Beyond The Launch: Essential Business Finance Podcast Recap

Vince Aguirre: Hi everyone, my name is Vincent Aguirre. I'm the president of a web design company named distinct since 2013. We've worked with over 400 small businesses to improve their online presence through web design, SEO, and marketing. I'm also the host of this podcast, Small Business Big Ideas. We also have a Facebook group with the same title. Today I'm joined by Ken Eitel, who's a longtime entrepreneur, a friend, and a mentor, Ken and I will be hosting a series entitled, Beyond The Launch. Today's session will focus on Essential Business Finance. Ken is a lifelong advocate for civic leadership and entrepreneurship. Ken's career has included small business creation and ownership, being the director of an entrepreneurship center, a faculty member of a community college, and leadership in a nonprofit and community development organizations of his community. Let me bring Ken into the chat.

Ken Eitel: Good morning, Vince.

Vince: Morning, Ken. How are ya?

Ken: I'm doing fine.

Vince: I want to give you an opportunity first to say a few words about yourself your experience and why you're interested in doing this?

Ken: Well, first of all, I'd like to thank you for the opportunity to talk a little bit about some of my experiences, and specifically about those things that you will encounter after you start your business. You know, we all do the planning, we have finally found the money, we open the doors, and then it's kind of what's next. And so the title here Beyond The Launch is about that it's about what are those challenges and high points and low points that you'll see? And how you can really, hopefully, kind of avoid those. And if they do come up, how can you correct them.

Vince: Yeah, that's great. And I'm really excited. I know, you and I have talked about this for years, especially as I've kind of learned and grown as a business owner. We talk all the time about people we see both in our community and in other places. So I'm really excited. I know you and I have talked about this but anyone watching at home, I want to let everyone know that I have a little outline on this screen. So I'll be looking at the outline. I'm also taking some notes. So you'll see me doing a few things. But Ken I want you to be the star of the show. And I know we kind of discussed some topics before we met today. So I think we're gonna jump right into financial reports and forecasting. And specifically, you know, why financial reports and accurate financial reports are important to a small business.

2:49 Business Can Be Profitable But Still Have No Cash

Ken: Well, I think one of the challenges that you have as you open your business, and you know, you've done forecasting, you've kind of made an educated guess, so to speak, in a lot of different ways on how you think sales will go on what you think your expenses will be and how many employees you might need and all of those kinds of things that really just can be kind of fun to talk about and do. But then you begin to have actual sales. They may exceed what you thought they may not exceed what you had projected. And so how do you understand what's going on in the actual business. Not necessarily on paper, but how is it performing? So there are two types of funding financial statements, one of those is an earnings statement.

4:10 Budget Base On Your Experience

Ken: But going forward, it also, excuse me, helps you set goals. And that's the other part that's really important. You know, a budget based on your experience, whether it's an average of that 10 years or five years, or whether it's something that you're looking to expand, budgets important to give you guidance. You never will be exactly on budget, you'll be over or you'll be under. But it does give you some way in which to know how you're going it gives you a roadmap. And kind of the same way that goals do soft goals, I'll call those, not financial goals. So those are the things that are important in accuracy and accuracy is important to your future. Because it helps you know where you've been, it also helps you project where you might go.

6:52 How You Can Adapt with Corrections

Vince: Absolutely. I want to go a little off the script because something came to mind as you were talking. I know some businesses that we both engaged with who had extensive business plans leading up to opening and kind of going with the title of the series right Beyond The Launch. Can you talk a little more about corrections and the good and the bad, you know, maybe you're not selling X product as much as you expected? Or product Y is just taking off and becoming part of your revenue, like a business that we both know of? Can you go to talk a little bit more about those corrections and how you can adapt and not be in that paralysis of, “This isn't my plan? This isn't what I was hoping for”?

