Episode 70: The Hidden Financial Trap Destroying Successful Entrepreneurs with David Phelps

There's a lot of white noise in your financials that doesn't matter for anything. A lot of the time, it is what many CEOs are going after.

In this episode of the Strength in Numbers podcast, Marcus Crigler talks with an entrepreneur and financial expert to talk about the hidden financial traps that many business owners fall into while trying to scale.

Listen as David Phelps shares why understanding your numbers goes far beyond reading financial statements, and why tracking the right KPIs and recognizing the warning signs are important in your business. These and more in this episode, enjoy the show!

You’ll Learn How To:

• Identify the financial “white noise” distracting you
• Use KPIs and dashboards to catch financial problems
• Separate ego-driven decisions from long-term financial freedom
• Understand why scaling can become a dangerous trap

What You’ll Learn in This Episode:

(01:47) Real estate investors are struggling with hidden financial problems

(04:36) CEOs are being forced back into operations

(08:00) What happens when businesses hit a growth ceiling in their market

(09:56) Maximize existing opportunities in your area

(11:49) The financial reality behind scaling into multiple locations or markets

(13:13) The scaling trap many entrepreneurs fall into

(14:28) Understanding your numbers as the biggest advantage in business

(16:27) Translating financial statements into key numbers as an alert

(18:16) Comparison pushes entrepreneurs into unhealthy growth decisions

(19:52) Ego as the real reason most people start a business

(21:20) Financial freedom and ego are often confused in entrepreneurship

(23:11) The role advisors play in helping business owners

Who This Episode is For:

• Entrepreneurs who are feeling pressure to grow
• Business owners who are struggling with profitability
• Real estate investors who are dealing with financial uncertainty

Why You Should Listen:

This conversation is a reminder that success is not just about scaling but about building a business that supports the life you want. This episode offers a practical and honest perspective that many entrepreneurs need to hear.

Connect with Marcus Crigler:

• Website: https://beccfo.com/
• LinkedIn: https://www.linkedin.com/in/marcus-crigler-cpa-977a45b7 
• Facebook: https://facebook.com/marcus.crigler 

Transcript

SPEAKER_02 0:00

There's a lot of white noise in your financials that don't matter for anything. And a lot of times it's what a lot of CEOs are going after, right? But it doesn't matter. What you've got to figure out, and we call it dashboards or KPIs or ratios, whatever you want to call it, doesn't matter. What you're looking for is the key things in your business that are going to alert you hey, bing, bing, bing, bing, bing, bing, you need to dig into this.

SPEAKER_01 0:25

Welcome to Strength in Numbers, the podcast for real estate entrepreneurs who are tired of being broke and not having control of their finances. If you're ready to finally take control of your money, slash your taxes, and start building real wealth, you're in the right place. And now here's your host, Market Crickler.

SPEAKER_00 0:47

So I was looking, I was looking back when we talked about, I guess, about six months, and uh, you know, we were looking at the marketplace then, and you know, your work with a lot of real estate business owners, and you're talking about someone being forced to sell assets, they never find that they have to sell because of liquidity requirements, because of of refines, blue notes, basically liquidity issues uh with the cos tech and both depreciation they take. And so now it's like, well, I got to come to the table. Didn't didn't realize that was gonna happen. Uh, you said something that that really struck with me, and I wrote it down. These assets that were supposed to create freedom are the thing keeping people awake at night. Sure. That's universal. That's universal because we all got into a realm of the economy and the markets uh being pushed up by the fiscal and monetary policies or irresponsibility, however you want to look at it today, and allowed for assets just to keep climbing the wall and we could scale to no end. And it's like then you get to this point where the market starts to shift. It's like, um, oh my gosh, what did I not know? And how did this happen? So that's kind of where we ended a few months ago. What's changed, if anything, from your universal standpoint? I'm just kind of curious. Anything changed or anything new?

