Cashflow Forecasting

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Join Virtual CFO, Jeff Meziere and Cory Miller as they discuss a framework for forecasting your cashflow.

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Machine Transcript – Cashflow Forecasting

Cory Miller  00:02

Everyone, welcome back to another business value academy.com. webinar. I’m really excited about the topic today. My name is Cory Miller co founder BVA with my friend and partner, CPA, virtual CFO, whatever, I don’t know how many titles I need to put here, but Jeff Meziere, the one and only and we’re gonna be talking about a really important thing as we were discussing this topic and and working up toward it preparing for it. I think I started having a little heartburn, Jeff, because I was like cash flow forecasting. I remember the days when it just didn’t feel good to be be real tight on margins and cash particularly.

 

Jeff Meziere  00:41

Certainly, certainly. Yeah, I think even in my own business career, there’s times where I wish that I would have kept a little bit better finger on the pulse on cash and cash flow and projecting out and looking towards the future and, you know, predicting that cash flow, or at least better predicting it.

 

Cory Miller  00:59

Yeah, we put this on the map, because we get in side of the business value Academy, we get this question frequently about cash flow. I mean, you think about it, it’s the oxygen of businesses cash, and being able to pay bills and things like that. Specifically, when you have a business that has some ups and downs, namely, like agency top work, professional services, often has the ups and downs. And so we get the question, how I better understand my cash flow, how do I better think about it. And I just want to tell you a quick story. You know, it was our third year in business. And we had not been looking at historicals. And some of the things that we’re going to talk about today. And we were rolling into summer, and we hired like five people. And later on, we’ve realized historically with our business, the low tide that we called, it was our summer months. It was bookended by basically Memorial Day to Labor Day for the US, those of you in the US. And so right in our low tide, right after taxes and all that kind of stuff. We hired five people, new people to our bottom line. Oh, and we started a nonprofit. So you know, in retrospect, maybe not the best time to do all that that was a summer sweating a little bit, we were fine, and all that. But I just didn’t like going that close to the margin. And so when I say I had a little heartburn, about even thinking about this is because I thought about all the times when it was razor thin. What I love is that it just Jeff and I have been talking it’s just Jeff’s thought and mindset and approach for all this specifically having someone like Jeff, who is an operator, who is an entrepreneur but has a very deep financial background and expertise and a financial mind and the analytical mind. And so I’m excited to talk about the subject today and want to share my personal like, hey, any entrepreneur, I think Jeff, that says they don’t have cashflow problems at some point is flat outline. This is my thought.

 

Jeff Meziere  03:02

Yeah, and I think the hopefully one of the big takeaways today is just trying to understand cash flow, but also kind of talking through what is the number of cash in the bank that makes you comfortable? Right. So I think we’re going to get into that topic later on later on during the conversation.

 

Cory Miller  03:19

So we have, we have a spreadsheet that Jeff did; I’m going to put the link in the chat here. If you have questions for Jeff or I please post those in the q&a button or the chat. And I’ll be watching that along the way. But I’m really excited. One, Jeff, really meticulously prepared this presentation to help us walk through this and also the worksheet which is really, really fabulous. So Alright, Jeff, you want to start kick us off?

 

Jeff Meziere  03:44

Yeah, just real quick, let’s start out with some objectives for the call, better understand how to calculate your breakeven, this is about just kind of really know where you stand and having that number in your head of how much revenue it would actually take to get to that breakeven point of what you need in order to sustain life. I know there’s a lot of people out there right now who are having a lot of anxiety. We’re in a, we’re in a very interesting world here with this COVID and pandemic and everything else that’s going on. And I know a lot of people are struggling and starting out with that goal of trying to understand how much revenue you need in order to be able to keep the doors open, I think is a is a major point that everyone should know. Secondly is know the stages of cash flow and where you stand. We’ll talk about that in a little bit greater detail here in a second. But that’s one of our outcomes for today. And then finally is just gained more confidence and understanding how to build your own cash flow forecast. How to think about cash, what impacts cash, some of the levers that you can do to expedite cash, or increase it. So we’re going to talk about all those things as we progress through the conversation today. So diving right in, let’s talk about breakeven. This is again how much sales must use have every month, and everyone is different, right? There’s all these costs that are going on in our organization; we can focus in on reducing costs and cutting labor. But at the end of the day, what does it take us to actually deliver on the sales that we have made? And so I think that we have to get through and understand a breakeven point. To that, to that end, I should we just go ahead and start by by sharing the calculator. I mean, this is kind of where we’re at, as far as breakeven calculator. So what I like to do is look at the last three months, right, I like to look at the last three months worth of financial performance in the organization to kind of get a better understanding of where we are in the current present day to know where what is my breakeven number. And so just, I’m going to kind of quickly run through this piece.

 

Cory Miller  05:49

Hey, Jeff, could you could you make that bigger on your monitor there?

 

Jeff Meziere  05:53

Yeah, certainly. How about bringing it full screen? Is that good?

 

Cory Miller  05:59

Full Screen? And then probably, if you can, the percentage up there. Just crank it up a couple notches? Nope. Go left? Yep, right there.

 

Jeff Meziere  06:11

Perfect. Good, or you want more?

 

Cory Miller  06:13

That’s good. Let me know if you can’t see that. In our that’s even better. Perfect. Right there. Okay, good, you bet.

