As founder of The CFO Project, Adam Lean consults with small businesses who’ve stalled and helps them to grow while maintaining a healthy profit – something the owners haven’t been able to do themselves.  

Every business has its own set of obstacles to achieving that goal, of course. But, says Adam, there are several specific things that he sees most businesses doing wrong… or not doing at all when they should be. 

One major point to keep in mind: more sales does not always equal more money in the bank. It’s a lesson he learned the hard way in the early days of his ecommerce business. We get into detail on all of this, including…

  • The biggest myth about profitability
  • Why an accountant or bookkeeper can’t help you
  • A four-step process for growing profitability and cash flow in your small business
  • The five most important numbers to watch in your business
  • Various invaluable tips and pointers which can vastly alter the long-term outcome of your business

Listen now…

Mentioned in this episode:

 

Transcript

Steffen Horst: Welcome to the Performance Delivered Insider Secrets for Digital Marketing Success Podcast, where we talk with marketing and agency executives and learn how they build successful businesses and their personal brand. I’m your host, Steffen Horst. Today we’re going to talk about why small businesses fail and what you can do to fail-proof your business. Here to speak with me about the topic is Adam Lean who is the founder of the CFO Project, a consultancy that helps small businesses grow and be more profitable. Adam, great to have you on the show. 

Adam Lean: Hey, I’m excited to be here. Thanks for having me.

Steffen: This is a topic that has probably less to do with digital marketing, more to do how people can ensure that they continuously to grow their business, but not only grow but also maintain their profitability. Before we dive into the main topic, I would love for you to tell our listeners about your background and how you came about to found the CFO Project. 

Origins of The CFO Project

Adam: Yeah, so I was an accountant after I graduated college and within months of starting my accounting job, and this is back in 2005, I was bored to tears because an accountant, their job is to record what happened in the business and I wanted to get my hands dirty and work in the business and help grow a business. So I actually started in 2006, started my own business and so I started an ecommerce store because it allowed me to still have the day job. But of course, ecommerce was something that was sort of new back then. 

And so I was excited, I got started and then when you know it actually grew. Within two years, I was doing a half a million in sales and I was able to, at that time, leave my day job and devote full time to my ecommerce business. Well, so sales are growing, I was my own boss, I was my own business owner. It was great. And then it seemed like, within a period of 12 months, things went from great to good to Oh, no, what’s going on? Something’s wrong. 

And you know, I remember vividly in 2009, I was, I just sort of hit a wall because I had so many sales and my website was growing sales-wise, but I, you know, I did not see the cash in the bank account. I mean, that my profit margins, and you know, was dwindling every single month. And what’s worse is that my bank account didn’t have anything in it. I mean, I didn’t understand it. What was more frustrating, honestly, was the fact that I was an accountant. 

I should know what was going on with the business, but I was so focused working in the business trying to manage employees, buy inventory deal with customer service issues, you know, order management. All the things that, you know, business owner, all the hats a business owner has to wear, you know, I was wearing them and I was working 75 hours a week and I was so overwhelmed. I felt like I had 20 balls up in the air I was trying to juggle and I just knew that all the balls will come crashing down one day and I will be you know, fall flat on my face and it was an awful feeling. 

And I didn’t know what, how to improve my business. I just didn’t know what to do. And, you know, I’ll explain what I did to fix it. But 10 years later, I created this business called the CFO Project to give people like me back then, somebody a financial guide to cut through the clutter and say, Look, these are the main three things that you need to do right now. Just these three things. And then next month, once I do those three things the next month, here’s the next three or four things that you need to do. 

And that’s what a CFO does for big businesses. The CFO, the Chief Financial Officer, tells the CEO of this big business, here are the priority list of things that need to happen to make sure the business makes money and grows and has cash in the bank and etc. Well, small businesses don’t have something like that. And I wanted to give something like that to small business owners. So that’s how the CFO Project was born.

