
Listen and enjoy:
What’s inside:
- Understand the difference between a CFO and a CPA
- Find out why you need a CFO
- Discover how Larry White views finances and get some crucial tips from him
- Learn why raising your top line is one of the most important decisions you can make
Mentioned in this episode
- Subscribe and rate our podcast at: http://www.Jackbosch.com/podcast
- Follow Jack Bosch on Facebook to get the latest updates: http://www.facebook.com/jack.bosch
- Learn how to flip land for pennies on the dollar: http://www.landprofitgenerator.com
- Email Larry White: larry.white@lkwconsulting.com
- Give Larry a call: 602 405 2296
Tweetables:
Transcription:
Jack: All right. Hello, everyone. And welcome to another episode of the “Forever Cash” life real estate podcast with yours truly, Jack Bosch. Today, our guest is Larry White, who is one of the, my opinion, one of the best CFOs in the country. He has been a CFO for billionaires, he’s been a CFO for large multi-hundred million dollar companies. And today, we’re gonna go discover what’s behind the role of a CFO and why you, if you have a business of let’s say at least six figures, why you need a fractional, at least a fractional CFO in your business. So let’s get started in just a second.
Announcer: Welcome to the “Forever Cash” life real estate investing podcast with your host, Jack and Michelle Bosch. Together, let’s uncover the secrets to building true wealth through real estate and living a purpose-driven life.
Jack: All right. Hello, everyone. This is Jack Bosch speaking and I already told you in the introduction, we have a world-class CFO with us, Larry. Larry, how are you doing?
Larry: I’m great, Jack. Thanks. Thanks for having me as well.
Jack: Wonderful, wonderful. You just came back from Hawaii. How was that again?
Larry: Well, clearly I look like it. So that’s okay. I had a wonderful three weeks and being part of doing what I do for a living, which is great. I can actually do it from anywhere in the world so long as I have Zoom, a computer, and a mobile phone, I can do everything that I need to do from anywhere in the world. So that’s what’s wonderful about what I do.
Jack: And probably Microsoft Excel.
Larry: That helps too. Yes.
Jack: Right. So, Larry and I go way back. Back when we did our big land auctions, and Larry helped us, at that point of time, it was about 2006 or ’07. We wanted to grow really big with the land auctions and literally get to our goal of like 10,000 properties in a year flipping. And we were at that time, we were doing 600 to 800 properties a year. And Larry came in to our recommendation through a mutual friend, came in and he helped us streamline our numbers such that we could go to a lender and get a big line of credit against it that would allow us to buy a whole bunch of more properties. Now, luckily, though, the lender held on for a little bit, waited, and that was the beginning of the market downturn. And based on how that last auction that we did, they decided not to…decided not to give us the loan which is probably the best thing that ever happened.
But in that process, because of that, we were able to ride out the downturn just really nicely without really losing a whole bunch and actually were able to have so much cash flow. Instead of having it tied up in real estate bought at the height of the market, we were able to use that cash to actually go into the cash that we had and going to buying houses like crazy and build up our forever cash strategy. But Larry was an integral part of that. Since then, Larry, kind of like we lost sight of each other for a while. But now Larry is our corporate fractional CFO. Now, Larry, first of all, tell us a little bit about you, what do you do, and yeah, tell us a little bit about what you do and what is the role of a CFO in a company?
Larry: Sure. What I’ve done for a long time is I’ve kind of gone back and forth between consulting and working, not only for multinational companies, actually global companies, but also working for startups. And I also have my own company which I bought and sold which had a retail component of it and a manufacturing component. So I’ve had the opportunity to see a lot of different industries, which has been really helpful, especially in the role of a fractional CFO. So I don’t really specialize in any specific industry. However, I know enough to be dangerous in a lot of different industries, but the fundamentals for finance are all the same regardless of whether you’ve got a manufacturing company, a real estate company, etc.
At the end of the day, it’s all about cash flow and how much cash I can put on the bottom line, which is indigenous to every business leader. And so what they really wanna understand is, what are the things that actually drive the business and what are the key components? So that we can either get more profitable, we can figure out different channels to actually put our cash flow to work. And they could do a lot of different things to figure out how to put more cash on the bottom line, mitigate their tax exposure, and figure out bottom line, is this how to make more money and how to make their lives better by having more cash hit their bottom line as a business owner.