 

Jeff Meziere  06:19

So again, cash flow breakeven, we’re looking at the last three months. So this is all of our incoming cash, outgoing cash, as far as revenue and expenses go. And I just took a quick snapshot of a random three month period of time here, and use some some just estimates, right dumped in some numbers, you’ve got sales revenue. So this spreadsheet will allow you inside of, you know, month one, month two, and month three, so the last three months there to calculate to get to what your totals are. Okay? So everything that is in white are the numbers that you would actually put in based upon your own p&l. And this starts off with and I’ve just kind of used an example here, subscription sales, project sales, or some sort of agency, you know, monthly retainer type things that are happening, and then other income. And you guys can update this spreadsheet, make a copy of it, use it for yourself, and add lines, as you know, necessary for your own p&l. But this is all of your cash revenue that is happening inside of your organization. That’s what we’re trying to get down to. And these should mimic your p&l, your profit and loss statement. So sales, we know what that is, I’m breaking this out into cost of sales, so that you can actually see what is the direct costs associated with delivering the product. I like to do that because I want to come down to gross profit. That gross profit number is a big big number, which means that every dollar that I generate in revenue, there is a percentage of costs that I have to spend in order to deliver that product. So we’ve got things inside of this cost of sales that are directly related with the product. Things like payment processing fees, we know that we don’t get 100% of every dollar, right. So if we’re, if we’re charging a credit card, or we’re taking credit card as payment, there’s a 2.75% that comes right off the top of every of every dollar that we make. You’ve got the direct labor people, those who are directly performing on product and service. And of course, the taxes and benefits that are associated with those individuals. You may even have some subcontractors or independent contractor outside people that you have within the organization that you are utilizing for development costs and other things that are happening there to perform on the direct revenue. Again, these are all just in cost of sales, and then any other, you know, technology, things that you have within the organization, right, that gets us down to total cost of sales and total gross profit. That is basically all of our cash receipts that we have coming in the door. And then we get down into the bottom end of a traditional p&l, that is our operating expenses. This is our selling and admin. This is what we pay ourselves as an owner is what we pay our marketing people. Other contractors that may be general administrative for customer support, things of that nature, rent, utilities, these are all pretty standard, but you might have individual line items that you want to add in here, feel free to update the spreadsheet should be pretty simple for you to be able to do that. You get your marketing agency fees, marketing ads, spend the direct amounts that you’re spending for Google ads, pay per click Facebook, that sort of thing. Your SEO, if you have an SEO company that you have as an outside consultant, or maybe accounting fees, things of that nature, these will all be in your operating expenses of general administrative kind of costs to come down to this profit and loss and again, we’re looking at one, two and three months to get to a to a total of those three months. Any questions, Cory or anything that I know sometimes I kind of glance over and run through.

 

Cory Miller  10:05

So did you share again, while we’re in the three months? breakeven? Yeah, I get two minutes in this?

 

Jeff Meziere  10:12

Well, one is we’re looking at a current a current day performance. And then looking back and looking at the history of the last three months kind of gives us an indication at least of averages, right, if I just looked at last month, that number would be different than it was if I looked at the last three months averages. So again, I’m just trying to be conservative and realistic, and take into account everything that’s happened in the current day. So when I, when I spend that by three months, I get a better indication of what my average breakeven point would be, if I’m looking at a cat from a cash flow perspective. So again, this is total incoming outgoing cash flow. And then I look at my three month breakeven. So in my scenario, when I dump in my p&l for the last three months, in this case, my number is $35,000. At least I now have a goal, I have a number that I’m looking towards of revenue that I need to generate in order to come to that breakeven point.

 

Cory Miller  11:09

And of course, your you didn’t three months to is like, you know, three months is a great baseline to start this conversation with, but you know, like month three is for you know, $4,000 more than the last month. And you know, doing it detailed wise, I can see why you had us do like a more detailed p&l on this because you go, Okay, what accounts for that $4,000 difference, because we don’t we want to make sure we’ve got, you know, when we’re thinking through our forecasting, but you set it up where you’re like, Okay, you can annotate, I guess, to the p&l and say, Alright, it was it was more month three in this particular thing, because we had, you know, a one time bonus, you know, that went out to the team or something like that. And the breakeven number, this average right here, I think, is just a is a number like a straw man kind of to say, all right, get somewhere, right? Set your thought on all this to

 

Jeff Meziere  12:02

Yeah, start with a goal, right? Like, am I am I in the ballpark for being able to break even right? Might is $25,000 a number? A lot of people, Cory, to be honest with you don’t even have this even range in mind, right? I think probably many people on the call might admit, I don’t know what my breakeven number is. I don’t know what number makes me comfortable as I’m progressing throughout the month, right? If I’m at the 15th of the month, think through that in this in this example that we use, I should be about 17,000. Right? 17 $18,000 worth of revenue by the 15th of the month. And if I’m not, then my trajectory is that I’m going to be burning through some cash by the end of the month.

 

Cory Miller  12:45

Thanks.

 

Jeff Meziere  12:46

You bet. So again, we looked at all those things, how to calculate breakeven. Now let’s look at the stages of, of cash flow. And what do those stages actually look like? First is the cash burn, that means that we are spending more cash than what we are taking in the neutral in the second position is is more of the breakeven point. That’s the one that we’re trying to get to at least making $1, right, we’ve built up the business and we’re trying to, to sustain life, then we go into this category of kind of the building of reserve, right. And that’s this kind of yellow that you might see as indication on the screen, that means that we are actually generating more cash than what we’re expending on an average in our current present day. And that’s the stage that we kind of want to focus on when we say what is the reserve that makes you feel good, and helps you sleep better at night? We should have a goal towards that. We’ll talk about that in a second. But this is just again, stages of cash flow. And then that fourth stage is more than investing stage right? Where am I spending my cash? What am I doing with it right after I’ve built up my reserve, and I’ve got that good solid savings account in the you know, rainy day fund if you want to, for better lack of a better description there. Once I’ve built that up, then what am I doing with my next dollar? Where can I spend that dollar to generate more revenue to make things more efficient inside of my process? Because sometimes spending money on technology and other things can actually long term produce better cost savings results? Right? So what am I doing with that excess cash flow? And that’s what this green stage. So I’m moving from a cash I’m sorry, on the screen here. I’m moving from a cash burn into a breakeven into building a reserve and then finally into this final stage of investment and risk taking.