SPEAKER_02 1:46

No, I honestly I think it's more of the same, if anything. I would say we're in a market right now, again, we're not too far removed from 2022, 2023, where the industry was gangbusters, and you know, you couldn't really mess up a deal. And then we went to 2024, and you know, we there was some blood in the streets, but I still think good investors were were okay. I think they had the reserves. I, you know, I think that was something that we talked about is you know, good investors were still investing. I've seen probably more in the last 60 days where some of those investors that you would think were on a little bit more stable ground today are feeling it, right? And feeling it in a way that it took them longer. They have bigger businesses. Those businesses, it took kind of longer for the bloat to flow through, but man, they realized that they were very bloated for today's economy. I was actually talking to somebody, I don't know, yesterday or the day before, not a client, but they were just they were pulling their hair out, trying to figure out what happened. And same top line as 2024, two and a half million dollars difference in the bottom line. Wow. And, you know, you think about that maybe being an issue with okay, costs have gone up and all this other stuff, but this is, you know, when we take talk about top line, we talk about gross profit. That's after the cost of selling the properties and the cost of rehabbing the properties and all that stuff. And so we're seeing that the bloat, the actual operating cost is what's caught up to a lot of these people. And and I think what really was the issue was that there was so much planning for growth and so much bloat in expenses for growth, and the growth never happened. And so, whenever you had the same top line but two and a half million dollar bottom line difference, the only way you can do that is preparing for growth that didn't have her happen. And then now they're in the middle of this chopping block of all right, we didn't grow. We actually think that our top line's good. We actually don't have a problem with our top line. We just can't function with this type of operating expenses. And so we're seeing a lot of that. I say a lot, I mean relatively a lot, more of that than I've seen. And what it's actually what it's doing, it's forcing the owners back in the business. And I've probably seen that more in the last year than I've seen probably in the decades that I've been doing this of owners coming out of the owner's box and really saying, hey, this is not my COO and my captains, my leadership team that we all love to hear about on stage and we've all talked about, and we want to have. They didn't really run the business the way we expected them to run it. And now we've got to come in and really get our vision back in line with what the expectations are of this company. That's what I'm seeing a lot of.

SPEAKER_00 4:35

That's super interesting. So I want to dig into that a little bit from that standpoint. So I I get it. You know, we all want to be in a business where we are the CEO and sitting above, and we're the visionary, and we have people that can run operations. And most of us, that's what we like to do in particular capacity. And yes, you're right. When things are running well and really the market has a lot to do with our success. And I think a lot, a lot of people uh think that because that we had this long run until you know we hit the dynamics of of COVID and the interest rate spikes, and you know, you got a little volatility there. And as you said, a lot of people that have had good models that have realized the profitability and the ability to expand and grow, as you said, over this long period of time, when the realization hits that that's not working, and then then there's a tendency, or we've seen this obviously in the last, you know, what, year and a half since rates went up. And then we're so glued to every other month when the FLMC comes out, well, what are they gonna do? Right? When's Powell gonna drop rates? You know, as if that does much at all, if anything, along into the curve. I mean, it certainly helps certain dynamics, right? And and so there's a lot of people, I know we both know that again, I get it. Well, just wait till rates come back down. They're gonna come back down and then we can go again. And when that does not happen, the margin starts to run short, then the CEO at the top has to come back in. I'm wondering, is it their the C-suite people, is it they were not really doing the job, or maybe I'm just saying, because I'm uh kind of up there too, I don't do a lot of the operations, but did I, as the CEO driver, maybe I was a little bit too focused on growth, and that's kind of what my vision was, and my people were actually doing it, and maybe I have to step back in because I got to cut some some labor costs and I just have to get back down hands-on, like I was a decade ago, and redrive a vision based on less profit revenues are still here, or where did I start shopping? Are people starting to cut back and get their model tighter again? Is that starting to happen?

