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Unlock the secrets to business success and gain valuable insights from local industry leaders. Join us as we delve into the strategies, triumphs, and lessons learned of thriving companies, empowering entrepreneurs to elevate their businesses to new heights.
Sharon 00:16
Welcome back to It's Time for Success, the business insights podcast. I'm your host, Sharon DeKoning, and today's episode is going to be a valuable one for entrepreneurs, founders ,and business owners at any stage of their growth. I'm thrilled to be joined by Jennifer Steckly, a highly respected CPA, and partner of Crowe MacKay LLP. I got to know Jennifer through the Women's President Organization, which we refer to as WPO. And I've also, I've always admired her sharp insight, approachable style, and her genuine drive to help business owners not only grow, but grow wisely. Jennifer works closely with entrepreneurs and business leaders, helping them understand the numbers that actually matter. Today, we're diving into top financial KPIs every business owner should know, metrics that can truly shape your decision making, strategy and profitability. So thank you, Jennifer, for joining us today.
Jennifer 01:11
Absolutely, it's my pleasure. Thank you for having me.
Sharon 01:14
Let's go into a little bit of a brief background for our listeners. Maybe your journey into accounting. Why accounting? That's got to sound like an atrocious job description, as far as I'm concerned. Tell us.
Jennifer 01:27
So why I chose public practice accounting actually comes from a part-time/full-time job I had when I was in university and I was studying business. I was working at a bookkeeping firm, and what I loved about it is, when you're in public practice accounting, you get the absolute honor and unique perspective to be able to see a whole bunch of different businesses in different industries, how they operate, how they grow, what breeds success, what doesn't. And so it really fed my entrepreneurial curiosity, I guess you could say. So once I got my designation in public practice, I was a senior manager at a mid-size firm, and I decided that there was more we could offer our clients in terms of advice on the management side of accounting. We could be more communicative. With what we know we could help in more ways. So I decided to open my own firm. I started with just me and a partner, and we grew it to a team of 15, and then just recently, on January 1st, we merged in with a larger firm that's across Western Canada called Crowe McKay and it's been great so far, but it's still new, so I'll keep you posted on that.
Sharon 02:38
Crowe MacKay. I pronounced that improperly. Sorry about that. Jennifer.
Jennifer 02:42
That's okay. I did it for the first three months I worked here, or I was a partner here.
Sharon 02:47
Yeah, I should have clarified that. Oh, yeah. Anyways, Crowe MacKay. Got it. Got it. So that's relatively new to you, and growing. That's really exciting. Okay, KPIs as a business owner, and I gotta elaborate on something actually. Jennifer, so I've been doing business for almost 20 years, and what I've learned over the years is there's three people that you need close to you in your back pocket who cares just as much as you do almost about your business, and one of them is a lawyer, an accountant and a banker. Those three are vital, I feel, and sometimes back in the day, when I first started, you just take your year-end to the accountant, you get your report, you pay your taxes, and you move on. But I feel that every business needs more from their accountant than that, and I believe that's what you have to offer to your clients.
Jennifer 03:35
Yeah, absolutely. So I offer, you could either call it fractional consulting or fractional CFO services. So basically, what that is, is I help business owners structure their financial picture in a way that helps them predict success or plan for success, rather than, you know, just come into the accounts at the end of the year and then it's a surprise whether or not you made money, how much tax you have to pay. So we review the financials regularly. We determine what KPIs or key performance indicators they need to track and watch to ensure that they have profitability and success at the end of the year. I like to be helpful, and I find that, you know, by the time we had done the tax return and the financial statements, even though I could offer them some insight based on the KPIs at year end, by that time, they're three months into their new year and and you know, they've missed an opportunity to really make real and lasting change in their business. So this gives me the opportunity to be more involved early on and help drive profitability, rather than just report on it.
Sharon 04:41
And is this… Is that something normal at all accounts that business owners that just aren't aware of? Or is it unique, this extra service?
Jennifer 04:48
Yeah, absolutely. So I think it depends on which accounting firm you're with. I like to do it with the clients I also do the year-end for because I feel like those two services marry very well. There are fractional CFOs or fractional controllers. Sometimes they're called business consultants, because that exact service is very a la carte in terms of, you know, you kind of tailor it for each business. There's lots of names for what we do. So if it's something that you're looking for, I would first, you know, talk to the accountant that does your year-end, because they might either a) offer that service and be very happy to do it for you. Or two, they might have somebody that they work with closely, that you know could already provide some synergies for you. If you don't have either of those options, after talking to your accountant, what you may choose to do is do a little research on who offers that in your industry. You know, Google, just like we all do. But then I would recommend in your interview call, maybe asking your accountant to sit in so that they can ask some very pointed questions that you may not think to ask, to make sure that the person that you're working with has the financial background to be able to provide what you need.
Sharon 05:58
18 years in It's Time Promotions. I just learned something in that first five minutes of our conversation. So thank you very much. And I believe that there's many businesses out there that don't even know this is an option for them. It's a lot easier to catch it, to be aware of it, as you mentioned, instead of after the fact, and even say, so you go a whole year, you're doing these things, and then you catch it later, but you've already created a bad habit as well, right? You know, it's something not to be… want to be aware of, but then you're also you might be stuck in a situation that you can't get out of for three or five years. So that's awesome. Thank you for that.