 

Cory Miller  14:43

And I I like to the green because you could say okay, we’ve been needing to hire x person for x role, excuse me for a while when we can consistently You know, my thoughts always go to when I’m in the green stages. Okay, what things do I want to tackle next new product services. All that kind of stuff or do have a role really been needing to need to pull in and feel good that I’ve got a consistent amount. But we all want to be past the red for sure. Jeff art asked the categories on your p&l back there, the worksheet closely mirror the IRS deduction forms are.

 

Jeff Meziere  15:20

Yeah, I would say that they pretty much mirror the IRS deduction forms, again, what we spend in cash, and what we report to the IRS as far as tax deduction. Cory, this is this is realistic cash in cash out. So we’re not trying to get to a number of what we report to the IRS. There’s a lot of things in there that are depreciation, amortization, right things of that nature are non cash events, we’re trying to get cash flow of cash in cash out. So it typically in a in an agency world and a professional services or WordPress agency Firm A world, I see that this is a pretty good indication. In the in the p&l that I’ve that I’ve put together here, pretty much mimic what I’ve seen by most people in working with their accountants, whether that be you know, bench or QuickBooks or zero or all the other ones that I’ve seen out there as far as software and technology, we’re taking in revenue in and all of the direct costs and all of the expenditures that we have in the business to get to a net cash accumulation or a net cash burn.

 

Cory Miller  16:29

And I’ll give them disclaimer to you know, Jeff’s isn’t CPA but trade route, he’s not giving it specific financial advice. That’s why you want to go to your account your CPA, for sure. On those type of things. Yeah, good, good, legit. cash in cash out what’s left over is in red, yellow, green stage.

 

Jeff Meziere  16:48

Okay. I mean, you should, as the question is, does it does it relate? Yeah, these are all line items of expense that you should see on your tax return as well as what you’re actually reporting. Those all are things that we’re putting inside of our p&l. I can’t think of anything really off the top of my head that I’m spending on that I’m that I’m not able to potentially deduct. But again, talk with your accountant about that, make sure that you got all the line items in there that makes sense from a cash flow perspective. I’m happy to answer any specific questions that anybody might have today as well. Okay, let’s let’s move into this quick conversation of what is a reserve goal? Cory, how did you think about reserve what helped you sleep at night? Was there a number in your head, I know that I can share from experience that I have had the moment as an entrepreneur of having $50,000 in the bank on Wednesday. And knowing that I had $120,000 worth of payroll to make on Friday, and hoping and praying that I was able to come up with that number by Friday, and that we had some more deposits come through. I’ve lived that world. And so there was definitely a number in my head of that three months worth of operating expenditures that that I had that we counted tried to work towards, once we started in at a point in time. But how did you think about it? What What made you comfortable when you were in business?

 

Cory Miller  18:19

When it came to finances, I’m extremely conservative, I would say specifically in business. Now, I guess some of the little bets we take happen to be expensive at times. But I wanted to be in the green always. And I wanted to be flush with cash. So when it came to the time, when we were acquired, we had a very, very significant amount of cash just sitting in the bank because I just wanted a war chest. If something happened, like I no one could have predicted. I don’t think you know, what we’re going through right now with a pandemic, there’s, you know, hundred year flood type thoughts, you know, but, but I wanted to have enough so that if something significant happened in our business that I had cash flow to, I had, I didn’t have cash flow, it wasn’t about that it was time, I want a time to figure it out. And so I would say we had about five months of cash flow in the bank and cash. When we left the business and for the greater part of the business. We kept it. We kept a lot of retained earnings in the business. Because I just there’s a book I think the said, says only the paranoid survive. And I have an entrepreneur friend said that because I said, you know, I’m just, I’m just paranoid thinking about these things. And he guess he is Yeah, it’s part of it, you know, so I was probably paranoid about something would like the dam breaks and some bust when all intensive purposes I like to prepare for that financially, and then act as if, like, let’s keep going forward and push forward. So that’s like having a good cash. Cash reserve.

 

Jeff Meziere  19:52

Yeah, I think that everybody’s risk tolerance is different. Right. And I think even personally, as I start to answer that question, myself, what I would have answered before as a comfortable number, six months ago, well, let’s say 10 months ago, is different than maybe how I would answer the question today, like my personal risk tolerance might be even less than it was before. In in, in knowing now that actually the unthinkable of a worldwide pandemic is a possibility and a reality. I’ve not lived through that before, personally, right? So we’ve seen some financial down markets, my experience was not necessarily in an industry that was was greatly affected by that. And so as I think through a reserve goal, my current risk tolerance would actually be a little bit different in that regard. So if I was, you know, needing one or two or three months, because I thought that we were on a on a good trajectory. Today, I might say, well, maybe that number is three, four or five, six months worth of cash reserve.

