From Cash Crunch to Cash Flow: Expense Optimization Tactics

0:00You're hopefully going to sell more, but you would have to sell 12 times more if you're going from a 1 pay to a 12 pay, right? To be even on cash flow. And then it's going to start to sell more. months before it starts doubling, like before it starts to compound and 24 months before you're fully caught up, assuming that you're not selling more. So if you did go to 12 pay and didn't sell more, you probably ought to go back. And you might want to test three, six, and nine along the way, right? Just to make things a little easier.

0:35Hey everybody, welcome to another episode of of the Business Lunch Podcast. And we have your host today, Richard Lindner and myself, Roland Frazier. Rich, how are you doing today? Man, I'm good. How are you? I'm doing really good. Everything is going well. Excited about our upcoming event for our Founders Board people here in San Diego. Looking forward to seeing you and apparently drinking some Weller Millennial, well, Millennium or Millennial? Millennial, yeah. Okay. Millennial is a different brand. it complains a lot and doesn't like the word. Um, so that's no millennial hate here guys. Okay.

1:12So, um, uh, you just, uh, did some amazing analysis and, um, found us an extra million plus a year in, um, our businesses. And I think that it's something that everybody that's watching and listening could really benefit from. So I was thinking maybe we chat about that. How's that sounds. Yeah. I think it's, I think you're right. I mean, I think everyone needs to, um, you know, needs to take a, take a look at the bottom line, no matter what climate we're in. I have said for years now, years that every extra million dollars helps every extra a hundred thousand dollars a month helps. I've also said, and I've heard you, I've also been, um, completely unsuccessful in disproving that, that point.

1:55Yes. Yeah. Despite lots of efforts that both of us have made. We've Yeah. So, so why don't you tell a little bit of the background of kind of what, you know, what the lead up to this was and, you know, then why we thought that we wanted to take a look at it and then kind of how we went about it. Yeah. So when I say we Richard did all of this, so. Well, there was a lot of we involved. We were at a point where sales had stalled, right? Sales had stalled in kind of two of our companies. And in looking at how do we change that, we went through all the normal evaluations, right? Did something change in the market?

2:38We looked at product, we looked at process, we looked at all of the things, including price. and where we ultimately landed, the easiest thing to change is pricing terms, right? Not price. We don't want to change price. We want to maintain, we believe that we're fairly priced in the marketplace for the value that we deliver. But one thing that is appropriate is to look at the pricing terms, the, you know, the, the, the payment terms that we're offering. So basically can the people afford it? Sure. It's worth it, but can the people that we want to buy it afford it? Right. What's that cash outlay up front?

3:13How are we structuring that? So we wanted to test that out. We tested changing the payment terms and really going to a 12-month. It's a 12-month program, so let's look at a 12-month. what we saw in one of our brands was we saw a doubling of sales velocity. In another brand, we saw a tripling of sales velocity. So it worked, right? It worked. The other thing that we saw, which is less exciting, obviously, if you go from a pay in full or a two month or a three month payment term to a 12 month payment term, the other thing you see is a massive reduction in the cash collected and you stretch out that, that cash collection over a 12 month period.

3:59So in, it's kind of this really weird, um, feeling of like, yay. Oh, you know, we're, we're, we're winning, but at the same time we're, we're watching our cash position and the unit economics have changed. The cash position has changed and in seeing an increase in sales velocity, but a decrease in cash. So at that point, we're not dealing with a business that's failing from a business model. We're dealing with a business that is in a cashflow crunch. So what do you do, right? We don't want to make any knee-jerk reactions. We need to keep spending and generating leads. We need to feed the sales team.

4:39We need to keep the core business functions going, but we have to be more efficient in the spend. So how do we look at our different categories of spend? Where can we reduce? And that's kind of how we got here, right? How we got here and said, we have to basically buy time for this model to work, I guess, was the challenge. How do we buy time for this model to work, for things to compound, and for these unit economics to get to where they need to be from the amount of cash collected in the snowball effect? Yeah, because you're hopefully going to sell more, but you would have to sell 12 times more if you're going from a one pay to a 12 pay, right?