And in response to your question about what a CFO does, it’s different from a controller or a bookkeeper, which most of you may have, is I look at things on a continuum, on a number line almost to make things simple, as a bookkeeper or a controller, what they do is they look at everything from today through historical to make sure that the numbers are indeed correct. I have a CPA background. So I understand the way that that works and that’s how I kind of came up. But what a finance or CFO does is they look at everything that is today that they’re provided numbers by the controller or the bookkeeper and then they take that information forward to predict or forecast how things might look in the future based upon how things are going today. And they also figure out again, how to get more profitable and how to put more cash on the bottom line. They also help with financing and capital raise as well in terms of how to structure that properly inclusive of tax advantages related to that.
Jack: Wonderful. So there’s a lot of stuff to dive into here right now. So what I love you saying is that…I heard you say the word cash about 50 times right now. And that’s actually a key difference I believe between an accountant CPA versus DNA and a CFO. Like a lot of people ask like, “Hey, do you have a CFO?” It’s like, “Yeah, I have an accountant.” So people out there, they use the word accountant and CFO synonymously. And it’s really one of my goals on this podcast is to make people understand, make the listeners understand that these are two very, very distinctive roles. And you touched on that already. You were particularly around the word cash you mentioned. So my CPA is worried about taxes, right?
They’re worried that numbers are correct, basically, that if I had $50,000 in expenses that the $50,000 are booked properly and the CPA is not going to question why I bought this or they’re not going to question whether I bought it in the right way. Where’s this finance or cash or whichever way? The CFO is very much worried about the cash. And can you dive into that a little bit bigger, a little bit more into that kind of differentiation of roles and why…particularly around the word cash.
Larry: Sure. Well, what’s exceedingly important is, and one cannot live without the other, is that you need accuracy and timeliness in terms of production of the numbers. Because if I’m not getting accuracy, and I’m not getting timely enough, then I can’t plan accordingly. Because if I’m not getting good numbers, then it’s kind of garbage in, garbage out. So what I’m doing is, is I’m relying on the accuracy of what I’m getting to actually figure out cash flow. And what that means is, from my perspective, is how are things structured? Do we have the right people sitting in the right seats on the bus? Are we as efficient as we could be? Can we be more efficient? How do we reduce our expenses so at the end of the day, or increase our revenue, so at the end of the day, the best problem to have is I’m making so much cash, I’m trying to hand it over to the tax accountant to figure out how to mitigate, how I can pay as little taxes as possible.
But even if I’ve gotta pay more taxes then I anticipated, the good news is you’re only doing that because you’re producing so much cash that unfortunately, the government’s got to take some of it. But what we try to do is, when you’ve got that problem, those are world class problems to have and that’s what I try to help business owners with…
Jack: Unless you invest in apartment complexes.
Larry: …personally.
Jack: Unless you invest in apartment complexes, huge depreciation. But yeah. So the key distinction again, I wanna make this really, really clear. You heard like the CPA, which is crucial to your business, the accountant is crucial to your business and your bookkeeper is crucial to your business, because they produce timely and accurate numbers, the bookkeeper. Then the CFO is actually a strategic…has a strategic role in your company because he is gonna interpret those numbers and tell you whether you’re suffering, whether you’re losing money, making money. You can even…we have had conversations, Larry, about product lines. If you do a counting down to the product line where you say like, “Here’s the effort we’re spending on this product line and here’s the return we’re getting on this product line,” versus, “Here’s the effort we’re spending on this one and here’s the return we’re getting on that one.”
Well, the normal business owner can see that as of normal accounting numbers but the CFO is gonna dive into that and he’s gonna find that out and he’s gonna have that conversation. We have had that conversation about like, “Listen, you’re spending all this time over here with very little returns. But over here, the returns are much, much higher. The cash is much, much stronger. Why don’t we put more effort over there? So it’s almost like a consultant role that understands the number because of the numbers speak to them, can give you a strategic management advice towards making your business more profitable. Is that an accurate assessment?
Larry: That’s absolutely accurate. What I would say to you too is as a business owner, have you ever gone to your bookkeeper or your controller, if you’re large enough to have a controller, and ask them, “Okay, you’ve provided me the numbers. How do I make more money? How do you interpret these?” And I would tell you that that’s really the distinction is they’ll tell you, they’ve taken the bank statements, they’ve taken all of the transactions, they’ll tell you that they’re right. But is it, as it relates to getting inside the numbers and actually understanding what they mean, they’re not gonna be able to tell you. And that’s kind of the difference with my role with a bookkeeper’s role and a controller’s role.
To be honest with you, I’ve sat in the controller’s chair and the bookkeeper’s chair and I understand the way that they think and they operate. And at the time, it just takes time actually going through and being part of a business on the strategic side to actually dive in and actually understand what those numbers mean. And I think that’s really the key distinction.