 

Cory Miller  20:55

Yeah, I like that you put, you know, when your mindset is, what is your risk tolerance? What is your market, every business is different? You know, Jeff, you had a medical supply business, you had physical goods that you paid for often, sometimes sitting there collecting dust. You know, my grandfather had a motorcycle dealership where he had floorplan, you know, worried about I didn’t have that had virtual inventory. But I did have very high paid salary, people that wanted their checks every two weeks to, but I like that, what’s your risk tolerance? And then what I’d probably didn’t do and all this conversation, which is why this is such a compelling conversation to me is I didn’t think back and go, what was my three month burn average? You know, and then go, Okay, do I need five months in? You know, what’s that look like?

 

Jeff Meziere  21:40

Yeah, certainly. Well, listen, let’s jump right into the good stuff for today. This is the forecasting and budget, right? So I’m a big proponent of looking forward, utilizing the history of what’s happened in the past, and actually being able to better predict the future. So there’s a lot of details in this. It can get a little bit complicated at times, as we work through this. So as you have questions, if I’m not saying something in in greater detail, Korea, hope you wave the flag or anybody else asks a question says pause and give me a little bit deeper dive into into what you’re saying there.

 

Cory Miller  22:14

So arts are just said he goes out, people are missing out that aren’t here and out, he’s always wanted to be in the green too. And, but generally underfunded. And that’s the, that’s the life of the entrepreneur, right? are just a scrappy bunch of people that do good in the world, and don’t have the luxury of having, you know, a billion dollars sitting in cash flow in the bank.

 

Jeff Meziere  22:34

I think my only takeaway, or at least my only bit of advice there is that sometimes we are what I’ll call an even myself, right? You know, how competitive I am Cory, like, I’m sometimes arrogant in my ability to think that I can always overcome. And in this model, when we’re talking about cash, I cannot stress enough how important it is to be conservative in your approach. Like, do you really think that just because you did it last month that you’re absolutely going to be able to do it again this month? Or is there some level of Okay, I know that I’ve had some people cancel on my service, and there’s a risk that that actually happens, right? So conservatism, I think, when you’re when you’re thinking through cash flow, to be better prepared. If I’m going to if I’m going to fund some of these, these cash burns, and I have to go to a bank and ask for money. I want to do that before I need money. Not right when I need money, right? It’s gonna cost me more.

 

Cory Miller  23:32

Well, you know, gosh, there’s so much here. I don’t want to last too much. But, you know, really, I was just contemplating for a second my exit Jeff. And I was like, it really came down to this, this conversation. I looked at the market dynamics, I looked at her customers, I looked at her team, and something you just said just kind of triggered me there is that? Can we figure it out? You know, can we get there? Can we always survive? I mean, it’s always about surviving, in small business, specifically. And it was not necessarily cashflow forecasting, but it was potentially seeing some big moves in the market. In our competition, particularly that I thought, Oh, man, this could really squeeze this out. And I’m not sure if we were always, you know, bootstrapped company, not a startup venture capital funding company. So, alright, forecasting budget better way to predict the future, like, all right,

 

Jeff Meziere  24:23

so let’s just give you some actionable items. In order to be able to come to a better forecast, the easiest way to do that is to get copies of the last 12 months of your financial statements, right. And we’re basically going to take a snapshot today in our approach to say, look at the last 12 months, and you tell me as you move forward, what it How confident are you in your ability to be able to replicate exactly what you did last year, and then make any known changes and updates based upon current day activity, right. So if revenue is not trending, and we’ll talk about some of this If there’s costs in there that you know are going to increase, let’s go ahead and update those, we’re going to take a look at the exact last 12 months. And we’re going to hope, right that we can replicate that and or make adjustments inside of our cash flow model. So we built this spreadsheet in a way. And I’m just going to go directly to the spreadsheet here real quick. And it’s on the second tab down here at the bottom, if you can see this. So the second tab is actually the 12 month forecast. And in this forecast, again, we come in and we say, Here’s month one, and we break down just like we did on our three month P&L, we were looking at that breakeven, this mimics exactly right. So month one should come down of revenue, 30,000 cost of sales 16 for some gross profit, right, and then we end up with all of our overhead costs that are happening inside of operating expenses to come down to and as you note, in my example, of course, I’m I’m the doom and gloom and saying let’s let’s let’s take care of some people who are struggling right now. We’re losing $9,368 in that first month. Okay, so that is month one. And we’re going to do that we want to see, we want to see the trends all through each of the 12 months that happened, right. So you can think of this in month one is January through December, or however you want to look at that. But again, January through December is kind of how I have this setup of MONTH one through 12. Do I Am I clear, Cory on the kind of framework and model here for the conversation.

 

Cory Miller  26:30

Yeah, we’re forecasting out all of our revenue and our expenses. What I wanted to say just to this is I was the guy and Jeff knows this, that that always loads to have these type of conversations. But they’re so critical. I didn’t have enough to Art’s point, by the way. And because I always thought Jeff, I was like, these are kind of mostly theoretical, but at least doing this you can see what particularly when you scroll down for a second, I looked at some of my expenses, and I go, Okay, I got down to this payroll wages, okay. And I said, Oh, month six would be you know, June, and I go, you know, Bob’s gonna be due for probably a race, we’re gonna have this coming out. And I could better accurately like, don’t just go by whim, which is what I did for a lot of it. But go by, like a thoughtful, planned out, measure, press, you can always come back. And I’m sure you’re going to get to this Jeff. But come back and match this up and see how our projections work. But this is, this is fine by instrument versus just punch in the clouds,

 

Jeff Meziere  27:37

for sure. For sure. Once you have your actual monthly p&l is put in here for the last 12 months, we’re now going to go backwards and basically look at and say, Alright, starting back in that first month of January, right that month, 1am I going to be able to replicate or what has happened in the business that I need to update that month one, right. So January of 2020. As I look forward to January of 2021, What’s changed? What do I need to what do i think is going to happen? What do I know has already happened? And let’s anticipate some of those changes that you’re talking about. Right? We’ll get into some of the more the greater finer details of that in just a second cost to consider. That’s where we kind of go first. You mentioned the headcount increases and decreases raises that have happened throughout the year. You and I were talking yesterday about insurance premium increase, right, that’s on the Employee Benefit side, as well as on the business insurance side,

 

Cory Miller  28:40

We went Hallelujah, if it was 15%, increase it.