Jennifer 06:31
Yeah, absolutely, absolutely.
Sharon 06:34
Okay, today we're going to talk about some, some of the main ones for KPIs. I believe that there's basically, make a KPI on anything. So I just picked a few top ones, and you can add or elaborate or change whichever one you want to do. But of course, it's the gross profit margin that's as an entrepreneur, that's a number that we watch all the time. So let's talk about how it works and how to calculate it, or what we're watching for. And is it, is it actually a very important one? Like, I think it is? Like, tell me a little bit about little bit about that one.
Jennifer 07:03
Yeah, for sure. So why gross profit margin is so important is because it deals with the biggest numbers on your financial statements. So I think we all, as entrepreneurs, or maybe not, but have kind of heard of the 80/20 rule, right? Like 80% of your effort gives 20% of your results. So… Other way. 20% of your effort gives 80% of your results.
Sharon 07:26
Yes, sorry, I wasn't Yes, but yeah, it's the number 80/20 that are 20/80.
Jennifer 07:31
Yes, backwards to me, because very small changes in these very large numbers will multiply over time. So if you don't have a lot of time to spend on your financials, if you don't have a lot of financial knowledge even, you can get some really big, really quick wins by watching your gross profit margin. So what your gross profit margin is, is it's your total revenue, less costs that are directly attributable to earning that revenue that gives you your gross profit. So it's your profit before all the things you have to pay monthly to keep the lights on, basically. And why it multiplies is because for every one percentage improvement that you make in your gross profit margin, that efficiency multiplies with every dollar of sales that you have. So that's why watching these numbers and having very small improvements in these numbers can lead to very big changes. Is it okay if I talk about some pitfalls in determining what your gross margin is?
Sharon 08:30
Please, yes, yes. Yes, I'm learning as I'm going. I'm making notes here. It's crazy.
Jennifer 08:34
Thank you. Yeah, absolutely. So the first mistake that I see when people track their gross margin is they're not actually tracking their gross margin. And what I mean by that is, so your accountant will set up your financial statements in a way that makes sense for Giphy, which is what we need to do an appropriate tax return. That's not always what you want to see from an internal accounting perspective. So sometimes, for example, in a service based business, you'll see wages just in the bottom section under expenses. It's not really an expense. It's not really a cost to keep the lights on. Your wages should be driving revenue in a service based business, so that should be up in your direct costs. It should be up in your direct expenses. Another one that can sometimes be misallocated is commissions. So if you're in a business that pays commissions to your team for sales and things like that, sometimes accountants like to put that in the center part called, you know, sales and administration expenses and for, you know, standard accounting practices and things like that. Sometimes that can be a good way to show it. But internally, you want to take into consideration with every dollar you sell that 5% or 2% or 10% or whatever it is commission that's going to employees. So that should be up in the direct cost section. Another one that I see often in the bottom section that could be moved up if you're a contractor, maybe you do landscaping and maybe you have to travel to do that landscaping. So let's say you operate in multiple provinces, and the travel is very job-specific. Any job specific travel is a direct cost. It needs to go up as a direct cost, because that will give you information about how to quote better, all sorts of things. One that I think is interesting, that even when we submitted our financial statements on merger, I think they were surprised that I categorized it this way for us, it's technology. So before we merged in, we had a per-user cost associated with protecting our data, managing our data, having access to software, all of those kinds of things. So because it's directly tied to how many employees I have, which is directly tied to how much sales I have, I put that up in direct costs, because it varies directly with how much revenue I do. I wanted to see, after all the software I need to provide the service and the technology I need to provide the service, what's left? And I think a lot of accountants, for year-end purposes, would argue that that would be an “other” expense, but for me, because I could tie it directly back to a per-employee type metric, I put that up as direct costs. So before you calculate your gross margin, what I'd like you to do is go through your entire chart of accounts and think to yourself, “Does this directly tie to what I'm selling? Do I have to pay this cost in order to make a sale?” And if so, then I'd put it up to direct costs. It might be handy to have an accountant or someone with a numbers background do this with you, because there are some things that are kind of tied that you wouldn't include. Like, for example, you know, staff incentives, staff gifts, technically, they're tied to staff in a service business, but they're not really tied to sales. So we want to always have the view that the level of detail can't overshadow the general trends. So there is, you know, like there's a gray area in there. It has to be meaningful to you. It has to be something you can affect change on, those kinds of things. But if you are going to track your gross profit percentage, which is so so important, then the first thing you want to do is make sure that the gross profit that you're calculating is meaningful to you for your business and is directly tied to sales.
Sharon 12:17
Okay, so what happens if you're doing the same accounting software for 18 years, and the expense, or the payroll, or all these things, are down in the expense, instead of your cost of goods sold? How easy is it to transfer them, to move them?
