Ged: [00:00:00] Should we go straight into where did all the money go?
Milan: Absolutely.
Ged: Okay,
and welcome back to podcast as always. I am here with Milan, ve how are you, Milan?
Milan: Okay, great. Good morning to Sydney and very rainy afternoon in Vancouver.
Ged: Alright. It’s a beautiful sunny day here in Sydney. There might be a bit of a temperature difference, but, but that’s just the seasons. That’s the seasons. Okay. So, as always, we are gonna, we’re gonna shuffle the deck and see what comes up and then we’ll talk you through the card. And we normally have great conversations here, so I’m, I’m excited to see what comes up from the shuffle.
Milan: Shuffle shoulder. And we have a diamond card today, and the title is worded
Ged: What’s,
Milan: Sorry.
Ged: What’s the significance of the diamond? Sorry. Sorry to interrupt. What’s the significance of the [00:01:00] diamond?
Milan: Yeah, that’s right, that’s right. We should be we should be more prescriptive about it or descriptive, I guess. The diamonds are the systems, right? And usually if there is money involved, diamond Card comes up.
Ged: Okay, that makes sense.
Milan: Absolutely. And so the title of this card is Where Did All the Money Go? Where did Your Money Go? Shit.
Ged: So this is, this is something we see a lot where companies think they’re very profitable, but the reality is they’re not as profitable as they think. They are, and this card goes into some of the reasons why. So what, what prompted you to put to create this one as a card Miller?
Milan: I think that you know, it wasn’t necessarily the illusion of profitability. It was more of the. Re really, as the title says, where did the money go? Like, you [00:02:00] know, so I, I’m talking to the CEO and he says, look, you know, I’ve been building this company, had it for 30 years. We are growing here over a year, but there is just no money left.
At the end of the year, I’m badly paying myself. Like, my goodness, what is going on here? Right. And it’s not like I heard it the first time there. It was just so specific and such an extreme thing, like imagine putting. 30 years, which is basically, you know,
Ged: Yeah.
Milan: People that’s their working career into something and then
Ged: Hmm.
Milan: Like you have nothing to show for it. Depressing, right. And, but far, far from uncommon, I’m afraid. So that conversation sparked it and it’s like, well, what, what are the usual things that we often see CEOs do that are causing this drain? And yeah, try to answer the question, where could the money go and where you might want to be looking.[00:03:00]
Ged: Yeah, and I think we, we often see the same sort of reasons, you know, the not, not having a real grip on, you know, the, the mechanics of their business, the financial mechanics of their business in terms of money in and money out and where it’s going and when is the good time to make an investment or when is the good time to be prudent. And just things like, you know. I, I’ve often, I often see CEOs, and I’m not, I can’t actually remember if this is in the card. I often CEOs really neglect to account for things like bonuses, you know, and all of a sudden they just see their profit at the end of the year or the cash in bank just suddenly getting sucked up because they, they hadn’t actually calculated what impacts things like bonuses we’re gonna have know, or, or that truck purchase or that new.
Manufacturing equipment that they invest invested in. And the, unless you’ve got that forward looking view and we, we talk about planning in one of our other, our other cards, unless you’ve [00:04:00] got, unless you’ve got that forward looking view on money in and money out and where and when you decide to make those investments, it’s really, really easy to suddenly realize that, oh, our cash is not where we thought it was gonna be.
Milan: Yeah, just you have to think about the cash and you know, what comes out of accounting, for lack of better word, is the ultimate lagging indicator. Because once there is the money either is in the bank or isn’t, there is not a hell of a lot you can do about it. And unless you have the foresight, it’s like, if I do this, I expect the cash balance to evolve in this particular way and is it doing it or not?
Right? If, if there is a difference, and I can be looking for reasons, but without that foresight, without that planning, so many companies so many CEOs and especially founder CEOs fall into this ultimate. Reactive mode of financial management, right? When really like the, [00:05:00] okay, this, we, we are doing our stuff.
We are doing our stuff. The receipts are going through the bookkeeper and, you know, at the end of the year, the account that looks at it and gives us what the hell our tax bill should be, and that’s it. Right? That’s sort of the, the looking at it and it’s so Such a misuse or lack of use on the or of a fundamental tool that tells you whether your business is healthy or not because beyond a particular, beyond some complexity there is no way that one can hold all of that in their head and just, you know, swim limb. And this might actually be now, now when we are, we are talking about it, one of the triggers that, you know, once you have a company of five people, you can keep it. Right. Once you
Ged: Yeah.
