Episode 105 Podcast Transcript
Speaker 1 (00:00):
The worst way to measure the health of your businesses via your bank account. It’s got to be through your profit and loss balance sheet and your cashflow forecast to be understand how it all hinges together from a financial perspective. Good day everyone. Rob Kropp and Dan Stones here from Pravar Group and welcome back to another episode of The Trade Den. Good to have you back, Dan.
Speaker 2 (00:26):
Good to be back. Rob. Hello everyone. I know you’ll be excited today, Rob Money Matters episode. We’re going to talk some accounting stuff. It’s going to be a pretty cool episode for you. I know that so you’ll be all excited.
Speaker 1 (00:35):
Yeah, this is the accountant in me. I love talking numbers and I can’t wait to get stuck into it.
Speaker 2 (00:41):
Yeah, for sure. Look, I think where we start off today, we know most of you, certainly our clients, the ones we’ve spoken to didn’t get into business because they had a love of spreadsheets and financial statements and all the good stuff that comes with running your own business. But they got in there. You got in there because you were sick of working for someone else. There was the need for more control, making more money, a better life for your family, the fact that you thought you could do it better yourself than what was happening where you were. But numbers is the language of business and if you are not paying attention to it, you don’t understand, you don’t learn the language and you can’t speak it, you’re going to be running blind and you’re going to trip over in some pretty big holes. The good news is you don’t need to have an accounting degree. You don’t need to go into depth. You just need to understand the basics and be disciplined about the rhythm. And I think this is the ideal starting point. The first thing we want to talk about is why so people are so anxious about it, this financial anxiety problem and the fact that it’s real. I mean financial stress, Rob touches everyone and everything when you have it, it will impact nearly all areas of your life.
Speaker 1 (01:46):
Financial stress is one of the biggest psychosocial stresses that anyone can have in life, not just in business because when you think of it, there’s not one area of life that money doesn’t touch. Now if you’ve got an operational problem that creates stress, if you’ve got a sales problem that creates a bit of a stress. If you’ve got team problems, that creates stress. So those are normal stresses within business. But I think when it comes to financial stresses, this is what we find as coaches that creates the highest amount of anxiety or stressful situation in business owners’ lives. Because financial stress is a bad stress.
Speaker 2 (02:28):
And it’s the difference between being uncomfortable and being stressed. I mean when you don’t know your numbers, that stress kicks in and that’s the lie awake at night. Now everyone has those sort of stresses in business at some point we all talk about and half joke about the fact that you can lay awake at night wondering when payroll is going to be met and how are you going to do that? That’s sort of part of the journey if you like as you start doing it, but you avoid bills, you don’t open the mail, partners snap at you. All those sort of things go on when you have this stress. And that’s what we mean by bleeding through into the rest of your life.
Speaker 1 (02:57):
Correct. Because when you’ve got financial stress that stress comes from, well that supplier’s clawing all over me to be able to pay their bills. How am I going to make payroll on Monday? I’ve got all these jobs coming up. How am I going to pay those bills, pay that person, pay this person. And you are looking at your bank account as you said, you’re looking at your bank account going, there’s not enough money in there and everyone’s crawling all over me to be able to get paid. How am I going to survive? And you carry the weight of the world on your shoulders and you’re looking at your bank account going, how am I going to do this? And we’re going to talk about this today, but that’s one of the biggest mistakes that you can do as the business owner is measure the success of your business via your bank account. It’s the worst measure for it. We’re going to talk about that today, but this is where the stress comes from is because you’re looking at this going, how are we going to survive? How am I going to pay my bills? How are we going to get through the next week sometimes? And that’s the stress that comes up.
Speaker 2 (03:55):
It is. And this is where guys get into that situation where it feels like they’re working harder but never getting anywhere. I’m working my guts out, I’ve been working harder, I’m just not making any moves, not going forward. But that’s because at a core level you can almost guarantee as we see it, it’s because they don’t understand the relationship between the numbers and what they’re using to measure and make decisions in the business.
Speaker 1 (04:15):
Yeah, correct. And the worst thing that a business owner can do is make business decisions based on gut feel. That’s not strategic decision making. And what happens is you shoot from the hip, you make the decision based on a gut feel or it’s like, well, I’ll drop my pants there to get that job across the line, or I’ll do this and make that decision just so I can keep moving for the next week or two. And that’s the worst thing you can do in the business because you’re making decisions without really understanding the implications of those decisions or you’re making moves without really considering the consequences from a financial perspective. And so every decision that you make as a business owner has to be based on having good information at your fingertips to make strategic decisions going forward. Otherwise you’re literally flying blind in all those decisions. And it’s not good as a business owner.
