take, even the ones that don’t pay off. But I think you need to look at your risk a little bit like you would look at walking into a casino. I’m going to walk into a casino. I might take 100 or 200 bucks with me. I might play. And if I lose that money, I shock it up to or I chalk it up to entertainment, no big deal, but I’m definitely not going into a casino and sticking my credit card in a machine and spinning and spinning and spinning and playing and playing and playing without any awareness to how much debt I am accumulating while chasing the jackpot. So I think you have to look at what your comfort level is for protecting the money that you have versus your comfort level on investing and taking risks for growth. I think that the more often you take risks, I think the more you learn and the better you get at it.
Lisa Larter (29:03):
So I remember, god years ago, when I bought Ali Brown’s Online Success Blueprint before I started this business. I invested $2,000. $2,000, and I checked every reference she had online to make sure they were real people with real businesses. I put that $2,000 on my credit card. I promised my husband, I would at least 10X it. Well, that little business has generated over $10 million since I did that. So the ROI that I got on that was pretty darn good, but I was committed to making the decision and making the decision right. I didn’t just invest and then not do the work. I think it’s important that when you are assessing risk and when you are looking at some of the decisions that you made that didn’t turn out to actually really do an analysis and understand why, so that you can carry learning forward the next time you take a calculated risk.
Stephanie Rainey (30:05):
Right, and what was the name of the book that you were referring to that you’re studying now?
Lisa Larter (30:10):
I’m not sharing that.
Stephanie Rainey (30:12):
Lisa Larter (30:14):
Stephanie Rainey (30:14):
Awesome. No, that’s good.
Lisa Larter (30:16):
It’s one of those books that I’m keeping a secret for right now. I’m keeping it a secret because I just bought a copy for every single person that is coming to Beach House mastermind Retreat with me, so there’s one in the mail on its way to you.
Stephanie Rainey (30:30):
Lisa Larter (30:30):
And yeah, I am not publishing that book yet. It is like a little gold gem that I have then I’m handing out.
Stephanie Rainey (30:37):
Oh, I love that. Now I can’t wait to open my mailbox. All right, next question. How do you ensure that you are forecasting and creating tailored dashboards to measure the most effective data?
Lisa Larter (30:50):
Well, I think that dashboards are a dime a dozen. You can download them online. You can find them all over the place. But I think what’s most important is that you are isolating the data that is most important to you to track. I think that for me, Excel is where I do it. I just identify what is most important. I iterate and iterate every year on the things that I want to track. I compare year over year. I compare month over month. And so I think that you just really need to figure out what’s most important to you. I don’t think, I mean, we use Klipfolio and Supermetrics, and we do all these fancy schmanzy dashboards with graphs and charts and stuff for the implementation work that we do for our clients.
Lisa Larter (31:39):
But quite honestly, I don’t think people even look at them. I don’t think people even care. I think that the key to effectiveness in terms of dashboards and tracking is to track the least amount of items that are the most important items so that you don’t get caught up in analysis paralysis. That’s why I keep going back to what are sales, what are my profits, how much money do I have in the bank? Those are the three most important things, because if I’m not making a profit, something is wrong between the top line and the bottom line. That is the most important part. If I don’t know that, then I can’t change it. And so by tracking all of this stuff on a regular basis, you are able to forecast more reasonably based on the trends that you see over a long period of time. But I think you should avoid complexity. If you can’t figure out how to create the dashboard in Excel, then you’re probably trying to create too much.
Stephanie Rainey (32:40):
Hmm. I already gave us a couple of questions to ask, but are there any other critical questions that we should ask ourselves to help us define what our business metrics or what our KPIs should measure?
Lisa Larter (32:53):
Well, I think it depends on if you are in a product or a service-based business. The one question that I think you should be asking yourself is what do I want my profit margin to be, and what do my sales need to be in order to get that? If you are in a retail business, I think the one critical question you should be asking yourself is how much inventory is enough? Because what people don’t understand when you have a retail store, and let’s say you sell $10,000 worth of cost inventory on a monthly basis, this is not sales. This is cost of goods. You sell $10,000 cost of goods on a monthly basis. If you have a store that has $200,000 in cost of good sitting on the shelves, you are potentially costing your business, I’m going to say $10,000 a month on the low end, because that money has been spent and paid for. And so it’s sitting there on a shelf. It’s not generating any ROI.
Lisa Larter (33:56):
And so I think that’s one of the most important metrics that small business owners who are in the retail business can look at is what is the value of their cost of goods. If you’ve got more than 60 to 90 days worth of cost of goods on hand, chances are you’re ordering way too much inventory. You don’t know how to manage your inventory levels accordingly.
Stephanie Rainey (34:21):
All right, if I’m a business that received some type of COVID funding, how should I be thinking about repaying this money?