Steffen: Was there, because when I looked at your LinkedIn profile, I saw that I think before you launched The CFO Project, you worked for a company on the operation side, right? What made you decide to found your own company other than saying, You know what, I want to help small business owners to grow. To overcome the challenges that I’ve faced 10 years ago.

Adam: So I took for granted. And I took for granted the fact that I was an accountant and I understood the numbers. And that’s back in 2009. when things were going awful, what I, my solution, and this is essentially, what I use with clients today is I mapped out the key numbers that were important to my business and started tracking those numbers on a regular basis. And then set goals for those numbers. And every month I tracked to see if I met those goals. And so I had probably a list of 25 numbers I was tracking and I, and that’s, you know, I took for granted the fact that I knew how to do that. 

And that’s actually what allowed me to see success. After that 2009 time period when things were going crazy I started tracking the numbers, and then things slowly started turning around because I was running the business like a true business owner like it’s a true CEO. I was running the business by the numbers and let the numbers tell me what’s going right and what’s going wrong. And the things that were going wrong, that’s what I focused on. So instead of being consumed with the day to day working in the business, I started removing myself and started working on the business. 

So I, again, took for granted the fact that I wasn’t like, that I had an accounting background and I started doing consulting with other businesses, business owners, and helping them do the same thing, you know, turning here running their business by the numbers and knowing what’s going on in their business and knowing their numbers. And I quickly realized that most small business owners are not finding, you know, they’re not financial experts. They’re experts at their craft. Like a dentist owns a dental practice, because they are trained in dentistry, not because they understand, you know, financial stuff. 

And so I just knew that I had something that people need and crave and they want to, small business owners want to know what’s going on in their business. They want to know how to fix it. They’re just overwhelmed a lot of times because they have so much going on and they can’t see the forest for the trees. So that’s why I wanted to start The CFO Project. I wanted to give small businesses the resources and tools that big businesses have in the form of a CFO.

Steffen: And their size probably prohibits them from hiring their own CFO because, you know they, those people come at a price if they are knowledgeable and have done this before. So your partial CFO service helps them get exposure to someone who knows what they’re talking about from a numbers perspective without them, the owner, having to take a business course or finance course at a university to catch up with some of the information that they would need to have.

Adam: Totally, you’re absolutely right. I mean, let’s face it, a full-time CFO for a big business is going to be making well into the six figures and small business owners don’t need that type of person. But they do need something. And here’s the problem, accountants and bookkeepers most small businesses have them, but they’re getting paid to record what happened in the past and that’s it. An accountant, their job is to record what happened to the past correctly for compliance reasons, for tax reasons, to make sure that the books are right. The bookkeeper is getting paid to record the books and make sure that it’s correct. 

And that your bookkeeping is correct. Neither one of those people are getting paid to help strategize and look at the financials and interpret them and help grow the business. That’s the job of a CFO in a big business. Well because small businesses can’t afford a CFO, we created this system so that it’s essentially a four-step process that we bring all of our clients through, and it’s led by a CFO, but we’ve created this system so that it’s affordable for small business owners. So we guide every one of our clients through these four steps every month. 

And the goal, the ultimate goal is to grow their profitability and cash flow. I mean, that’s the ultimate goal and we track that, you know, religiously. And that’s the whole point of having somebody like us, but we’ve made it affordable. So instead of getting this high price tag CFO, which is most business owners can’t afford and don’t need, we give you a system, this four-step process to grow profitability and cash flow. It’s just led by a qualified CFO.

Steffen: Earlier you mentioned that when you were running your own business, you tracked 20 numbers to determine how you were doing as a business. I would assume within those 20 numbers, there are a number of figures that are the same for every business that they should look at and should make sure that they track those numbers. Which numbers would that be? Which are the numbers that every business owner should look at in order to determine at least the basics of how they’re doing?

Five Numbers Every Business Should Track

Adam: Yeah, so there, I mean, that’s a great question. There’s really five numbers that every business needs to track and they’re going to sound obvious but a lot of business owners aren’t tracking them. They think they are, but what most business owners are doing is looking at their bank account and seeing if they have money to pay bills. That’s pretty much it. But the five numbers are sales, so you’ve got to, of course, track top-line sales for your business, whether you’re selling products or services. 

