The Three Pillars of Financial Success

The Three Pillars of Financial Success

Check out the latest episode below. Mr.Biz Radio provides business owners with the knowledge and insights needed to drive their companies forward.

Mr. Biz Radio: The Three Pillars of Financial Success

Unedited transcription of the show is included below:


Welcome to Mr. Biz radio, Biz. Talk for Biz owners. If you're ready to stop faking the funk and take your business onward and upward, this show is for you. And now here's Mr. Biz, Ken Wentworth..


All right, welcome to another episode of Mr. Biz Radio. With me, Mr. Biz Ken Wentworth and the good news is you're stuck with me. You got me? The bad news is you're stuck with me. We're going to do a show today talking about the three pillars of financial success. Let me tell you a little the genesis of this show. So I've been having a lot of people ask me, especially with the economic uncertainty that has been going on globally for seemingly far too long now, although we had a huge run there, people forget that we had a 10, 12 year run. It was pretty much unprecedented. Typically, economic cycle is about five years, right? You go up and you start to come down, you go back up.


And we had a constant about a dozen years in a row, actually, maybe a little bit more than that, actually, of prosperity. And I think that made people I've mentioned it before a little bit, pardon the phrase, but fat, dumb, and happy, right? I don't have to do much of my business. I'm going to grow at 15 or 20% a year just by kind of showing up every day because of the economy and the climate that we were in.


And I came to a screeching halt, as we all know, recently. Well, not too recently. Now, like I said, it's seemingly been going on for a while. But I think an economic downturn, a recession typically lasts up to three years, usually 18 to 36 months. Somewhere in there is about how long they last. And so, depending on who you talk to, some people say, we're still not in recession, which, if you guys have seen I did a video, gosh back in June of 22, june or July, I guess it was probably July of 2022.


We were in a recession then. It was convenient how they changed the definition. We had the same definition of what a recession was for 40 years, but because of elections and political crap and everything, that's not really how you measure it. We had two consecutive quarters of economic decline. That's how we've defined a recession for, again, 40 years all of a sudden. Now, we don't call it that. But anyway, regardless, we started a recession in July of 22, as far as I'm concerned, and we've been in it, and we're coming up on the end of the year here.


And as I started to think about a lot of the questions we get, and a lot of questions I'm getting when I go speak at events and things, and a lot of owners and entrepreneurs are asking me, what should I be doing right now? And there's no magic pill, there's no magic elixir for every single business. But one of the things that I started to think ahead, soon we'll be doing the year end show, right? So every year at the end of the year I do a show, what to expect for the following year. So we're coming up here at the end of 2023.


So at the end of the I think on December 29, we'll release the show that is talking about what to expect in 2024, how to be able to position your business, to be able to take advantage of the economic climate, the markets, all that kind of stuff that'll be in that year end show. And as I started to think about that, combined with a lot of the questions I've been getting over the last year, probably from business owners of what they should be doing and what I tell people without knowing a lot about their business, you really have to go back to it's like everything, right? You talk about sports, you talk about relationships, you talk about everything.


Go back to the basics, right? They say it all the time. Go back to the basic blocking and tackling in football, you go back to you got a troublesome relationship with anybody, right? Communication, going back to the foundation. And so one of the things I always talk about is I have every client that I engage with, every person that I help their business, we always start at that foundational level. And for me that is my three pillars of financial success.


And so I want to walk through those three pillars, some of the key things. We won't be able to get a whole lot in depth about all of them, in each one of them, I should say. But I'm going to give you some practical things that are pretty short term, pretty quick things. Most of them won't cost you a penny, maybe just a little bit of elbow grease to implement these things, but could have a good impact on you. And if nothing else from this show, you'll be able to sort of stabilize, firm up, somewhat optimize each of those three pillars.


And if you get these three pillars correct, and those three pillars are cash Flow, budgeting and Pricing, those are the three. You get those three right and you have that foundation with those three pillars, you're going to be in really good shape in a lot of other things in your business, and it's going to free you up to be able to invest in other things in your business, do some things to scale and grow and things like that.


But really these three pillars are just so critically important. So let's dive in and start talking about the first one, cash flow. So cash flow, critically important. Literally anyone who's listening to the show for the seven years we've been doing it, now 82%, US bank did a study on this, 82% of business failures, right? We all hear these statistics, small businesses only last X amount of time. Amount of time.


