MERGER SHE WROTE
Merger She Wrote is a podcast for business owners looking to scale, sell, or transition their companies. Each episode unpacks the strategies behind successful exits, the pitfalls to avoid, and the steps to maximize value. Featuring expert insights and real-world case studies, this podcast helps you navigate the complexities of M&A with confidence. Whether you're planning your next move or just starting to think about the future, Merger She Wrote gives you the knowledge you need to make informed decisions and build a business buyers want.
MERGER SHE WROTE
EP 8 | How Smart Business Owners Unlock the Hidden Key to a Successful Exit
Want top dollar when you sell? It all starts with your numbers.
In this episode, financial systems expert Louise Hipperson reveals what buyers really look for when evaluating your business and why messy books can quietly kill your deal.
She joins Paloma Goggins to break down the biggest financial missteps sellers make, from confusing cash vs. accrual accounting to ignoring add-backs and sloppy forecasting. You’ll learn how to clean up your books, present numbers buyers trust, and build the kind of financial story that makes your business irresistible.
Whether you're planning to exit soon or just want to boost long-term value, this is the financial wake-up call you didn’t know you needed.
Press play and discover how to turn your numbers into your strongest selling point.
In the world of business. Not all deals are what they seem. Fortunes rise, empires crumble, all with the stroke of a pen Mergers, acquisitions, hostile takeovers. Welcome to Mergers, she Wrote, where we examine strategies and stories behind the biggest deals in business, Because in M&A, the real risks are the ones you don't take. Welcome to Merger, she Wrote. I'm Paloma Goggins, the owner of Nocturnal Legal and your host Today. You are going to love my guest. If you listen along through this episode, no doubt that you will 10x your business at the exit or sale of your host Today. You are going to love my guest. If you listen along through this episode, no doubt that you will 10x your business at the exit or sale of your business. I want to welcome Louise Hipperson. She is the owner of Finance Agency. She's been working with businesses for over 15 years in making reliable and accurate financial systems. Thank you so much for being on today.
Speaker 2:No, thank you for having me. I'm excited to have this conversation.
Speaker 1:Likewise. So I want to just jump right in. For any business owner, that's, you know, kind of thinking about exiting in the near future and in the future at all, what are some key habits and systems that can really help a business build trust with future buyers?
Speaker 2:Yeah. So when it comes to trust in your numbers, really the trust comes down to you knowing your numbers. So and when I say you, it could be yourself if you have an in-house accountant, cfo, controller but whoever's going to be answering the questions from the buyer, they need to know what the numbers are saying, because the buyer, so they're going to typically look at the last three years of financials. They're looking at it to understand trends, patterns, see if there's consistent growth margins and ultimately understand the operations of the business. And so if you don't know how to answer those questions, then it's not going to give the confidence that the buyer is going to know that you know how to operate the business. And so it really comes down to two things.
Speaker 2:It comes down to the preparation of the data, and so it really comes down to two things. It comes down to the preparation of the data and also the review of the data, because you're not going to know yourself what the numbers are saying unless you know what the data is telling you and that's it's accurate and reliable for that review. So when it comes down to preparation, it's really consistent data making sure that transactions are handled in the right way. You're reporting the right way, because the buyer is looking over those last three years, so you want it to be very easy for them to align the data, to review it and understand how the business is operating. And then it comes down to the review of yourself reviewing the numbers and understanding what is happening. Why did it happen, how did it happen? And when they ask their questions, you'll be able to answer them them and that really is the trust of what the numbers are saying, because that's the first point that the buyer is going to be looking at before they delve deeper into that due diligence.
Speaker 1:I think there are so many business owners out there that are coming from a place where they don't even have their books organized, let alone if they are organized, understanding the numbers to be able to speak to them credibly. And so I think this idea about not only should you have them organized, but also understand them yourself, not just your bookkeeping people understand them as well. So, if someone is starting from a place of disorganization, what would be your first recommendation, knowing that, I mean regardless of whether someone was preparing to sell, you know, tomorrow or in 10 years from now, that the financials are such a key piece and that the last three years are inevitably the most important.
Speaker 2:So in your business bookkeeping. Regardless of whether you're going to sell or not, your finances are going to tell you and lead you the way through your business journey. So having that data is going to be able to tell you which direction you should go to improve, where you should cut costs. And so it does start with having that data, because the buyers like I, like we said, the buyer is going to ask for the last three years, which means that you need to plan for that, because it you can't go back in time and fix something that, based on how the numbers are showing, was reflecting of the operations of the business. So you need to be able to prepare, even if you're not thinking about selling your business. And in fact, there's two things that I actually look at operating for the business, and that is operate or act as if you're going to get audited tomorrow and act as if you're going to sell your business tomorrow, even if you know you're not going to get audited tomorrow, and even if you're not even thinking about selling. If you approach your business in those two ways, not only is the health of your data is going to have the integrity to be able to sustain or work for an audit, but also you're going to operate a healthy, profitable business, which will then provide a better valuation for you. So, and it really comes down to that data.
Speaker 2:So, as we said, last three years is what the buyer is going to be reviewing and you need to be planning Historically. You can't go back and change that. So you want to be able to prepare for the next three years. What does that look like? Or how do I improve to make that valuation higher? Because, ultimately, the buyer isn't testing to see how your bookkeeping skills are or what the system you're using, and you're not trying to prove how great your bookkeeping skills or your bookkeeping management is.
Speaker 2:If you're using a bookkeeper, you're looking to find the best valuation, the best, the most true and fair valuation of your business, to get the. You know, for whatever reason you're exiting, maybe you're merging, maybe you're looking to transition to something there is always a financial motivation and so the numbers you want that to be the best financial position that you can to sell and the buyer is looking to see okay, how accurate are these numbers to continue operating the business going forward, forward, is it going to continue making me money in the future? And the numbers are the gateway to proving and supporting what the ongoing operations of the business is. So you've got two elements, but all coming from the same data. So making sure that your data is organized, making sure it's up to date you're reviewing it regularly so you understand how the business is operating will then help with getting that organized ready for when you potentially or whatever you decide in the future, but in a potential sale, you'll have that data ready for that valuation.