5:18To be even on cashflow. And then it's gonna start catching up, but it's literally 12 months before it starts doubling, like before it starts to compound and 24 months before you're fully caught up, assuming that you're not selling more. So if you did go to 12 pay and didn't sell more, you probably ought to go back. And you might wanna test three, six and nine along the way, right, just to make things a little easier. But for us, seeing a doubling of sales velocity and a tripling of sales velocity, that's nice because sales did go up. So now we don't have to wait as long, but we do, even with the compounding effect of if you make 30 sales month one, you're technically collecting 60 sales month two, assuming you're retaining all of those and billing efficiencies the same.

6:06But still, it takes a while just to build back to where you were on even half the sales from a cash collected standpoint. So how do we make sure that we make cuts efficiently without negatively impacting that sales velocity? That was the challenge. The other thing I think for people to be thinking about, because I went through this this year, is switching to GAAP. If you are on generally accepted accounting principles type of accounting, which if you're headed towards selling your business, you probably want to be on that, you get into revenue recognition issues. And so not only do you not have the cash dollars, but your P &L starts to look very anemic because you are now receiving something that's going to be paid over that period of time.

6:57And the services are going to be rendered over that period of time. Presumably, if you were rendering all the services today, you might be able to recognize the revenue today. But the way that usually we do that is we say 12 months because they're going to continue to be getting value for that period of time. So that's another thing just to kind of chat with your accountant about if you're in the process of getting ready for a sale or something like that, it could affect you in a way that you might be surprised. Yeah, we had to go in and completely look at how we were classifying revenue. There were a ton of changes that had to happen when this.

7:29So at some point when it worked, we were the dog that caught the car, right? It was a bit of a win and a loss at the same time. So diving in and saying, how do we make this work? How do we make sure that the business can afford for this model to prove itself and get to that critical mass? So that was where I started and diving in and making sure that we don't overcorrect and accidentally lop off critical aspects of the business that are enabling this to work. So went through and kind of went through a stop process, right? As we're looking at the categories, really where overhead expenses hide, right?

8:14And stop, staff and people, tech and tools, operations and overhead and purchases and procurement, right? So those are the four categories of expenses. Four categories that you want to look at. And you kind of have to start with people, right? In most cases, these are going to be some of our biggest expenses and we have to look here. And is that primarily employees or are there other people that you would also be looking at? Employees and contractors. Okay. So, and contractors thinking of not only maybe contractors, but contracted services. So, if I'm thinking people, I'm also thinking contracted services as well.

9:00So any agency services, anything like that. And really within that staff and people, I'm going to have some additional categories. The first way that I would look at that is, are there any roles, right? I'm going to think role first. I understand every role has a name and this, you know, this is tough, right? Because we're talking about people. We're not talking about a pair of blue jeans you can take back to Nordstrom, right? These are human beings, and I understand that. The first category I'm going to look at is what roles within the company would we not rehire if we were to rebuild this company today?

9:43Because, look, companies change, right? We evolve as companies, and there are people that occupy roles that we like, that add value. But those people are in roles that may not be necessary for the value that your company adds or the model that you wind up in today. So when you're going through and you're evaluating people, the first place to look is, do we have any people, any roles that are not critical in the value creation process? right? So the easiest way to do is, are there roles that if we were to rebuild this company from scratch tomorrow, that role would not be an open to hire. We would not replace that role.

10:26The next place that I look for people is where are there? Let me ask you something about that. So when you're doing that analysis, are you also looking at what is new that might cause us to not have to have that person? So like kind of actively thinking AI particularly comes to mind, you know, can they, it has technology or automation, uh, advanced to the point where this person is in a role that can be replaced by computer effectively, um, or has our business changed processes wise, customer wise, product wise, in a way that we no longer provide the thing that this person used to provide. So the value is not there.