Lisa Larter (34:28):
It’s a really, really, really smart question. There’s a lot of people that are treating government subsidies and grants and loans and stuff like it was lottery money, instead of really thinking about what their obligations and responsibilities are. We’ve talked about inflation on this show and the fact that interest rates are probably going to go up. And so getting rid of debt is really important. I can’t speak to the timelines in the United States, but I know in Canada, some of the loans need to be paid back by the end of December 2022, before the interest kicks in. If you pay those loans back, there is a certain amount that will be forgiven. And so it’s important that you start thinking about how do you pay that money back now?
Lisa Larter (35:26):
Let me just give you an example. I took one of those loans at the very, very, very beginning. It was a $40,000 loan and $10,000 of it is forgivable if I pay the 30 back by December 31st, 2022. I took the loan because I didn’t know what I didn’t know. And so when they were offering this, I thought, “I should probably apply for this. I’m a small business owner. Even though I don’t need it. I don’t know what’s coming.” When they came out with the second loan, I didn’t take the loan. I didn’t take the loan because they changed the fine print. They changed the fine print to become a lot more clear about what constituted being in duress over COVID. They got a lot more clear about their ability to access your books and question you on all this stuff. I was like, “Okay, well, I don’t really need that money, so I’m not going to take it.” But I did take the first, the first one.
Lisa Larter (36:20):
And so $40,000 loan, and I get $10,000 that is forgiven if I pay it off by the end of December. Let’s just say, I don’t pay it off, all right? I’ve got a $40,000 loan. That $40,000 loan has interest rate of 5%. That’s a $2,000 a year expense. By paying off $30,000 between now and the end of December of 2022, I’m not just getting ahead by $10,000, I’m getting ahead by $10,000 plus the $2,000 in interest for however long it takes me to pay it back. So if you’re waiting to pay it back, and let’s say you wait five years to pay it back, and you’re just making interest payments, well, that’s $10,000. So now it’s costing you $20,000 to have $40,000.
Lisa Larter (37:15):
You have to be really careful that you don’t get this from the perspective of, “oh, it’s cheap money. It’s only $2,000. If I divide $2,000 by 12 months, well, it’s only costing me $166 per month. “No, it’s costing you way more than that. Because you just gave up $10,000 and now it’s costing you $2000 a year. The longer you let that go, the more that money is going to cost you.
Lisa Larter (37:44):
What you should be trying to figure out right now is whatever amount you owe that is not forgivable, I would be creating a payment plan today to start paying it back. If you can’t it back within the next 12 months, I would be starting a payment plan so that you can at least pay it back over the next 24 months so that you are minimizing what that interest is going to cost you, because you’re already losing because you lost the forgivable amount of money. It’s like credit card debt, right? People rack up their credit card. They buy consumer debt. They spend $25, $30 on a tube lipstick that goes on their credit card, but they’re maxed at the top and now they’re paying what 18% interest on that tube lipstick over the next five years, because all they’re doing is making minimum payments. And so that tube of lipstick didn’t cost you $30 or $40. It cost you $200, but people don’t do the math. And so they don’t realize how shortsighted and in some cases dumb their spending habits are. I say dumb because I’ve been there, done it.
Stephanie Rainey (38:54):
Yeah, I think we all have. I love that though. It’s almost like a $10,000 whatever the forgiven part is, is a bonus if you just take this next year to plan out how you’re going to save or put that money aside so that you can pay it off, bang, right on time.
Lisa Larter (39:10):
Yeah, absolutely. It’s super, super, super, super important that people get ahead of that.
Stephanie Rainey (39:17):
Yeah. That’s a great plan.
Lisa Larter (39:19):
Stephanie, I’ve got time for two, maybe three more questions, so hit me with your best ones.
Stephanie Rainey (39:26):
Okay. Oh my goodness. I have to narrow them down. Okay, here we go. How do I obtain better insights into future cashflows?
Lisa Larter (39:36):
Manage your cash flow. Past performance predicts future performance. If, for example, you look at your financial statements and they say you have a profit, but you don’t actually have that money in your bank account, you have a cashflow problem. You’re spending your profits without realizing that you have profits. You’re not protecting your profit. And so if you want to gain better insights into future cashflow than do an historical analysis on your cashflow trends. You can, there’s a spreadsheet, I think it’s in the Pilot Project. I’d have to go back and look, if you go to the pilotproject.com, I give away a ton of spreadsheets trackers in that program. But you want to track your cash flow so that you can see the ins and outs and you can see whether with your current spending habits and your current trends for money coming into the bank, whether you’re going to end up with more or less.