Jennifer 12:30
So easy, I literally did it on a call with somebody in about 15 minutes. So yeah, most… Well, it depends on your software. But for example, let's say QuickBooks, or QuickBooks Online. So in your chart of accounts, when you go into that line item and you say, “Let's edit this. Let's change this.” It gives you a whole bunch of options. It asks you, is this revenue? Is this a direct cost? Is this a cost of goods sold? Is it another expense? So just by changing kind of what you've called that, you can move it up to the direct costs section. It's a bit trickier if you have two different types of employees, like, let's say you have a receptionist, and you want to exclude that person because they're not tied to sales. You have to change where something is mapped in the actual payroll module, but you could still do it, and in most programs, it will give you an option to retroactively apply that back a year, so you have comparatives, but a good bookkeeper who's worked with your software a lot, or an accountant, or, let's be honest, ChatGPT can probably give, yeah, give you an idea of the easiest way to do that in your software. It absolutely should not require you to go back and repost anything. It just is about telling the software where it's already posted, what that should be changed to.
Sharon 13:57
So my year end was May 31st, so it's at the accountants right now doing its thing. This would probably be a good time to do that.
Jennifer 14:05
Yeah, I mean, your accountant can also, in their software, remap anything they want to. So for internal purposes, if you want something as direct cost, that doesn't mean your accountant has to show it that way. And they may choose not to, because CRA plays Sesame Street like one of these things is not like the other ones. So they may want consistency to trigger audit, but they also have the ability to map things wherever they want in their software. So let's say, like for me, I like to have technology as a direct cost. That doesn't necessarily mean that makes sense from a tax perspective. So on my internal financial statements that I use to run my business, that's a direct cost. When I go to file my year-end, I often put that, as you know, technology expense, in the bottom section, because that is more acceptable from a tax perspective in terms of continuity with what I've filed historically. So it doesn't necessarily have to look the same on your year-end financials. There's two things we're doing here right at your year end. We're making the CRA happy. We're making the bankers happy. We're showing things in a way that they understand and appreciate based on how they evaluate the statements. Internally, we're showing things how we need to see them in order to track and affect change and the profitability of our business. And those two things don't always have to be aligned. And in fact, in a lot of cases, they're often not.
Sharon 15:25
Okay. Got it. That makes so much more sense to me. Thank you for that. There's a couple things actually. Listen to this. So we created our own software so it does all our quoting. It does everything. It's our lifeline. But we consider it, because we have IT on it, we're always tweaking it. We're always tweaking it. We're always making it better. Someday we're going to sell it. Right now we consider it almost like an expense, but it shouldn't be down there, right? Like when we pay our IT, because actually it protects payroll, like there's probably taken away two payrolls, at least, right? So it should probably go up to the top.
Jennifer 15:56
Yeah. So I think for internal purposes, what you might choose to do is capitalize that to like an SR and like research and development cost. You might also choose to capitalize that as an intangible assets. Or, conversely, if what we're really trying to do is basically determine our gross margin, then if you have two particular employees that are generally assigned to building that software, then you just want to make sure they're in the bottom section “other” expenses and not up in gross profit margin, because how much or how little progress they make on this software is not directly tied to the dollar. So it won't give you information about if your team is quoting correctly, if you need to increase prices, if you're overstaffed, like it won't give you that kind of information, unless you separate out those employees.
Sharon 16:44
Holy, so many questions. Numbers are important, and I think, as a business owner, we get in the trenches, and we always look at that bottom number, right? We just hope for the best at the end of the year, but we're hoping today's episode makes our listeners realize that we got, got to stay in tune of it during the year before the year-end. So thank you for that.
Jennifer 17:03
Sharon, can I just mention one thing? Because I want to make sure that you hear it just for your own purposes, I would recommend reaching out, and I can give you a referral for this to someone who specializes in scientific research and development tax credits. Because you are building a new software so to the extent that that's considered novel, like it's not been done before, and we can prove that to the CRA, you can get a good chunk of that money back. And oftentimes SR and ED firms, who specialize in that, will, if they think it will work, they'll take it on, and then their payment is just a percentage of the tax credit that you get back. So in some cases, you can invest in looking into that without any dollars out of your pocket. So I would… Your accountant may have someone that they already refer for that. So, you know, I would talk to them about that. But whenever I hear new software or new development or new technology, it's worth looking into, because it can be very lucrative.
Sharon 18:01
Wow. Thank you so very much. Because, yes, we've invested, and it's an ongoing process, and if we weren't so busy, we would have it launched. We just, yeah, we just haven't got to that level yet. Okay, awesome. Thank you so very much. Jennifer, I really would love that number and that contact, okay, that income. We're going to talk about that now we're going to talk about the bottom line. Tell us.