Speaker 2 (05:09):
As a wise man that we both know says it’s good to make informed decisions. That’s what we need the information for to make informed decisions.
Speaker 1 (05:16):
Correct. Yeah.
Speaker 2 (05:18):
Alright, well let’s look at it then. Let’s understand the basics today as we said a two part series. So we’re going to get into how to use this stuff and give you some really cool stuff in part two, but today’s all about understanding the basics. And let’s start off with this concept called the triple bottom line and what that actually means. It sounds like some weird sort of thing, but triple bottom line, let’s explain that to begin with.
Speaker 1 (05:37):
In accounting terms, there’s really three main reports that you want to be able to understand in your business. There’s the profit and loss, there’s the balance sheet, and there’s the cashflow statement or the cashflow forecast. And so when you think around, well, how do we look at our business from a financial perspective, we’ve got to be able to look across those three reports to get a complete picture of what’s really going on. And that’s why we call it the triple bottom line because in the end of the day there’s three main reports. It gives you a holistic view of what’s actually going on and each of them all feed into each other. So you’ve got to make sure you look at the complete picture, not just a little bit of one in isolation because otherwise you’ll be missing a trick across the board.
Speaker 2 (06:27):
If you think of your business as a body, it’s like you wouldn’t have your body just check one thing and go, yeah, my heart’s beating. How cool am I? You have different measures. Same if your business was a body, you’d need three different measures is what we’re talking about. And those were the three you outlined. So let’s start with profit and loss statement, financial performance.
Speaker 1 (06:45):
The profit and loss is what this is, shows your performance, it’s the performance of your business over a period of time. And so this is when you are looking at your profit and loss or your P&L is you always run it over a period of time, whether it’s over a three month period or a six month or year to date, because what you’re looking for is over an extended period of time rather than just isolation. Now you want to be able to look at that over extended period of time because you can get away from the lumpy profit loss that might happen. And this is for the builders out there, they do one big stage claim and it makes it look like they’ve had a killer month, but then the next prior two months have been horrific because there’s been no invoices going out the door. So when you’re looking at your profit and loss, it’s a performance over a period of time so you can almost iron out some of the lumpiness that’s happened within the business.
Speaker 2 (07:45):
Yeah, absolutely. And the statement itself, you look at it as a storytelling device, what’s the story, not just a snapshot in time of what that number mean? Is it good or is it bad? It’s too hard. So making sure you’ve got that. Now, other things that a P&L tells you, maybe just sort of what does that statement tell you when you look at a profit and loss?
Speaker 1 (08:05):
Yeah, really good question. The accountant in me, I’ve got the ability, this has come from years of experience and training, but I’ve got the ability to be able to grab a profit loss of a business and look for the story. That’s what you’re doing when you’re looking at a P&L. You’re looking for a story of what the business is doing, reflecting through its numbers.
(08:31):
You’ve got to remember the business’ numbers are there telling a story. So what you’re looking for is you’re looking for trends of revenue, you’re looking what’s happening over a period of time. You’re looking for what revenue sources are potentially making you money or not making you money. You’re looking for is the business trending in a growth way or is it trending downwards and not going in a healthy position over a period of time. So to begin with, the story you’re looking for is at the revenue line to be able to go, what’s the health of the business at the top line, which is your revenue line and what’s it doing over a period of time. So you can start to see how that business is performing from a revenue perspective.
Speaker 2 (09:16):
Yeah, exactly. The next thing obviously then is the other part of the story we look at straight away at a high level is spending under control, a cost out of control. How’s the business operating and is it spending appropriately.
Speaker 1 (09:30):
Correct? That’s when we get into the cost of sales line, which is the area below your revenue, which is the cost delivered to deliver the direct cost of delivering a job. You’re looking at what’s happening at the cost of sales line to be able to go, well, how are we going delivering jobs? How’s our labour going? Where are we at with our materials? Is our revenue sources and our cost of sales in line with each other, our cost to deliver these jobs blowing out because we may have not got our variation management systems right or whatever it is. So it’s our job management systems. So what we’re doing is looking in particular at our costs of sales within our P&L at the business level to see how the business is performing to deliver the jobs from a profitability perspective.