 

Jeff Meziere  28:45

And you already know, and you already know that you can already anticipate that that’s going to happen, right. So in your in your projection, as you look forward, and you know that you spent $3,000. Last year in insurance, you know, it’s probably going to be 3500, this year, right at least. And so again, we can start building that into into our model. The last point there, I think that we had was just infrastructure increases, if you know that you’re going to be spending money on hosting costs or new software, equipment, upgrades, whatever the case may be, we want to build that into the model. Okay. So once we start here with our framework of the last 12 months, we’re just going to kind of go through line by line, that’s what I’m going to encourage you to do on your cost of sales, as well as each individual line of expenditure, just start making those updates. And I’ll show you a couple things in here that I actually built. So this is like January 12 months ago, all the way up through and on the right side of the screen is like that December number. So as I’m looking forward to the next January. Notice that my costs here on payment processing fees from 827 have crept up to now 1100 Right, well, that’s not going to mimic which we’re not going to start back over 800 we don’t To start back at 800, it’s now at 1100. Right? So as revenue has increased, the cost of that payment processing is also going to increase along in line with it. Right? So we want to start back over here. And again, make those adjustments for this line item in particular, around that. Does that make sense? what I’m saying? Good. Okay. So we’re going to do that line by line by line and make any adjustments that we know. And again, I think that I’ve also used this. So here’s another good one inside of operating expenses. Notice that I was plugging along at about 80 $500 a month in in selling an admin wages. And then guess what I brought somebody else on over here, right? In this last quarter of the year, it’s now 90 $500. So when I go to change my model, and I start looking through what my cash outlook is going to be, I need to update this, this now has to be 90 $500. Right here, right? Because now, this month, one moving forward, is actually going to we know that we’re having at least 9500, from exactly what we had done in the that month 12, which is the most recent month that we have available to us. Does that makes sense? And again, as Cory had mentioned, do I know that I’m gonna have raises is my 8500 actually going to go up by 3% 5%? What am I historically done. So we want to make those changes inside of this model as well, so that we can start looking at the flow and trends of what we can expect for cash flow moving forward. Rent as rent gone up. Again, you mentioned this insurance deal. So insurance last January, we paid $5,250, we might know what that is for of business expenses, maybe some errors and admission, general liability, whatever. I’ve never known insurance companies to give me a premium cut, right? It’s always it always goes up and always has it probably always will. And that number is probably going to be more this year, as we move forward. Any other thoughts in there as far as things that are happening?

 

Cory Miller  32:08

Now? I I just thought this was a good exercise even like do it for your cash flow forecasting, but also do because you’re liable to find things you go, oh, man, our lease is coming up or good grief, you know, I got to pay attention to this, you know, AWS bill, or hosting bill or something like that, or Garcia doesn’t cashflow very well throughout. I’m paying, you know, a big lump sum and April and needs to be kind of spread out. But yeah, I think this is this is what you do to on a monthly basis with virtual CFO and why value the server so much is because it for me it’s discipline and time and space set aside to review things like this. So I think a byproduct of this is better planning,

 

Jeff Meziere  32:54

for sure. And it’s an indication of you know, when you go through and you’re looking at this, I think you will probably uncover and ask yourself the question of why or at least be prepared to have those conversations. Look at these travel costs that we threw in there in January, and then again in July or August, whatever that is out here. Am I going to let my team go to a conference this year? Or is my cash position currently in my business in a position where we’re not going to do that conference again, this year, right, we need to find different, more unique opportunities for training and learning. And we’re not going to let people travel all over the place, or travel is just simply down? Well, I just gained back 30 $200 worth of expenses that I’m not going to spend on travel this year. And I can divert those funds and reallocate those to something else that can help us make money. Notice the when I look at history, and I start to move forward, notice that last year, it looks like I made a decision to hire like an I used to use this example, like I hired an SEO agency, right? In my model. Well, that was halfway through. Well, now that I’m going to continue that I got to come back and update this model. So I still now have $500 a month but is now going to continue in that month, one two and three this year that that I didn’t have in January of last year. So I’m really just making an update to prior years, monthly p&l in order to be able to generate a an estimate for my cash flow.