Lisa Larter (40:32):
I am cash OCD. I look at my bank balance and I look at my balance sheet all the time to see whether my cash situation is getting better or getting worse. The best way to do it though if you want to know how to get better insights into the future is look at the past, because past performance will predict future performance. If you started the year off with $10,000 in the bank and by the time you get to December, you’ve got $8,000 in the bank, well your pathway shows that you’re spending more money than you’re saving in terms of cashflow.
Lisa Larter (41:05):
People confuse cashflow and profit. Cashflow is a snapshot of how much money you have in the bank right now. Profit is the result of one of a calendar period in time, so whether it’s the first of the 31st of one month or the first of the year to the 31st of the end of the year, profit is the result that is left over. But on the 31st of December, you don’t get your P&L, because your bookkeeper has got to reconcile and do all that work. And so you typically don’t get the results until two to three weeks later. Your cashflow situation has changed since then, which is why it’s important to measure cashflow separately and do everything you can to protect it.
Stephanie Rainey (41:54):
All right, last question. Even when I know what my metrics are, I find it hard to know what to tackle or do next to increase my profits. When I do know my top five metrics, so revenue, revenue by product, expense, profit margin and conversion rate, how do I decide what action to take first to increase the profits in my company?
Lisa Larter (42:18):
Well, if you know what your revenue is and you know your revenue by product expenses, profit margin, conversion rate, et cetera, then if you want to increase the profitability in your company, there’s only two ways you can do it. One, you can increase your sales and/or increase your pricing. Two, you can spend less money. It depends on what it is you’re trying to do.
Lisa Larter (42:43):
Are you trying to increase sales? Because if your profit margin is 10% hypothetically increasing your sales isn’t going to change your profit margin. It’s just going to change the dollar value, so 10% of $100 is $10, but 10% of $1,000 is $100. So if you increase your sales, but your expenses stay the same, therefore your profit margin stays the same, then you will have more money, but you won’t actually increase your profit margin.
Lisa Larter (43:17):
If you want to increase your profit margin, you need to increase your price. Instead of charging $100 for something, charge $120 and keep the expenses the way they are, and now you’ll net out with 20 more dollars at the end. At the same time, if you want to increase your profit margin or you want to increase your profitability, you need to take a really hard look at your expenses, because there are lots of places where we spend money willy nilly, without really being mindful of what it is we’re spending it on. And so that’s why looking at your expenditures and budgeting and setting certain levels for how much you’re going to spend on things is important. If you could reduce your profit by 10%, or reduce your expenses by 10%, all that money goes into profit.
Stephanie Rainey (44:03):
Excellent, thank you. That was such a clear answer. I wasn’t sure where you were going to go with that. Thanks so much for answering all of our burning questions. I know there were so many more. Well, hopefully we’ll hit them on episodes, other episodes, but thank you so much for your answers.
Lisa Larter (44:19):
You’re welcome. One last thing that I will say is don’t assume that the cost of running your business is the same from one year to the next. Sometimes we make decisions in our business related to pricing and we hang on to those decisions for too long. Business is constantly changing, which is why looking at money, metrics and measurements is so important, because if you are not able to see the change, then you’re not able to see the impact to the bottom line in your results until it’s too late.
Lisa Larter (44:50):
Thank you Stephanie for the great, great, great questions. And so I just want to wrap up and I want to iterate what Stephanie said. I want to thank those people who sent us questions for taking the time, not only to send us questions, but for listening to the show. I appreciate that. I always love getting your questions. It doesn’t matter to me if you send them on Instagram or if you send them to me via email, firstname.lastname@example.org. It’s good to get real life questions that we can answer, because if you have a question, somebody else has the exact same question.
Lisa Larter (45:27):
Then I just want to tell you a little bit about what is coming up next. Next we are doing a little bit of an interim season. We are going to be hosting what I call a Conversation with Friends. We will be leading off with a colleague, friend and client of mine, Roberta Matuson, who has just written a really, really, really great book called Can We Talk? It’s all about having difficult conversations. I think the timing of her book is so important because so many of us have become keyboard cowboys who avoid face to face, eye to eye, belly, to belly, heart, to heart difficult conversations. I think it’s time for us to shift that. I hope you will tune in next week to listen to Roberta and I, and that you get some really, really valuable insights from it.
Lisa Larter (46:23):
I just want to say Happy New Year. This episode is coming out right before the new year. I hope that 2022 is an incredible year for you. I hope that you have lots of success in your business. I hope that you have a beautiful season with your family members between Christmas and a New Year’s. I hope as a business owner, that you commit to a plan and commit to the day to day activities that will help you to get the success that you want by the end of this year. Thanks so much for listening.
Lisa Larter (47:06):
Thank you for joining me for this episode of She Talks Business. If you enjoyed the show, you know the drill, leave us a review, tell someone about it and join the conversation on social media. Thanks for listening and until next time remember, done is always better than perfect.