This percent fail within the first five years, et cetera. Of the failures, 82% of the failures are due to cash flow challenges. So what I like to do is like to flip that on its head a little bit and turn the tables. If you get cash flow, right, you only have to worry about 18% of the reasons that businesses fail, because if you got the 82% nailed down, you just got to worry about the 18%. So you got an eight out of ten chance of being successful if you just get this one pillar correct, the cash flow piece of it.


It's just so important. So let me first start with I know a lot of people is going to be kind of cash flow 101, but I think a lot of people that I talk to don't fully understand what cash flow is. It sounds pretty simple. And I think a lot of people, frankly, are embarrassed to admit that they don't fully understand exactly what cash flow is because they think, oh my gosh, I should know that. I don't want to say I don't know it because I'll look silly.


No shame, right? If you're a master widget maker, you're probably not a cash flow expert because that's not your expertise. You're a widget master, right? And so really, the best way I tell people to think about cash flow and how to define it is it's not about profit. Like, you could have profit and have terrible cash flow, have negative cash flow, you could have a bunch of cash and be losing money, right? It sounds completely counterintuitive to most people, but it's the truth.


So the way I tell people, and the most foundational basic way to think about cash flow is to think about your checking account and when money goes in and when money comes out, that's cash flow. That's cash flow in and out of your checking account. And so it's really just about when you literally receive the money in, when it's in the account and available for your use, or when it's gone and it's no longer available for you. It's all about that cash has nothing well, I shouldn't say nothing.


There's a relationship, but could have nothing potentially to do or very little to do with actually profits. As I mentioned, you could have a business where your financials say that you're making money and you've got positive net income, but you don't have enough money to make payroll. I know it sounds counterintuitive, but it's all about the timing of when money is coming in and going out of your account.


So that's one of the things I wanted to start with, is really defining that, because it's not just about profit, it's not just about margins and all this other stuff, right? It's really just about the movement of cash in and out of your account. And I can give you some examples on that. We're running out of time here. I'll give you a couple of things that we're going to talk about here in the next segment. First of all, we'll give the Mr. Biz Tip of the week, which actually this week is, funny enough, very much related to what I just said about money coming in out of your account.


But we're going to talk about one of the key things of cash flow. And again, we'll get into this a little bit is shortening the payable receivable cycle. I'm going to tell you some different ways to do that, and we'll talk about that. That's going to be the main thing we're going to talk about, because that's all we have time before we get into budgeting and pricing as well before we wrap up the show today. But come back after the break. Here again, we'll hit the Mr. Biz Tip of the Week, and we'll talk about improving cash flow by shortening the payable receivable cycle.


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All right, welcome back to the show. As I said, it is time for the Mr. Biz Tip of the Week. And I mentioned it is strangely, ironically enough, very much tied to what I was just talking about in regards to cash flow and cash coming in and out of your account. The tip this week is actually a quote from none other than Mr. Jesse Itzler. And at first when I say it's going to sound a little bit negative, but it's not. Let me explain.


So his quote is, don't celebrate until the money is in the bank. How funny is that? That it ties into what I was just talking about. I promise you I didn't plan that. But what he means by that, especially as entrepreneurs, so those of you that are entrepreneurs, business owners, you may have already seen where I'm going to go with this. You already know where I'm going with this. There are so many times as an entrepreneur, when you have a meeting that goes really well and it's a potential partnership, and you already start to think about the possibilities of that partnership and the results of it and the potential impact, positive impact it can have on your business, you start to get as an entrepreneur, right?


You start to blow things up. Man, if we did this and then that would expand that, and then that would happen, and then nothing ever happens, right? You plant all these seeds and you have all these great meetings and things like that, and sometimes it never happened. So what he talked about and what he means by don't celebrate till the money's in the bank is things fall through. When he gave that quote, when I heard him speak, he was talking about he had a deal and a verbal agreement to sell a company that he had developed for a lot of money.


And he got home, they had a handshake agreement. They just had to draw things up and sign them. Long story short, as you can imagine, it fell through. He had already gone out and started thinking it was the first company he had sold. He had already gone out thinking about, man, I'm going to get this much money and I'm going to be able to take care of my parents. He was already making plans, and it never happened. It fell through.


So that's what that means, is it's good to get excited about things, but you got to kind of temper things sometimes now and again. And don't celebrate until the money is in the bank, until it's a completely 100% done deal. Not 99%, 100%. So that's tip of the week. Entrepreneurs will get that one. The roller coaster ride of entrepreneurship I'm sure you dealt with at a time or two. All right, so let's get back into talking about the three pillars, specifically cash flow.