 

Cory Miller  34:25

It’s good stuff. All right now we’re going to talk about revenue. My favorite topic,

 

Jeff Meziere  34:29

your favorite topic, right? So history trends. You talked about the the seasonality to income. We also know some of these things around monthly subscriptions, right and what is our current active subscription numbers looking like? If you’re not if you’re in a subscription based company and you don’t have a really good pulse on your MRR, your monthly recurring revenue and everything in that funnel that affects it. have, you know beginning MRR? The adds to it as far as new subscriptions, the upgrades that you have the downgrades that you have, and then also your cancellations to arrive at your ending MRR, those are things that you would definitely want to keep a finger on the pulse, right? Like, why are people not renewing their subscriptions? In a project base of a traditional professional services or WordPress agency firm? This is our sales pipeline, what is happening inside of there? What are we doing? Are we tracking anything, because there is a percentage, if we look at it historically, of the number of leads that we have convert to some percentage of revenue at some point in time in the future, I love how I keep using this, some and some. If you look at your history, you should be able to know these numbers, right. And look at that sales pipeline. When you move from prospect into a real opportunity. There’s a percentage of those what we consider real opportunities. Once we define that, there’s a greater percentage of those that should convert to customers. At some point in time, maybe it takes us 90 days to convert that maybe it takes us six months, some people are telling me that they’re that their sales cycle is a year and a half, you can still predict what that looks like if you’re looking at your sales funnel. And you move that from from a opportunity into a proposal. Once that proposal goes out the door. We know how many of those were able to convert or historically, we should give a look at the the percentage that we’re able to convert in the conversion rate, and be able to understand what is our average sale? What is the number in the pipeline, and again, start to better predict what that revenue looks like. And again, we’re just going to do that right here inside of this sales numbers. Right? So how can we plug in? This is not a detailed calculation that’s going to allow us to plug into all those percentages. That’s something that you would work with your accountant or CFO or Yes, we talked about this in a virtual CFO offering all the time is how can I build that use that sales pipeline, and the analysis of my monthly recurring revenue to better predict what next month or three months out or six months out may look like. And then you just perfect that model as you move through. But you know what your subscription sales are. And if they have increased here throughout the year, and is now moving to $12,000 a month of baseline recurring revenue? Well, again, I’d want to update my model. Right now. I’m at $12,000. So my $12,000 number, and again, that just affects the calculation. In my example, here on project sales, or or the direct projects that we’re working on, there’s looks like there’s some sort of seasonality to this, maybe in months, March and April, the third and fourth month there, I actually have a spike. And it’s a known spike. And I can anticipate what that looks like. But breaking down that project sales and thinking through where I got that revenue. And is that person, am I going to be able to sell the same type project to this customer again this year, or was that a was that a once in a lifetime deal, that’s not going to happen again, that I get a big increase or a big bump last year of 20,000 that I might not have had in the in the that I might not have going forward. Right. So again, I just want a month by month, go in and evaluate my numbers so that I can start looking forward to questions.

 

Cory Miller  38:30

Now, just want to make sure we have a little time to and I don’t want to have to blow past some things. But we’ve got about 20 minutes left. If you have questions for Jeff, post them in the q&a button, and I’ll filter those out for Mr. Meziere.

 

Jeff Meziere  38:47

When we talk about conservatism, I think when we start thinking about revenue and the percentages of of our ability to be able to replicate our last 12 months, I think we have to think about some of these external factors, right, like what’s going on with our not just our ability to be able to produce revenue, but what’s happening and how is like these things like the pandemic affecting our clients, our competitors, the industry in general, right. Economic, we’ve got a we’re in a political season. And I’m definitely not getting on a political soapbox today. Not having that conversation. This is strictly cash flow. But again, we’re in a political season, and how is the economy? What How does, how did those things affect what is going to happen with our potential revenue and our ability to be able to replicate last year.

 

Cory Miller  39:35

But that’s still an external thing. So we know regardless of your political affiliation, election years, everybody pulls back on on their budget. So we’re not only in election year, we’re also in the pandemic. But next year, we’ll start to think through what that looks like, play play out all the scenarios. I mean, this is what I like to do is fast forward the movie and say, Okay, what things could affect because I think this cast conversation now Jeff can be totally a great planning conversational spark tool to really go Okay, Kent, one of those months he had a low month and Okay, what’s going on, seasonally, contextually, within our business, the market? All that kind of stuff? Can we plan a specific thing? One thing we did for that was, we knew in our lowest months in the summer, we planned big version releases of our software, specifically to try to get that up a little bit. Now, was that right or wrong? It was a good test for us was like, let’s see if we can generate some income. Well, we kind of found through through just data. It’s just everybody takes vacations in the summer. And that was just a low points, we start podcast going into more cash going into those lean months.

 

Jeff Meziere  40:45

You know, the one thing that we talked about a lot Korean sub the the BVA, is gaining an edge on our competitors, right? How do we gain an edge on our competition? And if the if the people who are on this call were to spend even 234 hours in evaluating their last 12 months financials and actually start to look forward and develop a plan, you were in a better position than probably 90% of your competitors who are absolutely not doing this right now?

 

Cory Miller  41:11

Hey, it’s got a really good question. And I would say yes, this already, by the way, do you use an additional spreadsheet to project revenue item by item or client by client?

 

Jeff Meziere  41:20

Ah. I am a spreadsheet King? Cory, Cory will tell you. Yes, absolutely. You should have a separate spreadsheet that says, if I’ve got a projection of $12,000 a month in subscription sales, how did I come to that number? Right? That’s a whole detailed like a financial analyst. That is, I’m looking at last year, I’m knowing kind of what my bear numbers are. I know what my history is my trends within my subscription sales, my recurring revenue, I know where I’m generating my my project sales from the things that I’m working for, and bidding out proposing to prospects, how am I generating? And how am I estimating the 20,000? If I can’t prove that number? How do I know that next month in this month one of my projection? How am I coming up with that number, we should have some methodology some way to calculate and anticipate what that revenue number looks like.