Speaker 1:So what I'm hearing and correct me if I'm wrong is that if someone's had historically disorganized financials, it's better for them to then just start doing the right thing and do that consistently for the next three to five years, or however many years forward. Right Then to try and go back and clean it up. Am I hearing that?
Speaker 2:correctly yes and no. So I would definitely say have accurate data, make sure that's cleaned up, make sure you're understanding, because let's just say you decide to sell, maybe next year you still need to have that three year period. So having those financials but I would also say your financials isn't just for your business review or potential buy, they're for taxes as well. So having them up to date every year is needed anyway on an annual basis. So just having that up to date to make sure that you're also paying the right amount of tax.
Speaker 2:If you don't have organized numbers, you could be paying more if you haven't added all your business deductions in there, or you could be paying less because there's a mixture of different things in there that shouldn't be reported and if you ever got audited, then that would be flagged as a red flag and potential all the consequence that comes with that. So I think having organized financials should just be a priority task and anyone that's owning a business and operating, because you need that on an annual basis. But if you are in disarray now, let's get caught up. But then that data is going to tell you your starting point to know how to move forward, and I think that's the power with your numbers. The historic is great, but there's nothing you can do to change that it's about. Okay. What can I do with this data to improve the profitability of my business?
Speaker 1:excellent points and I think to this idea that I mean for some people, going back and doing forensic accounting on their own books might be required because they get audited but.
Speaker 1:If they're not being audited at some point to your to what you were saying with the taxes like you've already usually filed, and so going back and getting those organized is actually probably, you know, not top priority for most businesses because on a go forward basis, if you start getting organized and just maintaining that practice, then everything from then on can be clean. But to your point. So let's say a business owner is wanting to sell next year. They haven't been doing good practices. They know they can start with this year to clean things up. Would it behoove them to work with someone like you at the finance agency to come in and try and clean up the last two years so that they look more uniform across the last three years, even though it's not going to change the past tax filings and all that?
Speaker 2:yeah, and in fact that's pretty much where the majority of our project work for that comes to is like we get brought in to help clean up not necessarily we have clients and then they start to grow and want to sell. But I'd say the majority of our projects is cleaning up the historic because they're getting ready to sell and so there's obviously a little bit of tidy up. But actually even if you've filed taxes or and it's not really a concern right now we actually just went through we engaged with a client this year. They were looking to sell, but they're exactly to your point.
Speaker 2:Their last three years wasn't uniform and so we need to make sure. It doesn't mean that we're being creative with the numbers, it's just making sure that you know everything's reported in the right place. They decided to change how they were reporting two years ago and so that first year did look very different to the second and third year. So just making sure we can understand okay, this is what the P&L is saying, but this is what the adjustments are. Just to make it more uniform definitely will help with the buyer and it comes back down to that trust of understanding what the business is doing and making that align, so easy for them to be able to review that for themselves.
Speaker 1:Maybe simplifying this a little bit further, because I know a lot of business owners don't want to bother themselves with getting the lingo down for finances. You know what's the big difference between cash accrual and you know what's. Can you switch between the two? Is it kind of a mess when companies decide to switch or is it something that once you start you kind of are stuck in that cash versus accrual?
Speaker 2:Well, actually some businesses will use both. So it really depends on how your business is operating and what you're looking at From a tax perspective. Majority of businesses are operating on a cash basis, whereas you might look at profitability in your business on an accrual basis. So just to explain both cash basis is when you're reporting revenue and expenses on the date it was incurred. So let's just say you send an invoice to a client in January, that and the invoice is dated January. On a cash basis, if they paid in February, that revenue is going to be reported in February. But let's just say you actually physically worked in January for that invoice. Well, on an accrual basis, it will be reported in January. So it depends on whether cash is when it physically had the transaction of cash. Accrual is when the date of the transaction was worked. So just to help with the cost example, let's just say you book travel today for something in October. Well, if it was on accrual basis, the cost would actually be incurred or being reported in October, not today when it physically came out of your bank or credit card. So that's the difference.
Speaker 2:From a tax perspective. You're looking at cash because you don't want to pay taxes on invoices that you haven't been paid for. So you're looking at it from a cash basis. But when you're looking at profitability, you want to see okay, how much have we actually invoiced out with the hope that you're going to get paid eventually, but how much are we actually? Have we actually sent out in invoices, how much have we actually incurred in cost and how does that line up for that period? To help you with with really truly understanding how profitable you are in your financials. So you need to look at both at different times, but it's all the same data. It's just how and when it's being reported.
Speaker 1:I like that explanation, and to tie this kind of back into something that I see frequently in the M&A industry, is that you know when someone is purchasing a business with a lot of AR accounts receivable, you know there's inherently this decision about whether the accounts receivable will be collectible, and sometimes it gets wrapped into that purchase price.
Speaker 1:And so, to your point, having really well organized financials to show historically that you know every time you have this like large sum of accounts receivable, that on average you're collecting those, albeit delayed, helps to at least provide comfort to a buyer who's packaging that into the purchase price under the assumption that they will in fact be able to collect those later. And a lot of times, when you can't show proof of that, you get buyers that want to have an earn out or some other mechanism where they're holding back a portion of the purchase price under the assumption that you're wrong and you won't be able to collect the AR or the revenue is not going to be there like it was the past years. So I think that's it just hits home this idea that you're looking at both sides of the coin when it comes to accrual versus cash, because in some ways people want to be able to see that you're operating with good cash flow, but at the the same time, they also want to know my cash flow is going to be there in the future as well.
Speaker 2:Yes, and it really comes back down to what we said at the beginning of it's really knowing your numbers, because on the financials that the buyer is seeing, they're seeing top level and that number can be interpreted anyway. So once they start delving in and asking questions, you need to be able to justify and talk to it. Another example of that is inventory, for example, and so you can see like OK, we've got a potential. If there's like an inventory amount of a million dollars, once sold, it's like great that sounds, you know it's a great asset to have. But if we then ask the question, well, how long has that inventory been sat there? That completely changes what that number looks like. And so if it's been sat there for 30 days, okay, it means that there's movement in inventory.