Jack: Yeah. Can you tell me a little bit about your…you told me one time, we were having a glass of wine somewhere because we live in the same town. So it’s not just only virtual, sometimes we do meet, plus you’re part of our ultimate boardroom mastermind. One time, you told me over a glass of wine that you running your own company, so you started your own company, brought it up to almost around eight figures and then sold it, right? That that experience made you a better CFO. Can you tell me a little bit more about that?
Larry: Yeah, Jack, it actually probably changed my life. Because as a finance guy, sometimes you become exceedingly myopic and all that you see are the numbers on the page. But what you don’t understand is what it takes. What are those numbers on the page mean? And so given the…what I did was is I ran a company that made flame resistant clothing for oil and gas and public utilities and we were doing it internationally. So I was in Latin America a week a month for four years, and had the opportunity to actually run production lines, which I have no experience with on the operation side. And how to understand how all of those pieces specifically led to the bottom line, which are the numbers, which at the end of the day, all the numbers are, they’re just shorthand to tell how you’re executing and if you’re executing properly.
Because if you’re executing well and you’re as efficient as you can be, the numbers will be no surprise at the end of the day. And so for me to become a really good CFO, one, I had to become a business owner and really understood what that was like. But I’m convinced that by getting into operations and being an operator, that made me an incredibly good CFO, or at least I think so.
Jack: I can confirm that, yeah.
Larry: But by understanding what operators are going through and the problems and the issues that they have to go through, you can now understand that from a financial perspective and how one ties into the other, and how all of that works. And it included sales and marketing. It included all of that, because I became interested in sales and marketing and not just what numbers on the page were telling me because at the end of the day, in my opinion, as a business owner, and now as a CFO, raising your top line is probably the most important decision that you’ll ever make, meaning your sales and your revenue. You can figure out how to streamline your expenses after time but being able to have that volume and that ability to have sales is by far the most important thing that you’ll ever do in business.
Jack: Wonderful. Yeah, absolutely. I agree with it. Not only were you running your own company, but then you received [inaudible 00:13:53]…was it Elizabeth Arden’s Red Door spa, was that right?
Larry: Yeah.
Jack: And then they actually made you a COO there too, right?
Larry: Well, I kind of played a dual role there. Yes, I had that opportunity to play that role as well and that was really helpful for me to understand, again, how all of the pieces fit into the financial puzzle and how all of that stuff worked together. Like I’m convinced look, literally, at the end of the day, if you are…your bookkeeper and your controller, they’re not diving into the business. They don’t understand the way the business runs, similar to the way a CEO would understand because the CEO has to understand everything about the business from beginning to end. And the CEO, sometimes they’re really external in terms of what they do. What their focus is in is really driving revenue, driving attention to the company. And if you’ve got somebody internally who understands what the CEO knows, but understands it from a financial perspective, that changes everything. Then the CEO truly has a partner on the financial side that can really drive their business to great heights.
Jack: Absolutely. Absolutely. That’s great. So now, and that’s the thing again. That’s why I was telling the listener here that Larry is…we love having on board because he has been in pretty much all three leadership positions. On the top, there is, as you know, there’s the CEO, meaning the Chief Executive Officer, which he has done when he ran his own company and started up and sold it. There’s the CFO, the Chief Financial Officer, and the COO, the Chief Operating Officer. So he really has been in all three positions, which ultimately makes him a better COO, which is his chosen role that he’s doing now for a whole bunch of companies and remotely which explains why you can hang out with a t-shirt and a cap on and just sit home and a beard and stuff like that. Because and just like I do…
I mean, the only reason I don’t have a beard is because I go on stages sometimes and I don’t think people wanna see me with a beard. But the thing is, it’s now you’ve carved yourself a beautiful niche there. But let’s go back into the place…I wanna know about one kind of experience that you had, particularly working with some let’s say more eccentric people and so on. And there’s one experience that you worked for a billionaire, actually the founder of GoDaddy, and you worked as a CFO for his family office, really. But after he sold his company, made something that’s public knowledge, and made something like $2 billion dollars or something like that, and he bought…since he lives in Phoenix, it’s like in Phoenix where I live, we kind of know what Bob Parson is doing because it’s in the news all the time.
Bought like strip malls, apartment complexes, Harley Davidson dealerships, golf courses, all kinds of stuff with that money. And they’re all are running as individual businesses but their financials rolled up for quite a bit of time to you. Tell us about the challenges there, tell us about the role there, and tell us about the dynamics of a work like that.
Larry: Well, first of all, Bob’s done a great job doing what he did and he deserves everything that he gets because he struggled for a long time, built companies, sold them, and he’s been very, very philanthropic with everything that he does locally. So in that way, I’m a complete fan of everything that he’s done and he’s been very helpful in the community and he does a lot of things behind the scenes that not a lot of people know about.