Ken: Well, I think realism is important. Also testing markets is important. I use a term called ‘conservative risk'. And I use it a lot. Because I didn't mind taking the risk as long as I didn't bet the whole bank. And I think that's part of, of expansion of experimentation. The other thing that you can stumble into, and this is a business that Vince and I both have been involved with, is you thought you were going to be doing certain things as your major business, and all of a sudden you discover this market you didn't see. It's still relative to what you do. It's still a piece of what you do. But all of a sudden here's your future. Here's where the cash is. And another term I use is ‘backdoor business'. Oftentimes what you see when you go into a business, let's just take a restaurant as an example. If they are strong in catering, that is a backdoor business that you don't see. We own a family flower shop and people saw one thing when they came in the store, the retail side, but they didn't see the weddings and the special events and the large banquets and all of those things that we did. And oftentimes, it's those backdoor things that you don't anticipate that ultimately will provide you with a good living.

Vince: Absolutely, yeah. For me, it was the adaption of recurring revenue in our business model. Never really was in mind when we started the business and then it changed the way we do things with the recurring revenue. So yeah, I think it's really important to be able to adapt like that. And especially the back door revenue, you and I talked about that often and it seems like every year becomes more and more important. You know, we see small retail boutiques, that you know, they do good business in the store but they sell a lot of their items online and it's necessary. So you might not see that foot traffic in the store. But it complements and helps them promote as well. So absolutely.

8:51 The Importance of Adaptation

Ken: Really good example here Vince to continue a little bit down a rabbit hole here. This is what's happened in the hospitality business, particularly in restaurants. You see now or at least you read about restaurants that have the in-person restaurant, but they have a whole ‘nother operation that is delivery and pickup. And it's kind of a take-off on catering. But as a customer dining in, you don't see that at all. And that's a perfect example of an adaptation.

Vince: Yeah, absolutely. Ken before we move on, I think it's important. You kind of mentioned the flower shop. Can you talk a little bit just for you know, a minute or two about the history of the flower shop and your involvement?

Ken: Eitel Flowers and Gift was founded in 1908 by my great grandfather as a wholesale grower here in our community. And in five or six years, they then opened a retail site in Greencastle to allow surplus to be sold. That continued for a number of years. It had a number of different locations eventually ending up in 1946 When my father came back from World War II in one location and stayed there until it ultimately closed in 2010. Excuse me 2019. In 2010, my wife and I sold that business to our local manager who'd been with us for 10 years. Ultimately, the business closed when it was 112 years old. We were 4th generation. And it just served our family extremely well, the community but we also gave and wanted to give a great deal back and I learned that through the generations of my family that that's something you did you gave back. And for that period of time. We have a lot of different products, did a lot of different things. With the market – another word that I use is ‘organized abandonment'. That's a whole ‘nother session.

Vince: Great. And you did write a book about the history of the flower shop, right?

Ken: I did. With a really artistic collection of memories and pictures. And we then donated any extra copies to the local museum. And they have that for sale as a fundraiser.

Vince: Yeah, awesome. All right. Now I'll go back to the script. I apologize for veering us off. But I think these are important things to talk about. So I think the next subject and correct me if I'm wrong, is talking about what information should really be available in these reports and how frequently you should be running them? And things along those lines. Do you want to talk more about that?

12:33 Make Sure You're Not Throwing Your Profit out in the Dumpster

Ken: I can. We were fortunate when we bought the store, we bought it at a time when in the eight late 80's period of inflation, a number of different reasons and we're able to grow that and diversify. And as we did that it became more and more important that you kind of have a sense of where you were going. So the earning statements we did monthly and early on we used to very, very much have a manual system. I don't quite predate computers, but I'm pretty close. But as electronics began to come, become available, we eventually had a proprietary system that had capsules for payroll, as well as merchandise and purchases. And I actually, every day after we posted, I could run a current financial statement daily if I wanted to, I didn't, but I could. So what we needed to look at when we did that, and when we did get accountant, accountant prepared statements every month. And they had comparatives to the year prior. So we knew where we going what was happening. And so we had three months statements, six months statements that had all the, you know, the year to date information. And as I said earlier, I maintain 10 years' worth of records. So what you need in those earnings statements, depending on frequency, you need to course, your total sales, less any returns that you have. And in our case, as a flower shop, it was perishable so if you're running a restaurant, which is somewhat similar, and that you wanted to make sure you weren't throwing your profit out in the dumpster restaurant, you may want to make sure that at the end of the day, you don't have 2 dozen hamburger still on the grill, and you have to throw those out. So you need to count for that and that you have fewer returns as well.