Speaker 2:If it's been sat there for 12 months, what does that look like? How does that impact your valuation? So I think it's also looking at the top level of the number. But then how does that impact going forward in the future? And again, that's what the buy is. Testing is to see how can this business continue operating. So it's making sure your data is accurate, because if that million dollars also inaccurate in terms of inventory, they could be making decisions based on inaccurate information, making sure you know the numbers, and then that's the only way. The only way to know that is to get your data organized and reviewing regularly.
Speaker 1:I love what you said because it is an absolute nugget for a potential buyer, not the sell side, because I have seen situations where the data being reported is inaccurate, arguably false. Whether it's intentionally false is to be deep right. Sometimes I think it's just bad practices, but I've seen people come in and they buy businesses where the inventory is supposed to be saleable, usable things that they're going to rely on to continue operations. They close, they show up, they figure out that most of the inventory is not saleable and that essentially they purchase a bunch of inventory. That's no good.
Speaker 1:I think that highlights the importance on the back end, from a buyer's perspective, to go and inspect your inventory before you buy it, which a lot of people glaze over, or if they're an out-of-state buyer, they don't think it's worth the hassle to fly in pre-closing and do that due diligence, which I would argue it's very important. But to your point, if a seller is not using good practices, whether it's intentional or not, you know you're in the purchase agreement. There's a representation and warranty by the seller that the inventory is good and saleable, or as is, depending on the situation. Most of the time a buyer isn't going to allow an as is clause because there's too much risk, and so if they come in and find out it's not saleable, you could have a giant breach of representations and warranties on your hand. So that just ties back into what you were saying, which is that having good data is absolutely the most critical component.
Speaker 2:And it can go the other way as well. In fact, we had an engagement this year where we were brought in during the due diligence process. So they had already presented financials to the buyer and they were. They had questions and there was a liability account on the balance sheet and they were questioning it. And so they and they wasn't. They weren't really sure what it was. They were saying, like, well, when we did, they did their own bookkeeping in-house and they said that when we were doing, you know, playing around in their accounting system, this is what the outcome of those numbers are. So it kind of just threw numbers onto the balance sheet and they weren't really sure what that meant.
Speaker 2:But when you reviewed the last three years, you saw that liability steadily grow and it's like, well, why is it growing? So you need to be able to answer to that. But they brought us in to reconcile and when we reviewed it was like, oh well, there's actually duplicate entries in here. There was um, so that liability actually was much lower, which then improved the profitability of that P&L, which provides a better valuation overall.
Speaker 2:However, going back to, does the buyer now have confidence in the numbers versus if they were just accurately able to catch that reconciliation error, provide the financials to the buyer in the first place to see okay, now we've got a much better profit position. So I think it's making sure that again it comes down to the integrity of the data, making sure that it's up to date, reliable and that you understand it, because if you see a liability growing, that is going to impact the valuation. So they were able to have a better valuation number because it's like hey, they don't have as much liability in the business, their profit is actually a lot better. But just that simple reporting error or that discrepancy because it wasn't caught, does you know? There's a lot of back and forth with the buyer that way. So there's going to be questions, there's going to be a lot of back and forth, but I think just making sure that what you present you're understanding and then you can catch any reporting issues prior to that as well.
Speaker 1:And Louise can say that again because I feel like most people don't realize in the due diligence phase there's so much back and forth and so well. I think a lot of sellers go into this thinking I'm going to provide the three years of financials, an up-to-date P&L or balance sheet, and you know that's going to be the end of it. They'll look at it, they'll figure it out for themselves, and they're always caught off guard when the list of diligence questions related to financials comes back and it's long and detailed and sometimes the answers end up causing further drill down into the financials and so you could say that again times 10. So I want to pivot a little bit here. You know, one of the things that I see a lot with the smaller business owners which I mean small in the vast scheme of like the SBA's definition right Like not the giant corporations, but people who are lower middle market small teams but doing very well financially.
Speaker 1:I see over and over again these business owners utilizing their bank account as kind of their personal piggy bank, side by side with their business, and we all know it's bad practice. But what can a business owner do on the like, you know, accounting side, bookkeeping side, to make sure that all of the sort of personal expenses that are being drawn out of the account if they're unwilling and unable to bifurcate, and make sure that they're not commingling those types of transactions, because I know you're probably going to say that's the best decision. Yeah, um, but like, what are, what are the options here? And, just you know, run me through like if you were going to advise a small business client who's actively pulling money out on a regular basis for their personal use yeah.
Speaker 2:So I want to want to kind of there's two definitions of like personal use, especially when it comes to evaluation. So the first thing absolutely you want to make sure that your personal and your business expenses are separated and handled separately. So make sure that you have, you know, your business bank account. Your business credit card has only business income and expenses coming out. Your personal is your personal and it shouldn't your personal transactions or your bank and credit card should not even be touching your accounting or your business financials. So making sure that's very separate and things happen right. Sometimes you're at the checkout you're like, oh my gosh, I've only got my business card, you're not going to walk away, go and get your business, your personal card and come back. You're going to use it. But it's also that communication with your bookkeeper or, if you're not doing your bookkeeping yourself, communicate, communicating saying, hey, I charge this onto the business card, but it is a personal expense, can we handle it? We know where to report it to ensure that it doesn't get part, doesn't get included in the business calculations on the P&L. So there's that. It's just making sure it's organized and reported correctly on what's business and personal.
Speaker 2:But also there are things called owner ad backs when it comes to the valuation side of things. So there's some decisions or expenses that you're going to incur that is based on you, as the owner, deciding to do it. So it's not technically a personal cost, it's a business cost, but it's one that you, as the owner, has decided to invest in. So should that be part of your valuation on your P&L, yes or no? And that's what you'll be reviewing your valuation on your P&L, yes or no, and that's what you'll be reviewing. So for example of that is let's just say, you decide to completely rebrand your business, so that is then typically added back to your P&L, because that's a one-time expense which you personally, as the business owner, has decided to invest in, but that doesn't really contribute to the operations of the business.
Speaker 2:Yes, it might help with the you know, marketing and branding, but really that doesn't really contribute to the operations of the business. Yes, it might help with the you know, marketing and branding, but really it doesn't impact how the business is operating. So, with all these transactions, you just want to make sure that it's being recorded and reported the correct way on whether, okay, is this something that is true, personal? We need to make sure that we're taking that out of the business so it's not included in that. And then, upon valuation, is and is all the transactions in there anything that we can add back to improve the profitability and valuation of the business, because it was a decision that you, as the owner, made. So really utilizing and your accounting systems I hope you use an accounting system that should be able to help report that, report that separately, so you can see consolidated and separate.
