Mark: Welcome to Unsuitable on Rea Radio, the unique financial services and business advisory show that challenges your old school business practices and the traditional business and culture. You’ll hear from industry professionals who think beyond the suit and tie to offer meaningful modern solutions to help you enhance your company’s growth. I’m your host Mark Van Benschoten.
Today we are joined by Brad Martyn, founder and CEO of FocusCFO, a company that provides CFO level support to small, medium sized businesses throughout Ohio. Brad, you and I have known each other we think 15 years?
Brad: A long time, yeah. I was six when I met you the first time.
Mark: I’m supposed to crack the first joke.
Brad: I’ve got lots of them
Mark: I’ve always been impressed with your business and what it can offer to clients. I think it speaks to our testament about providing service to clients that we still know each other today.
Brad: It’s great to be here with you, Mark.
Mark: Brad’s going to share some tips and insights to help you transform your business’s health so it can improve its value. Before we get started, Brad, a couple of questions. Have you ever Googled your name?
Brad: I have. There’s a guy in Denver that looks exactly like me.
Mark: That’s not the same guy that I saw. Google image, there’s a body builder Brad Martyn. You look like that?
Brad: Well, you’ve never seen me with my shirt off, have you?
Mark: Yes, for the record, that is true. I’ve never seen Brad without his shirt. Did you ever Google your surname, Martyn? M-A-R-T-Y-N?
Brad: I have a few times. What’d you find?
Mark: That it is a family name from the … It’s a premier merchant and political family from Galway, Ireland.
Brad: Interesting.
Mark: I thought that spoke well of you, you know, the premier business merchant family. I think that suits you well.
Brad: You know what? None of that is true, but I’ll take it. It’s better than the real story, that’s for sure.
Mark: Oh, come on. I felt like I hit on something, like you’re going to have a family crest to share with us or something. No?
Brad: No, not at all, not at all.
Mark: We’re talking about business’ health and I have another personal question for you. Do you only go to the doctor when you’re healthy? Or when you’re sick?
Brad: I go to the doctor at least once a year for a checkup. Usually he tells me some things that maybe I need to be aware of before I get sick.
Mark: I assume you would offer that advice to your clients.
Brad: Absolutely. All the time.
Mark: What types of things, I don’t want to hear what your doctor has to say to you. That’s personal, HIPAA violation, but what would you, a client comes to you, what would you look at? What would you expect to see or …
Brad: Companies come to us for different reasons. Sometimes they come to them because there’s some type of problem going on in the business. Sometimes those problems are because things are going really well. Sometimes those problems are when things are not going so well.
Mark: Can I interrupt? Problems, because things are going really well? That’s a problem?
Brad: It’s really interesting because if you talk to business owners whose businesses are going through a growth spurt, sometimes that causes a change in the business. Some businesses aren’t prepared for that.
Mark: Interesting. I would assume that would be unhealthy. You’re doing well and for example revenue is up, cash flow is up and that could cause problems. That’s in interesting concept.
Brad: Well, it’s interesting. One of the best ways for a business to actually get into cash flow trouble, sometimes is to grow at a really accelerated rate because it take s a lot of cash to grow a business. If you don’t plan for that, you don’t anticipate that you can actually find yourself falling short.
Mark: I don’t want to speak for all business owners, but I think a lot of business owners are out there hopefully listening to us and it’s like, “I want to grow. I want to grow. I want to grow.” Maybe that’s not the right answer.
Brad: If I had a dollar for every business owner that’s ever said to me, “If I had more sales everything would be fine,” I actually wouldn’t be sitting here right now.
Mark: You’d be on a beach somewhere.
Brad: Revenue covers up a lot of sins and a lot of problems in businesses. Sometimes businesses may pick up some revenue and yeah, I always equate it to if you’ve ever been white water rafting and you go down a river sometime when the water is really high and you just sail through the river, everything is just great, but you go back six months later when the water level is not so high and there’s just all this stuff in the water that gets in the way.