14:35 Gross Margins

Ken: The other one other thing that's extremely important, is gross margin. And the gross margin is your cost of goods sold less your sales, less your cost of goods sold, the product merchandise you buy, to resell, and that'll give you a gross margin. And that gross margin then is what you pay all the rest of your expenses with. And after you do that and pay those expenses, then it should show either net profit or a net loss. Not every month is going to be profitable. And every month will be different. And hopefully, over a period of 12 months, you end up with something left. So I think those are what's important. However, there are three things that you need to look at that are extremely important. One of those is your cost of goods sold percentage to sales. And generally speaking, we tried to keep ours around a third, 33%. Some margins, and you'll hear that as an example on Shark Tank, somebody's got a margin of 80%. You need to know how that's figured first of all, but I knew what where we needed to be just from history, then you need to understand what your fixed expenses are, that make a difference what you sell, you still got rent, you still got utilities, you still got insurance, those things you know, you're going to have, in our case payroll would fluctuate. Is it Valentine's Day? Or is it Mother's Day? Or is it the middle of July? And it's hot, and everybody's on vacation? And so you know, what is that expense that that changes with the month or with the day or with the week. So what are your fixed expenses, you can kind of project based on history, what your expenses are going to fluctuate might be? But the other really important thing is to keep your total Payroll Expense in line. Now, in this outline, I have the total in capitals.

16:38 Anticipate Hidden Taxes in Business

Ken: One of the “Aha's!” of most people, when they go in business, are hidden taxes. Now, they're not hidden just from people who have never been in business. And I know when I taught business classes, we did an actual business model. In one of the business classes, I taught an entrepreneurship class. And we started putting together a business, an expense sheet, and all of a sudden, here's the payroll tax, here's workman's compensation insurance, here's the fact that the business has to match the Social Security that is taken out of the checks and that has to be paid folks, monthly. And so and sometimes quarterly and as I began to transition out, and now that is taken directly out of your checking account. And if you are paying attention, you don't have that and one of the other favorite quotes that I'll have to give here is, do not mess with the government. Pay the government what you owe them and because they have very deep fingers. So you need to know the cost of goods sold you need to know your expenses and you need to know your total payroll expenses. What I always did is a third, third, and third. And worse, where's your profit? Well, that's a percent profit, you read that up. You hopefully come out that way but that's kind of just a good, good rule.

Ken: Then the other one we talked about was the balance sheet. And there you're going to have your current liabilities, what you owe currently, you have to pay within 30 days. You're going to have your long-term liabilities that are maybe the cost of your facilities, equipment you've purchased that you owe after or over 30 days long. Then you have current assets, cash, things that you can get your hands on in 30 days, of course, to pay your current liabilities. And then when you subtract all of that out in addition to your long-term liabilities, you end up with your net worth. And hopefully the equity, so to speak, or your net worth is on the plus+ side, that you are not what people call upside down. And all of this works together. It seems complicated, that's why I always recommend you have an accountant, as one of the important people you have in your business life. But if you don't have these reports, and you don't understand the percentages, it's really hard to manage your business effectively. It all starts with sales. But from there, it's up to you to manage where you end up.

