The Virtual CPA Success Show for Creative Agencies: Episode 21

In this episode, we are joined by Jamie Nau, and Jody Grunden to talk about some of the biggest issues we see as CFOs. Listen to hear about the main things we help our clients with and the main things you need to be considering as you run your agency.

Jamie Nau: Hello and welcome to today's podcast today we have a very interesting topic we're talking with Jody Grunden CEO is Summit CPA. We're going to do a little bit of a hodgepodge episode. Jody and I were kind of talking about some clients, and some of our experiences. One of the things we talked about is what are the real big issues that we see most of the time. As we were going down this conversation we decided this it was a perfect podcast topic. So we wanted to dig into it a little bit more. So Jody, I'm going to let you start. What's the first issue that you think comes up for most of our clients that you want to dig into

Jody Grunden: The first issue, I would say would be cash flow. I would say 9 out of 10 clients actually come to us with some sort of cash flow issue. Meaning that they don't have enough money in the bank, they're not sure what to spend their money on, maybe they don't have enough for taxes or whatever. So cash flow by far, I would say, is one of the biggest reasons they come to us for sure.

Jamie Nau: Yeah, and just so you guys know, some of these issues we have talked about in previous podcasts. I'll make sure I mention that. We did a deep dive on cash flow, episode 11. Just so we make sure we're not just throwing a topic out there and leaving it. So Jody, what are some quick tips you can give people who are listening to this podcast, and they're like oh yeah, that's me. I've got cash flow issues. What are the things they should be thinking about?

Jody Grunden: So when we talk about cash flow one of the questions I always ask when I'm interviewing a prospective client is how much money do you have in the bank, compared to your revenue? Because that's really important to us, because we want to generate at least 10% of your revenue and have it in your operating account at all times. So that's an addition to what you've got set aside for taxes. Taxes should be included in that 10%. So when we're going through the interview process we're asking that and trying to determine if they truly have or are flushed with cash, or if they have potential cash flow issues. Once we have decided on that, now one of the biggest things is we push them into a cash flow management process where we actually meet with them on a weekly basis. We go through their cash over the next 8 to 12 weeks, and really determine what money needs to be spent, and at what time it needs to be spent. When they think they're going to get their money in from clients and so forth. We build that general basic model out for them. So they really see where their cash is going. At what point in time will they be out of cash? Then we can react a little quicker. Do we have a line of credit setup, you know, what's the situation? Do we defer payments? So cash flow is one of the biggest things that I see that they come to us because they really don't know how to manage cash. I think it's important to set up meetings on a weekly basis. It's important that your bank accounts are reconciled pretty much on a daily basis, in my opinion. So you know how much cash you have. You know what checks are coming through, deposits being made, all kinds of stuff. As an owner of a company I even do this. I always look at cash on a daily basis, Once a week I go through it with our Firm Administrator. I go through the exact same process that are our CFOs and senior accountants go through with their clients just to make sure that there's no surprises. You know, the worst case scenario is that my Firm Administrator calls me up on Sunday night and says hey, I forgot to tell you payrolls going out tomorrow, and oh by the way, we don't have enough cash to cover it. You know that that would be a devastating phone call. We try to make sure that that doesn't happen for any of our clients. So visibility and cash, I think by far is the number one reason why we see people come to us as, and I think it's one of the biggest things that our firm has to tackle for our clients.

Jamie Nau: Yeah, I definitely agree. I think, you know, that's something that everyone could do like you wouldn't need a CPA firm to help you with that. It's come up with a plan look at what your inflows are, what your outflows are and you're going to time them out, and then be able to see what the short term cash flow looks like. I think the second step of that is once you do that, you're going to start to see what the problems are. It's really hard to say oh wow, I need to make payroll tomorrow at $400,000, and just instantly come up with $400,000. The first step is really important here. Building that short term forecast to know what your cash flow problems are and why they exist. I think that's number one. I think once you see it there's going to be one or two problems. One is going to be your forecast. Your company is just not built to be profitable and make cash, and so then you're going to have to kind of deep dive into the forecast. Something we've talked about on several of our podcasts. So the first step to take is okay, what am I spending too much money on? Why am I not profitable? Why do I not have enough cash? The other area that comes up a ton is just collection. You're just a really slow collector, and so you're going to discover whether it's one of those two issues, or another issue, pretty quickly by having that cash flow process in place. Then you're going to be able to know those next steps to take. Which is obviously the real parts of the problem.