Milan: Hundreds of thousands in provincial, millions of dollars in terms, you know, in payment terms and all of those things, you can’t do it by seat of your pants anymore, but [00:06:00] maybe you miss the moment when it’s ceased to be so.
Ged: Yeah. Yeah. Yeah.
Milan: You need a system to start supporting you in the, in the decision role. Otherwise, you’re going to wake up like this, you know gentleman who was like looking, you know what the hell happened, right?
Ged: So, so where, where are the specific examples of where you see cash or money or profitability or whatever you wanna call it now? And I know, I know they’re different, but let’s just use that as a general term. Where, where do you, where do you see the decisions going wrong? They end up draining money.
Milan: Let’s start from the point that, that, you know, the warning system is not there, right?
Ged: Mm-hmm.
Milan:. You don’t see or you don’t notice that the money is going away until it’s too late, until it’s gone. You know, with that aside, because obviously when, if you have that trigger, then you can look immediately at what’s happening in that specific case. [00:07:00] So that, that aside. I think there are sort of five-ish main categories. Obviously people, labor. You know, we
Ged: Mm-hmm.
Milan: About labor efficiency ratios. Like, you know, if, if you don’t have the right labor to do what you need to do it’s a problem. Generally it is that you just. Are, you are not getting the ROI on the people you have and you can have various reasons.
You know, we discuss why a players leave. We discussed the you know, the lovable losers, you know, people if you are holding on for other reasons than economic ones. And that all cost money month, month after sorry, pay cycle after pay cycle. And, you know, there is no stop to it until you put a stop to it..
Ged: And that’s often one of the easiest ways to, to retrieve money
Milan: You
Ged: In that
Milan: You would think
Ged: If you.
Milan: You know,
Ged: If you, [00:08:00] if you know
Milan: In the mechanical sense is in,
Ged: Mm-hmm.
Milan: You know, let that person go. But it seems, it, it’s very, very hard, especially if it’s a founder, situation. You know, you have a loyal. Person has been with you for 17 years. They were great for the first two.
Ged: Mm-hmm.
Milan: So again, very, very common. So I would not bucketize it because it is not to, it’s simple, but it’s not necessarily easy, which is why so many companies get stuck in that, in that vicious cycle.
Ged: Yeah. And you know, may maybe that we need to create a new card about why people don’t make tough decisions because this is one of those decisions that is easy, but tough at the same time. And from a, from a, a ceal point of view, you can identify someone who is not contributing and probably costing the organization and probably dragging their colleagues down at the same time.
So you would think, [00:09:00] okay, you know, that’s an easy decision. But as soon as there’s people involved, it’s no longer an easy decision.
Milan: Yeah.
Ged: But in business, we are there to make tough decisions because someone’s gotta make them. And if you don’t, you are gonna see cash just flowing out the business for no return whatsoever.
Milan: Ly enough. The next cart in my draft folder is called the decide how to decide.
Ged: Right. Okay. So where, where, where else does money flow out?
Milan:. Sometimes the the founder or the owners themselves, that has two sides of the cart, no pun, no pun intended. If they pay themselves too much
Ged: Mm-hmm.
Milan: Pay themselves too little, both of those are dangerous. Right, too much. Obviously, if the company cannot afford it, like, you know, my opinion, your, your company’s [00:10:00] doing great.
You’re leaving enough money to finance growth. You are properly capitalized. It’s your company, it’s your money. You know, I don’t care. I. But there, there’s a there, there is such thing as too much what, which is when those conditions I just listed are not fulfilled, meaning there isn’t enough money for a growth, there isn’t enough reserve capital for in case of emergencies and so on. I see that sometimes, but not very often. What we see more often is that the founders are not paying themselves enough and they’re not realizing that it’s actually. Sign that the business model is not healthy.
Ged: Mm-hmm. Mm-hmm.
Milan: The card mentions Greg Crabtree’s, simple number, straight
Ged: Yes.
Milan: Profit, which is that he has a whole chapter on this. So, you know, in. Benefit of time, let’s leave it to the listener to pick up [00:11:00] that book and read it because that is probably the best guide of how to spot those flags and do
Ged: Yeah.
Milan: What are the best practices of how to avoid them.
Ged: Yeah, and this is, this is often a real blind spot for founders and for CEOs because now I often. I often ask the question is your company profitable and how profitable is your company? And they say, they come back and say, oh, you know, we were 40% profitable. And it’s like, okay, well that’s, that’s phenomenal.