Speaker 2 (10:23):
Yeah, nice. Do you want to keep going? We’ve got a couple of little pointers there as well that comes next.
Speaker 1 (10:28):
The next part is then into your overheads. You want to be really then seeing, well what does it take to run the business from an overhead perspective at the cost of sales line, that’s what it takes to deliver the job in the overhead section, this is what it takes to run the business. And so what you’re looking for here is how is the business going to be able to actually keep the doors open? This is your accounting bills, your interest repayments, your motor vehicle expenses, your running costs of your premises, your overhead team of your admin and your bookkeeping and everything. What you’re doing there is looking, well, how are we going from an operational point of view? Are we running lean and mean in keeping our cost under control or are we becoming a little bit fat and lazy in our spending as well? So really in the profit loss, we’re looking at revenue cost to sales and overhead and we’re really looking at that profit and loss to be able to see, well, how’s the business not necessarily performing at the job level? We want the business in its entirety how it’s performing because in the end of the day, you’re there to make profit and that’s what the profit and loss tells you, whether you’ve made a profit or you’ve made a loss and that’s the story you’re chasing.
Speaker 2 (11:42):
Over the specific period of time, monthly, quarterly, yearly, whatever period you want to show for how long we’re going to look at the story. Really cool. Alright, let’s go to the next one then is balance sheet. And this is the financial position. So if profit and loss was financial performance over time, balance sheet is financial position for a moment of time.
Speaker 1 (12:02):
It is. It’s a position at a moment of time. Now when we were talking around your health before, I was going to make the joke of saying we don’t skip leg day is you’re not looking at your balance sheet, is you equivalent of skipping leg day?
Speaker 2 (12:16):
It would be absolutely.
Speaker 1 (12:18):
What do you reckon guys don’t look at their balance sheet?
Speaker 2 (12:22):
I think the main reason is it’s a total unknown, it’s a mystery, it’s a black, I could look at it, but I don’t dunno the language, I don’t see it. I dunno the point of it. There’s so much stuff on here that just doesn’t make sense to me. And it’s even words that I don’t even use in the business. I don’t talk to anyone about it. It’s got no context and no real purpose for me. So I think they just miss the fact that no one’s ever told them what the purpose of it is and then they just don’t understand the language and never get comfortable with it. And then it’s just something that’s too scary to look at.
Speaker 1 (12:51):
Yeah, it’s a bit of a black hole of a report, isn’t it?
Speaker 2 (12:54):
It is. And there is a lot of stuff in there that really happens at moments in time when it becomes more relevant than others. Like the accountant gets into the balance sheet and does all kinds of stuff, but only at a moment in time of the year. So I think there is stuff in there that you get lost in the weeds when you get into a balance sheet if you don’t understand the basics. So maybe today, let’s go through what we think a balance sheet tells us or what it should be telling you as a business owner at a high level.
Speaker 1 (13:23):
Well, at the highest level it’s what you own, who you owe, what you owe, and what’s left over. In the essence, that’s what it is. Now when you think of an investment property, for example, you’ve got an asset which is the property worth a million dollars, you’ve got a liability, which is the bank loan at $700 grand and you’ve got equity worth $300,000. So what you’re saying is your net wealth in that investment property is $300,000 of equity or net wealth. The same thing is as business, a lot of business owners forget that they’re actually running a business and building an asset. Most business owners treat their business like a hobby and something that they turn up to, not an asset that is a vehicle to actually build value that’s actually got value attached to it. So when you think around your balance sheet, your balance sheet is that report at that moment in time as a snapshot to be able to go, well, what are my assets? What are my liabilities of the things that I owe? And what’s left over which is your owner’s equity, which is the net worth inside of your business that you run. And it’s its simplest form. That’s the formula, but also that’s what the balance sheet tells us.
Speaker 2 (14:45):
Yeah, not like it. And that high level is all you need to know when you start getting into this. All right, what do you own? What do you owe? What’s the difference? That’s that piece. Now when we go to look at it, that’s great, Rob. There’s still all these lines, I dunno what to look at, which ones do I pay attention to? And for us today, what we’re going to do is talk to two in particular the two key elements for tradies to start even just peaking at their balance sheet and not skipping leg though.