Jody Grunden: I would say the number two thing that we get, outside of cash, is taxes. And they kind of relate a lot to cash, because what we hear a lot of the time from our prospective clients, especially at this time of the year, or maybe earlier, they just got their tax return and they were not expecting to pay a huge amount of money. Now all of a sudden they are like, now what do we do? You know, we thought we might pay a little bit but we didn't think we were going to pay a lot because we made our estimated payments. We hear that all the time. So that's a big thing that I think a lot of our clients, I would say a lot, but we get a significant amount of prospective clients that come to us because they had that big, huge tax surprise. And that can be easily avoided if everything is done on a regular monthly basis where if you're meeting with your accountant, or your CFO on a monthly basis, you're going through the estimated payments that your tax preparer had set up for you, you know, from the prior tax return. You make sure you make those on a quarterly basis and you set money aside, either on a weekly basis or a monthly basis. What some of our clients do as well is put aside funds into a separate account, a tax reserve account, setup completely aside from the their operating account so it’s out of sight, out of mind. Money is just flows through there on a regular basis, building up cash, that money is then used out of that account to pay those estimated payments, it continues to build based on your forecasted revenue, forecasting net income, you know, what do you think you're going to be? That's why it's really important to have a solid forecast so you can actually do this. Otherwise you're going to base it on last year's money, or you have to base it on an incorrect years net income, and that's a little tougher, because if you have any seasonality at all it makes it a little rough to do this, but putting that money into that tax savings account. And then if you need to pull it back out, you can always do that. But just kind of keep building it. And then, as I said, as the year progresses, you should get closer and no more what your tax situation is going to be especially halfway through the year, you know, you've already got halfway through the year done and you've got your forecast through the rest of the year. You know what is that tax situation going to look like. It doesn't have to be a hard tax plan where you have to find all your investments and that kind of stuff, just a soft one. You know, hey, we're going to pay net income. Here's our tax net income, and it is about 40% we set aside for taxes and so that gives us an idea on where we're going to be. Again you set the money aside on a regular monthly basis into that tax account. If you do it right and if you're close on your estimates at the end of the year, you should have the exact dollar amount that you're going to pay on April 15th. On the pandemic years it’s on July 15. You’ll have what you need set aside. No surprise at all and that really comes working closely with a Virtual CFO if you have one, or an accountant if you have that, to where you know what that number is every single month so that you can plan for it. You can set the money aside and you not do the silly thing on spending it and not realizing you have taxes for it. We hear that all the time. Well, I got these taxes, but I don't have any money to pay for them because I spend it on maybe new hires, or a new piece of equipment or whatever you might have done. Now you are kind of behind the eight ball. So taxes are big thing a lot of prospective clients come to us for. We don't see that at all with our existing clients because we meet with them on a regular weekly or monthly basis.

Jamie Nau: Yeah, I was going to note that I think the one thing I noticed as a CFO pretty early on that this was the one thing that was a huge comfort for clients. Once we have that money set aside, and we told them that, you know, this this money is in this account for a reason. It's there for taxes, don't touch it. It just gave owners that extra comfort, but also helped them just get that money out of sight, out of mind, and know that money is tagged for something, you know already. I think for me, what I was in that CFO role it was crazy how much of an impact just one small thing made on so many clients. That okay, I don't need to worry about having that surprise tax bill. If I have to pay $60,000 come April 15th, and I don't have that much in the bank, it's already set aside. So that was something that I realized pretty early on when I was a CFO.

Jody Grunden: Those are my two topics Jamie. Do you have a couple yourself?

Jamie Nau: I do have a couple. The number one thing that again was something that kind of surprised me as well when I was a CFO, that this issue kept coming up over and over again. And it was something that I didn't really think about prior to being in this role, and that is ownership issues. So I've had so many clients come to me and say I want to buy right now.