So it was a great experience for me. Running a billion dollar company, to be honest with you really, isn’t that different than running smaller companies. It’s just a lot more zeros, but the fundamentals are exactly the same. The fundamentals are how do we get cash flow out of the business, what are the right decisions to make, how do we look at the financials, how do we structure them appropriately so that these financials tell us the appropriate story that we need so that we can make decisions going forward in terms of always increasing cash flow?
And just because you’re a billionaire, doesn’t mean that he feels like he’s got money to throw away because his fundamentals are no different than any other startup business. He just wants to continue to make money. And for him, in terms of making money, what’s important to him is giving back to the community. So I have a lot of respect for that. And at the time, it wasn’t the right thing for me because where I get more joy out of what I’m doing is I love working with smaller business owners and with startup companies, because to see them see the light, in terms of if I can pass along some knowledge with the experience that I’ve had, both with billionaires as well as all the way to startup companies, all the way to owning my own company, if I can pass along some of the challenges and the knowledge that I’ve gained along the way, that’s where I get the most enjoyment about what I do, is that I have the ability to see business owners when the light goes on and they start speaking financially different than they ever have before.
So that’s the thing that, for me, has meant more to me than anything is watching people grow and understanding and seeing the growth of their business. And if I can be part of that, that’s just an amazing gift for me.
Jack: Wonderful. So now, let’s actually go…and I know that’s to be true about yourself. Now, let’s go back from the billionaire to the exact opposite. Somebody is starting up their company right now and let’s say that their revenue level where they reasonably speaking cannot yet afford a virtual CFO. They do their bookkeeping somewhere and they get their taxes done. If you have some kind of a one on one advice for somebody to go, if they get their numbers fairly timely from let’s say a bookkeeper, where do they look in their numbers so that they don’t just run their business based on the bank account? Because most…here’s the truth, most people running businesses even into the seven figures don’t have a clue how to look at their numbers and they end up running them based on the checkbook account basically.
Hey, this month, we have more money in the bank account than last month. We must be doing well. That’s their level of CFO, that’s their level of accounting in a sense. So you as a CFO, what would you recommend for somebody like that if they don’t have a CFO yet or can’t afford one or believe they can’t afford one, whatever it is, but where do they look to see if they are actually…how their business is doing?
Larry: Well, it’s pretty simple actually. What I would do at a minimum is that I would at least find a bookkeeper. And you know, you can go out and you can get QuickBooks. You know, you can buy QuickBooks at Costco for $130. And you can find someone who can probably do at least the bare minimum for $30 an hour or $40 an hour who, at a minimum, can take the bank statements and at least put them into a documented program that definitely tells a story, so at least you understand what your cash flow is. And then what you wanna do is probably take that information and, at a minimum, see that if I’m to continue in this way and maybe do their own forecast based upon what the bookkeeper is telling them, that if I’m to continue in this path for the next six months or the next year, here’s how much cash I may have available. And I can utilize that cash to grow.
And if I need to grow, it will tell you a story. It will tell you either I don’t have enough cash to be able to grow the way I wanna grow. And then maybe at that point, you figure out, “Do I need to raise capital? Do I have something? Or maybe I give away a small part of the company? Or could I actually go out and maybe I’ve got something that I can collateralize and maybe do a business loan so I can get money from the outside that can actually help me grow?”
But at a minimum, what I would do is I would at least have, hire a bookkeeper, be able to meet with that bookkeeper every month, have them produce your prior month’s financials maybe by the 15th of the month following the month. And at least review that and understand what’s coming in and what’s going out and seeing if you’re making cash and you’ve got a nice trend that that maybe tells you how much in the future you’re gonna be able to do and if you wanna grow, great.
And if you’ve got a lifestyle business, at least it tells you how much you can plan on for the next year or so or how much cash are coming in so you can plan your household expenses, etc. And if not, if you start seeing a downturn, then maybe it will tell you what specific places in the business that you need to start cutting to make sure that you can maintain either a lifestyle or maintain the cash flow of the business.
Jack: Yeah, I would definitely second that, particularly on the expense side of things because as an entrepreneur, you’re usually very aware of where you’re generating revenue from. So the revenue side is what is very high visibility is like we had another land sale, we had another house sale, we have another flip. So when I go to Masterminds with a bunch of house flippers, they’re always telling me about top line. Nobody talks about bottom line. And the same with like these other kind of…any kind of industry I go to, they all talk about yeah, well, we have done $7 million in revenue this year. It’s like, “Okay. What’s your expense ratio?” “Well, I don’t know.”