11:14Absolutely. Okay. Yeah. Typically my third, that's kind of my third filter. Okay. So I want to kind of get the, just, I say easy, get the off the board of like this, this role is not required. Got it. Right. It's not required at all. We wouldn't replace it with automation and we wouldn't replace it with a human. It just don't need it. We don't need it. And it is a nice to have. Is there an example of that that you could think of? So, I mean, let's say post-COVID. And I know that was forever ago and we don't want to talk about that, but it happened. And let's say the company went virtual and you used to be in office and maybe you had an office manager in that COVID environment.

12:02And maybe that office manager has stayed, right? You've kept an office manager and you found things for this person to do because this person is fantastic. But if you don't have an office, but you still have a person - If there's no RTO, then there's no need for the manager. Right. And they may occupy a different role or have a different title, but at some point, that's a nice to have, right? And if we're being honest, we can't keep that role. So I think that's a maybe more obvious example, but I think it might be more relevant. I like it. I think it's good. That's a great example. So after we go through those nice to have, like what will we not rehire?

12:44Then I'm going to look more to scorecards, right? Hopefully we have scorecards and they don't have to be people scorecards. I'm looking for department scorecards. Where are we missing our goals? Where are we underperforming departmentally? And then I'm going to look in those departments and say, where do we have people that are paid at the top of the market that are performing under, below average? And at that point, that's an ROI thing, right? That is an absolute ROI thing. We are paying top dollar. Every business doesn't have expenses. Every business has investments. Are you looking at that?

13:25Like, what's the KPI? Is it an RPE for the industry? Like a revenue per employee has to be? I'm definitely looking at a revenue employee across the board, but I'm saying, let's go to the marketing scorecard. Let's go to the sales scorecard. Let's go. I'm wondering how do you figure out whether they're contributing or not and what is the level of contribution required? Sure, at a very high level, I want to go to that department scorecard or that scorecard on the company level and see what is, let's say marketing, for example, what is marketing supposed to be contributing to the company goals and is marketing contributing?

13:59And if marketing is green across the board, they're contributing at or above goal, then I'm probably going to move on and go to that department last. If marketing's yellow or red, then I'm going to look in marketing and say, let me see marketing and let me see how many people we have, what are we paying and do a little bit deeper of a dive inside of that department, because at some point someone or everyone in that department is underperforming unless we're just really poor at setting goals. And you have to be honest about that. Did you set realistic goals? I like to think we're pretty good at goal setting.

14:34We kind of, we set really good achievable goals. We, we reverse engineer them. So if we're red in a department and I don't mean for a week, but if we've been red in a department, that's a tipping point for us hitting our goals, then that's an inefficient spend. So the next category I'm looking at out of nice to have is inefficient spend, like low ROI on team members. So if we are paying at or above market rate and getting below average performance, then that's an opportunity, right? I've got to go there next. And then rolling the third area that I look as exactly what you said. What are the roles that could be replaced with new technology automation?

15:19Sometimes it's AI, sometimes it's just automation. Yeah. Right, sometimes we have people doing things that could just be automated. And that's really how I go through and identify where are there opportunities within staff and people. So that's the S of the stop. That's the S of the stop. Okay, what's next? Tools and tech. And I'll tell you, this is where profit dies by a thousand cuts. Yeah. Right. The number of people that add little to big subscriptions and then forget about them. Sometimes they're used. Sometimes they're not. Sometimes those people no longer exist, but the subscription long outlives them.

16:02So two places that we look here, we go to the P &L and we go to any card. So whether you have a tools card, a specific card for those, or you have just a company card, however that works. But I want to attack both places. I'm going into the P &L and I'm looking at a detailed transaction in the P &L sorted from most expensive to least expensive. And what I'm going to do is I'm going to run a three month P &L, open up those categories because I want to see something that shows up three times. I want to make an impact. I don't want to make a one month savings. I want to know that if I'm canceling something that's$1 ,000 that we're not using, that's a$12 ,000 savings annualized.