SPEAKER_02 6:16

Yeah, I think so. I think in in the couple the instances that I'm specifically talking about, or where I gave you that specific instance, I think the owner was driving growth. I think the owner was not driving accountability. And I think those were the issues, right? Where the story that was being told out of the mouth of the C-suite was not the story that the numbers actually said. And so they trusted the what was coming out of the mouth and not what the numbers said. And when you set back and look at the numbers and you analyze, you can very easily see that you've got millions of dollars of expenses that aren't necessary and certainly need to be handled quicker. But I think the difference is, and I think why this is a struggle. First off, nobody wants to admit they're wrong, but that's number one. Number two is if you're in an employee position, and and you know, what we got to keep in mind, some of these COOs, they are highly respected in the industry, highly paid, highly successful, at least from what it looks like. And the expectation is if we're supposed to grow, that we're growing. And you know, sometimes the leadership team paints a different rosy colored glass than what's actually out there. And that's what happened in this situation. Was that specifically, hey, I wasn't looking at the numbers, I wasn't keeping my eye on the ball. We needed this person because we needed to grow here, but I actually wasn't looking to see, well, was that generating profits? Was that, you know, we needed to do this new advertising channel? Was it generating profits? Was it not? So I see a lot of that, but there's no doubt. I mean, I believe that there's a lot of markets and there's a lot of owners that are in markets where they've they've maxed out the market too. You know, I think there's this uh concept of, hey, there's always deals and there's a ton of deals, and I do think that's the case, but I also think that some of these guys that have been doing it for the last 20, 25 years, they've grown their business to where it is today. And where it is today is is as big as it's gonna probably be. And so, you know, maybe you're gonna get some growth, but when you've got 20 million dollars of gross profit going for 30 in a year is very different than going from two to three in a year, right? And so I think that's where they've got to realize, and they're realizing that the growth that we used to have is very different than the growth we're gonna have in the future because just from pure, hey, we own the market in a lot of ways, we can only grow by increments, not by exponential growth like we used to. And so that means your expenses and your expense management has to change. You can't just go out and run a hundred thousand dollar marketing campaign because you're not reaching anybody more. You're kind of doing what you've done. And so, aside from expanding markets, which most people don't and shouldn't, you've got to kind of grow incrementally and maximize out the dollars that you have in the market. And that's another thing that I've been talking a lot with a lot of people about is how do you maximize your dollars in the market? If you've got we've got this amount of leads, got this amount of appointments, got this amount of contracts, what are you doing to maximize the dollars on every single one of them? And I think it used to be you could just wholesale everything and it'd work. I don't know if that's the plan. I don't know if that's the strategy. I think leads are too expensive to only rely on wholesaling deals, at least consistently. I've seen a lot of that.

SPEAKER_00 9:55

So, Marcus, you deal primarily with real estate investors. I deal with dental practice professionals. They're both businesses. And what I've seen is that in the realm of wanting to scale up to grow, to you know, a lot of times entrepreneurs just use the word, well, I'm gonna double next year. Well, you come back to like double what? Let's get specific. What are we gonna double here and and how are we gonna do that? And what I've seen, and you kind of made this mark a moment ago, and I've you know been in the groups that you serve very well, and we've seen those that have a good market presence, they have great operations, and then as you said, they start to tap out that market. It's like, well, let's just take what we do well here, and let's just go to another market. And the same thing comes up to professional practice owners who build a culture in a certain proximity, geographic area, and they do it quite well. And they grow it and they're reasonably profitable by whatever success definitions they have. And that's always the entrepreneur's idea is like, well, if I can do this much here, why can't I do more? And then so that the doctor in this case says, Well, then I should have another practice two miles away, three miles away. Sometimes they go out like 30 miles because that's where they think the opportunity is, and all of a sudden, the culture that they're so good with, hands-on, because they're still somewhat hands-on if they have other doctors there, still hands-on, taking that culture and putting it in another place, but they're not there on a regular basis. I just haven't seen that, except for small exceptions, work very well, or at least there is a a real constraint to get from, in our case, from one practice to let's say finally getting it scale to a point where you really have operations place to maybe it's seven, eight, or nine, but that gap in between, oh my gosh, that's where I just see a lot, a lot of victims, quite seriously. Do you see similar things in in models where people are trying to scale beyond a certain uh geographic area?

SPEAKER_02 11:40

Yeah. Well, first off, I've never seen anybody use the word scale and have a lot of success.

SPEAKER_00 11:46

I was gonna go back to that.