That’s incredibly high. Now if you, are, you sure you factored everything into that? And they say, well, you know, I pay my salary out of, out of that 40%. Ah, okay, so you are saying your gross margin is 40%. Okay. So once you pay your salary, you know. How much is it then? Oh no, it’s still 20%. Okay. So, and once you pay your distributions and your dividends, you know, they suddenly start to realize that their business is barely profitable at all.
You know? Or they’re choosing to pull all the money out of the company every quarter or every [00:12:00] year, depending on what their distribution cycle is. And that’s okay. But then that’s, that’s then a lifestyle business and that’s not a growth business. So you need to be clear about, you know, what are you actually trying to build?
Are you trying to build a lifestyle business or are you building a growth business? Now you can do both, but you then gotta make some very, very clever decisions about how you reinvest money in and when and when you take those distributions out. And how much. You take out. So that’s a great example of, you know, revenue is vanity profit sanity, but cash is king.
You know, if you are paying yourself all the profits now you’re just, it’s just a lifestyle business.
Milan: Absolutely. And, and again, nothing wrong with lifestyle business, if that’s what
Ged: No, not at all.
Milan: If that’s what you’re, what
Ged: Mm-hmm.
Milan: To do. But, you know, you must not kit yourself. That something else then what it looks like. I
Ged: Yep.
Milan: A opposite example where [00:13:00] the. Payment to the owners was done in a way, believe, that they were billing it to a different company. That was the situation. So that hap what, what happened was that it was just a straight cost for the for this organization. And guess what? There was a profit sharing program and there was never any profit. You know, like that this could be really, really abusive and obviously, you
Ged: Mm-hmm.
Milan: You have a huge turnaround of people because you are trying to incentivize them on something that then you take away from them. Like, you know, it was ridiculous. But again, the key here is to understand your role as an owner versus your role as an employee or a manager, or CEO or
Ged: Yep.
Milan: You are. Right. What is the market cost, market value of the work you’re doing for the company? And then what is your right as an owner? What do you want to do? [00:14:00] Presumably you want to be a good steward of what you, what you created. But it’s, those are two very, very different roles, right? Incorrect directly would tell you, you know, pay yourself as much as it would take you to replace yourself. That’s a really, really good rule of thumb.
Ged: Yeah. Sound advice by Greg there. Yeah. Mm-hmm. And if you haven’t read Simple Numbers, if I’ll do that again. Mm-hmm. Yeah. If you haven’t read that book, you should. Mm-hmm. Mm-hmm.
Milan: Well, if you are listening to this podcast this far, that means that a topic is probably interesting to you. Then you definitely should read that book.
Ged: Absolutely. Yeah. And both additions as well, because there’s a volume too that covers different topics around money and cash.
Milan: Yeah, that, that, that one goes more to, if you are really a little bit farther into the finance side, it’s really how to sustain, you know, create sustainable growth in
Ged: Mm-hmm.
Milan: But the first one is essential. The second one is really, really [00:15:00] valuable if you don’t have
Ged: Yeah.
Milan: Finance professional backing you up. Yeah.
Ged: Yep. Yep. So, so where else does money flow out in, in a way that is often surprising to CEOs? Hmm.
Milan: Really surprising for people is that growth costs money, right? That, oh, we added a million of dollars in revenue. Fabulous. It cost us 600,000, and our growth margin is 35%. Guess what? That money had to come from somewhere, right? The, the difference if you are in a recurring business, a recurring revenue business, that might still be okay because you’ll get the money in the next year.
Without
Ged: Yeah.
Milan: Without that customer acquisition cost, it’s fine. If you are not. In a recurring business, or if you are not expecting that future revenue, you know if you’re not dealing with the terms like customer lifetime value and so on and so on, you still have to make sure that you can finance that that bridge [00:16:00] until that relationship with a customer is going to return, what you’ve put into it.
And sometimes that takes years
Ged: Yeah,
Milan: And
Ged: Absolutely. Yeah.
Milan: The money has to come from somewhere.
Ged: Yeah, I, I worked with a client, a couple of, well, it’s a few years ago now, and, you know, they, they in theory had a very, very healthy gross margin. But they had no cash, no money, no money, and they couldn’t understand where it was going. And we pretty quickly came to the conclusion or to the realization that they were in a professional services environment and their sales cycle was really, really long.