Speaker 1:But really it comes down to making sure you are handling your transaction separately and understanding why they're coming out as well I'm glad that you talked about ad backs because I feel like one sort of common issue in the in the smaller business on the the end you know, the lower end of the lower middle market is that inherently you do have a lot of income that's getting pulled out based on the owners being both owner and operator, and I think there's a lot of confusion in the unsophisticated buyer that appears in maybe even more of the main street space right the brick and mortar, the local you know coffee shop for, say as an example that when you are adding back in all of these costs there's no like red herring in there that the business is doing poorly and that there's a lie.
Speaker 1:Because I've seen this come up where you know buyer sees the financial, sees all these ad backs, doesn't understand it and then gets cold feet and pulls out of the deal. And then we're back to the drawing board and trying to explain sort of what those ad backs are and how you know if you don't have an owner operator in there, you just have a manager. The financials are going to look drastically different without all the ad backs in. So I'm glad you mentioned that because I think there's just so much confusion in that space about how it's not. The ad back is not smoke and mirrors.
Speaker 2:Yes, it's the best way to describe it. Ultimately, the buyer wants to know how, how, how is the business operating? And if you're doing a one-time website refresh, that doesn't really contribute to the physical operations of the business, so you just want to. It comes down to judgment Because, also to your exact point, if there's a heap of ad backs, then it's like, okay, how reliable is the business operating? Or, you know, there's also there's different strategies as well.
Speaker 2:Valuation of a business is a very different strategy to if you're trying to pay down or reduce your taxes. So one requires more business expenses, one what you want to take out as much to show better profitability. So it really depends on the strategy that you're trying to do, which is why it does require planning. You know, looking at your numbers now to see what can you change in the future. Historically, there's nothing you can do about it at that time, but it really comes down to okay, what can you change in the future? Historically, there's nothing you can do about it at that time, but it really comes down to okay, what am I spending and how am I wanting to report this, but then also tracking that as well. So if you're not even sure, if you want to sell in the future.
Speaker 2:Ad backs is just something that just out of habit in fact, we have a client that, because they've sold before, it's just now habit that we'll discuss, okay, what could be considered as an ad back, and she actually reviews both to understand, okay, what's true operational profitability and then what's profitability from a tax perspective as well. So I think, again, similar to cash and accrual, you need to look at both, you need to understand both and then make sure that the data is supporting that and tracking that accordingly.
Speaker 1:If you will, can you please go into even more simpler the idea behind wanting to do the ad backs differently, based on wanting a valuation versus reducing tax liability? Because I think for anybody that's an entrepreneur or a small business owner this also comes into play, not just at the exit, but when you're trying to get a loan in your business, when you're trying to buy a home. There's all sorts of kind of peripheral things in your life that could really be drastically changed based on how you're handling these ad backs.
Speaker 1:But please can you just simplify it a little bit further for anybody who's listening that maybe doesn't quite understand that concept.
Speaker 2:On a broader level, yeah, so your financials, it's all the same data, but depending on I always say that accounting is an art form, right, it's how you interpret it and it's how it's presented, and so it is a math equation, but it's one that moves constantly and so, depending on what strategy you're trying to do will impact how you then operate or what you want the numbers to show. So I say that because, as we said, a tax strategy is going to be very different to a valuation. So, taxes you generally want to pay as little tax as possible, which shows lower profitability, however, and so you're. You know you're investing, you're spending. However, we actually had a client that said well, we want to, she's self-employed, she wants to get a mortgage, she wants to buy a house. Typically, banks are looking for at least two years of self-employment income to help with understanding what they could you can borrow. Well, you want to then show as much profit as you can in your business to help provide a better mortgage rate, mortgage amount, and so that strategy changes. And so, and then same with valuation again, you're wanting to show as much of a profitable business as possible to get the best valuation that you can. And so these expenses, you want to. They're all operating, you all incur them.
Speaker 2:But it's looking at, okay, but what's true operational cost? And then what's true? Because I've made the decision as the owner to invest in that. So an example would be for example, let's just say I decide to invest in a mastermind. That doesn't mean that you don't need to invest in a mastermind to operate your business, but it's something that I wanted to invest in myself and so, and that can be, you know, pretty pennies sometimes.
Speaker 2:So when you add that to your financials, from a tax perspective, great, that's going to reduce my taxable income. But from a valuation it's like, well, that's a one-time add back, let me remove that, because that doesn't actually relate to the operations. So from a valuation, it's like, well, that's a one-time add-back, let me remove that, because that doesn't actually relate to the operations. So from a valuation perspective, the buyer is going to see okay, I'm seeing true operation profit, let's add back the cost of that because you've deducted the cost. So that's what we're trying to say. We're adding back is that the cost of the mastermind is already in your financials. It's reduced your profit, so we're going to add back the cost of the mastermind to your profit to increase and improve that. So I hope I may.
Speaker 1:I explained that clearly no, no, I think that was great and I actually appreciate you using the example of the mastermind, because any business owner out there knows that masterminds are always ridiculously priced. Yeah, so it's a really good example of a really high expense that could drastically change the financials in terms of looking at them on paper.
Speaker 2:Yeah, and, if I may, then also add, though because I typically people will say like oh well, that means to reduce my taxes. I need to spend money Just a note here but you need to make sure you have the cash to support that investment, because it's not just a case of, okay, I'm just going to spend in order to reduce the valuation of, sorry, reduce the taxable income for taxes. Let's make sure that your cash healthy as well, which also then contributes to understanding how, from a buyer's perspective, the the operations of the business and making sure that you're not just profit healthy, but your cash and balance sheet healthy as well excellent point, well, well.