Jennifer 18:20
So this, I find, is the most popular number with entrepreneurs. They go to their income statement, they go straight to the bottom line and decide if they made money or not. And that's basically what it tells you. After you've paid absolutely everything you have to pay after you've accounted for the costs of using up your assets over time, so your equipment and your property, furniture, whatever it is, that's the bottom line amount of money that you made. Now, I don't know if you've heard of a book called Profit First. It's actually quite funny. He talks about how he doesn't love accountants in the beginning, but I totally agree with him, and I totally understand why. And what he talks about in the book is that we treat profit like it's a leftover, like it's what's left over after we've done our operations. And what we should do instead is we should plan for the amount of profit that we have and make the business survive on whatever is left. So what I… how you can set this up in your business if you want to have profit be a more intentional number, instead of scrolling to the bottom of your financial statements and either feeling elated or depressed, depending on what it says, is you can set up a separate bank account, and you can take whatever percentage of your revenue you think you want to have for profit, and then each week, each month, however it makes sense for you, each day, some people do this daily as a ritual, just to make sure that it happens, they move that into a separate account, and that account doesn't exist. You just forget it exists. Then you require the business to survive on what's left. And so what that does is it makes sure that you have some certainty under… on on what that number is going to be at the end of the year. Why I love it is because. It gives you a sense of control. And why else I love it is because it's something that you can improve. So let's say, you know, cash flow is really tight right now, and all you can do is half a percent of revenue or less. Then you do that for a quarter, and you require the business to survive on what's left in your operating account. And then you think, “Okay, well, that wasn't as hard as I thought.” So then the next quarter, you increase it to point seven five of a percent, and you put that away each week in terms of your sales. And then you require the business to survive on what's left. And it's basically the same as personal savings that we all heard about. Wealthy Barber, pay yourself first, like have your RSP come directly out of your account. It's that, except it's for business. And outside of that, I don't feel like your net profit is necessarily the best indicator of the success of a business. I mean, you do want to watch your operating expenses. You want to make sure the number is positive, but I think if you're going to use it as a key performance indicator, you have to plan what you want that number to be, which, to me, means you have to take some sort of action towards ensuring what it is going to be. So if you haven't read the book Profit First, it's got a really moving story in the beginning about where he was in terms of cash flow and debt and worry and stress and all of those kinds of emotions we feel as entrepreneurs, and how he used this system to get out of that space. Now, he recommends a bunch of accounts. I don't think you need five. I think he wants you to have like, five or six accounts, but, but profit account is definitely one of them. And I think it's a good habit. I mean, we've all been taught for a very young age, save for your retirement first. Put it away. Don't think about it. Put it in a place that's hard to reach, all of those kinds of things. So why wouldn't we apply that same good habit to our businesses to build wealth in our businesses?
Sharon 21:49
What I find is, right now, we operate off of the three accounts, which makes no sense. But anyways, whatever we do that, and you're always paying for Peter to pay Paul. And I don't think I'm the only business out there that does this kind of stuff. But everything is so easily accessible, right? So, like, how sometimes you think, Oh, I quickly… Whatever. Is there besides that, when you say, like, kind of make it hard to get at, what kind of account would you suggest to put that into that's a little bit harder to get?
Jennifer 22:15
Some people do it at a different bank. So you have to e-transfer it over, e-transfer it back, there's fees associated with that. You know, some put it in a savings account, and then they ask the bank to not attach that savings account to their online banking. So it just… the reason why we do that is just so that it creates enough pause for our brilliant entrepreneurial minds to find a different solution. The other account that you might be thinking about that you have is a tax account, that one is also important. So a profit and a tax account, I won't get into that here, but suffice it to say, you don't want to get to the end of the year and find out, you know, the $20,000 that's in your profit account, like half of it needs to go to taxes. So we want to plan for those things in advance, particularly GST, because that one can be really expensive, and it's something that we can often forget about. But, but yeah, so the profit account, you want it to be a pause, which is why I think it's easier on the personal side, because when we think about paying ourselves first, we're thinking about an RSP. I think most people know there's huge implications to pulling money out of an RSP. So it gives you the minute to pause and think, Do I really need to make this purchase? Is there another option I could use? And so this profit account enforces those good habits in the business. Do I really need this to make more money? Maybe it's yes. Maybe it's an asset then, and you can pull it out. If it's no, then we don't spend it. Or maybe it's, you know, is there another solution? Could I use something in my organization rather than hiring a new staff member? Is there someone with capacity who could do this work? You know, all those kinds of things… Just helps us pause long enough to be… to find a more creative solution that may be more cost-effective.
Sharon 23:51
I love it, and I'm implementing it. I'm doing it. Thank you for that. Because, you know what? You go to the bottom number and you think, okay, yeah, we're good. Yeah, we can do… Yeah. I hear you. I'm hearing you, and I think everybody else listening is hearing you too. Okay, cash flow.