Speaker 1 (15:11):
Yeah. The first one is which is going to be a line item in your balance sheet, which is your accounts receivable. And the second area that is just as important is around your regulations, around your obligations of who you owe the ATO that you owe money to, which can be a combination of BAS, PAYG Super and company tax that comes under your accounts payable section. Now most small business owners don’t run true accounts payables reports, but if a small business owner can just get very good at the accounts receivable section, which is the customers that you’ve invoiced which owe you money and the regulations area of the liability section in your balance sheet of who you owe, in particular the ATO and the other governing bodies, if you can get really good at understanding those two sections of your balance sheet, you’re going to be further down the line than most business owners when it comes to the balance sheet.
Speaker 2 (16:13):
Absolutely. And it’s important to say that we’re using the terms accounts receivable, accounts payable, it may not read exactly as that on your balance sheet there’s a couple of terms that you might usually see on a balance sheet that represent the exact same thing we’re talking about.
Speaker 1 (16:26):
Yeah. Other times they call ’em debtors or payables. So it just depends on how your file was set up initially. But the reason why accounts receivable is super important is because we’ve got to remember that and we’ll talk a bit about this more in this episode, is just because you invoice someone doesn’t mean you get paid straight away. And the accounts receivable is super important because it’s a sub report of the balance sheet where your balance sheet might say there’s a hundred thousand dollars of money owed to you from invoices gone out the door. But when you look at your accounts receivable, it’s a sub report of that saying, well these 20 people make up the a hundred grand and of those 20 people, 10 are within terms, but these 10 are 30, 60, 90 plus days overdue. And so by looking at the detailed accounts receivable report, it helps you get really clear on who owes you money, are they in terms who’s overdue, who do you need to chase? And that’s why that accounts receivable report is so important because it gets in there to help you manage cash flow from the work that you’ve already completed.
Speaker 2 (17:37):
Yeah, I like it. Perfect. Alright, well let’s go into cashflow. Cashflow statement is the third thing in this triple bottom line, right? The third measure we look at cashflow statement is it’s lifeblood, right? It’s the blood flowing through the business is the equivalent in our body metaphor.
Speaker 1 (17:51):
Correct? If you run out of cashflow, that’s the oxygen gone in the business. And that’s why the cash flow is so important because what we’ve got to remember, that profit does not equal cash. And this is where a lot of business owners get tripped up to be able to go, well, my P&L is saying that I’m profitable, but why is it that I’ve got no cash in the bank? And that’s because profit does not equal cash. Now a few examples around this might be you may have invoiced invoices out the door but the money hasn’t hit the bank account yet. Or there might be transactions on your balance sheet like your obligations to the ATO or loan repayments to equipment or those types of things that hit your bank account and your balance sheet, but not your P&L And that’s why you’ve got to be able to understand what transactions hit in what areas of the triple bottom line, either the profit loss balance sheet and the cashflow so you can understand the true picture of going on. But what the cashflow forecast or the cashflow statement is really a derivative of the profit loss and the balance sheet together, which gives you an understanding of money coming in, money going out, which is a combination of the two other reports. And if you manage that tightly, that helps you understand the ins and outs of your cash flow now and into the future rather than just bringing up your internet banking saying, okay, how much money have I got in the bank today? Am I feeling good? Yes or no?
Speaker 2 (19:28):
Yeah, absolutely. Like you said.
Speaker 1 (19:30):
Does that make sense?
Speaker 2 (19:31):
Yeah, it does. I mean, as you said, you can be profitable, go, I’ve got no cash in the bank. Similarly, you could say, Hey, I’ve got all this cash in the bank but I’m not profitable. And how does that relate? So it works both ways. That’s what you mean. You’ve got to understand there is a real difference, a material difference depending on which of these statements, which of these measures you’re looking at and understanding them will let you have a much better understanding of those questions. Why is there money in the bank but nothing in profit and loss? Why is profit and loss looking good? There’s no money in the bank. Depends, and you’ve got to look at it together. Like you said, it’s a holistic view. You need all three to get the story.