Speaker 1:So I know you know from your background that you've worked with large corporations as well as entrepreneurs. You know comparing the two and their practices. You know obviously every entrepreneur for the most part and I'm probably generalizing too much here, because I know there's plenty of people who like to be solo entrepreneurs in perpetuity but when someone wants to scale and grow and kind of looks up to those larger corporations, as you know something, they want to be someday or some version of that what is the disparity between the two? What? What's the difference in how the small guy operates versus the really large corporation? And like what could be some advice for people who are having a glow up moment where things are getting complicated really quickly and maybe out of hand from an accounting standpoint?
Speaker 2:yeah, so there's really two. I have two answers to that. The first one is to be quietness. There's not real much difference, apart from the numbers, whether there's extra zeros at the end, because the numbers are still going to tell you that, like what your current position is, whether you're operating on six figures, seven figures, eight, nine, the numbers are still going to tell you where you're operating and then how you're managing it. We'll have seven figure businesses that are making maybe five percent profit, but we might have six figure businesses that making 38 profit. So it really does depend on also you as the business owner. We have those that are willing to spend money and those that are so scared to spend money, and so it's like, okay, it's trying to find that balance between, let's say, for cash reserves but still invest in your business. Those decisions and that's the second answer is the decisions are also the same, but also it depends on where you are in your business journey.
Speaker 2:The decisions that you make when you're a solopreneur just starting out or you know it's just you those decisions are very different from when you start bringing on team members. It goes from like what do I need to do to what do we need to do and then also I need to manage the team, and they come with a very different set of pros but also challenges with that, and so the cash reserve number, for example, goes to okay, can I pay myself? Am I covering all my expenses? Do I now comes? Now it goes to do I have enough money to cover my team and sustain the team in the future, to the point to the next stage of scalability of okay, are we ready to now open up a different location, a different store, and what does that look like? Do I have the investment, the time, the commitment to do that?
Speaker 2:So I would say the decisions are all the same. Sorry, the financials are all the same. You still need to have very strong financial data, make sure it's organized, make sure it's reliable. There's just more volume generally as you start to grow, but the decisions are also based on what stage you are. So, no matter whether you're smaller, larger, it's still making sure that you have that financial data integrity and you're reviewing it to then take you to that next level. So I would say, working with both you know, publicly traded businesses and the entrepreneurs. There's different levels of like, audit and requirements, but it's all coming down to the same thing. What is the revenue coming in? How am I managing the money coming out? Are we profitable? Are we growing cash? And then, what do we invest in the future? Those decisions are all the same.
Speaker 1:I think you make an excellent point when it comes to scaling, being sort of hinging on that, adding team members, because habitually working with business owners, I'm sure you see the same thing. The biggest hurdle in scaling and growing is not necessarily finding more work or having more revenue, it's bringing on the team to be able to handle that more work and bring in the more revenue, because inevitably as a solopreneur there's only so many hours in the day, and so this idea of you had said, you know, when I bring on a team, am I profitable enough to be able to sustain the team? I think is one of the biggest fears that I hear is like how do I make this leap?
Speaker 1:In the legal industry, especially in firms like personal injury law firms, are a good example.
Speaker 1:A lot of their sort of finances, from what I understand I'm generally speaking here because I'm not a personal injury law firm is that they tend to grow in anticipation of revenue being brought in, which to me is such a terrifying concept that you know we're going to take a bridge loan because we're planning on getting this settlement worth $3 million and we can't afford any of our payroll right now.
Speaker 1:But you know, give us six months and we will. When it comes to like this, looking forward at profitability of your business and whether you can afford employees, are there some metrics that you would say you could look at the books and say this is a better gamble than not and maybe gamble's the wrong word here but I mean, at some point you have to take that leap of faith and to know, or at least have faith in your business, that it will continue to operate at the same level of revenue or grow even more before you can really start to, I think, grow in a way that's more meaningful and create more profit. But, like I just want to hear your thoughts from, like a you know metrics and a bookkeeping standpoint.
Speaker 2:Yeah. So really, you know, and it comes back down to, as we mentioned, like the business owner how risky, I guess is the word do they want to invest in their business to make sure that they can, because it's commitment that you need to cover. So when you bring on someone and you can, you know whether it's contractor or an employee. When you bring on someone, you want to make sure that you can sustain that commitment um long term, and so it looks. It comes down to your numbers, like what's your profitability doing? Um, how is it? What's your future revenues? How is it? What's your future revenues looking like? And it's really about forecasting and really making sure that you can project. Okay, how confident are you in being able to sustain that forecast? Because that's really ultimately what it is. Even if you looked at your numbers today and let's just say you had 50% profit, well, what happens if all those contracts ended next month? Can you still sustain that? So your data is going to help you answer that question. But then also, I would say, really the team is really the biggest questions that we have with all our clients of who do we hire, how much do we hire, what do we hire also, but what do you provide in terms of benefits? All of that has a cost impact and so, understanding, okay, what costs are we going? What's the full commitment? It's not just the $80,000 salary, it is the payroll taxes on top of that workers comp. Are you offering benefits? And so, when you bake that all in, can you then cover that commitment going forward as well? So, again, your data is going to tell you when and a forecast.
Speaker 2:I always say it doesn't tell you no, because a lot of people like I don't want to budget. They don't like that word, I don't want want to. You know, forecast for anything, but it's because it's confronting, right. It's like OK, I'm seeing my numbers, what can I do? You? Typically, the business owner likes to have a more favorable view of what revenue or expenses look like, and then us accountants like OK, but based on the historic, what does that look like?
Speaker 2:You're finding the middle ground to say when is it the right time to invest? Not, no, you can't invest, might not. Is it the right time to invest? Not, no, you can't invest. It might not be that, might not be now, but you, when is the right time, based on the decisions that you make, to invest in that team member. So I would say it's based on what you are comfortable comfortable with or that's how we've seen with our clients. But the data is going to show when's the right time and really the right time is can you cover that salary, can you cover that cost, and does your profit show that? Because if you added that, what happens to your profit, what happens to your cash, and then do you have the cash to sustain that? So I would say there's no like um metric, it's more just understanding. Okay, if it's this x salary, can my profit cover?
Speaker 1:that excellent points, and I was going to say one thing, too that I've seen working with my clients is that it's not only whether they're risk averse or not right in deciding to make that investment in building a team and going to the next level, but also are you willing to take a pay cut yourself Because a lot of solopreneurs, I think, find themselves in a situation where, in order to take the next step forward, they must temporarily take a couple of steps back.