So particularly, if you only have bookkeeper run books, make sure that on a monthly basis, and at the very least on a quarterly basis, you go look through those expenses. And look at it from a month by month basis. Don’t just look at an aggregate. Look at like the last half a year or the last year and see which categories of expenses keep creeping up. And if there is no reason for them to creep up, well, you got to look into those, what are those, and then you can adjust them. If there’s a reason for them to creep up and they’re responsible for your higher sales, well, then great. But it gives you the chance to figure out ratios, right?
So you love working with ratios, for example. And when you send us data, the ratios I find very, very helpful because it tells us that, for example, marketing is at X%…let’s just pick a number. Marketing is at 25% of revenue. So for every dollar generated, we spent 25 cents on marketing. That might not be the number right now. I’m not pulling them. I didn’t review my numbers prior to this call. It might be much higher, it might be much lower, and it differently depending on which industry you’re in. But if you see month by month that it’s going from 18 to 19 to 20 to 22 to 23 to 25 but your sales are not going up, then something is like your marketing starting to become less efficient, right, because you’re seeing it go…cost goes up and revenue doesn’t go up with it.
So it’s time to look at that. So it gives you instead of just saying, “Hey, my revenue is good, my revenue is good,” and not seeing that your margins are being squeezed, you have predictors. You can say, “Well, if this keeps going on for another year, then we’re not going to make any money anymore.” Right? So then you can kind of…that’s when you start breaking it out. He’s like, “Well, which marketing activity drives which sale?” And then if you see that you have this app for $1,000 that’s generating you zero land sales or zero real estate sales or zero new customers and this one costs $200 and generates you all the customers, well, it’s time to kick this one out and double up on that one.
And so I love this. And I have to admit that in my early, early years, we ran our account by the checkbook, right? But once we hired a virtual CFO, back then it was a different company, when we had lost touch for a while, and the problem was their numbers were not timely. So they gave us our numbers three months later. So that wouldn’t work. But then we got back in touch with Larry and now by about the 20th of each month, we have our numbers. And part of that is because some of the reports only come out until the 18th. So we can’t have our numbers before we have all the reports. So property management reports and so on. We have our numbers and that allows us to look at these things and make some forward-looking decisions based on numbers. And that’s truly how you’re supposed to run a business.
Larry: Yeah, I would tell you, Jack, the thing is, is that you brought up some really, really critical points in terms of the way I like to look at things is looking every all expense as percentage of revenue. Because at the end of the day, what you’re saying here is I got a couple of rules of thumb that the group, the audience might be interested in.
Jack: Yes, absolutely.
Larry: Is my rules of thumb is that whether you bring in somebody who’s not a revenue producer or somebody who is a revenue producer or somebody who is going to…whether it’s a marketing group or something like that, the things that you should be asking are, “Okay, I’m going to pay you X amount per month. But how much do we expect to produce on the top line based upon me hiring you?” Because whether you bring in somebody who’s not a revenue producer, and if they’re not a revenue producer, you say, “Okay, that’s just overhead or administration?” Well, at the end of the day, the reason why you’re hiring them is you’re hiring them to free you up as the rainmaker to be more efficient in terms of what you do.
Jack: Absolutely.
Larry: So it frees you up who’s the CEO or the owner of the business to allow you to bring in more revenue so you don’t have to spend time on…I’m not saying not important but non-revenue activities. Non-revenue producing activities are going to take you away from producing money for the company. So my rule of thumb is, is that every investment that you make, whether that’s people, a marketing group, a call center, I always look…my rule of thumb is three times the amount you’re going to spend on that expense should go to your top line revenue.
So for example, if you bring in someone who’s going to produce revenue for you, whether that is a broker, an agent, somebody like that and you’re going to pay them $50,000 a year, you need to be specific in terms of sitting down with them and providing expectations is that for in order for me to justify the hire, you’re going to have to produce $150,000 in revenue. And then you’ve got something subjective or actually objective to sit down with them and say, “Here’s the expectation.” And at that point in time, they know what’s expected of them. It benefits you and it benefits the company altogether.
Jack: And that’s a hard one if you hire, let’s say, a personal assistant or an office manager or so because I mean how are they adding revenue? Well, they’re not but they are by freeing up the people around them. Like, for example, our sales team, we hired basically, well, an office admin for them because one of our top sales guys is just not good at the computer, let’s put it that way, right? So he spends just as long entering an order as he spends on the phone. So we’re losing a lot of revenue by him having to enter his own orders into the phone.
So by him now having an assistant that not only can answer certain questions and help with other things and actually do occasional smaller sales themselves, he’s now freed up and the production has exploded. So now you have a non-revenue producing role really helping drive revenue but you got to specify it. You can’t just say, “Because everyone is overloaded, let’s hire somebody.” If everyone’s overloaded, the other question is, “Why are they overloaded? Are you doing stuff in your company that you don’t need to do? Can you automate more things? Can you streamline more things?” Would be the first thing to look at. But yes. But once you hire, that’s a good rule of thumb. What else do you have? What other rules of thumbs do you have?