Speaker 1 (20:11):
I love it when we teach the slide at one of our events where it’s a bar graph of a business that’s got like $600 grand in the bank and we break up that bar graph to be able to go, well, this is working capital to run the business. This is the amount of money that’s sitting in that’s owed to regulations. This is a tiny little bit of savings left over and here’s a little bit of money that could be taken as dividends. But when clients see that, it’s a real eyeopener for them because that’s a client’s example of someone who’s got their cash management dialled in. But any business owner who’s got $600 grand sitting in their bank account or even a hundred grand in their bank account, they think that that’s just their money and they can take it whenever they like and they don’t understand, well what makes up that money in their bank account when you’ve got none, it can impact your mindset negatively. If you’ve got a lot, then you can think that it’s your money and you can take it whenever you not understanding that you’ve got an ATO bill due in two weeks time. So cash management is so important and that’s why the worst way to measure the health of your businesses via your bank account, it’s got to be through your profit and loss balance sheet and your cashflow forecast to be understand how it all hinges together from a financial perspective.
Speaker 2 (21:32):
Yeah, absolutely. So let’s leave it there for today’s, what these statements are and what we mean by it. As we said two parter, right? So understanding the statements is going to be the first step, but just knowing what they are isn’t going to help you much. You know what you’re looking at now, but you need to understand and have a rhythm and a process. So without giving it away in part two, we’re going to go through some of those ideas about, well, how do I use these statements, right?
Speaker 1 (21:58):
Definitely we’re going to be able to look at more in detail around how can we can utilise our bookkeeping support around us better. And we’re going to talk a bit about how often we should be looking at these reports and how can we use the power team around us to be able to get the information we need at the right rhythm on a weekly, monthly, quarterly basis to be able to understand these financial reports better and make much more informed decisions. So this episode is more around what is the triple bottom line system and the reports that sit within that system. But next episode is going to be more around, well, how do we get those reports and then understand them better and make far better decisions based on the meetings that we can have on a regular basis?
Speaker 2 (22:47):
For sure, for sure. Now, it’s not so much a challenge, but let’s just do this as a little bit of quick homework if you like, before you listen to or before we get to this part two, ask your bookkeeper or your accountant for the p and l and the balance sheet, just get it run in your business for the last month and ask for it month by month for the last 12 months. And your accountant or bookkeeper will know what that means, but that’s what you’re asking for last month, P&L compared to the last 11 months, which will give you 12 months. Same thing for the balance sheet and get that run. So you’ve actually got the statements there. You may not know what they look like, you may not know anything other than the fact that the title on the top says profit and loss and balance sheet. That’s fine, but get them run. Because when we run through this in part two, we’re going to walk through a little bit more detail about how you’d use them, the questions you might ask and what to do with these statements and when. So getting them runs a starting point. Don’t be scared of getting them run. Don’t be scared of having numbers in front of you. You’ve got to start somewhere.
Speaker 1 (23:48):
And for some people this might be the first time they look at their statements in a very long time, which is Dan. It’s bloody scary when clients or business owners say, when you ask them, when was the last time you looked? And they say, I know six or 12 months ago when I was sitting in my account accountant, it’s like playing a footy game with no scoreboard. It’s so scary, isn’t it?
Speaker 2 (24:07):
It is. It’s scary, but it is so common. It’s scary and surprising. I mean, we do it with our clients all the time. We’ll pick a number out reading the story. We know how to read the story and we’ll go, what’s that number mean? It’s a big number you should know. And they’re like, I know. Dunno what that was. And you sit there go, how could you? It’s like 30 grand, just walk straight out of the business and you don’t even know what it was for. That’s the scariness of not getting across this stuff. The information’s right there. You’ve just got to know what to look for and when.
Speaker 1 (24:36):
Yeah, absolutely. If you are ready to stop guessing and actually start really getting grip on your financial position and actualize the thing that you got into business in the first place, which was to actually make more money, have more free time and build wealth for you and your family, then jump across to strategysession.com.au book in a discovery call for a time that suits you and let’s talk a bit about where you’re at and where you’re trying to go, and let’s help you build a business that you’re in control of rather than the other way around where it feels like you’re out of control. What a great episode today. I know we just spoke around the fundamentals, but these fundamentals are so important for every business owner, aren’t they, Dan?
Speaker 2 (25:19):
Yeah, absolutely. It’s crazy to think that you’d try and run a business without at least that level of understanding.
Speaker 1 (25:25):
Until next time, looking forward to talking to you on next episode, which is all going to be about the rhythm. Until then, take care.
Speaker 2 (25:32):
See you soon.