But sales is not the end all be all. Many high sales organizations that, you know, businesses that are making a lot of sales go out of business all the time. It doesn’t matter how much you make, it matters how much you keep. And sales is the making part. Profit is the keeping part. So of course, you need to track sales. And of course, you need to grow sales of, you know, in most cases, but it’s not the end all be all. So you’ve got to track sales, but you also have to start tracking gross profit. And all that is simply your sales minus all the direct costs to provide the product or service to your customer. That’s your gross profit. 

So you know, just for a simple example, let’s say you own a pizza restaurant. You sell a pizza to a customer for $10. Customer gives you $10 you give them a pizza. So the sales is $10. Well, the direct cost involved with providing that pizza to the customer is like the dough and the pepperoni and the cheese and the labor to make the pizza. Let’s say that that was $4. So the gross profit on that pizza was $6. You sold it for $10. It cost you $4 to provide the pizza. So that means you had a $6 gross profit on that pizza. So you can measure gross profit in two ways, dollar amount, so $6 and then also percentage amount. 

So $6 your gross profit divided by sales of 10 a 60%. You’ve made a 60% gross profit. Now you can start comparing your product or services, you can compare apples to apples. You can see it with percentages. You can see how you’re doing across your product line up, across all your categories. You compare what you did last month. You can compare how you did last year. And so the goal is to improve your gross profit percentage-wise. So we’ve talked about sales, we’ve talked about gross profit. The third thing to track our expenses, your overhead. These are the overhead expenses to run the business that are not necessarily direct cost. 

So these are just overhead, whether you sold one thing a month or 1000 things a month, you still have to pay these overheads. So things like rent and insurance and payroll and marketing. You know, you still have to pay those, but you have to start tracking them because every single thing that you spend money on, on all these overhead expenses, has to pay for themselves in some way. So every time you spend money in your business, you have to think Am I going to get this money back in some way? Is this a good investment of my cash? Because if it’s not, why spend the money? Like it’s like an ecommerce business, you know, of course, where customers don’t visit. 

It’s like an ecommerce business spending $20,000 on office furniture. Like why? You’re never going to see that. It’s not a great investment of cash because you’re not going to see that return. Like it’s, you know, what’s the point? So if you’re not going to see a return on those expenses, you might as well keep the money in the bank account. So we talked about sales, we talked about gross profit, we talked about expenses, the fourth is net profit. So sales, minus your direct costs gives your gross profit. You take that and you subtract your expenses, that gives you your net profit. And of course, at the end of the day, you want your business to be profitable. 

And so you can measure your net profit just like gross profit, you can measure it dollar-wise and percent wise. And you want to make sure that percentage number is growing as much as possible every single month. So we all know about profitability. You want to be profitable. But profitability is not, and this is where a lot of business owners get tripped up, profitability does not equal cash flow. 

And as we all know, you have to have the cash to stay in business. And it’s like the lifeblood of your business literally. It’s the oxygen. If you don’t have cash, you’re out of business. And one of the best ways, of course, to get cash is to make a profit, of course. You can also borrow money and get investors or whatnot. But for most businesses, profitability is the best method for getting cash flow. So the fifth thing, the fifth number that every business needs to track is their cash flow. 

You need to know exactly what’s coming in the bank account every day and every month, and what is leaving the bank account every day and every month. And you’ve got to make sure that on a regular basis, you’re getting more in the bank than leaving. So those are the five main numbers that every business regardless of what you sell, needs to track. And you need to know those numbers on a regular basis.

Steffen: That makes sense. That makes total sense. It gives you a great overview of kind of from the top, generating sales, then breaking it down to each step to let the end of the day you know, as you said, what goes into the bank and what needs to go out of the bank in order to pay, you know, your employees pay your the companies that you deal with that provide services or products, etc. 