Jennifer 24:10
Yeah. So this word is used for everything. So as an accountant, I hear people talk about cash flow all the time in a way that doesn't ever relate to cash flow. Sometimes it doesn't, sometimes it doesn't. So let me talk about when it is a cash flow problem and when it's a profitability problem. So a lot of times when I hear a business owner say, oh, you know, it's fine, I'm just having cash flow problems, I always challenge that, because what generates cash in your business? Making money. Making profit generates cash in your business. So unless you have a business where you have to purchase a bunch of inventory, unless you've just purchased a big piece of equipment, unless you know your payment terms on big jobs are 180 days. So you know, if you work with a big oil company, or you work with government or you work with a multinational, they pay when they pay. Like it doesn't matter how many times you send the statement; they pay when they pay. So if you're in that kind of business model, then it could actually be a cash flow problem. But if you're a smaller startup, or you're someone in a service-based business that deals with multiple clients, you don't have inventory, all of those kinds of things, then it's not a cash flow problem. It's a profitability problem. So I think if you're having cash flow problems, that's the first question I would ask. Is it a profitability problem, or is it a cash flow problem? And when it's a cash flow problem in a service-based business, it's usually because you're experiencing rapid growth, and we didn't plan for it. So if you're going to go into a period of rapid growth, you're in scaling mode. You're like, you know what? I'm going to double my revenue this year. If you have strong financials, go to the bank and ask for the line of credit you need to do that with a cash flow plan before you do it. Because the banks will always want to lend you money when you have money. When you don't have money, and you need it, that is when it becomes more difficult, interest rates become higher, all of those kinds of things. So if you're thinking you're going to go into a period of rapid growth, and you're all… and you're profitable, you know you're profitable. You're tracking your numbers, I would do a cash flow forecast. I would take your statements and go to the bank. Here's my plan, here's my profitability. This is the line of credit I need. And approach it from that point. Where I often see businesses suffer from cash flow problems that do end up stifling growth when they are profitable, it's because they've waited. They they've created all the growth. Now they have to do a job where they have to send 50 employees out, and they have to wait 180 days to get paid on that, and they don't have the cash flow or the depth in their line of credit to be able to do that, so sometimes they have to say no to a job that would have made them a couple $100,000 or more, because we haven't planned ahead for that cash crunch. So if this is the year for you where you're, you know, buckling down, you're gonna have rapid growth, you're gonna do all of those things, I think, and you're profitable, that is the time to start thinking about, how much would I have to pay out, and when would I expect the cash to come in? And plan for when that cash flow shortage is going to come and have the line of credit available before you need it.
Sharon 27:15
Interesting. So is this something? Again, we're entrepreneurs. We hit the ground running. We really don't understand numbers totally. Is this something where we go back to the CFO? Is that something that your firm, or you, would help your clients with?
Jennifer 27:29
For sure. So if you're going into a stage of rapid growth, or if you want it set up for financing, this is a good time to reach out to your CFO. I actually had a client who I worked with quite closely, and he had a successful business, and he was growing very rapidly. He had relied on some numbers where his bookkeeper wasn't posting all of the expenses until they knew what they were, which meant that when he looked at his profit and loss, he showed 200,000, 300,000 in profit. Then when he knew, when the bookkeeper could categorize everything, it went to a $200,000 loss. That is quite a shock. So we worked with him, and his main goal was that he wanted to grow quite rapidly and buy a building. And so for his consulting, what we did is we looked at cash flow, we looked at debt service coverage ratio, we looked at debt to equity. We looked at all the things the bank was going to look at, and what he could do operationally to do that, and then how we could generate the cash flow to get out of the position that he was currently in, which also improves all of those ratios. So I think if you're if you're listening to this and you're thinking crap, I'm already there, nobody's going to help me. I'm not going to be able to get funding. I'm not saying you won't be able to get funding. There are ways to figure it out. So all is not lost. But if you're in a period of rapid growth and you're struggling with cash, and you have, you know, an hour or a little bit of time or a couple hundred bucks or whatever it is, to enlist some help, I would focus on cash flow planning. When is your cash coming in? When does it have to go out based on how rapidly you're growing your business?
Sharon 29:08
And very interesting. That's remarkable. Wow. I'm just thinking like we all look at that bottom number, and so sometimes it is growth, sometimes it's So, what about seasonal? So sometimes, so cash flow… So you got to be able to forecast the seasonal work. Sometimes you're really, really busy. You use up all the money to get through. Then it comes in, you spend it, and then you're on a dormant cycle. So you got to be able to monitor that cash flow for those seasons. And some people, when they're starting up business, they don't know those seasons yet.
Jennifer 29:41
For sure. So I think it would be unrealistic to say when you're starting a business, you would have the ability, or the time, or even have enough resources like this podcast to kind of understand what your seasons are. I would say, speak to others in your industry. You know, go to industry events. Ask lots of questions. I think a good question that I like, I like to ask other accountants is, hey, like, if you could have done one thing differently, what would you have done? Or I'm just starting out, like, if you had one piece of advice to give to me, what would it be? Or I'm struggling with this, how did you deal with it? So I think the more questions we ask, and you'll and you're surprised, you know, I think the business community, particularly in Edmonton, like I'm assuming it's that way everywhere, but I love that it's that way in Edmonton. We are a very collaborative group of people. I don't think that when I've asked a competitor, a competitor or another accountant about a struggle or how to deal with something that I ever got the answer, Oh, I'm not gonna, I'm not gonna talk about that, because I wouldn't want you to be successful. You know, so, like, I just don't think that's it. But I think when you're starting a business and you don't know your seasons, and you don't know things like that, I think you can feel that way. I for sure felt that way. I think it takes a lot of confidence in yourself and growth, and it's very scary to ask very powerful people who you're trying to aspire to be like those questions. But in my experience, when I have had the courage to ask those questions, the advice and responses that I've received have been invaluable. So… And, you know, when I started my business, we didn't have AI. I mean, I think if I was brand new, I would even just and I had because, you know, it's the time-money curve, right when you're starting out, you have no money, but you have a lot of time, because you don't make clients yet. I would definitely spend some time doing some research on different AI platforms. So, you know, like, I'm starting a dance studio. Can you tell me, like, three pitfalls I should watch out for? And, you know, three, three things I should plan for in the future that I may not think of? And if they're things you already thought of, then ask, ask a better question. Or, the other day, I was putting a proposal together, and I asked, What didn't I ask you that I should have? And it said, oh, you should have asked me how to make this deal close better. So I was like, how would I make it close better? And it changed the language, right? So, I mean, there is a place for professionals. So, you know, there's lots of things that ChatGPT will get wrong, but for those overreaching questions, like, hey, what's the seasonality of my business that I should watch for? I mean, I don't think you need to call a $300 an hour accountant or whatever it is to answer that question. I think there's probably a lot of resources out there that could get you on the right foot very inexpensively.