Jody Grunden: Ownerships have issues?

Jamie Nau: Yes, they do.

All: Laughing [inaudible]

Jody Grunden: Okay. I was just curious.

Jamie Nau: Yeah. It was very surprising to me like, you know, ownership really is a marriage. You are getting invested with someone for a long term project that you're hoping to make profit on, and so like again, when you think about it and step back, of course these issues come up all the time. But it was surprising to me how often I was working through almost being like a marriage counselor with my clients, and walking them through and saying well, let's talk about how are things set up and how can we make this relationship better? So that was something that people come to us all of the time with. You know, two months into a relationship they want to buy a partner out, or want to add a new partner or this partner is not working out. It's something that comes up all the time. So I think the biggest thing you can do is look at your ownership agreement, and make sure that everything is set up properly. Make sure that those buyouts are there up front and that they're understood how they can happen. Also when you're choosing a partner. So if right now you're starting a business and it's just you, and you have a couple of employees and you want to take your best employee and turn them into a partner, that's not always the best strategy. You want to make sure that you have a good relationship with that person. But also, and I'm going to plug Jody and Adam here, our partners at Summit, it's really good to have owners that think differently. You know, if Jody and Adam are always on the same page with everything I don't think Summit would be as good as we are.

Jody Grunden: So I think correctly.

All: Laughing [inaudible]

Jamie Nau: Adam thinks correctly as well.

Jody Grunden: Oh wow…

All: Laughing [inaudible]

Jamie Nau: This is being recorded remember Jody?

Jody Grunden: He doesn't listen so I'm good.

All: Laughing [inaudible]

Jamie Nau: No, I think just having that ying and yang there, to bounce ideas off of each other. Not just the way they think, but also the way that their mind work. Like Jody is very big picture, He always thinks of the big picture, and is trying to think what's best for the firm overall. He doesn't really want to get into the details all the time. Adam is very detail oriented, and Adam is also a little bit more pessimistic than Jody, where Jody is the optimists. So the two of them just balance each other often. By the time you get them in an agreement on something, it's probably the best idea for the company. That is what I've seen with Summit. I think having just the difference in personality in the ownership group, or the owners that I've seen also through my clients that work out the best. You can tell pretty early on if you get into a client meeting and the two owners are the exact same personality style. They're both quiet. They're both just sitting there, leaning back, listening. You think, I wonder how these owners work together because they seem to have a very similar personality. So that's one tip I really think for people that are in the early stages of entrepreneurship. Making sure you choose your partner wisely, because you really want to have that person that's going to challenge you, and that person that's going to think a little bit differently than you.

Jody Grunden: Yeah, and don't think you have to have a partner. I mean most partnerships fail. So why go into a failed relationship. So don't think you have to have a partner, and don't think everybody wants to be a partner. That's a real big fallacy that a lot of people think, because everybody wants to own part of the business. In reality that is not true. Only the entrepreneur type people really want to own a business. Some people just enjoy being an employee with no risk, you know, they can come in and do their thing, and they may do it really well. Don't think that person necessarily would be a great partner for your company.

Jamie Nau: That's a great point. I think the other part of that too, that I see is a lot of people are in love with the idea of ownership, but not actually in love with ownership. Once you find out what it's actually entails, yeah you're going to put some capital into this and the time you're going to be paid out, or when the company's doing well, you might have to go three or four months without getting paid at all. There's a lot of risk that goes into ownership. I can't tell you how many times I've gone down the path where a client has said yeah, I want to make x, y, z, a partner. It’s like okay, let’s talk with them. And then you get about five minutes into that conversation and you see their face go white. Now they are thinking oh no, this is not what I thought ownership was. I thought I was going to be a millionaire and I was going to have ownership in this awesome company. Once they actually find out what the logistics of it are they are like, yeah that's not for me.