So the title of the podcast is Why Small Businesses Fail? Why do they fail from your perspective? One thing I think you mentioned potentially, is that people don’t track the numbers, not even the minimum these five numbers we talked about just now. But what other reasons contribute to small businesses failing?

Why Do So Many Small Businesses Fail?

Adam: Yeah, that’s a great question. You know, according to the Small Business Administration, half of all businesses will never see their fifth birthday. I mean, that’s a staggering number. One out of two businesses will go out of business. And there’s a few reasons why this happens. The main reason is they just ran out of cash. I mean, that’s one of the top reasons. So why did that happen? Why do businesses fail? Why do they run out of cash? Well, there’s a couple of things that I’ve sort of come up with over the years as to why businesses fail. And we try very, very hard to ensure that this doesn’t happen to our clients. 

And I mean, you know, it hasn’t happened to our clients yet. So we know we’re on the right track. The first and you’ve already sort of mentioned that just now, you know, you’ve got to track your numbers. The reason why people don’t track is because most business owners, and we talked about this earlier, are not financial experts. They start a business because they’re experts in their craft. You know, a fitness guru starts a gym because they know fitness. A chef starts a restaurant or buys a restaurant because they know how to cook and they love food. 

You know, you’ve got to know your craft, obviously, but at the end of the day profitability and cash flow are financial terms, and you’ve got to know what is involved in that. So that’s the challenge that business owners face is that they’re not financial experts. They’re experts in their craft and their business. Another challenge the business owners face while they go out of business is that they know they can be making more money. They may have a lot of sales, but they just don’t see that in their bank account. They don’t,  they always struggle and wonder why it’s a struggle to make payroll every week. 

They don’t understand why, where the sales that they’re making is going, and so what they end up doing is they just work, they just think the solution is just working longer and harder in their business trying to get more sales and just try to work their way out of the hole. And the, and you know, and that’s just simply working harder, throwing more time at a problem is not necessarily going to solve the problem. You got to fix the underlying reasons. You know, the profitability and cash flow, you gotta fix those holes. Where is the profits leaking? Where are the sales leaking? Where’s your cash leaking? 

Until you can sort of step out of your business and work on the business, you’re never going to be able to fix those holes. If you just, the solution, and many business owners that fail run and, you know, try to work themselves out of the problem. And so they’ll end up working 90 hours a week, just working,  just hustling, if you will. And they just either get burned out, they just quit, or they just run out of cash because they haven’t fixed the underlying problems as to why they’re not profitable, why they have no cash. 

And then another challenge that’s facing small businesses is that, and this is sort of piggybacking off of what I just said, is that there’s sort of in a catch 22 position. They started their business because they want freedom of time and freedom of money, being able to make as much as they want. But they quickly realized that they’re sort of a slave to their business instead of their business serving them. Because of the reasons I just said. They’re working constantly in their business and they’re now a slave to their business. And so they started the business because they wanted freedom of time, just freedom period. 

But they realized that they can’t get that freedom without money. Well, of course, that’s the catch 22. You can get money without the freedom. You can get the freedom without the money. And it’s, there’s sort of in this weird situation that constantly in what I call like a growing pain phase where they’re just constantly growing, but yet there never seems to be enough money to grow. And it’s just a struggle. And it’s hard to get over that hump. And it’s really, really tough. And that’s kind of the situation I found myself back in in 2009. 

I wanted to grow, I needed to grow. I needed to have, to be able to hire more people so that I can have more freedom in my personal life. But I didn’t have the money to do that. And, you know, it was just a bad cycle and that, and a lot of business owners struggle, and then they end up calling it quits. So they just end up simply running out of cash and they can’t play the game anymore. And it’s a sad situation. But that happens all the time. That’s why half of all businesses go out of business.

Steffen: For me, a lot of it just sounds a little bit, so it sounds a little bit like that potentially having a proper business plan in place, making sure that the business model is sound, that the product services they are selling a properly priced could be the root problem of the things you just said. Because if I run out of cash, I mean, there could be several reasons. 