SPEAKER_02 11:47

Good. Thank you. Thank you. You know, that's I think I I agree with you, and I can't even imagine the complexity that a dentist must feel in going from one, you know, office, which again, again, you know, an office has a finite amount of revenue that you can generate in an office, right? There's only so many chairs, so many hours in the chairs, yada, yada, yada. And so I I totally get it, but I think what's underestimated is not only the culture side and how do you expand your culture, but the financial implications of that. And now, you know, we were first business, and this is the same thing with real estate entrepreneurs, when they were building it, they were in the middle of doing it, they were hands-on. The business was more profitable because they were in the middle of doing it and they were monitoring it and they were doing, you know, they made sure the refrigerator was a $800 refrigerator, not a $1,000 refrigerator, right? Well, that doesn't matter to your contractor, but when you do 50 deals, it's a big difference on the bottom line, right? And so just the little stuff that you're seeing, but as a dentist, it's the same thing, right? You're serving this office, but you're not serving in this office. So this office was able to build more profitably, more quickly, so that it can grow and support itself. Well, this office is going to take a lot of financial backing because you're not providing that financial backing in the time, right? You've got other people that you're having to pay for that time. And so it takes longer. You called it a trap. It's this scaling trap of you have to get over that hump where the financial burden is just killing you to where you can finally get to that seven, eight, whatever, however many dentist office it takes for that to be actually successful. But the gap in between, you're like, hey, I'm really profitable here and I'll be really profitable up here, but we don't realize how painful it is between the two gaps and how long it takes and the staffing it takes, everything that it takes. And honestly, what a lot of times we find out, and this is what a lot of my real estate entrepreneurs are finding out, is over here wasn't so bad. The grass wasn't actually greener. It's like I'm okay getting my hands dirty a little bit if I don't ever have to feel this feeling again of growth, expanding, scaling, whatever you want to call it, to a level that I'm financially feel broke, but yet I'm I'm successful.

SPEAKER_00 14:11

Well, you just end up stacking liabilities and risk factors uh to get there. And and that's that's part of being an entrepreneur. I mean, we do take risks, do we not? So how much do you want to take and where do you want to mitigate your risks? I want to go back to something else you said, Marcus, which I thought uh was really paramount. As you said, a lot of times that the CEO uh listens to what their C-suite says, but the CEO doesn't really be able to dissect or understand what the real numbers are. I assume that wasn't probably a CEO that works with you because that's what you do. You help the CEO understand and translate or read the tea leaves or whatever you want to call it, so they understand what the real numbers are. Because whether the the C-suite uh intentionally or just because they don't know, doesn't give the right information, you've got to have someone like you in place. And I I'm a huge believer of having uh a controller and CFO, even fractional, a part of a CEO's team. Because if you don't have that, then any moves you make, you're just flying blind. You just have no idea unless you're gifted. And most entrepreneurs are not gifted with numbers. Or can we just say that? It's just a fact. It's just a fact.