It’s really the same thing in a business. In a business when the revenue is up, sometimes things look like they’re okay, but actually when that revenue maybe slows down a little bit or they go through a little bit of a downward cycle, there’s a lot of rocks and a lot of boulders and a lot of things in the river that you have to be careful about.
Mark: Brad, just trying to think here, would that maybe too much staff? What would some of those rocks look like?
Brad: It really depends on the industry, but too much staff is certainly one. We would probably put that into a category called too much fixed cost where you’ve just got a lot of cost in your business that they don’t really change when your revenue changes. You contrast that to other businesses where when revenue goes up cost goes up and when revenue goes down cost goes down.
That’s more of a variable cost. Those costs change with revenue. A lot of really strong healthy business have a pretty good variable cost structure as opposed to a very high fixed cost structure.
Mark: In your experience do business owners have that ability to identify fixed versus variable?
Brad: If they have good advisors then they usually do. Most business owners, most people that run businesses in our experience don’t have real strong financial backgrounds, so they rely on other people, whether it be their outside CPA or perhaps a business coach that is financially oriented. Or someone like us that’s a CFO that looks at the operations side of the business.
For a lot of business owners that don’t have that support, the business owner often struggles because they think at the end of the day that what they really need to do is just grow revenue. We actually find that most business really just need to get healthy as opposed to just focus on growth.
Mark: Can you give me an example of getting healthy?
Brad: Great question.
Mark: Oh thanks. First one of the whole series.
Brad: Really the key to business being healthy is really that their cash flow is manageable. What I mean by that is when you look at the cash flow inside of a business, there are business cycles that the business goes through and sales may go up and down, inventory may go up and down, but really healthy businesses tend to generate positive cash flow all of the time. Or certainly more often than not.
As CFOs we’ve been trained our whole careers to understand that the most important measurement in any business is actually its cash flow from operations. Not so much its revenue. Not its gross margin. Not its net income, but cash flow from operations.
Mark: That’s a hard number to get to.
Brad: It’s a really hard number to get to and if you’ve got a really good CPA they can usually calculate it for you, but it doesn’t come out of a lot of the accounting systems naturally. It takes a lot of work to figure out what that is if you don’t have the right resources around you, but it’s absolutely the single most important measurement in any business.
Mark: Without cash flow from operations you can only borrow so much money, you can only sell so many assets. Where else are you going to get cash flow to operate?
Brad: Yeah. We’ve talked for a long time about the fact that when you run a business there’s only three places to get money. You can get it from an investor. You can get it from a bank. Or you can get it from a business. The really healthy businesses, the business is actually the primary source of cash flow for the business.
It’s interesting, when you ask a lot of business owners about cash flow, they gravitate towards the first two. They talk about needing an investor and they get frustrated because their bank won’t lend them money. The reality is most people don’t want an investor. They want the investor’s money. There’s a big difference.
Mark: Huge difference. That’s a great point. Yeah, they just want the cash to cover up some of these sins, to cover up some of this stuff in the water and the rapids as you were talking about. They just want the cash and maybe string them along for another five years.
Brad: It’s interesting. When people bring in an investor they forget that not only do they get the money, but they get the investor’s time. Sometimes we equate that to kids moving back in with their parents after they’re out of college. They don’t really like the adult supervision that comes with that, but certainly with an investor who puts their money in the business, they want to be involved in the business and understand.
A very entrepreneurial business owner, one of the reasons they’re successful is because they make decisions quickly and they don’t collaborate a lot with other partners. Sometimes that structure of having multiple people that they’re accountable to actually stalls the entrepreneurial spirit that they might have and it slows them down to some degree and frustrates them.
Mark: Probably some level of unhealthiness, right?
Brad: Absolutely.
Mark: Some discourse there. Cash flow from operations isn’t a one year goal, right? It just needs to be for the continuum you can’t … We’re going to have cash flow from operations this year and next year.
Brad: Right. When you think about the reports that most business owners look at, they look at an income statement, a profit and loss statement which starts off with revenue and it goes down through your costs of services or costs of goods. Whatever you call it. Then you’ve got overhead in there. Then there’s this number at the bottom that is called net income.