Sharon 32:25
So many resources. I think, when I started, I don't think we had Google, for crying out loud. Okay, so let's talk about customer acquisition costs.
Jennifer 32:35
I love this one. I love this one so much, because I think if there's one thing that most business owners don't know, it's which… What of their marketing is actually making money and what it costs them to get a customer. So what you want to do here is you want to come… First of all, you need to be able to track how your leads come in. If you don't know where your customers are coming from, then you can't begin to calculate this. So the first system that I would implement, if I was new, is a really solid system to track where your leads are coming from. And it's this easy, Oh, how did you hear about us? That's it. And then you document it. So you don't have to spend a lot of money to have that system. Like an Excel sheet with a list will work. And then the next number you need to calculate on this is your close rate. So it doesn't matter if, like, let's say you spend $1,000 on social media and you get 1000 leads. It doesn't matter if none of them close, right? So if they're… none of them are closing, they're not the right leads. So the second thing you need to be able to track from how you get your customers is when you get those customers, how do they close? So for example, for me, like we do a little bit of online or we used to do a little bit of online marketing and social media that wasn't to get customers, that's just to kind of increase information we're giving to our current customers. But we do track leads that we get from Google, how many they close and things like that, to see if that is a good way for us to market. The other thing that we tracked is which leads came from referrals and from which people. Because for us, for me, I think time is the shortest resource that I currently have. So if I have time to network, I want to be networking in organizations where that's leading to great relationships that lead to referrals. So for me, I track where my business is coming from on a people basis, so that the cost of acquisition in terms of time, is also a smart choice. So this doesn't necessarily have to be dollars, but it can be. You want to track the different things, and then the other thing that you want to know, and maybe this is down the road, but you also want to know the life of your clients, right? So I think I gave… I give this example a lot, because I think it's easy to kind of understand. So if you're going to go to a barber or salon, you go to a barber or salon, you have a haircut. So is the value of that client the $40 haircut? Probably not, because we're very habitual, right? So if people come to you on average every eight weeks, every four weeks, whatever the case may be, maybe the lifetime value of this client. And please don't try to do this math, because it's off the top of my head, and it's early, so I'm sure these numbers won't track. But let's say, you know, you go, you know, once a week, so the or every two weeks, or whatever the case may be, maybe every four weeks. So the average sale of a client, or the dollar amount associated with a client, is not 40 bucks, it's $400. And then the choices that you're gonna make about whether or not your acquisition cost is too high or going to be very different if you know a client is worth $400 than if a client is worth 40. The amount of discount you might offer, the amount of, you know, referral incentive, the amount of repeat business discount that you might offer, all of those decisions are going to be different if you understand that your clients are actually $400 annual or $4,000 annual. They're not their initial purchase at 40 bucks or 400 bucks or whatever the case may be. So customer acquisition cost is how much it costs you to get a customer. That information is only valuable if you also know how much each customer is worth.
Sharon 36:19
100% yes, even in our software that we developed, anytime we have to enter a new customer, we have questions like, How did you hear about us? So we track it here and then it’s incorporated into our software, so any new customers, how did you hear about them and then track, if I'm picking up what you're laying down. Their lifetime value, whatever would you want to track for that, for how long they stay with you, right? Am I picking that up?
Jennifer 36:44
For sure. And I think, if you're new, you just want to estimate, right? I think, and that's an easy thing to do. So if like, let's use social media marketing, for example. If your contract is one year, then that's pretty easy to calculate. It's whatever the annual one year fee is. And I think for starters, you want to just think about that one year as your life of a customer. If they have the option to renew. As your business grows, you'll make decisions on how to retain those clients longer, or how long they actually stay with you. And so you can adjust from there. But you know, I think sometimes when we're thinking about KPIs, or when I'm talking to clients about KPIs, they get really bogged down in the details of all the unknowns. Throw some spaghetti, see if it sticks, and then if it does, you use it. If it doesn't, then you say, Okay, this data isn't what I thought it was. I'm going to test and measure and adjust. So just like anything else, we don't want to be shooting for perfection. We want to start so that we have some data, and then as we grow and learn about that data, we can tweak and adjust our key performance indicators accordingly. It's not an exact science.