Speaker 1:And I think that too is frightening in that that scalability step in that they realize well, as a solopreneur, I'm making X in order to afford my first employee or my first two contractors. I have to essentially take a pay cut, and a lot of times temporarily, if the business is doing well right. It's just that mindset of like I'm giving something up and having to have faith in the ability for the business to grow even more now that I have the people so well, it depends on what is important to you, right?
Speaker 2:so anything that you're investing in your business is at the I guess the word I'm thinking is sacrifice to something else. So if you, if you want to free up, you just say you're so busy and you need to bring on an employee and you need to bring on that additional help, well, what you're doing is replacing your time with someone, which is a cost. So, yes, there might be times where you need to reduce your pay. There might be times where you're not paying yourself, especially at the early stages. Right, we've all been there.
Speaker 2:And so it's like where am I investing this? Am I going to invest in me and then I will be executing the work that still needs to be delivered, or am I going to invest in someone who's going to free up my time to be able to go and do the other things I need to in my business? Really depends on what the priority is. There's no right or wrong, but I do think it's. It's that balancing, like I said, when you're making decisions, if you do something one way, you're kind of taking away from another. That's what a forecast is telling you is understanding the financial impact of what your decisions are. So if I invest in x, where can I not no longer invest? If I spend money here, I'm reducing my bank account. If I increase my bank account, it means that I'm not investing somewhere that could potentially have return investment.
Speaker 1:They're the decisions, and that's what that moving math equation is doing with your numbers no, it's so true, and I was going to say to the um, the forecast right, I mean inevitably could be more conservative, or or not? And I think a lot of people lose sight of that. As well as that, the forecast is not written in stone. So you know the forecast, you know, obviously you want the forecast to be conservative enough that it's close to being true, but it would be nice to outperform it right. But you also don't have to look at it as, uh, the only reality that you're going to live, exactly, exactly it's telling you when is the right time, and then you play with the numbers.
Speaker 2:Um, it should be something that you review regularly, but to your exact point, it's not set in stone. It's only set in stone once the month closes. So you just want to be able to understand. You're prepared for what those numbers are. Let's just say you, you forecast you're going to make a hundred thousand this month and it came to you actually closed at fifty thousand. What impact does that have to your numbers? Do you have enough revenue or cash to cover the expenses in the next month? Because that's all these numbers are doing is impacting the future. And what does that impact do? So it's more, it's to provide you with okay, what is our current position? And then how do we impact or proactively change what the forecast could be? But yes, it's an evolving document and should be reviewed, but it's not set in stone.
Speaker 1:So true, I was just thinking while you were talking about this forecasting and, you know, knowing kind of your expenses on a go forward basis and sitting down recently in my own business and feeling a lot like and I'm sure most business owners can relate to me that every piece of software has switched to subscription and it's starting to feel a lot like our Netflix, youtube, tv, the Amazon, like you have now. You know, decentralized cable and it sounds great in theory, but now you have a channel for everything and when you add them all together we're most households I've, you know, through just casual conversation I've learned are paying, you know, double, triple the amount that they were paying for cable plus internet originally when it was bundled together. And I felt that way in my business too, is sitting down and looking at all of my software subscriptions and seeing how decentralized everything has become and nothing you know. I remember when Microsoft office used to buy a disc right.
Speaker 1:And you were good to go until the next one came out, and now we're paying monthly for the office suite in any capacity, and so I think sitting down and being able to see your forecast and also the forecast allows you some of the subscription-based stuff gives you some reliability. It's not great that it's subscription-based, but at least you know what it's going to be on a go-forward basis.
Speaker 2:Well, it also helps highlight any changes and variances. So, with our forecasting clients, if they said that they were going to spend a thousand dollars on subscriptions a month and we see one month, it's 2000,. That triggers the conversation of like why Something happened that we weren't prepared for, and most of the time, subscriptions is a great example. In fact, we actually just sent all our clients like the mid-year do you want your subscriptions subscriptions list, just to do a little bit of housekeeping, to understand, because more often than not, the clients that did review they're like oh, I didn't realize that we had this, this and this. We're going to cancel this and this and this.
Speaker 2:You trial things, you test it out to see how it can work in your business, and then something happens. You forget about it, and so I think it's the forecast is going to help flag what are the things that you weren't expecting. And sometimes it's like oh, okay, yeah, maybe it's just a timing thing insurance paid out, you know, on the 31st of May instead of the 1st of June. So there's those timing things. But that's what these numbers and your forecast, with your reviewing of your numbers, are going to show is, what are the variances? What's going to trigger, to then look deeper to, so you know your numbers.
Speaker 1:I think this is a perfect moment to highlight.
Speaker 1:I was at a data privacy continuing legal education summit thing, and they had said in the presentation that when the app or the service is free, the product is you, and so I think this highlights a really good reason why having a bookkeeper to be able to send you your list of hey, here's your recurring fees she's not selling your data on the back end, and somebody you know there's tons of apps I get ads for them all the time about.
Speaker 1:You know, download this app and hook it to your bank account and it will tell you all these recurring things. It'll help you cancel them. Well, you're not paying for it, and so you're giving away your data for free to these companies that are essentially just monetizing you, and so I think this is a shameless plug for Lou and her team that you know she's providing the same type of benefit, but she's also, her and her team are, you know, in your books every day, so not only can they provide you with your recurring subscriptions for an odd and internal on it and to make sure you actually are buying the things that you want to be buying, but also to kind of help you stay on track, like you said, to make sense of your financials, so that when and if you do decide to sell, you can speak intelligently about what the numbers are saying.
Speaker 2:Yeah, because, especially as you start to grow, typically if it's just you, you're the one with the credit card you kind of have a better idea of what you're purchasing. Automation sorry, sometimes get caught up, but otherwise you know what you're spending. When you start adding team members and giving that level of responsibility, that control starts to like loosen. You know, we were, I was, at an agency where they have 200 employees and they all are, you know, submitting expense claims and whatnot. You're, the owner, isn't looking at every single transactions approving, and so it's being able to flag where you can and just keep you know, have a sense, check of what the numbers are, making sure they're understood, making sure that is in line with what you're planning having that.