It’s really interesting because when you talk to a lot of business owners, when they started their business a long time ago they actually just thought cash flow. Because that was a very natural way for them to think. What cash is coming in, what cash is going out? What am I going to collect? They really didn’t think about a sale until they got paid. They didn’t really think about expenses until they paid them.
Then as they began to grow and get more sophisticated or to get more help, they were forced t transition to thinking about net income because that’s the way the banks tend to look at things and others on the outside. Cash flow from operations is actually a very natural way to think about it because you end up taking the income statement and taking out all of the stuff that is more accounting-related and less business-related. It’s a little bit of a complicated process to do, but once you get the routine down it’s actually something you can report every week or every month going forward. You can budget around that. You can incent people around that.
Mark: That’s a great point about budgeting around it because I don’t know any of our clients, I shouldn’t say any, very few of our clients would budget around cask flow from operations and it is such a driver. I would say this applies to our exempt organization clients, our nonprofits.
Brad: Absolutely.
Mark: They still need to have cash flow from operations.
Brad: They do and not for profits typically are run with a mission. They’re not necessarily profit-driven in all cases.
Mark: But they need to be.
Brad: But they need to be and they also need to have cash because if you don’t have cash you can’t fund your mission. You can’t fund the objectives.
Mark: Not to steal your thunder, but they would be unhealthy with no cash.
Brad: They would be very unhealthy.
Mark: Yeah. I think unhealthy is, it’s not short term. I think of healthy as long term. Maybe you get a cold at some point, but this is a long term strategy.
Brad: It is a long term strategy. That’s a great point. It’s interesting because a lot of times what you find is that one of the ways that a business can transition from being unhealthy to healthy is actually by getting smaller because if you can identify some of the things inside the business, perhaps it’s a … An example of something that makes a business unhealthy is a customer that may pay in 90 days or 120 days.
You get that sale, you get the order. You ship the product out or you provide the service and then you spend that money. Then it’s not for 60 or 90 or 120 days that you actually get paid. That’s an example of being unhealthy. Having customers that are very small, that are very disruptive on the business where they call you on Friday at 3:00 and they want their weekly order and it’s $200 or $400. It’s really a burden to the organization to get that out. That’s unhealthy.
One of the things that people look at is let me get rid of some of those things and make the business smaller. Then once it’s smaller you can get it healthy again and then grow it back in a very healthy way.
Mark: Being disciplined, maybe what customers you take on, maybe what geographic locations you go into I think all would go into a healthy discussion.
Brad: Absolutely. Having a healthy company that really runs the business around cash flow is really a culture inside the organization. Every organization has a culture of some sort. Some cultures are just sales and growth-oriented so they end up bringing on customers to book the revenue. Then once they have the revenue they struggle with getting paid. That’s a sales culture that may not be conducive to having a healthy business. Having a business that’s really focused on cash flow where you’re looking at what’s the cost, what’s the cost to the company from a cash flow standpoint of that order or that customer really changes the way people think.
Mark: I could see that that might be smaller. It might be not as accelerating growth, but I could see that company being significantly healthier in the long run. Not dealing with problem clients, not dealing with cash flow problems. Probably a happier staff I would think through the whole process, just not having to deal with all of those issues.
Brad: Absolutely. It really does change the whole nature of the organization. When you go through that process and when you look at it and everybody gets focused on really the key things that are going to drive the business, that’s where the staff can come together, morale can improve, everybody can get focused on the things that are really critical to the business. If you think about it, what would you rather have? Would you rather have a 10 million dollar business that’s barely making money? Or would you rather have a 5 million dollar business that’s making a million dollars a year?
Mark: That’s an easy question.
Brad: It’s easy for me. It’s easy for most of the business owners out there too.
Mark: I assume it’s hard for them to get there.