But one thing that I’ve seen in the past when talking to people is, you know, they just dive into business without having a clear understanding of what their costs are, at the end of the day. To deliver a service, which means they might not have done the pricing right, therefore give money away or they don’t even charge enough to cover the cost at the end of the day. How important is it to do a business plan, to do planning in general before someone starts with the business? 

Every Business Needs a Plan

Adam: Yeah, so here’s Okay, so here’s how I would answer that. Business plans, you’ve got to plan. Okay, you have to plan. There’s no point, you can’t build a house, there’s no point in breaking ground and starting to build a house before you’ve made the plans. You’ve got to draw out the blueprint. So you have to have some sort of idea and a blueprint. And everything sort of has to make sense. But when people think of business plans in a traditional sense, they think of these like 30-page documents that spell out operational procedures and who’s doing what and all this. 

You have, when you’re if you’re starting a business, you have no clue, I mean, about 90% of what’s in that giant guide. And the only reason most people do it is for their banks, that they’re trying to get a loan. And the bankers think that this document is somehow relevant and will come true, and it doesn’t. So those types of business plans are sort of worthless and useless. But you do need to plan. You do need to have a plan for your business. And so, I mean, we run things with our clients very practically, and we come up with a very practical plan. 

Every single year we essentially map out with the client, what, you know, based on what they’ve done in the past, usually the past 24 months we’ll map out alright, what is a realistic plan for sales, for gross profit, for expenses, for net profit? And we’ll look at that. And well, of course, I’m generalizing. But because of course, there’s so many things that make up sales, and gross profit and all that, but we’ll come up with a plan on paper before, you know, usually in the fall, or when we start working with a client, and we’ll look at, on paper, does all of this make sense? 

And we’ll sort of pressure test it, if you will. We’ll sort of say, well, if this doesn’t happen, you know, what happens to profit? If we miss the sales target by 50%, what will happen with profit? And we’ll sort of see, does this make sense? Is this realistic? Is it attainable? If our plans come through fruition,  is this going to work? And so we’ll map all this out, and if the client is happy with the profit number after we’ve mapped out the plan, then great. If not, we’ll look at each one of those components that make up profit and figure out what needs to change for it to happen. 

Once we have this plan set, then the client can, you know, the business owner can plan what they want to happen. They have a blueprint, a financial blueprint for the upcoming 12 months, the upcoming year, then they can get their team to rally around the initiatives that need to happen in this, in order to carry out this plan. You know, so for example, if you have a sales department, you can, you know, you can say 

All right, here’s the sales goal that we came up with for next year. I need you over the next month to come up with you know, realistic objectives for making this plan come to fruition, this financial plan. And then every single month, we sit down and see how on track are we to accomplish that plan? That’s the other point I wanted to make. Most people when they create a business plan, like this formal business plan that, you know, sometimes they fill out, they’ll fill it out and everybody will look at and say, Oh, that’s great. 

And then it’ll stick it on the shelf and they’ll never see it again. A true business plan, a true plan that I’m talking about this financial plan, you’ve got to look at every day, every week, every month, and then at the end of the month, you got to compare it to your, to what actually happened. And then make very specific and quick adjustments to make sure that your team is constantly readjusting so they’re always on track to meet that plan. Because at the end of the year, you want to make sure you hit that goal for profit that’s in your plan.

Steffen: That makes sense. So what you’re basically saying is forget about the 30-page business plan that the past everyone, well many people created, but create a plan to kind of it’s realistic, what the company is doing, and plans to do in a more compact way and then test the more conservative side. You know, if you say I want to create 100 sales on average per month, how is everything going to look if you only get 50 or 30 or 20? When is this kind of becoming an issue if you fall short? So that you also know when I go into problems when you’re veering off the set plan that you put forward.

Adam: Yeah, absolutely. And that’s the thing you have to, you, yeah, you’re absolutely correct. I mean, and it’s much easier, and let me make sure I clarify this, it’s so much easier to develop a plan if you’re an existing business. Because you already have history and data. You know what works. You know what’s realistic. And you know your staff. If you’re a brand new business, you’re starting a business, this is going to be harder because you’re just essentially guessing. 