So once they did a deal, you know, they could work out their gross margin. Okay, this is what we’re charging a client. This is what it costs to deliver the cost of sale. And yes, the, the gross margin looked pretty healthy. Where they were, where they were losing money, it, they were losing money in two ways.
First of all, [00:17:00] because the cost of, sorry, because the sales cycle was so long. Once they, once they allowed for the cost of the sales resources to win the deal in the first place, and once they allowed for the cost of overruns and rework, that didn’t figure in their theoretical gross margin calculations, they were barely breaking even.
Yeah. And it should have been so obvious to them. It should have been right in front of their faces, but it’s just not something that they were prepared to accept.
Milan: Greg would tell you to put your sales into direct labor so
Ged: Yep.
Milan: You know, you would see it in your contribution margin.
Ged: Absolutely. Yeah.
Milan: Ged: Yep.
Milan: Instead of just having a massive over, ’cause the, you know, dealing with with things like work in progress or, you know, work that you’ve done, but it’s actually
Ged: Hmm.
Milan: Being sold effectively by stage.
Right. Those are, [00:18:00] those are a little more complex, but again, it’s just, it’s just a fairly basic business. It’s so easy though for a founder, CEO to get a. Sort of a financial tunnel vision, right? And looking at the numbers that make sense and that they fit and, you know, and ignore the residents sucking money off left and right. Yeah, the, you know, the, the dilemma you described is like they have this great gross margin risk. Where is the money? And, you know, probably wouldn’t take very long investigation to a, any decent accountant to take a quick look and say, Hey, this is where it’s going. Right.
Ged: Oh, we, we didn’t even need to rely on an accountant, you know, once we go, once we opened the books, it was apparent. But the thing is, you know, once it became clear to them, they weren’t prepared to change their behaviors because this was a deep rooted belief that, well, you don’t, you don’t, you don’t factor sales into the cost of [00:19:00] the cost of sale.
Well, yeah, you do. Yeah, you do.
Milan: Well honestly, you don’t have to. But then don’t be
Ged: Hmm,
Milan: Right? Once,
Ged: Right.
Milan: You put everything together and the cash is not in the account, at the end of the day, account which one, you know, which dollar went where and why,
Ged: Yep.
Milan: And then decide whether you want to keep doing it that way or not.
Ged: Yep. And we’ve, we’ve mentioned grab, grab Greg Crabtree a few times. He has this notion of labor efficiency ratios, and I often, I often implement this with my clients where we are working out some key ratios around how much something brings in and how much it costs. And then. Tracking those numbers month on month on month.
And that then gives us the ability to make decisions about when is the right time to make the next investment. And that next investment could be a new customer service representative. It could be a new truck, it could be a new, [00:20:00] manufacturing piece of manufacturing equipment. But having the insight to be able to say, right, okay, now we’ve made a, the last investment is now returning us a, a return so we can now we’re building up our cash balance.
It will then give you the trigger point to say, okay, we can now spend this amount of money on that investment and that’s gonna drop your profit. But then as long as you’ve made the right investment, it’s gonna give a return and you end up with this sooo model where gradually you go up and then down and then up again.
But because you are tracking those ratios, you can make the informed decision at the right time and not before. ’cause if you do it too early, you’re gonna kill your cash balance.
Milan: Absolutely. And look, the ratios are beautiful in a way, right? Because you
Ged: Mm-hmm.
Milan: Looking at it and you look at it month after month and you’re like, you know, some things that been previously hidden, blaringly obvious. Right. And sometimes [00:21:00] really just about surfacing the information in a, in a readable way.
And Greg does a great job at that.
Ged: Yep.
Milan: I didn’t want to go into that much of a technical detail in the card because again, you can read a book, right? It’s more about
Ged: Yep.
Milan: The from the leadership perspective. What, what are the things to usually look out for if the, if the cash is tight? And yes, you should always get a second
Ged: Mm-hmm.
Milan: On your financials and see, you know, what’s, what’s going on in there.. But there are some, there are some obvious things, right? Like are you getting out of your labor? What do you expect? Are you investing in things with a predictable ROI, right? The ping-pong table is a luxury. It’s not an, it’s not an investment unless you absolutely need it to, you know, retain the A players that you are looking for in your particular market. I’m not saying. [00:22:00] Don’t buy a, a ping pong table if you can afford it. So that would be an over investment. If the under capitalization piece, right when, when basically it actually costs you more to add another dollar of revenue that you realize. And if it costs you more than the margin that you make on the dollar, it’s sucking your cash on somewhere. Again, that’s fine. It’s common and it’s healthy as long as it’s controlled and predictable and you can model it in advance and then see what is, what is actually happening, right. A
Ged: Yep.