As I mentioned, shortening what I call the payable receivable cycle, and that is when you pay for something, maybe goods, raw materials, et cetera, the widgets that you make paying the salaries of people that are providing the services that you provide, and then when you actually get paid for those things, so shortening that cycle. So usually if you make widgets, you pay for raw material, and then it takes you some time to make the raw materials, and then you have to put it out for sale, and then you have to sell it.


Depending how you sell it, it may take you you may have to do an invoice. And so it's not 30 days. It could be depending on how long your sales cycle is, right, between when you paid for raw materials and then the subsequent labor to create the widgets to when you actually get the money in the bank. As Jesse said, it could be 3,4,5,6, months. That's a great example of cash flow of you got cash that went out the door here on, let's say, day one to buy these raw materials. And you don't actually get cash in the door to pay for the materials, the labor, et cetera, that went into creating those widgets for several months.


And so that's how you end up with this cash flow situation where you've got money out and you've got goods out and you haven't gotten paid for them yet. So shortening that cycle. And so instead of it trying to shorten it as make it as close as possible to when you're receiving the money for the goods or services you provide, that's what I mean by shortening that payable receivable cycle. So again, there's a whole bunch shameless plug cash flow is so important. Literally. My first book is about it. It's called how to be a cash flow pro.


It's a pretty short one. It's, I think 70 pages long. But there are I think we counted can't remember if we wrote it in here or not. I think there are like 50 cash flow tips in this thing. So how to be a cash flow pro, check that out. But a couple of quick ones I can give you that are important in helping shorten that payable receivable cycle. And it's around invoicing and these are what I was talking about earlier, things that you could implement probably not going to cost you anything or very little.


And one is you bill immediately. I know it sounds silly, but a lot of people, a lot of business owners, it's dreadful. They don't like billing, that's pain in the butt. And so I've worked with business owners before where they do their invoicing once a week. So they may work on Sunday, Monday, Tuesday, Wednesday, Thursday, Friday, and then do their billing Saturday morning. Well, if they did work on Sunday or Monday, that's been how many days that have already lapsed that you haven't even invoiced them. And if you are a business that invoices net 30, you're waiting, they might pay you in 30 days.


If they're late, it might be even later. So you got to wait another 30 days. But now you've just added whatever, five days to the process by not billing immediately, invoicing immediately. And one of the ways to do that is to have an automated invoicing system. And it will cost you some money, but you can find them out there, these platforms that are very inexpensive, I mean, less than $50 a month to be able to invoice automatically, immediately. And then the other thing, the next thing I was going to mention is automate your invoicing.


Meaning that so if I do a job 10:00 in the morning on a Monday, when I go back out to my vehicle, let's say I'm a plumber and I go do a plumbing job at someone's house, when I get back out to the truck, I invoice them immediately. I might even invoice them while I'm in the kitchen. Because then if you do that, it's even better because you can invoice them immediately and you could say, hey, can you please check your phone to make sure you got that? And more than likely, what happens in that scenario, they'll pay you immediately while they have it pulled up. Yes, I got it. And while they already have it pulled up, they'll pay you. Boom, you just got paid.


Instead of waiting this extended period of time. The other thing that using a platform to do your invoicing does is you can have it set up to automatically send reminders. So again, if you do a net 30 and you're expecting to be paid within 30 days, you can set it up to send out automatically reminders throughout. If they haven't paid yet, it'll send out a reminder, let's say 15 days out. Hey, reminder, this is due on the 30th, it's the 15th.


And then again, you can send it out as often as you'd like. Try not to be a nuisance, but you could make them a little more frequent as you get closer to 30 days. And then the other thing I like to do that will do a massive thing for you is if you're 30 days on day 35 ish. So give them a few days, right, maybe they mailed it, got stuck in the mail. That happens especially nowadays. But by day 35 or so, you should have received your payment.


Hopefully you received it much earlier, but have someone on your team that every day they go out and any invoice that is 35 days gets a call. And it's just a phone call. And it doesn't have to be heavy handed or anything, it's just, hey, this is Ken, I'm calling from Ken's Plumbing. We just want to make sure you got your invoice. We were looking for payment on that soon. If you want, if it's convenient for you, I can actually take payment right now and you could get the payment right over the phone. Right then they might say, oh yeah, we sent the check, or it's in our accounts payroll department, or something like that. Nonetheless, with the reminders and then a phone call, they know you're serious about your accounts receivable.