SPEAKER_02 15:12

Well, it absolutely is. And the great thing is, if you can figure it out, like that's the special sauce. I mean, really and truly, when you figure out how to understand your numbers and not only just understand, everybody talks about understanding your financials, but it's not understanding your financials. And you're right, they weren't a client, by the way. I thank you for noticing that. But when you understand the pieces that actually matter within your financials that create the alert, like there's a lot of white noise in your financials that don't matter for anything. And a lot of times it's what you're, you know, what a lot of CEOs are going after, right? But it doesn't matter. What you've got to figure out, and we call it dashboards or KPIs or ratios, whatever you want to call it. It doesn't matter. What you're looking for is the key things in your business that are gonna alert you hey, bing, bing, bing, bing, bing, bing. You need to dig into this. Bing, bing, bing, dig into this, bing, bing, bing, ding into this. And I think this particular CEO, that's what he called me for. He was like, hey, I get the financial reports. I was reading the financial reports, but nothing was coming off the page that this was supposed to be an issue or this was an issue. And I'm like, well, that's because you're looking at financial statements, you're an entrepreneur, you're a business person. That's not your skill set. But what you do need to figure out is how to translate those financial statements into some key ratios, some key numbers that will alert you if those are not getting hit, and then you can dive in and get answers to the questions that you want. That's the key here. And and again, Robert Hersheveck says this, and I think he puts it in an eloquent way. Accounting is the language of business, right? And so when I say it's kind of the X factor, it's the thing that if you figure it out, if you finally take the time to study it, you're set, right? You don't see a lot of accounting firms going bankrupt. There's a reason. It's not because they're busy, it's because they understand finance, they understand financials, they understand how to spend less than they make and how to project out how to spend less than they make. Even what I would call not great accounting firms don't go out of business because they understand that stuff. And so I think I think it's important that what I do every single day is inform people that they need to understand that, whether they work with us or not. You know, that's a whole nother story. But in your world, to me, the dentist needs to figure out what those alerts are. And they need to figure out when they need to dive in and when it doesn't matter, and when it's a waste of their time and it's white noise. And the sooner that they figure those things out, the sooner that they have that realization, then that whatever they want to do from there, right? And that's what I believe is they can go whatever direction they're informed, whether it's, hey, I need to take my cash flow and just invest it until I can it pays for itself and I can have this passive investment portfolio, or I want to have nine dental offices and this is how it's gonna work, but I've got a detailed financial plan on how I'm gonna make it work and I know how much capital I need to make it work, and I'm willing to suffer the pain because I want to see what the end of this looks like. Everybody's different, but it seems like the other thing I'll say about this, I'm rambling a little bit, is that comparison is what drives most people to that next level. Is like, oh, well, that guy can run nine dental offices, I can run nine dental offices. Like that guy's not better than me. He's not, but he's also not probably as happy as you are. He just may seem as happy as you are, or maybe more than happy.

SPEAKER_00 18:41

Yeah, I think that's the thing is most people from witness, other people from the outside that look like they've got it all together or you know, maxed out, scaled up, optimized, whatever. You don't know the backstage. And oftentimes we we get to, right? And we get that's confidential, but in the rooms we get to be in, that's where when people are vulnerable, you get to see, uh, yeah, it's not all that we thought it was or what they thought it was. And I'm so I want to just kind of, you know, this is a great conversation today, by the way. I love this. One one last thing I've got. So as we're talking through this, you're the numbers guy, but you're also an entrepreneur. You have a business, you also have a family, you also are trying to, you know, use that the word that really doesn't work with entrepreneurs, but balance. And so let me ask you with yourself and with all the entrepreneurs you work with, what's the reason, uh, other than our DNA? But what's the what's the real reason that we want to have a business that you know we think we control, and many times it controls us, but we still think that we're not working for somebody else. We only work for ourselves, build something. What's the real result, in your opinion, that people really want, uh, that many times they miss the mark on?

SPEAKER_02 19:39

Well, I'll answer two different questions I heard there. One was the reason, and one was the result. I'll give you what I think is the God's honest reason. And I think I would be lying if I said this wasn't my reason as well. I can say it in one word and it's ego, right? I think a lot of times, and for some of us, it's the right move, it's the right ego. Ego doesn't necessarily have to be a bad thing. And an ego can tell you the things that you're good at, and also can be a pretty big critic to you as well. But I do think when you're in a business and or you're in a setting where you're like, hey, I could do this, I could do this thing, whatever this thing, be a own my own dental firm or dental company, own my own CPA firm, own my own real estate business. I don't want to work for anybody else. That's all ego stuff, right? We can say it's for freedom. It is a piece of it, but there's a lot of different ways of achieving financial freedom beyond having your own business, right? And that's many times, it's honestly the hardest way of doing it, right? If you go in and work for somebody and do a really good job and find the right employer, I mean, I got a ton of uh employees that by the time they're done with me, they're gonna be plenty financially free, right? And so, but they don't want the the business, and so you know, I I see that as being a big here's a reason why we start. Yes, there's this other piece of this financial freedom to it, but the real reason is hey, I think I can do this, I've got an ego, and I'm and I'm going to, and that's healthy. I'm that's not a negative thing, but the result of it really comes down to what was that next reason why you did it? Right? Did you get into it truly for financial freedom after the ego piece, or did you just get into it for the ego piece of it, and you're gonna continue that ego piece until you're a billion-dollar company? Well, the problem with that is that there's only a very small amount of people in this world that are built to have a billion dollar company, that are built to get served with lawsuits from the SEC, that are built to have the IRS screaming up their skirts. There's very few people that are built for that. And so the result actually is hey, if you start with ego, but then you have your next reason, and that next reason Still ego, you're going to end up having to find that why, if you will. Simon Sinek talks about the why. I know the why to start a business is always ego. But beyond that, that next question is like, okay, what's going to keep me in business? It's going to be financial freedom. It's going to be getting security. It's going to be making sure I'm not, you know, I'm sleeping well at night. And I think most people lose sight of that piece of it as they're trying to serve the ego part of it and not the why part of it.