Larry: Well, I also say just depending upon the type of business. But typically, I look at how much cash flow or net income profit that you’re producing as a percentage of your total revenue and income. And the number I always like to get to is just as a rule of thumb is somewhere to 20% to 25%. So for example, if you’ve got a $1 million business, I would want to see a healthy business in my opinion, especially one that needs to have employees. I’m looking at $200,000 to $250,000 that bought to the bottom line after everybody has been paid, after all of the bills are paid, etc. To me, that’s kind of what I look at in terms of having a healthy business.
Now if you have a business that’s more technologically oriented, where you don’t need people and you’re doing, for example, a Facebook or something like that where people are paying for a service, I look at a higher profit rate because in most businesses, especially on the real estate side, what are really the key items that you that you pay for? It’s payroll and marketing, right? Those are really the key expenses that you pay. And so as it relates to marketing sometimes, what I look at is as a percentage, I look again from 20 to…it could be anywhere from 10% to 25% of your revenue should be on marketing, depending upon what stage you’re in.
If you’re a mature business, so you’ve been in business for more than three years, your cash flow is pretty stable, I’m looking at kind of 10% to 15% that you’re spending on marketing. And as it relates to personnel and support, you know, you have a mature business, you’ve got admins, you’re probably looking at about 25% is spent on payroll. And so at the end of the day, once you get all of that stuff done, you should be delivering 20% to 25% on your bottom line. And, you know, those are kind of my back of the envelope rule of thumb items. And that’s what I kind of look for when I look at a business. And if I don’t see that, that’s when I try to drill in further and understand of what you’re spending on, are you getting the most bang for your buck to actually deliver that to your bottom line?
Jack: Wonderful, great. Hey, Larry, I know we’ve kind of gone probably gone for a little bit already, but I do want to jump into one last subject. And that is another subject that I believe most people, including me when I started out and actually hasn’t been that long since I know the relationship of it or appreciate the relationship, let’s put it that way, and I went to business school, right, is the relationship between a balance sheet, a P&L, and most importantly and least talked about, a statement of cash flow. Can you talk to those three items?
And really from a beginner level because I do understand that, again, my opinion is or from my feedback that I’m getting at live events and when I talk to people that people run their business based on their checkbook. They don’t have an understanding of what the balance sheet even does but the P&L, they understand somewhat the P&L, income expenses, income expenses, right? But they don’t have a clue what’s difference between accrual and cash is. Let’s not jump into that. But just the relationship between balance sheet, income statement, and then how do those things feed a statement of cash flow and why do you actually, as a CFO, look at a statement of cash flow?
Larry: Sure. Where a lot of business owners get confused is they are trained especially in this era where you’ve got QuickBooks and you’ve got things like that where, you know, people who don’t understand finance as well as I might or somebody else who’s a tax person will look and they’ll concentrate on their profit and loss statement and say, “Okay, this is how much I made for the month.” But when they go and look at the change in their cash, they see, “Wow, this is a lot lower. I thought I made a lot more money than I did.”
Unfortunately, accounting rules get really complicated. It’s probably beyond the scope of this call. But let’s just say that you sell something and you send an invoice from QuickBooks, for example. But you’ve got an accounts receivable, meaning that it’s something that’s payable in the future, but you’re allowed to say you made that revenue, they just haven’t paid for it yet. And so what it can do is it can actually skew the amount of cash that you had come in because you were able on your P&L or your profit and loss statement to say, “This was a sale, but I never received the cash for it.”
Okay? Or, “I bought a building, for example,” and that’s really easy or, “I bought a piece of land but how come that’s not on my profit and loss statement?” Well, it’s something that I’m going to hold for a long period of time. And just for your listeners, what’s important is, typically everything that makes it to the profit and loss statement is something that would be you would hold for less than a year or something where you get the service in less than one year. Anything that is going to…you’re going to buy and hold for a period of longer than one year, will end up on your balance sheet. And that’s kind of a really easy rule of thumb to understand.
Jack: So a balance sheet is stuff that you hold on for longer time and [crosstalk talk 00:35:40]…
Larry: For longer than you can.
Jack: …go also for a longer time.