 

Cory Miller  42:18

So I, again, back to the Paranoid but I mean, you know, when you start looking at, let’s say, as an agency, month, seven, eight to nine, and what you’re talking about here, Jeff, on the spreadsheet, I go those alone months, I would go by like if you’re gonna depend on a client coming through a month, any month in the future? Definitely. I go client by client Strengths, Weaknesses, Opportunities, and Threats, this good old fashioned SWOT analysis on those. And really, I think that’s an excellent question, specifically an agency question art, because, like, I want to nail that stuff down. And the whole point of forecasting and planning is to remove obstacles and have something to aim at. So I love that idea is going by, you know, what do you think though, if you’re an agency, and you think you’re trying to project your, you know, income out, what types of clients could you potentially think would come in at this time, historically, looking back past even what you’ve done here in this webinar, and say, who are my clients? What can I expect from them? How can I do promotions, or lean in on that kind of stuff, we have a member that has the book at what is it like a year and like, they, they their cell cycles really long, but constant stay with them very long. Now, every business again, is different. But I would definitely dive into all of that for me, because that’s how I if I, as an entrepreneur, when you don’t have confidence, that’s the worst thing in the world. And we deal with every single day uncertainty. And what we’re trying to show here, and just shown here, is to get a little bit more certainty to have a plan where you’re not just all just in there in shock that you go, Okay, this mismatched projection, but I’m going to work because I know my numbers. I know my clients, I know my business.

 

Jeff Meziere  44:05

So the first thing that pops off the page to me from a financial mind is just look at this. I’ve got to get past months one and two, somehow, in my model. Once I looked at this, I had to figure out how do I either boost up revenue or decrease these decrease costs in these first two months of the year, in order to make it to what is a couple really good healthy months, right in March and April? So my big thing is where do we devote our time, effort energy? I can I can, if I’m able to squeeze more revenue out of March and April, that helps me then sustain some of these months where revenue and cash flow is a little bit more strict, right. And so again, I’m just thinking through, it’s better planning, and you’re at least armed with some ability to be able to start making some decisions. Can I move any of these expenses? I mentioned the travel thing earlier. Well, if I can take 3500 As off of this $9,000 loss and just delay that travel to March or April, I’m feeling a lot more confident already in my ability to be able to sustain life. So taking into account all of those analytical things, then I can start making some maybe better decisions, instead of allowing the tail to wag the dog, like, Oh, my marketing department came to me and says, I got to write this check for $10,000. And I’m like, man, if I could have just delayed that, that project that they’re working on, by 30 days, we’d have better cash flow, right? But now I’ve got more stress, because I didn’t communicate that to my team.

 

Jeff Meziere  45:37

One of the things that we talk about all the time in the BVA is levers like, how can I increase my cash flow? And some of these are so broad that I don’t want to dumb it down and talk condescendingly right. Like, we know, if we increase price that that will in that should increase cash flow. Now, there’s a lot to that, right, you increase price and next thing, you know, you have a lot more cancellations. So before you just go out and say, I’m going to go, you know, increase my price. Don’t say the Jeff Maziar told you to do that. Because that’s not what I’m saying. But price is a is an indication, right? It is one way to that impacts cash, new sales, right? So when I gain new customers, when I upsell additional services to my existing clients, and am I cross selling, of the other things that I offer, or product or service offerings to my existing client base, sometimes that’s the easiest way is I found in my past is that sometimes clients don’t know everything that we do, right? They’re like, Oh, I had no idea you even did that? Well, they already trust us on one thing that we do, they had no idea that we also do website development, right? I didn’t know that we did that. So now that we just make them aware, sometimes, the uplift there of upselling to our existing clients, cutting costs and reducing costs or deferring costs, all of those things, obviously will impact cash flow. And then the big one is time to collect an AR, right? Sometimes offering our customers a small discount, no different than our payment processing fees. 3% 5%. allowing people to pay up front in a different way, can sometimes greatly improve our cash flow, especially when I see people who are days outstanding, which is the time that it takes to collect my invoice from the time that I invoice it to the time I get cash, sometimes can be 90 120 180 days, right? We want to know what that average timeframe is to, to collect. Because when we produce the income today, we’re invoicing it today, but we might not get paid on that for another six months.

 

Cory Miller  47:45

So it’s a good note is how are you getting paid? In Review? And that, you know, as you’re looking at your financials and seen, gosh, these cars paid 30 days, you know, after all this work? Well, that definitely affects cash flow. I know you have specific examples from your medical supply days. But it you know, anything like that I’m going to add one to this list, too is and it’s more of a create in your business. But is is there a way to package what I do into a recurring revenue product. So again, look at these ups and downs, just some this this spreadsheet Jeff has like that, that that’s not fun to see read, you know, but recurring revenue is one way freelancers and agencies always get a little bit more normalized. And so the up and down roller coaster break your neck kind of thing. So is there something you know, you can look at forecast out and say, hey, maybe we can do this by q1, you know, offer this to our clients and get some consistent, recurring revenue. Every time we’re on the BVA, we I try to bring up recurring revenue because it is the Holy Grail. It’s the thing that it’s the subscription economy. If you can get somebody on automatic customer, you know, painting, you’re not chasing somebody down for AR at think about, can I add that to my business? Is there a front end offer back end offer I can do that would help a lot of agencies do maintenance plans with sites, you can go even about that and do marketing, you know, maintenance, marketing, content, ads, whatever you do SEO, those type of things that are always to generate recurring revenue that your clients you’ve already gone through the cost of getting the client. Adding something on the back end that helps them is probably an easy sell for you that you can add in for recurring revenue. So I’ve just posed the question saying, how can you add recurring revenue to your business?