Sharon 37:55
No. Thank you for that. Okay, common financial blind spots. What do you got for us there?
Jennifer 38:03
That the cash in the bank is how much money they made. What cash in the bank? I'm like, you have $10,000 of cash in the bank, which is great, but I don't think you should go buy a $5,000 asset, because you have $20,000 in accounts payable. So you know, looking at your cash in the bank is very dangerous, particularly if you're not using a system of accounts where you're splitting out money for taxes in advance and all those kinds of things. So entrepreneurs, when they start, they never look at their balance sheet. Some of them don't even create balance sheets. And why that's dangerous is, a balance sheet is the annual physical, or the monthly physical, or the weekly physical, of the financial health of your company. You want to know if your company's healthy. That's important. It will speak to its performance. The financial health of your business is directly tied to your ability to pivot, to make big purchases, to make decisions, all of those kinds of things. So I think one common mistake entrepreneurs make is not caring about the balance sheet. And the balance sheet is kind of a weird statement. You need to understand how it works and how it ties to your income statement. So if I was brand new and I was going to spend a little time early on, I would sit down with a numbers person or an accountant, and I would say, hey, I want to protect the financial health of my company. This is what my… This is... I understand balance sheets are important. Go through it with me. I think if I'm breaking it down here, like the 5000-foot view is the top section is everything you own. The bottom section is everything that you owe. We want the things that you own to be bigger than the things that you owe, period. Because without that, you don't have any ability to maneuver. So if you are just pulling up your balance sheet now, while you're listening to this, just look at that. Are my assets bigger than my liabilities? For starters.
Sharon 39:54
Perfect. That really simplifies it, because there's a lot of numbers in that balance sheet. Like so many. Numbers, and it's just like, you tap out, like, it's like… yeah, I got you. So make sure the top number is bigger than the bottom number. Got it. Thank you for simplifying that. There's a lot of numbers in there. Okay, we're gonna do some… anything else you want to elaborate on that part, because I know that there's a lot of financial blind spots, and sometimes, as entrepreneurs, we're scared. Sometimes you're even scared to open up your bank accounts. You don't know what to expect. So and the and the balance sheet is a big one for sure, and what's and when you don't understand it, it could be really scary for sure. Or overlook because you don't know how to read it, so you don't even bother.
Jennifer 40:34
And here's the thing, I think that's the other one, what we don't understand or know we can't improve. What we don't track and look at, it will not improve. So I would say, if you're a new entrepreneur, set a habit where maybe not on Friday afternoons, depending on where you're at in your business. Because, you know, sometimes it's going to be good news, sometimes it's going to be bad news, but at some point in the week, set aside an hour for yourself where you go through your financial statements, you look at every entry that went through your expense accounts, and think, do I still need this? Do I still want this? Did I spend money wisely? You look at your revenue and think, Oh, why didn't that deal close? You just go through every number in your financials and do something. As you grow your business and become more financially astute, or work with a professional, you can fine-tune the things that you're looking at, but just looking at every number on your profit and loss, every number on your balance sheet, and then the details associated, particularly with your expenses. If you can do that one thing on a regular and consistent basis, I would say no less than monthly, then you're setting up a habit of tracking your numbers and having success. Where the fear comes in is things aren't going the way that we thought, and so we get afraid to look. But if we're looking all the time, then you will start to have a sense of control over those numbers, which will a) make you run your business better, and b) take away all the fear and anxiety and stuff that comes with numbers.
Sharon 41:56
And even… Yeah. So if you're starting, if you don't understand those numbers, then you know what to even ask, right? Like? So that's perfect. So just be mindful and start doing it and creating a habit. I love it. Okay, what's one KPI you would check weekly?
Jennifer 42:11
Throughput. For me, it's throughput. So there's… we talked a lot today about lag indicators, so that's the results of the things that you do. So that's what's in your gross profit, like money already spent, revenue already came in. That's a lag indicator. It lags the action. Ideally, what we want to do is, at some point, tie that to the lead indicator. So the action that creates the results and across almost all businesses, if we can do more things in less time, we'll make more money, right? If I can finish more files in a month, my revenue is higher with the same resources, right? So I think if I was going to track one thing consistently, every week, every month, like weekly, it would be, what is my throughput in my business? Because if you can increase your throughput without increasing your resources that you're using to make that throughput, you're gonna make more money, in almost all cases. I mean, I'm sure there will be people listening to this that have very unique businesses that are thinking that will work for me, and I'm sure that there are businesses where it won't. But I would say on the, you know, the 80/20 thing, that in most cases, if you can track your throughput, the actions that create the results on a weekly basis. One, then you're not waiting for bookkeepers to finish stuff. And two, you can do it in real time. And three, I think those feel very controllable. So for me, in tax season, I work a lot of hours, and sometimes I just want to go home, but I set throughput targets because I know what I need to do to hit the goals I want to hit. So then it can help me sometimes do that extra file, or do that one more thing before I go home, or follow up with that one more person, or push that one more hour. So for me, they also seem quite a bit more motivational if you can find a good lead indicator. So I would spend time finding a lead indicator, and then that's what you want to track weekly, because it's in real time. They're easier to track, and they're more motivational than some of these other lag financial indicators that we talked about today.