But at least you, if you’re setting a financial plan, you can at least benchmark off of that every month, and see if your guesses were correct or accurate or not. And you can just adjust, and you can always just continue to learn and get better. But the bottom line is you’ve got to know your numbers, but you got to set your, set a plan for numbers. 

Steffen: Adam, so the second part of kind of what we talked about today was how to fail-proof a business. So how do you go about fail-proofing the business? How do you help businesses to fail-proof themselves?

Fail-proofing Businesses

Adam: So most businesses fail because they essentially run out of cash. So that’s the goal, to not run out of cash. And so we essentially work backwards. We make sure that the client doesn’t run out of cash. And so we look at all the sources of cash flow and find out, you know, how you’re getting cash, where the cash is going. And then, of course, that’s, we monitor that and forecast our cash flow to make sure that the client doesn’t run out of cash. Well, that’s just the basic first thing that we will do. 

The next big thing that we’ll do is exactly what I was explaining earlier, is we’ll set goals and we call it the profit target, we’ll set a goal or a target for profit and then we’ll map out, we’ll create that plan for ensuring that the client is going to make enough profit to ensure that they have a healthy cash flow. Because of course, you have to take into account how much debt you have. How much you owe on your credit cards, how much you have tied up in inventory, if you have inventory. How much you have accounts receivable, all that affects cash flow. 

And it all affects, you know, profitability in some way. So we created a target, a plan or goal for making a profit. And then once we have the goal for profit, then every single month we’ll analyze the business and see where, which part of the business is hurting our efforts to meet that profit goal. And that is the number one thing that we’ll focus on with the business. We’ll focus on fixing it. And it could be a sales problem. It could be a gross profit problem.

Maybe one of the vendors is, one of your products or services just doesn’t have enough margin and we need to shop around suppliers. It could be the fact that you have way too much inventory on your shelves, and that’s tying up cash. It could be the fact that your accounts receivable, that the amount of money that clients owe you has gotten out of whack. 

You know, let’s say that it takes on average 80 days for a client to pay. Well that’s way too long. You know, if we can get that from 80 days down to 40 days, you’ve essentially doubled your cash flow for the month. And you know, all of these things we’ll look at and compare to our target, profit target, and figure out the most important things that need to change. And so that’s the, essentially the most important thing that we do. 

And anybody listening, that’s the most important thing you need to do on a monthly basis, is establish a short list of no more than five things that are the most important things to work on to improve your business.  Because if everything’s a priority, then nothing is a priority. You got to establish priorities. You’ve got to establish no more than five. And we do for our clients, we give them three to five priorities, we call them action steps. 

And these are the three to five most important things that if you work on these, will help ensure that you will be on track to meet our profit target for the year. And that way that the client, the business owner knows that when they’re working on these three to five things, they’re working on the most important things on their business instead of just simply working in their business and just hustling.

Steffen: Yeah. Adam, thank you for joining me on the Performance Delivered Podcast and sharing your knowledge about how to grow small businesses and make them more profitable. If people want to find out more about you and what you’re doing at the CFO Project, how can they get in touch?

Adam: That’s a great question. So I actually, if you could go to the website, thecfoproject.com, but if you go to thecfoproject.com/video, I have a 20-minute presentation on why your business might not be as profitable as it should be, and five changes that you can make this quarter to boost profits. So if anybody wants to check that out, you know, and that website also has a link to my calendar. So I would love to talk to any business owner. Just schedule a time on my calendar. We’ll talk for about 20 minutes about your business.

Steffen: Thanks everyone for listening. If you liked the Performance Delivered Podcast please subscribe to us and leave us a review on iTunes or your favorite podcast application. If you want to find out more about Symphonic Digital you can visit us at symphonicdigital.com or follow us on Twitter at symphonic HQ. Thanks again and see you next time.

 

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