Brad: Well, it’s hard to get there because it requires change and sometimes change is the hardest thing. As business owners sometimes we struggle because we make decisions and yeah, we make lots of decisions and we do lots of things, but the reality is nobody makes all the right decisions. If you’re batting 500 on your decisions a lot of times you’re doing pretty well, but it’s the undoing of some of those decisions that may not have been in the best interest of the company that sometimes are hard.
Sometimes we don’t want to admit that. Sometimes it takes other people to bring that to our attention, but at the end of the day those are things that we can do to really get our business focused on the things that matter most not only for the business, but also for our employees, our staff.
Mark: I’m a business owner out there and I’m kind of struggling along. I’m at that 10 million and I think I’m doing okay. I want to get to 11 because that extra million is going to drop it right to the bottom line. What would you suggest that I do?
Brad: Well, it’s a great question. I would probably take a look at the 10 million and figure out what was happening from that. If you’re doing 10 million dollars and you’re really not happy with the results or you’re not generating cash flow from it or you’re still struggling with whatever it is, payables or payroll or being able to make investments in the business, you probably need to take a step back and look really hard at the 10 and make sure you’re happy with the results from that.
Sometimes it’s a matter of if you’ve got an opportunity for another million dollars of revenue. Sometimes the answer is that you start with 10 and as you’re bringing on the next million you’re also getting rid of some clients too or some revenue as well.
Mark: That’s hard for people.
Brad: It is, but sometimes it’s in the best interest of everybody.
Mark: Personal relationships, oh, they’ve been a client for a long term, a long time. Those are just hard things to do.
Brad: Well and sometimes they’ve been a client for a long time because you’re not charging them very much money. They’re getting a really good deal. It is hard. At the end of the day you just have to ask yourself what your primary objective is and if you really want to run that 10 or 11 million dollar business and really not make a lot of money or not have …
Mark: Potential? Not get your potential?
Brad: Then keep doing that. If that’s really what you want, but if you have a vision for what it can be and what it can become and what the growth is and what the potential is and how you really create value, sometimes when you see all of that one of the challenges is a lot of business owners run their business around their accounting system.
There’s nothing wrong with those systems, but they are very clearly historical-oriented. To some degree it’s like picking up last month’s newspaper or a magazine from six months ago. It tells you great information about the past. It’s really a matter of a business owner having a team of people around them that can take what’s in their head, the strategy they have in their head and translate it to a future set of projections that give them clarity of where the business is going.
A lot of times when you go through that process Mark, you take what’s in the business owner’s head and you translate the numbers and you create a projection or a forecast. They look at the end result and it’s not what they want. That’s where they’re headed.
Mark: Sure. It must be an eye-opening experience.
Brad: Sometimes it changes their whole business outlook because it’s what Steven Covey says, you begin with the end in mind. You really have to create that roadmap of where the business is going to go. We talk a lot about it’s like going on a long car trip. Nobody goes on a long car trip without knowing where they’re going and having an idea where to get there and then having checkpoints along the way and having people along the way that help them.
Whether it’s putting gas in the car or finding a place to stay or finding a place to eat. It’s really the same thing in the business. We have to have an idea of where we’re going. We have to have a map of how to get there and we have to have people around us in the business that can help with the journey.
Mark: Brad, these are some great points and unfortunately we’re running out of time. We do have one question we ask all of our guests.
Brad: Sure.
Mark: If you could have one super power, what would it be? Please don’t say x-ray vision.
Brad: Well, I wasn’t going to say that. I actually thought of it, but I wasn’t going to say it. Is being able to hit 350 and help the Reds get to the World Series considered …
Mark: That would be a super power, yes it would.
Brad: I’ll take that one then.
Mark: That’s a good one. That’s our show for today. Brad, I got to tell you, this has been very inspiring to me. Very insightful, very engaging. I really appreciate you taking the time.
Brad: Well Mark, I appreciate being here. You’re a great host and maybe the next time I watch Family Feud I’ll see you on there hosting the show.
Mark: Do you know something I don’t? Thank you for listening to Unsuitable on Rea Radio. Until next time I’m Mark Van Benschoten encouraging you to loosen up your tie and think outside the box.