And squeaky wheel gets the oil, as they say. I talk about this all the time is getting to the top of the pay pile, pile. The end of the month, you get a business, especially in these uncertain economic times, they've got $5,000 of invoices to pay and they've got $3,000 in the bank account. They got to prioritize their invoices. Who am I going to pay? Who's going to have to wait? If you're the squeaky wheel, if you're the one sending the reminders, if you're the one they know they're going to get a phone call 35 days in, you're going to get paid before the company that does nothing sends no reminders, doesn't say anything doesn't really care.


So that is extremely important. The one other thing on the payable side that I'll mention, it's the flip of that, right? So if you get an invoice, that's a net 30. Unless you're going to pay it early and you can afford to on your cash flow for a discount, unless you're going to do that, there is no need to pay that invoice early. And that's not nefarious. That's not the bad business. Someone sends you something and says, this is due 30 days out, say, on the 30th.


If you paid them on the 29th, you've paid within the terms that they've asked. That's not bad. A lot of people have criticized in the past and say, oh, my gosh, you should pay right away. No, you shouldn't. Absolutely not. People don't do that for you either. It's part of business. That's why you do a net 30 invoice. Otherwise it's due immediately, right? So that's another thing you can do to shorten that payable. Receivable cycle.


We're going to hit another break here, and then the last segment, we're going to talk about budgeting and pricing.


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All right, welcome back to the show. All right, again, talking about the three pillars of financial success cash flow, budgeting, pricing. We've talked about cash flow. You might say we're two thirds of the way through the show, and you've only gotten through one. Well, cash flow is the most important one. I close every show. Cash flow is king. If you don't have cash, you don't have business, right? It is the most important one.


So I don't feel bad that I've spent a lot of time on that one. It's a very important one. Budgeting and pricing. Another shameless plug. My second book pathway to profits. I think there's two chapters in here on cash flow, and then there's a really long chapter on budgeting, and I know there's another chapter as well on pricing. So critically important. If you want to dive into it a little bit more, you can check out Pathway Profits. You can go to our YouTube channel. We've got a bunch of videos out there. I think we even have like playlists for cash flow videos, for pricing videos, budgeting videos, et cetera. But budgeting so why is that important? Budgeting, as they say, what you measure is what moves, what you monitor is what moves and what improves, right?


And budgeting is by far I got a lot of experience check the gray hair here. I got the credibility. As far as the experience goes, budgeting is the best way to measure your financial results. Without a budget, you're kind of flying blind. And one of the things I want to clear up is a lot of people I think, are fearful of the word budget because they think of budget in the same way they think about the word diet, right? If I tell you you need to go on a diet, the first thing you think of?


Again, the extreme. I got to eat salads and drink water all the time. No. When I was Powerlifting, I would have a diet that was to gain weight. So I was eating my butt off trying to gain a bunch of weight. Diet is just a controlled plan of what you're eating and then you make the plan based on what your goal is. So a budget could be a growth budget to where you're not pinching pennies everywhere. I mean, you're not spending frivolously either, but you're not pinching pennies, you're trying to grow the business.


And so a budget is not just like a diet. It's not just like shrink and shrivel. That's not it at all. It's just measuring what you do. So a couple of things that are really important, the way I build a budget, and again, I got to kind of run through this, so I make sure we get through the pricing stuff as well. But I start with a revenue budget. Start with what you want to have for the budget for the year. What is your goal for sales, for revenue for that year?


From there you can look at your historical percentages for your cost of goods sold section. So the things that are driven by sales. So when you sell a widget, you know that that costs you $2 of raw materials and $3 of labor and whatever. You can do those percentages and have your cost of goods sold be a formula that drives right off of whatever the revenue you put in for each of the twelve months. And then from colleagues you go down to the admin section and the expenses. An admin section, what I would strongly encourage you to do an admin section is things like things that are not variable or not as variable and they don't flow exactly with sales. So it could be the rent of your office or your building, it could be insurance, it could be marketing.


Kind of fits in that role as well, that realm as well. But I suggest on the admin side. Use a zero based approach. That means you start with zero. I'm going to assume we're going to spend $0 on overhead, on admin expenses. Prove to me what we need to spend. Now what you can do is you can go back and look at last year. What do we spend last year? Do we need to spend that much? That's kind of the zero based approach.


We spent ten grand on this last year. I want to spend zero. Prove to me we need to be something more than zero. Is it ten, is it five, is it 20? Right? It depends what the goals for that year are. So that's another very important thing to do is use that zero based approach on the admin or overhead expenses. The other thing that's extremely important is to add cyclicality seasonality to your budget. Don't just straight line it. Don't say I want a million to a revenue, I'm going to put $100,000 in each month.