Milan: Deal is not looking at the financials as a proactive measure of the health, health of the business, and just looking at the number at the end.. Hmm. Need to use accounting as a tool to run
Ged: Mm-hmm.
Milan: I remember, I’ve been a little bit obsessed about it. You know, so running this, [00:23:00] you know, three person company as we are building it, I’m talking to my bookkeeper and say, Hey, these are the things I want to see every month. I was like, we don’t do that.
Like none of our clients had located a freaking balance sheet on a monthly. I said, well, I will.
Ged: Yep. Absolutely. Yep. Mm-hmm. I think the, the last thing I want to flow in to this, this conversation is just the cycle time of money. Now most companies, once they are spending money to generate revenue, there is a delay before the money actually comes in. And, and if you’re lucky, that might only be the time that is needed to get the invoice processed.
But for most businesses, they’ve actually gotta do some design work or some development work or some implementation work or some service delivery work. And then the invoice goes in. And I’ve seen examples where people are. Basically acting as their customer’s, banks, their client’s, banks for 6, 9, 12 months in some [00:24:00] cases.
And just because you’ve made the sale doesn’t mean the invoice has been paid. So sale, A sale in a lot of business is not revenue. It is a promise of future revenue if you deliver, okay? And if that cycle time takes too long, then you just grow broke. You run outta cash before you’re able to send out the invoice because the right criteria haven’t been met before the invoice can go, and that’s, that’s another really, really dangerous way to drive your business into the ground just by not being aware of how long it takes to get money back into the business.
Milan: Then you have opposite situation. You have some great businesses that get money from their customer long before they have to pay the cost of pay the cost of what is it to actually they’re actually selling correct.
Ged: Yeah, absolutely. It then becomes a customer funded business. You know, the, the, the, the, the customer pays before the service is delivered, and that’s an awesome business model. [00:25:00] Anything you can do to reduce your cycle time and even get it negative. Negative’s a good thing in this case, then that’s gonna make your business a lot, lot stronger.
That’s gonna make your business model much more robust and predictable.
Milan: Great way to finish.
Ged: Okay,
Milan: Let’s call it a
Ged: Look, I,
Milan: Can you
Ged: I said
Milan: Running water?
Ged: No
Milan: Good.
Ged: Is, is there running water? Have you got a stream next to you?
Milan: No, but there is a bathroom above me and probably one of my
Ged: Ah,
Milan: Decided to go take a shower right now, so I could hear it. But
Ged: No, no, I can’t. No.
Milan: Up the, it’s good.
Ged: Yeah, it, it, it is rejecting it. I’m not hearing it. Or, or descrip is rejecting it,
Milan: Alright, let’s do
Ged: So, yeah. So. I, I think, well, before we do that, I think Luke is gonna have to do some edits there. That, you know, both, both [00:26:00] from both of us. You know, we, I think we both rambled a little bit at times, so you know, if Luke, if there’s any way you can sort of know, tighten up our language, our conversation, and maybe take some of the pauses out, then that would be great.
Milan: Absolutely.
Ged: Mm-hmm. Okay. Intro. Shall I do the you know, what, what did we talk about? You know, this is, this is probably a, this is probably a card that you would want to drive. The, what did we talk about? Content.
Milan: A, yeah, and since the cart is long, we’ll do a very short intro.
Ged: Yeah, yeah, yeah. Mm-hmm. Mm-hmm. So in our conversation today, Milan, we talked about, I’m gonna start again. I can’t remember the name of the card. Here we go. Got it. Got it. Yeah.
So in our conversation today, Milan, we talked about the card. Where did all the money go? What did we talk about?
Milan: He talks about where does the money go sometimes, because we both have experiences talking to our [00:27:00] companies and CEOs who are.
Ged: I.
Milan: Puzzled with despite with the fact that despite of their company appearing healthy and everything’s running and buzzing, there just isn’t much money or any money left at the end.
And we were talking about the various places where the money could be leaking and we were talking about various ways of how to fix that and, made a book recommendation that could help listeners even further.
Ged: So some of those were maybe obvious, some of them less obvious. So digging into this edition and see if you find any gold.
Indeed. Yes. Okay. I need to change my earbud cushions. There are not that comfortable anyway. They’re okay for now. [00:28:00] Okay. So actually that took a lot longer than I thought it would. I didn’t think we were gonna get that long out of this one.