16:43And then I'm guessing if, because a lot of like SAS's bill annually. So I'm guessing if you see a fairly large thing, then you're going to investigate that and find out that it's the month of the year. I first go a quarter, then I go a year and I'm looking for those large months. So I'll export a year's P &L, break it down and look for anomalies in those different categories. Where is there a month that jumped out on a spend? There's obviously an annual there, right? There's an annual there. I need to look at that. When is that coming due? Are we using it? Can we go ahead and give notice now if we're not using it?

17:23But I'll tell you, we saved just as much in the reduction of tools as the cancellation of tools. So you don't have to cancel tools. There were accounts that we signed up for five years ago that we've been paying, that they've changed their billing. And frankly, we've changed our usage. So we were on a contract for, or we were on a plan for$1 ,000 a month. When we went back and looked, we weren't using it that month. And they had plans that were$120 a month is a real example. That was more than we needed. Yeah. One click, right? One click and we save$780 a month. It's like your phone and cable bill that you should always be looking at because they keep coming out with new programs and things.

18:10Yeah. So wouldn't it be nice if you didn't have to do that, but you do. It would be amazing. This is something that we used to do once a quarter, but this is, you know, this is the internal saying that we have that is funny, but it also hurts. It works so well, we stopped doing it. Yeah. Right. But tools and tech, we saved, you know,$40 ,000 a month, give or take in the cancellation, the reduction of tools and technology. That, again, had no effect on our ability to fulfill our products and service, to generate new leads and prospects, to manage our team. Nothing. Zero impact. So any of those redundant tools.

18:54Okay. So then are we moving to the, let's say S and T? We're going to O. Okay. What do we got? O. Operations and overhead. So what are your facilities? What are those utilities? these. And again, you said things like your cell phone bill and stuff like, what are you paying for internet? If you have an office, right? We reduced internet at our office from some archaic, dedicated fiber that was horrible internet to it. I think we were paying$2 ,200 a month. Now we're paying$300 a month and we have better internet, right? Better for less who knew. Um, So what are you paying in these different utilities?

19:35I would think even leases now, because there's so many vacancies in offices that landlords probably to keep you there. And also if you were thinking of renewing, it's a great time to renegotiate that, right? Yeah, definitely. If you're within 12 months of your lease, it's a great time to go and look at an early renewal, especially to your point, Roland, And if there are vacancies within the building that you're in, it's a great time to get a deal. And don't get a deal on when your lease expires. Have the new lease, renegotiate a lease that starts next month and lower the lease. So dive in there.

20:20What's your insurance looking like? Where are these different things? What we're trying to do here is just figure out what are we overpaying for? again, because at one point someone looked at it, it was the best deal then, but maybe it's not now stuff changes. Let's go in and renegotiate. These are things that we assume we should look at when our term is up, but you don't have to. Are you also looking at efficiencies like workflows and things like that to see if things could be done? I mean, cause you're kind of doing that with looking at the people that are absolutely unnecessary, then you probably look at redundancies and then how we do things.

21:04Are we doing things in the way that's most efficient or are we scratching our ear by reaching around the back of our head? Yes. I'll tell you, one of the best places to look for that is inside the tools and tech. With the launch of AI, now AI is not just what we're using, you know, inside of our different standalone AI tools, the tools that you're using have now launched AI inside of them, right? So they have AI attached. Through agents you're talking about basically, right? Through agents, through, you know, what is available now inside of your ERP. That's AI that you could now replace any number of things with efficiencies by leveraging the AI inside of your ERP or inside of these other software solutions that you were incredibly efficient with your automations and your processes, but that was in a different world, right?

22:01So we're always automating our SOPs and our processes quarterly, but now we're looking at them outside of just the value creation process. We're looking at them through each one of these lenses. So when we're staff and people, we're not just looking at the people, we're looking at the processes. When we're in tools and tech, we're not just looking at the tools that we're cutting. We're looking at optimizing the tools that we have for efficiencies. Same with operations and overhead. Then how do people purchase? That's the last one in stop P. If what we're doing is we're finding and kind of shoring up a lot of maybe bad purchases or at least things we haven't checked in on, let's go ahead and put a stop to it now.