Larry: Correct. And so what you do is you may say, “It looks like I made $30,000 for the month, but how come my cash only went up by 10? That doesn’t make any sense.” And if I’m somebody who doesn’t understand finance or accounting or balance sheets, that is a legitimate question. And that’s why we accountants or finance people have created what they call a statement of cash flow. And the purpose of that, which is really important is to take your net income. And what it does is it analyzes really the balance sheet changes for cash that have come in and out from the balance sheet that has no effect on your profit loss to get down and show what the change in cash was. So that’s how those things kind of fit together is it shows all of the changes in cash that may have affected the balance sheet, but not your profit and loss, so that you can actually reconcile or show the changes and show how you got from net income all the way down to your ending cash flow.
Jack: Wonderful. Wonderful. That’s an excellent point, Larry. So thank you very much for sharing that. As a matter of fact I want to share one quick example that I learned many years ago. There was this company called Enron about 10 years ago or so, they went bankrupt. They did whatever they did, energy stuff. Actually, when Enron went bankrupt, they were showing something like I think over a billion dollars in profits that year. So the P&L showed a billion dollars in profits. And I might be wrong, it might have been $700 million or $1.7 billion or something like that. Actually, I wanna say it was over a billion dollars in profit, but their balance sheet showed strong assets and all kinds of stuff.
But what happened is they were hemorrhaging cash and nobody paid attention to the statement of cash flows. So the statement of cash flow was showing that the cash every single quarter would go down dramatically. And even the analysts, even the analysts out there, the stock market analysts did not look at the statement of cash flow, they just looked at, “Oh, it’s more profitable, it’s more profitable.” They showed all these profits by booking revenue without having received the cash, right? By booking revenue into their books and say like, “We did another billion dollar contracts, wonderful. Billion dollars in revenue, our profitability is off the charts.”
But the cash would come in over the next seven years and starting a year from now. So all of a sudden they would…but you can’t pay your employees with profit. You can only pay your employees with cash. So the cash would go out the door but the profits were sitting there as future profits not actually yet realized in terms of cash. And what shows the truth about that is the statement of cash flows, right? And as a result, all of a sudden they surprised everyone because they went out of business and because the definition of bankruptcy is not that you’re not profitable, the definition of bankruptcy is that you’ve run out of cash.
Larry: That’s right.
Jack: So that goes to Larry’s point that the P&L doesn’t always show your cash position. As a matter of fact, it’s very different from the cash position in many cases. So I would encourage anyone educate yourself about that. There’s a guy that teaches all of that called by the name of Keith Cunningham. He’s one of our mentors, bright guy. But the PP is for this not to happen your business is to have yourself a CFO. Now many people might say, “Jack, I can’t afford this.”
Now, I almost want to say that, yes, if you’re running a business that makes revenue a few $1,000 a month, you might not be able to afford it. But if you have a six-figure business, you almost cannot afford not having a CFO because, again, as we said earlier, the CFO provides a strategic advisory role into your business if you let them. So, Larry, so what do you say about that? How can somebody afford a CFO, a virtual CFO, a fractional CFO? Which really is what you are for us. You’re not just a virtual CFO, you’re a fractional CFO. You do that for a bunch of companies.
Larry: That’s correct. You know, what’s important is, and I think what I mentioned previously, is I’m also an investment in the company, just like what I had mentioned with anybody else hiring, bringing in a marketing company, bringing in outside admin, the standard that I would hold myself to is whatever you spend on me, you should be able to get more intelligent, smarter, be able to increase your top line, your revenue or decrease your expenses. So I hold myself, to be honest with you, to that same criteria, that if there’s not a return on investment in terms of what you’re spending on me, then I have failed doing what I’m doing. And so, what I would tell you is, is I sell a small amount of time.
And so even if it’s a matter of me just looking over your financials once a month for a few hours, typically the minimum amount of hours that I will do per month is five hours. And so if I do five hours a month and you want to spend $1,000 a month just for me to just look at something, it’s a really small amount of money for me to say to you, “Look, I may be able to increase your bottom line by $50,000.” And so what I would say is do you want to spend $12,000 on increasing your bottom line by 50? I think anybody would do that. And so I’m so open to doing stuff like that. And, look, the thing is, is in my position as well, I’ve got to be critical of how you’re spending your money, which is also inclusive of how you’re spending your money on me.
Because if I’m a steward of the finances of the company I’m helping with you, I also need to be cognizant of that and I need to be sensitive to what you’re going through. And as a business owner, that’s where I can kind of stand with you. I understand the way it all works. And the last thing I want you to do is spend all your money on a CFO that’s not going to provide you that value. And so that’s kind of my value proposition to everybody is, look, I understand what you’ve been through. I sat in your chair, I get it. And I also want to make sure that there’s value in terms of what you’re getting. And I have the ability to actually…you’re not just hiring me to sit in the chair, but you’re hiring me to help you to get more profitable and to get more revenue in the door.