 

Jeff Meziere  49:44

Okay, takeaways. Hope for the best but prepare for the worst, right? Let’s be conservative in our approach. Let’s build those models out that you know, building a financial The comment that I made the recording of the day building out a financial forecast model that says you’re going to make a million dollars is really no helpful. I don’t even think your mom would be proud of you for doing that if you can’t attain it, right? I mean, there’s just there’s no reason for doing it, right? I don’t know, I don’t know what gratification, you would get out of that you have to be honest and realistic with yourself as you start to go through and build through this. This framework. This is an ongoing review process of forecasting, meaning that when the first month happens, it’s always we’re always continuously improving and taking what we knew from last month, and building out and adjusting our forecasts. This is not a one time activity where you can put it down every month, you should build this into your corporate performance management system. Right? constantly monitor the KPIs that are meaningful to your business, we mentioned like the MRR movements, you know, the cancellation rates, the conversion percentages of leads that actually turn into customers. These are all great KPI measures, you got to measure what matters. And my last bit of takeaway or advice here is start now there’s no reason to wait. There’s no way reason to delay, you’ll get better over time, it’s not going to be perfect. nobody’s asking you to be a CPA, nobody’s asking to be a financial analyst. But by going through the exercise, and at least starting, you’ll be in better position and definitely gain an edge and an edge over your competition.

 

Cory Miller  51:32

I learned in the way blows, be prepared. Yeah. It didn’t say be paranoid, did say be prepared. Hey, I want you to know also everything you’ve done today just graciously given us time and expertise to share with you he is a virtual CFO, in addition to his other things project he has going, if you want a free 30 minute call with Jeff, I highly, highly encourage you to do it. I promise you, he’s going to ask questions as you’re going to be thinking for the next couple of weeks, it’s going to be very valuable to you. I’ll put the link here into the chat later dot team Ford slash virtual CFO. And, but but book that call with him, you can go straight to that page, click on his calendar and get a time, I’d highly recommend you do that. Because it’s my story real quick with a virtual CFO. Three, four years into the business I had one did stab me so much good, saved me more money in the first year to pay for services. And plus some then started helping me really truly make money. He’s got my books in order to help us to think about the business, make tough decisions, ask tough questions, make tough decisions, but it’s the ones that we had to. For me, it was about discipline and accountability, the things that entrepreneurs entrepreneurs loads. But I’m telling you, when you get somebody on your side, like Jeff, who I highly recommend, I’ve seen him work in the world. You have that kind of discipline, accountability, it’s only going to make you your team, your family. This is you know, most of us our businesses are our nest egg. And so I highly recommend you book a time with with Jeff.

 

Jeff Meziere  53:11

For the time that we have left, are there any other questions that we have, we can dive into any question that you might have around your own current position?

 

Cory Miller  53:19

Simon mentioned a really great topic idea is sales, pipeline forecasting and cash flow? Absolutely. So we can dive in kind of art and Simon talking about, you know, clients and sales that that’s a definitely great one, three, why love among many things, being a partner, Jeff is like answering questions at them. And he can apply these type of mindset so that I can ultimately with my projects make better decisions. So that’s a great one sales pipeline forecasting. That’s right up your alley to Hey, would you love to save money, but I know you’d love to really, really love to make money.

 

Jeff Meziere  53:52

love making money? Yes. Love it, love it. I have recently come across and I say recently, just in the I’ve never seen it done this way before. But utilizing our CRM tool to be able to project and predict so we know how many leads come in. And as we convert that, so I’ll accept your challenge on the sales pipeline forecasting and we’ll see what we can put together around around that piece.

 

Cory Miller  54:21

We love this. We’ve been wanting to do this cash flow forecasting for a while because we just know it’s it’s just data for an entrepreneur. But the sales pipeline specifically we didn’t enter these these fun topics and going okay, here’s where we need to go get who do we need to go land. Any other questions for Jeff? And while you’re posting your questions for Jeff, I added the last slide there, Jeff, I wanted to also show at the BVA business value academy.com. These are the things we talk about every month, twice a month when we have a q&a open q&a format. Second, we have a specific topical discussion. In always fruitful, if anything, use it as a way to have a dedicated time and space to think about your business. Think about your future, while building your present, every meeting we have at the BVA, we recite the business value mindset, which is my business is the ultimate product. The buyer of it is my ultimate customer billing for value is my is the ultimate business strategy, we should almost underline the the reason why you may not want to sell today, but if you think strategically, it’s an upper level entrepreneurs thought that Jeff and I had been thinking like this for a couple years, based off our exits, by the way, going, if we had planned like this, we would have gotten more money, probably saved a lot of sleepless nights to get you know, and, and been healthier for it. So we always think think, you know, just mantra is always begin with the end in mind. So, but it’s parallel, in tandem with the present, you build a better future, you have a better present while you go there where you’re walking along side there. So I hope you come join us at the business value academy.com. I don’t see any questions coming in Jeff to share. But thanks for your time today and the link is there in the chat for you. Lisa Simon all says Thanks. Great mindset. Absolutely.

 

Jeff Meziere  56:25

Thanks for joining Lisa.

 

Cory Miller  56:29

All right. Well, thank you, everybody, for being here today. Be sure and go to it’s also at the business value Academy calm you can find the virtual CFO, tab and book a time with Jeff to have that great conversation one on one. Yep. heart says thanks for the gift. Simon says See you all next time. Okay. Well, thank you, everybody. Thanks, Jeff.

 

Jeff Meziere  56:51

You bet. Have a great day.

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