Almost no business is that straightforward. There's always a little bit of cyclicality or seasonality to the business. Make sure that you reflect that on the revenue side and then again, that's going to drive down to your cost of goods sold, which is variable based on your revenue like we just talked about. So that's another thing that's critically important. You got to have the cyclicality in there, the seasonality in there to make sure that as you go through the year, you understand where you're at based on where you should be and not just on a straight line approach.


So that's budgeting, I know I ran through that really fast, but again, you could check out more in Pathway to Profits or our YouTube channel got the budgeting playlist or whatever they call it. We've got just a little 4 minutes left here, so I want to make sure I get through pricing. Pricing is the third pillar. Why is pricing important? Well, the first thing I'll say, other than the obvious, right?


A lot of business have what I call and many of you heard me probably say this, for the silent business killer. And that is a product or service that you offer and you sell. That is at best break even, but oftentimes actually loses you money. So for every time you sell that product or service, you're actually losing money. I call it the silent business killer because of course you wouldn't do that on purpose.


Almost every business that I've ever worked with has a silent business killer, or more than one, meaning that they're unknowingly. It's costing them $100 to create that widget and sell it. And they're selling the widget for $80. So literally losing $20 for everyone you sell. And sometimes what that silent business killer can really kind of mess with your head a little bit because it's not intuitive at all.


Because in that scenario, again, if you're losing $20, you're selling something for $80, but it. Costs you 20. And because you're priced like that, you're probably priced below market, right, your competitors. So you're probably going to sell a lot of them. So all of a sudden, you see sales going up. You see revenue going up. Well, man, I'm killing it. But every one of those you sell, you're actually losing money.


So sales are going up, and your net income is going in the crapper. It's going down. Wait, if sales go up, shouldn't net income go up? Well, that's intuitively what you would think, but in this scenario, it's not. The higher this goes, the lower this is going to go. And you're driving it in the opposite direction. Critically, critically important. I've got examples I wanted to talk through, but I think we're going to run out of time here. But a couple of things I wanted to mention that are really important.


People talk about gross profit. People talk about net profit. And this directly ties into pricing. Gross profit. Okay, fine. Okay. You got to do it. You got to take a look at it, right? There's some meaning to it, but it has maybe a fifth of meaning. Meaning that net is net is what ends up in your pocket after everything, right? And so that's what's really important in regards to pricing, because a lot of people price off of gross profit. Hey, I want to get my gross margin, which is just gross profit divided by your sales or your revenue.


So they go, Man, I want to hit 60%. Well, they may hit 60% on a gross profit, but then their overhead expenses, like we were talking about with budgeting, eat all that up and then some. So maybe they're 65%. So at the end of the day, you might have a 60% gross margin, but you're negative 5% net, you're losing money. Right? Critically important in getting that, all right? And make sure your pricing has all aspects of your business. There's another thing that I see mistakes made on the pricing side is people don't put all of them into it. Again, I've got examples. I was going to give real life examples with clients that I wouldn't name who it was, but I've run into this scenario where they didn't price things correctly and just absolutely was really crushing their business until we got it fixed. And then when you do fix it, that scenario I mentioned where sales are going up, but net income is going lower and lower.


When you fix that, make a couple of tweaks, it drastically swings things in the other direction, like almost overnight. Think about it if you did that. And just real quick, I wrote these down just so I didn't mess up the numbers talking through it. But you could literally, if you get your pricing right and you tweak it and your pricing is off right now, meaning your margins, I always talk about NYM mind your margins, right? You guys probably have heard me say that before.


You could have less sales, less revenue and make more money, have a higher net income. Mr. Betas. That sounds crazy. Well, if you have 10 million in sales at a 25% net margin, you're going to make two and a half million bucks. Right? 25% times 10 million. If you had 9 million in sales, 10% less. Right. A million dollars less sales. But your margins, net margins were 30%. Sounds like a lot. It's not. To make that change to 25 to 30, not a huge thing.


Your net income is 2.7 million. You make $200,000 more on a million dollars less of revenue. That's how impactful pricing is. All right, guys, again, pricing pathway to profits in there too. Running out of time. I know I ran through the last two pretty quick, but hopefully it was valuable. As always, thanks for watching. Thanks for listening. Have a great rest of your week. Hope you guys got something out of this one and guess that's about it for this one. Don't forget, as always, you know what I'm going to say. Cash flows. K.


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