Speaker 2:And there's also a level of judgment that a lot of apps can't do of just like okay, you know, are they go? I don't, I haven't used these app, I won't lie. But so I don't know what, how the data or information comes to you. But it's like, do they send you every single transaction of just like, is this something that you want to cancel? And it's like well, I know you can't cancel that because you can't cancel your quickbooks, otherwise we can't do your book.
Speaker 2:So it's just more like help sense, checking the data and making sure that you know, just from a judgment perspective, is this a cost that makes sense or not? And as we as bookkeepers, you know, we're not responsible for the activity that you do in your business. But as we're looking at the data and seeing those transactions on an individual basis to report, we get an idea of how your business is operating and be able to flag any oh, what was this? This insurance payment wasn't meant to happen. Now, what happened, or did something happen? And that's where the conversation comes in and that's where you then get to know your numbers.
Speaker 1:Oh, absolutely.
Speaker 1:I think this is just another good example of why having bookkeeping can be a critical component of making sure that your business is secure from a spending and data privacy perspective.
Speaker 1:I had an episode a couple of weeks back with Paige Hansen about data privacy and we were talking about situations in which, you know, employees go rogue, not like intentionally to disrupt things but, like you know, making purchases on the company card. I've seen it with a client that had a C-level executive that you know making purchases on the company card. I've seen it with a client that had a C-level executive that you know purchased gift cards and thought it was a directive from the president. And so, to your point, having a bookkeeper who is in your books every single month and can see what's normal and what's not normal can flag and potentially save you thousands, if not hundreds of thousands over time based on potentially fraudulent charges or employees that are doing things that they didn't know was not, like you know, sanctioned by the company or whatever it may be. So I think that's also you know, bookkeeping can in a lot of ways help with data privacy, data integrity and also just financial security of your company absolutely, and I think it's again.
Speaker 2:It's that just relationship that you have with your bookkeeper. Making sure you are communicating also depends on what level of support you have with them as well. But we do get pulled in when there's something like fraudulent happen or they need to get back up for anything. If it's an audit, if there's data that they need to drill down in, we're there to help, support and provide that.
Speaker 2:When you sometimes download a report, let's say, from QuickBooks, it can be a bit overwhelming. There's so many columns you don't know what any of it's saying, but we can just help present it in a way that will make sense to you, because you don't need to. You didn't start your business to become a bookkeeper or an accountant. You just need to make sure that you know your numbers and have the team if it's not yourself to be able to execute it in a way that isn't just about bookkeeping. Like can you figure out how to use QuickBooks? Yes, but there is accounting principles and compliance that you also are applying to that which you just want to make sure is correct from the start.
Speaker 1:So tell me a little bit about the evolution of the finance agency. I'd love to of the finance agency. I'd love to hear the backstory, and then I'd love to also know, like, as a business owner, you know what are the ways that the finance agency can come in and help.
Speaker 2:Yeah, so just to share it started off with. So I came into the country now it's been 10 years and I knew no one but the friends that I started making. They were all happened to be entrepreneurs and, being from an accounting background, they would ask me questions and I would answer and they said, oh, do you mind just helping my friend. And the next thing I knew I had clients and it was a learning curve opportunity for me as well, because I came from a different country. You know, the UK has a very different tax structure to what the US has and so learning things like sales tax and all the different entities.
Speaker 2:So it was a journey as an entrepreneur, even though my background is in accounting. I was going through that entrepreneurial learning with everyone else that I was around with too. I just had. Obviously, it's just my background, so I just understood the data a little bit better, but it's still something that I had to learn, pick up and then share with our clients. And then it was just me and similar to what we'll say you know you make decisions for you and then as you start to add your team that grows and scales and now we're able to provide more operational support for our clients to be able to in.
Speaker 2:Really, we have a focus on that data integrity. Um, the number of times that we know we sometimes will have a client come to us and it's like, okay, we need to clean up the books and there's a difference with, like I said, bookkeeping is an art form. We all interpret it different ways, but I think you know where it's, making sure that it makes sense to us and then we can share that with the client. So really being able to provide that accurate and reliable reporting operationally as well, from a billing AP bookkeeping perspective is really key and that's what we continue wanting to do and support other business owners.
Speaker 1:Very good. I think anyone listening could tell that Louise came from the UK.
Speaker 2:I love your accent it makes giving information about numbers a lot easier because it is a confronting subject. So I do find it's a lot easier to deliver good or bad information.
Speaker 1:Do you find that people just inherently trust you more Because I feel like the British accent is like for the American mind, at least from my perspective is that in a lot of cases, when it's the proper version, is very eloquent, and so, like when you're talking about numbers, I'm just like, yes, yes, all of that makes sense.
Speaker 2:Sometimes I do see I'm like, okay, you're not listening to what I'm actually saying. I can see the eyes glaze a little bit. But I think also it's like I said, numbers are confronting it's. You know, no one likes it personally business and there is an element of I joke like financial therapy. It's the mindset, it's being able to have a conversation with your bookkeeper and accountant and I think that's that's the key thing. I'm glad you brought it up. There are so many great CPAs, accountants, bookkeepers, cfos out there.
Speaker 2:It really comes down to chemistry. You know, majority of us know what you know numbers. We've either had education, we've had experience, but it comes down to chemistry and so when finding the right fit for you and your business, it's finding someone that you are comfortable talking to. And even from my side I might come across as more gentle, but I'm still here to have those tough conversations and I have the data to back me up with that. So I think it's being able to have the conversation and then you develop that trust that you're still responsible for your business to know the numbers. So you know we might send reports out. I can't physically force you to look at them, but I think it's more just. It's a partnership, and that's what you're wanting, especially with such an important element of your business.
Speaker 1:For the small, you know, solo entrepreneur. Is there ever a time that's too early to get bookkeeping on board? Because I feel like bookkeeping, especially when you're starting really lean. I think when you start looking at even for legal, like I know for a lot of solo entrepreneurs that are on a shoestring, trying to get things done and grow on a basis that's difficult, right, they're trying to support probably themselves, maybe their family, and they're doing it with cash from their savings. Legal can be a cost center for a lot of people. Unfortunately, they find out later that, you know, not having legal involved from the get-go puts you at a disadvantage. Sometimes it causes liability. Is there, you know? Obviously probably the sooner the better. But like, at what stage do you think it's really imperative that someone bring in a service like yours?