Sharon 44:08
Okay, I'm making notes. That's why I'm pausing here. So thank you. Okay, one thing to review every month.
Jennifer 44:15
Your full financial statements, particularly with emphasis on total expenses as they compare to what you budgeted, your gross profit margin as it compares to what you budgeted. And then I would look at your current ratio, which is your current liabilities and your current assets. So on your balance sheet, there'll be a section for current stuff, like cash receivables, and then they'll… in your current liabilities, you'll have payables. So basically that you have more cash and things you can turn into cash than the things that you need to pay in cash right now. Those are the three quick things that you can look at every month that will provide you some insight and give you some targets to reach towards.
Sharon 44:55
Thank you. A habit to build into your leadership routine.
Jennifer 45:00
Yes, this is a good one. So for the larger businesses out there, you're going to have different teams, and it's not always reasonable or a good idea to share the minutia of your financial statements with them. And so if you're going to build a financial habit with your leadership routine, it has to be things that they can control and things that aren't going to put the privacy of the overall financial picture of your business into play. So if I'm a buyer, I need to know, you know, what my day's sales in inventory is, for example. Like, Am I over buying? If that's my job, that's my number, I need to know what it should be, where I'm at, and what my goal is for that number. If I'm in sales, that's a bit easier. I need to know what my revenue targets are. Maybe, if I'm in management, maybe gross profit is what I'm going to share with the management team. Maybe I share it as a percentage, right? Or an efficiency percentage, like how efficient my staff are as a percentage. That's another way to report on gross margin. So I think each person in your leadership team should have a number. That number needs to be tied to something that they can control, and it needs to be something that you can easily track. None of us have time to spend eight years calculating stuff. So I think if we think about… I come back to throughput, what the throughput is, what is the action that that person does that creates the result? We can tie that to the result that we want to see financially, reverse engineer what their target is and share that number with them. I think that… And then that's discussed monthly at every leadership meeting. And if we didn't meet our target, what are the why’s? What could we do better if we killed it and we exceeded our target, we also want to know why we did that, because that… that we want to multiply, right? So there's a really good book out there called Traction, and it talks about how every function of your business should have a number. If you're in a larger organization, and you're looking to do this, depending on how big you are, you'll take pieces from traction because, because I think it's geared towards fairly large businesses, but that whole, every team has a number and is working towards a number, I think, is gold.
Sharon 47:05
We just incorporated EOS at It’s Time, and that's one thing that we're focused on, is, for sure, is those numbers. All right, so some closing thoughts. We're at 48 minutes, and I appreciate… I could listen to you all day, and I could take some positive wins, or I have taken some positive wins from just from listening to you. So today we talked about why tracking KPIs isn't just about finance. It's about clarity and control. Can you tell our listeners, Jennifer, how they can connect with you and if they need any support out there?
Jennifer 47:37
Yeah, absolutely, for sure. So I'm on the Crowe MacKay website. You can email me at Jennifer dot steckly, at crowemackay.ca. From there, I'd be happy to set up an appointment with you to help you kind of walk through your own financial statements and give you some things that you could do on your own to make big results.
Sharon 47:54
Thank you. You're such a great speaker, and I can tell by the way you talk that you're so passionate. Is that something do? You ever do courses or any kind of teaching to a wide variety of people?
Jennifer 48:05
Yeah, I actually have done a couple talks like this recently, and I do love it, because I am very passionate about the control this can give entrepreneurs over their numbers. So if you're looking for somebody you know to give a talk or talk about numbers, please feel free to reach out to me for that as well. I love to do that. And then I do have also a podcast. It's like a bit more on the humorous and pithy side. It's not quite so business-focused. So if you're a female entrepreneur and you're in the very early stages of business, like just starting, I think you might find some support in there. I do it with a lady who does marketing. So those are some ways that you can connect with me and, yeah, just reach out. I'm always, I'm always happy to talk about numbers. That is where my joy is.
Sharon 48:46
Perfect. As I'm listening to you talk right now, because I'm part of BNI here in Lloydminster, and it's all businesses, right? So I'm thinking something like this would be great to have you speak to all the business owners here. So thank you for that. Okay, final advice for business owners feeling overwhelmed by their financials.
Jennifer 49:02
Just start. Just pick one thing and start. Just say, today I'm going to call my accountant about this, or today I'm just going to look at my financial statements. Just pick one thing, do it once a week for a month, and then turn it into two things. But just start, because you can't fix what you don't know.
Sharon 49:19
Absolutely. Thank you so much, Jennifer. For our listeners, I encourage you to subscribe to the podcast and Jennifer's that she had mentioned before. Reach out to Jennifer. She, as you can tell, she has a wealth of information. I suggest sharing this episode with someone in business who could benefit from financial clarity, and leave a review if you found it helpful. So thank you, Jennifer, for joining us. We… I really super appreciate it. I've learned so much, took many notes. So to our listeners, thank you for joining us today. Bye for now. And that’s it. That’s all.