Jody Grunden: Yeah. The other thing is, you know, we were talking about ownership from the very beginning. Ownership from the very beginning you won't have that operating agreement in place from day one. No emotions, how it's going to be, you know, how the valuation is going to be determined no emotions at that point and everything is really done on a non-emotional stance. When you do split up, unfortunately like a divorce, it gets emotional, you know, whether it is a high emotion or a low emotion. So you want to make sure that everything is laid out. You know, here's how we dissolve it by x, y, z. That’s really important. The other thing that I would say is that if you're adding a partner partway through the process, let's say you've already built a million dollar practice and now you're adding a partner into that practice, be careful how you do it, because you could have some really unintended tax consequences if that person isn't truly buying into the practice. Because keep in mind that they're getting a value for it, and that value is actually taxable. You know, we had a situation, probably been about eight years ago where they gave like a half a million dollar deal to the to this partner coming in, and he thought it was a great deal until you realize is going to pay $200,000 in on his tax returns the next year. So we had to quickly go back and reverse everything out so that didn't happen, and approach it in a completely different manner. The good thing about it was that we were able to catch it early, because we brought them on as new client. It would have been really hard for us to unravel that and then they would have this huge tax consequences.

Jamie Nau: You know, so that's funny. I had the same conversation with a client yesterday. Like this exact conversation. The new partner was fighting for 20%. Well then that means, 20%, a $200,000 tax bill. They were then like, maybe 20% isn't what I want. So you know, there's a lot that goes into partnership that not everybody thinks about. So I think, you know, the point here is you want to make sure you have the conversations and have them often. Be completely upfront with them. And you know, I think that evaluation comes up a lot with this. I've heard people say evaluation is what it is like if I decided my company has $100 and I had all the partners agree with it, we could use that. While that's 100% true, no one's going to feel that way when six months down the road when they're assessing their breakup and that's not what it's valued at truly. So I do stand behind getting a true evaluation calculation when you're doing any partnership agreements. Even though it can be somewhat expensive. That's a podcast issue we have not touched on yet so we will probably do a deep dive podcast just on ownership stuff eventually. I forgot to mention we were talking through the tax planning. We did a podcast on tax planning and that was episode 13, so if you want to get more on tax planning and tax protection you can listen to episode 13. So my last issue that I want to kind of talk through is another podcast we've done in the past, and that was episode 14 on forecasting for growth. A lot of companies come to us and say I want to grow. I need to grow. How do I do it? What are the steps I need to take in order to grow this business? And this really touches back to forecasting, which is why when we did that podcast we didn't just call it growth. We called it forecasting for growth, because it's really hard to build your company without a plan. I've heard and used this analogy a couple times, it's really hard to drive to Disney World without a map. Without a plan to know where your stops are going to be, and to know what you're going to do there. It's the same thing with growth. You're never going to do it unless you come up with a plan of what is it going to take to get there, because there's a lot of things that go into it. A $2 million company is much different than a $5 million company. The admin looks different, the number of employees looks different. The revenue sources look different. So you want to make sure you put that plan on paper and you're drawing it out, and then you're putting costs next to it. So that when you are a $5 million company you don't want to see yourself be a $5 million company that's bringing in $400,000 net income. So you want to make sure you're not growing the company without a plan, When you grow to that $5 million company you want to keep your profit margin about the same. You might not be at the 25% but maybe you'll be at 20% and then you're having you know, a million dollars of gross or net income on $5 million of revenue. Which makes a lot more sense. The reason to do it is because you grow your cash quicker. It gives you more flexibility as a business. I can't tell you how many times, I’ve heard it in our onboarding clients, our goal is to grow to be an $8 million company by 2022. I think that's where the fun begins. I love doing forecasting. I love doing planning because I get to take people that are listening to this podcast have great ideas, and I get to put it on paper, and I get a calculated out and see what it’s going to look like, and put some numbers behind it. That's a process that is really fun in helping companies figure out how to grow.