Speaker 2:I get asked this a lot when is the right time to bring in a bookkeeper? And the answer that I generally give first is when you no longer want to do it yourself. If you're not willing to invest the time and commitment to make sure it's done regularly, then you need to outsource this, because it can go wrong, and it can go wrong very quickly, and then there's an impact and a consequence to that. So there's no like revenue, like, oh, if you make 5,000 a month, 50,000, you should 50,000, you should bring one. But in those early stages it's when you no longer want to do it yourself.
Speaker 2:At the same time, though, similar to like you know, we're all business owners you want to make sure you can cover that financial commitment. So, again, if you're investing in bookkeeping, you're probably taking away from something else and it's understanding what's the priority for you in that time or in that decision. Obviously, if there's not a lot of transactions going through, you should be able to manage it yourself and within reason. If it's just trying to figure out how, how to, there are a lot of resources out there where, even if it's just like youtube or social, just to get like the starting points of like how to use a system, but you could always reach out to us as well. We're here to answer as many questions as we can to help business owners like get the starting point and understanding of the system, because quickbooks, for example, is a great system, but I think you need to be an accountant to know how to utilize it properly and then apply that compliance and that regular.
Speaker 1:You know the principles around it so you can ask the questions, but I think to when's the right time is when you are no longer wanting to spend the time to do it well, and I can say, as someone who uses QuickBooks, or at least has logged in to look at QuickBooks, that to me personally, relearning another system wasn't worth the time and energy that I would have otherwise been spending in my business.
Speaker 1:So I think a lot of this at what point do you stop DIYing it? There are certain things that I think legal accounting, compliance, probably data privacy as well, I mean there's just these like little areas of your business that you can DIY it up to a point and I think that you're probably getting into dangerous territory. I mean, I hear all the time from you know, businesses in the Valley that have been operating for a year or more without any contracts with any of their clients or customers, and my original thought is how you know? How have you gotten this far along without having something in writing other than an invoice, knowing that inherently, there's always disputes or disagreements, or you know some sort of need to go back to something that's been written and say well, this is what we agreed to. So I think that this idea of, like you said, if you have the time and energy and you want to learn something like QuickBooks, you can certainly do that off of YouTube, but at some point is it worth your time and energy.
Speaker 2:Yeah, because similar to both legal and accounting.
Speaker 2:And then I loop in you know HR and everything else, the back end of your business, the cost of fixing it is going to cost so much more than you just maintaining it from the get-go.
Speaker 2:Having that structured contract and having all your ducks in the road to send out to your very first client is going to save you in the long run than a year's time when there is a conversation, if there is a disagreement or an uncertainty around the deliverables or payments. Fixing it is just a lot. There's a lot more cost, time and energy that goes into it than just having that right from the start. And same with bookkeeping. To fix bookkeeping, if you know the amount of times where there has been like a tax order and we have to go back and clean up something, it just costs a lot more to fix than it does to maintain um going forward and also for your own peace of mind as well, making sure you know okay, this has been looked after, I've had someone review legally, I've had someone review accounting and just that peace of mind, because that's not what you want to be worrying about in your business?
Speaker 1:no, absolutely not.
Speaker 1:No, I think, like going back to what you had said earlier about when is it time to hire.
Speaker 1:There's like this adage out there, right, and it's like a multiple of, like what you're bringing in on an hourly basis and I can't remember it off the top of my head, but it's something like you know, if it falls below 75 or $80 an hour and you can hire someone to do that on a contractual basis or even for less, right, um, that maybe that's better than you spending your time which could be better spent doing the the.
Speaker 1:You know, there's some sort of formula out there, I think, that that you could do to determine whether you should outsource or keep it in-house, and I think at some point you get, you get to an area where it will cost you money. But there's, you know, time and money trade-offs, right, absolutely well, you know, in closing, like, what is one great resource or book or podcast that you've listened to that you think would be great for a business owner? Excuse me, that would, you know, help them in their journey, either on their way to exit or building up their business, with the plan, at some point in the future, to pass on the business to someone or exit?
Speaker 2:yeah, so a book that actually, and oh my gosh, I can't remember the author, so I don't know if I can quickly look it up right now, but it was actually the art of persuasion and I can't remember who the author is now but the art persuasion and not, you know, obviously ethically, but I think for me it's at the end of the day, when you're in your business you're looking to grow, communicate and sell and I think just having the tools to be able to effectively communicate, to be able to effectively know how to position your business, is going to ultimately grow your business to a better valuation, to better profit, to be able to invest in more team members, to invest in other things in your business, and so for me that has been very powerful.
Speaker 2:Someone who's an accountant, who needs structure, process and kind of that structure and process. It just helped me kind of identify the different elements to consider when you are positioning and speaking about your business. So persuasion is, I think can sometimes come across as like manipulation, but that's not. It's more just having the tools to be able to know how to position yourself. And I think for me that was a very recent powerful book that really helped me kind of hone in on that.
Speaker 1:Nice I had another guest who I'd said how to win friends and influence people, and that probably falls in the same category of being able to persuade or or speak in a way that I think like to you, to your point what you said persuasion at its core is really the ability to talk to someone and have them understand you Exactly, Exactly and just considering the different elements that come with that.
Speaker 2:It's not just oh, I do bookkeeping and accounting services. You're like, yes, from the plainest perspective, but it's just understanding what does that mean for the other person hearing that, and then how can you contribute and continue growing on that discussion or that topic? So that's been helpful for me, awesome. Well, thank you so much for being a guest today.
Speaker 1:Yeah, thank you, it's been a great conversation. Thank you so much for being a guest today. Yeah, thank you, it's been a great conversation. Thanks for tuning in. Leave a comment below if you have one for us, and look forward to having you listen again to the next episode. In the world of business, not all deals are what they seem. Fortunes rise, empires crumble, all with the stroke of a pen Mergers, acquisitions, hostile takeovers Welcome to Mergers, she Wrote, where we examine strategies and stories behind the biggest deals in business. Because in M&A, the real risks are the ones you don't take.