18:20 Balance Sheet: Assets, Liabilities & Net Worth

Ken: And the other is assets, liabilities and net worth sometimes called the balance sheet. These are two very different types of reports, the earnings statement is for a period of time, a month, a quarter, a full year. Whereas the balance statement is just a snapshot in time. It shows you where your debts are, where your assets are. And it's quite honestly probably more important to the bank, or whoever you're trying to help finance your business, then is the earning statement. Often a business can be profitable but still have no cash. And so you have to have cash, cash is king Vince knows that I've said that several times. And that's how you pay your debts. And so it's very important to stay on stay up to date on these types of things. So how do you use those to forecast? Well, you used to use those things to forecast when you establish your business when you were working with a business plan or it might be somebody like IASB DC, which is a local Indiana small business development group that has counseling free no charge. But it helps you when you look at those to make corrections. “Am I not do not have a strong margin? Are my expenses too much? Do I have too many employees?” It also helps you forecast trends. And in the businesses that I was in, especially the last family business, I kept 10 years of works with comparatives. And so while I didn't do that every month, I usually did it every quarter and every six months. But our year ended our fiscal year ended in June, I usually went on vacation in July. And I always took my year-end with me. I didn't look at it until the end of the week. But I did an in-depth analysis of those trends and compared them to the last 10 years. And it was always very eye-opening, both exciting. And also some real realizations there. So you get to see your successes.

20:30 The Importance of Starting Your Bookkeeping Early

Vince: Absolutely, absolutely. I think this is going to be a trend that I continue to do. And I apologize, but I have a couple of rabbit holes, I want to take us down. So you and I talked before we went live about the importance of starting your bookkeeping early. You know, I look back when we started our business as a bunch of kids with $300 in the bank. Somehow we understood that and I'm guessing maybe you mentored us to do that and we worked with an accountant from day one. But I know a lot of people don't. So can you just talk a little more about the importance of both bookkeeping, maybe using a tool for bookkeeping, and definitely using an accountant from the early stages?

Ken: Well, if you do a business plan, and you do a full business plan, there's going to be a financial piece to it. And the state, the state group, ISBDC, as a matter of fact, is an extremely robust financial program that they can put together also its projections. But if you don't you start out with that, but you have to keep track of where you're going from there. There are some things that.. well we've all heard that good leaders understand where their weaknesses are? Well, there's also a weakness in the time you have available. And if you're going to try to run a business or conduct a service, you don't necessarily need to be bogged down and trying to post an account for all the money and all the invoices and do all the billing and figure out where that goes. There are programs out there that advertise, you can do it yourself. But as you know, Vince says, and he's right, as a small business person, you probably shouldn't be spending days and days on your own website. The same thing is true with accounting. Yes, if you have somebody that can understand a program like QuickBooks, that's well and good. But if you don't understand basic accounting, it's very, very hard to set QuickBooks up. And you need to have a professional, a consultant, or an accountant who understands QuickBooks to do that. And they are there. In fact, they oftentimes can do this work for you online. And they never have to come in your store, which is different than it was, actually 1010 to 15 years ago. So you have to start that from day one. Because I can tell you from experience it will get away from you in a hurry. And when you start writing checks, just based on your checking account balance. We'll talk about that. I think probably next time about how you stay out of trouble. But you can get in trouble real fast. And $1 spent is $1 gone. And so I just hated to spend money. Unless there was a return.

Vince: Yeah, it's not a bad thing. And you know, I'll add that oftentimes I've run into people who say, “Oh, QuickBooks is too expensive”, even though QuickBooks online is relatively affordable in my opinion. But you know, there are other tools out there, we're a partner with the Zoho platform and Zoho Books, which is a QuickBooks alternative. There are pros and cons to each, they actually offer a free package to small businesses. The downside is a lot of accountants and bookkeepers might not be familiar with it. But as a free plug, my accountant is familiar with it. So reach out to me, if you use Zoho, and you want to work with an accountant that knows how to use it. We don't have any sponsors, but I think I'm gonna make some sponsors up as we go along with this, Ken.