Jody Grunden: Grow profitably. That's the key, I think Jamie mentioned there. A lot of people ask well, should we have a really small margin as we grow? In my opinion no, you know, you should be able to grow at the same rate. It depends on how you're doing. And you should be able to grow at a fairly similar rate that you would normally be at if you weren't at a growing stage. You should be at 15% normally, maybe 13% growth, you know, profit margin, because you're hedging a little bit on your expenses to be able to handle growth. But growth is the big thing. It's kind of funny you mentioned growth because I just received a perspective call that popped on my calendar day, and that's what they said that they're looking to do. They've got everything down. They're looking for growth and strategy. That was the couple of big things that they're looking forward at. So growth comes up a lot, and growth is just one of those things that we can't teach people how to grow, but we can teach you how to grow profitably. That's the key there. That's I think even more important, if you're going to grow you've got to grow with a healthy gross profit margin, and you've got to be able to have everything in line so that it's not all going haywire.

Jamie Nau: That is a great point Jody. I think it's really easy to say right now I'm a $2 million company and I'm going to have that $500,000 profit, and it's really easy to say when I'm a $5 million company I'm going to have a million dollar profit. But what about every stage in between there? So I think it's really important to kind of do those benchmarks. This is honestly what I do at Summit. The next time we hire a CFO, I need to prove to Jody that even at the first day we hire that CFO, and they have one client, and that's all they have, are we still going to be profitable at that point. That we're not just adding X amount of cost to our bottom line. Now you're not going to be as profitable if you add $50,000 of cost to your line item, you're going to have a little less profit at that point. But you want to make sure you still are being profitable in all those stages. And again, it's important to kind of figure out what those benchmarks are and say, as we grow from two to five, what are we going to look like when we hit four? Or what are we going to look like when we hit 3.5?

Jody Grunden: For sure, and profitability again, we stress profitability. You want to be at least 15% profitability net income that's before your owner compensation. If you have an owner compensation in there you are maybe looking towards like a 25% profitability margin. Maybe even more depending upon you know what your billing rates are, what your costs. But if you're not getting that it's really difficult. You have to look internal, and it's really hard to grow if you're not profitable because you're going to zap your cash very quickly and that's something that you're going to get an abundance of from growing, But be careful of your profit margins and make sure you're set to grow before you take that plunge and start taking on these big clients that could actually put you out of business.

Jamie Nau: And it does tie back to the cash reserve. You know, I think that anytime a company is telling us they want growth, we bump that cash reserve up a little bit and say okay, well you don't need 15% of revenue in the bank, you need 20%, 25% because growth does cost money. You know, it cost money to purchase it the addition of a building, or to add computers. So you want to make sure you have a little extra in your cash reserve if you're going down that road. And so the last thing is I want to throw our email address out there. We have an email address for anybody that is listening to the show that wants to give us feedback. We're always looking for new topics and are also looking for guests on the show. So if you want to be a guest, or have a topic for us please email us at vcfo@summitcpa.net. We're always looking for email topics and some are starting to coming through. So we appreciate that. But we're always looking for more. So Jody, any final thoughts on the four topics we hit, or anything else that we need to talk about?

Jody Grunden: Yeah, I think all four of these you probably should just write them down, you know, cash flow, tax projections, growth, ownership. So you can look back and say hey, my handling right cash flow, check the box. Tax projections, check the box. Growth and ownership, check. Make sure you have those covered. And if you don't, don't be afraid to reach out for help There are people out there like ourselves, or people you know, that can definitely help out. Don't feel like you've have to this on by yourself, and figure it out by yourself, because you know if we did that I'd be a one person shop, you know, and now we're a 50 person shop. You have to be vulnerable and be able to reach out for help in the different areas that maybe you don't have the expertise to focus on.

Jamie Nau: That’s a great point. I think all four of the areas we talked about there are experts that are out there in these areas. You can find people who are ownership experts, or tax people, or lawyers. You can find CPAs that are tax experts. The for growth, a CFO in that area. So yeah, don't be afraid to reach out and get help in these areas because I think these are things that people reach out on. You don't have to be an expert in these four areas because there are experts out there.

Jody Grunden: For sure.

Jamie Nau: Cool. Well Jody, I appreciate you starting this conversation with me today and then recording right now to get this out there for our listeners. I'm fired up for sure.

Jody Grunden: Yeah. Thanks a lot.