SPEAKER_00 22:30

So, Marcus, do you sometimes in working with your operator owners, CEOs, do you end up doing a little bit of counseling with them sometimes, particularly when in in recent months, last year or so, that that there has been this compression, some of the headwinds that we just talked about, and they're starting to look and wonder, like, why am I here doing this? Do you ever have some counseling where you actually talk a little bit more about life and what what the business could look like based on the reality that they come to the conclusion, not what you or I would tell them to do, but kind of get there because many times we don't want to go there. We don't know how to go there, right? And sometimes it takes somebody who can reflect back that you know as a trusted advisor that can actually just have us look in the mirror and say, well, what was this all about? And if I'm not happy doing it right now, then is there a different model?

SPEAKER_02 23:10

Well, I think that's exactly what it is, right? I think that's what an advisor is supposed to do. We can do, I think whether it's an attorney, a CPA, fractional CFO, banker, you know, coach, mentor, their job is to just use the tools at their disposal to give you the information you need to make better decisions. Like that's as simple as that. And so, you know, I have a certain set of tools at my disposal that I'm going to, you know, give you the information so you can make a better decision. And sometimes that's just honestly, buddy, you don't need to be doing this. This is costing you more than the profits that it's going to generate you. And not from a financial standpoint, but from a life standpoint. You're working 12 hours a day, 15 hours a day, you're not healthy, you're gaining weight. I don't have a problem with calling somebody out in those types of situations. Now it's got to be the right way, and you got to know who it is, right? And how to how to have that conversation appropriately. But I think the reality is any advisor that you have in your team has got to be willing to step outside of, well, you made $15,000 in profit this month. Is that good or bad? What does that make you feel and how does that impact your actual life? And it all goes back to us personally, right? Like these are all small businesses. And at the end of the day, it's about you as that individual running that small business. We're not big corporations, we're not, you know, big, you know, Fortune 500 companies. These are small people, small businesses that they deal with the everyday life of having to deal with that. And so, yeah, there's a ton of counseling. There's a ton of just trying to draw from facts to provide that counseling because again, they're in it. They're forced through the trees, right? How do you see, how do you see everything when all you see is a bunch of tree trunks? Somebody's got to step up above and say, hey, look at all these tree trunks out here, right? You got to watch out for those.

SPEAKER_00 25:09

Yeah, no, so good, so good. Well, hey, I I always enjoy having these conversations with you. Um, they're fun for me because you bring a real life perspective because of of all that you see, and then I just know the person you are too. So that gives good color. So hey, I always appreciate you take taking the time. I know life's busy and you got lots of stuff going on, so I try to keep these compact, but just you know, getting a check-in with you and getting, you know, your pulse on what you're seeing in the space because you're in it, you know, you're in it. And I serve from a different level than than you do. And so it's just nice to get some touch points there. So always always grateful for that.

SPEAKER_02 25:36

Awesome. No, it's always fun. I appreciate you, and I appreciate uh you having me today.

SPEAKER_01 25:41

Thanks for listening to Strength in Numbers. If you're ready to take control of your finances and start building real wealth in your business, be sure to schedule your free discovery call with market at BETTFO.com to get started. Thanks for listening, and we'll see you on the next episode.