Jack: You’re hiring a second very, extremely experienced financial set of eyes that can actually make a story out of your financials, help you understand your financials and where the trajectory is going so you can make the proper adjustments for your financial story to go in the right direction. And again, yes, we paid some time. I mean, we’ve had difference of ours. Now, you’ve been with us for a long time now, but we’ve paid like about $1,800. One time we paid $2,500. We paid different amounts. So it’s not super expensive and it’s less expensive.
You don’t need a full-time CFO unless you run a really large eight-figure company already. But for a regular company, there is such a thing like a fractional CFO and Larry actually does that. That’s where he transitioned to after being a CFO for $300 to $500 or $600 million company that being CFO of a $2 billion family office. He went back off…after starting his own company and selling it, he went off to now becoming the CFO for…how many different companies do you do this for right now?
Larry: Right now I’m probably six to eight.
Jack: Six to eight? All right, for six to eight company. Meaning six and two probably have you a more as a consultative kind of position as an as needed position.
Larry: Yep, Correct. Correct.
Jack: That makes all the sense.
Larry: My smallest companies are startups and my biggest company right now is on track to do $100 million in revenue.
Jack: Wonderful. That’s great. So in the lower part of that, not a startup but I need a Starbucks. But yeah, we are…we’re obviously in at a level where it totally makes sense for us to have a fractional CFO. With that, Larry, thank you very much. How can people get ahold of you if they’re interested in knowing more about you or knowing more from you?
Larry: Well, I’ve been exceedingly fortunate. So I’ve been in a position where I haven’t had to have like a website, everything that I’ve done is on referral. But I know that I probably have to spend some marketing money. So that’s coming in the future. But if anybody wants to get in touch with me, I’ll give my email address and feel free just to say that you heard on the podcast and I’m happy to call you back. As Jack knows, I call everybody back within 24 hours no matter what. And, you know, part of my job is to be responsive to the needs of my clients and others that are interested and I’m always happy to help. So you can reach me at larry.white@lkwconsulting.com. Or send me a text. I’m happy to give out my mobile number, 602-405-2296.
Jack: All right, wonderful. And we’ll put those obviously also into the show notes, the contact information so you can reach him there. And with that, Larry, thank you very much. Now, perhaps you have…well, I’m gonna ask you one last question is like do you have any kind of like one piece of advice to any business owner?” Obviously, we have a lot of people flipping land here. Any business owner that is just struggling overall with making sense of the numbers? What’s one thing can they do to just learn a little bit more about that?
Larry: I would say is, like I said before, I think the most important thing is understanding what the numbers mean. And even if you do this on a checkbook, I would definitely would hire somebody who is a bookkeeper to help you make sense of those numbers. And I think, Jack, as you mentioned, which is really, really important is, take a look at things on a trend basis, look at things month by month by month so that you can identify, if the market is always going to change, things don’t stay this the same way that they do forever.
But if you notice a change by bringing in a bookkeeper and able to look at your P&Ls; each month, if you’re able to see certain changes over a few months, what that’ll tell you you’ll be able to understand and see if your net income changes, etc., over a period of a few months, well, maybe this is something that you need to make a decision on and need to move on quickly. So that you can maintain not only your cash flow, your lifestyle and the way you’ve done things, it will give you some time to be able to look at things. And I would also say just as a rule of thumb, one last thing is I always like to keep a minimum of six months’ worth of cash in the business if you have the ability to do that, because typically people lose sight of that is that you want to understand what you call is your cash burn.
And especially if everything stopped, you want to understand how long you can stay in business if you weren’t able to generate sales. And so that’s what I would look at. And make sure that you’ve got enough cash to cover you for six months. Because if you have six months lead time and you’re seeing changes, well, then you have the ability to make the right decisions as opposed to panic decisions, which 9 times out of 10 are the wrong decisions, because you’re panicking because you’re seeing your cash flow go down. And so you want to be in a position where you’re making the right decisions, and you have the time to make them to correct course in terms of the trajectory of your business.
Jack: Wonderful. All right. With that, everyone, thank you very much. This concludes another episode of the “Forever Cash” life real estate podcast. Thank you very much Larry for being on the call.
Larry: Thanks, Jack. Thanks for having me.
Jack: And with that, as always, if you’re listening to this on iTunes, give us a five-star review and actually add some text to it too. So we need those to spread the word, for iTunes to spread us more out there. And if you’re watching this on YouTube, make sure that you give us a thumbs up, share the link, take notes, rewind it, send it to other people that need to know about financials and how to read your numbers. All right. With that, thank you very much. Bye-bye.
Larry: Thank you. Bye-bye.
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