Vince: Another thing that's come up a question in the chat is, what is an appropriate margin for a business? And I'll kind of start off with an answer for my opinion and ask your opinion, but each industry, in my opinion, is going to be very different, restaurants are gonna have a much lower margin than a software company or a shark tank product. But Ken, what's your opinion on that subject?

25:05 The Challenges of Competing with Large Businesses

Ken: Well, I would agree with what you indicated, Vince. And there is a lot of information available at your fingertips, about each industry. And with a little research, you can find out what those averages are. In my business, there are a couple of different ways you could account for it. And I chose one particular way, my early background was in furniture and appliances. And so that had no perishable piece to it. In addition to that, you didn't manufacture a product. And so the question that always came to me was, “Did I include the production labor in the cost of goods sold?” And that becomes almost manufacturing accounting, I did not do that. It's the way I put mine together so I knew what I was doing. I use the general rule that my cost of goods sold, including supplies was 33%. Now that was probably a little high, relative to the industry. But when you got your information from, in this case, FTD or Society of American florist on floors of similar sizes, then you were able to take a look and see how you compare, and it was all over the board. Now the other thing in our mix was is we just weren't a florist. We also had a large inventory of gift items. And so the markup on gifts is different than the markup on a perishable. And so it is all over the board. Generally, if you can do a third, third to third, and play with that, you should be okay. But if you're doing a service, it becomes a little bit different. The other thing I've always said is you always, always talk about the low margins in certain businesses. But those businesses base their cash and their business on the amount of cash they take in. Not necessarily on margins, because they have such a huge volume. And so that's part of the challenges of competing with large businesses, small businesses can't compete, you have to offer service, you have to be exceptional with what you do. And you have to develop personal relationships with your customers. Because you can't do the volume to keep the prices low. You just can't. So that's not a very good answer, other than to say the information you're asking is out there. And there's a lot of it.

Vince: No, I think that was a great answer. And I'm jotting down our time right now. Because I think that was the nugget of the stream so far is that you know, as a small business, you can't compete on price against a large corporation. So differentiating with that service, the quality, the personal connection, or something unique that a larger corporation just can't do is going to help you stand out and stay competitive. So I think that alone was the biggest nugget you could have given.

Ken: And Vince to come back to the purpose of this particular session. That's going to be more expensive in certain areas. To do those things. And going back to our discussion about an accountant. In most small businesses, people want to see the owner. If you have a good accounting system and a good accountant, you're not worrying about that. You're out there developing business. And that's to me kind of a lost art today.  And many small businesses is that, you get so involved in running the business that you forget that business development is your future. So that may be a discussion for another session. But that's important.

28:20 How to Guarantee Accuracy

Ken: So let me talk a minute about how you can assure accuracy as we begin to close here. First of all, do not put your business revenue in a personal checking account. If you are going to start a business where even if it's a sole proprietorship, please open a checking account for that business. Because when you start commingling, you really have no idea of what's happening in the business. Secondly, we've already talked about having an accounting professional. Thirdly, have a payroll cost transfer account. And what do I mean by that? Well, each week, when you get ready to write your payroll, take all of those expenses, those taxes, we talked about the matching FICA or social security, we talked about, put all of that in a different checking account, all of it. So that when the bill comes from IRS, the money is already set aside and you haven't spent it on something else. And all of a sudden, you owe the government several $1,000 and have no way to pay it. A QuickBooks advisor, a bookkeeper, we've talked about that. And make sure you have checks and balances. You know, you hear the statement, “trust but verify”. Yes, you want to trust the people that work for you. But just have a system that verifies that the information that you're seeing is correct. And there are all sorts of ways that you can do that just normal accounting procedures, to just check and make sure everything's, you know, accounted for in the proper way.

30:28 The Importance of Being Involved Daily

Vince: Yeah, absolutely. Well so, I have a few notes I want to cover before we get off. But I think just to reiterate the importance of being involved. And, you know, I go through phases, I've gone through phases, not so much right now. But in the past where I don't want to look at the books, because I'm afraid of what the books might show. So I ignore it because if I don't know it I can't worry about it. That's a weird way to think of it. But I think a lot of business owners do that at times, where if I just don't look at my expenses, then they don't they don't exist right now. So can we just double down Ken on the importance of being involved daily?

Ken: Other than just the, what I'll call the marketing side, which we can talk we'll talk about at some point later. I've always believed that, while you don't have to personally wait on every customer or greet every customer, you need to be seen. If that business has your name on it or you're associated with that, even before you hand this individual off to someone else to take care of it, the owner needs to be seen that says a lot about your involvement.

31:25 Managing by Walking Around

Ken: There's another book written years ago, called In Search of Excellence by Tom Peters, one of the things that I took away from that book was called “Managing by Walking Around”. And that means that you don't sit in your office all the time. Your alums, in my case out on the sales floor, I knew somebody who was a plant manager in a very large production facility, he practiced that he practiced going out on the production floor and talking to the people who actually operated in this case, the extrusion presses. So that's part of that as well. So you know I think it's interesting Vince that you don't want to look at it because you know it's not going to be good. But if you don't understand reality, you have no idea where to g and what corrections to make. Early in our flower shop career, we were struggling with margins and all those kinds of things that go along with cash flow and all of that. And so I actually went to a seminar on financial accounting. And, by the way, one of the best things ever did was take an accounting class. So just take an accounting class. But I realized that while I was covering the cost of my flowers that went into an arrangement, I had forgotten that there were invoices that were charged to that and that there were those little enclosure cards and there were those little plastic picks that you put the card on. So when I started adding up everything that went into that, I realized that all my money was going out the door. And so you have to be proactive. If there's a problem, you have to find it. And you have to get the education to know what it is.

Vince: Absolutely, absolutely. Another book I read last year that's really helped me too is “Managing by the Numbers”, by Chuck Kramer & Ron Rizzuto. A really good book and helps just simplify the numbers and give you the things you should be paying attention to if there is just one or two things you have time to pay attention to, right. So, Ken before I wrap up, I have a couple of things I want to talk about. I'll kind of go on a monologue. Is there anything else you want to say before we wrap up?

Ken: I think when we get together again, we're going to talk a little bit about how you stay out of trouble. And then, you know, continue that on. We've kind of gotten freewheeling and we had an outline but as so often happens, you know that the outline just doesn't always get followed. But it's important to as Vince said, I don't want to look at it. But you do have to and how do I stay out of trouble. And I think that's been one of the things that I've seen in many businesses, not many, but several businesses I've worked with. Once you start down a certain path, it's a lot harder to get back. And you just need to not start down that path. I appreciate this opportunity and to those of you listening, feel free to contact Vince if you'd like some more information.

Vince: Yeah, absolutely. Thank you, Ken, I'm going to go ahead and wrap us up. But I look forward to talking with you again here in our next session.

Ken: Thanks!

Vince: Thank you! So thank you all everyone who's made it here this long. And what I want to do now is kind of talk about recaps and things that we went over and some ways you can get more information. You may have noticed, we talk a lot about Indiana that's because we are in Indiana and the I SBDC is mentioned a few times. That's Indiana Small Business Development Commission. So I'm going to go ahead if you're listening to this after the fact I'm going to put that in the show notes. So you can click on their website and get them as a free resource. I'll also be adding the Zoho Books link to our website there as well and a link to ask any question you might have through video and to be featured on the Small Business Big Ideas podcast. If you are interested in being featured in a video or podcast session, you can reach out to me. We want to talk with business owners, we want to talk with people who support local, really anyone who loves small business or works in a small business. So I think that's all I have. Again, check the show notes for these different links. And we really look forward to having our next session. So thank you all and You all take care!