22:42Like, what are the ways that we allow people to purchase? And where are the contracts we have? Or what are the rates that we have? Now is a good time to renegotiate with any vendors. Like, what are your raw materials costs? Or what are those core inventory costs that you have? You can go back and renegotiate now. What are the things that you're using? What are the terms that you're getting? Right? If you're spending media dollars, how are you paying for those media dollars? Are you being invoiced? Are you paying on a credit card? Is that the best credit card to pay on? One thing that I just was consulting with some people yesterday, and they are in the mobile homes business.

23:33And so they go and buy repossessed mobile homes and then find people to occupy them and then place them in mobile home parks and then sell them to investors. And so obviously a giant cost for them is the cost of acquiring the mobile homes. And so we talked about why not just like if they're acquiring those homes at 30 to 45 % of retail, but if they sold for that company, the company would pay them a 10 % commission. And I said, so basically they're charging you for the carrying cost of holding the inventory, uh, 35%, the difference between the 10 % they'll pay you as a commission when you don't buy it in the 45 that they'll discount it.

24:21If you buy in bulk, um, that to me is an opportunity for you to shift costs because they got stuck with a bunch of inventory and the interest expense on the inventory is so high that it can create a, uh, you know, a negative profitability. issue. But even if they could get back half of the discount and go from a 10, not a 10%, but a 22 and a half percent commission, it's a win for the people that are doing the repos, trying to liquidate them to have somebody that can do it. Particularly, I told these guys, if you can sell in advance, because if you could sell in advance and then arrange for delivery, within say 30 days, you've got the money, completed the financing, and then you could go buy in bulk and effectively eliminate, it was about a$400 ,000 a month carrying cost on just that simply by changing the process.

25:17So I think that kind of thinking is a good thing to get into too when you're doing this. Absolutely. And similarly to the media example, we put all of our media onto an Amex card that we switch from points to a cash back that at the end of the year gives us a 1 % cash back. But in evaluating that, there's a media card that if you hit a specific tier that will qualify for quarterly, they'll actually give you a 5 % cash back on any media spend. So you got a 500 % increase in what you're getting. By getting a different credit card. And instead of waiting until the end of the year, you're getting it quarterly.

25:58So what are these little things that, I mean, that's a Google search away. Yeah. Right. I mean, it, it, it, and, and at this company, we offer every employee unlimited Google searches. It's one of the benefits of working. Wow. That is a pretty sweet perk. I know. Chat GPT credits too. It's crazy. And we pay for all of that, right? The whole cost of Google. 100 % of all of it. Nice. 100%. Okay. So, so we've got the four categories. And so I think, and correct me if I'm wrong, I'm doing it from memory. It was staff and people, uh, tech and tools. Uh, I remember purchasing procurement, uh, operations and overhead.

26:36There you go. Okay. So, so we've got those four categories. What is the actual process? Cause there's a process like a step-by-step to go through, to do this as well. Right? Yep. So now we're going to go through the save process. Okay. So now we've stopped and now we're going to save, stop and save. Okay. Stop, drop, and roll. We're going to stop and save. So save the kind of acronym there. We're going to scan, we're going to analyze, we're going to verify, and we're going to execute. What we don't want to do is just put this list together and assume yay, and then go in and kill everything, right?

27:12We need to scan it. We've created this. We're making a list and just build that comprehensive list, put a spreadsheet sheet together and create the categories that they're in. For me, I actually have the categories of, you know, is this employee, contractor, software? So we've got those categories. I also have categorization of separation difficulty, right? So I want to know, is it low, medium, high? Then we want to know, we want to go and analyze. So let's look at them, right? What's the usage? What's the strategic importance? What's the alignment of this tool with company goals? What we're looking for is the low hanging fruit.

27:57What are the tools, the people, no impact? Low to no or no to low impact, because we know those go right now. I mean, we're not waiting for anything but consensus amongst the leadership team or people who, outside of yourself, You want to just verify again. Now, are we in analysis or are we in scan still? So I'm in analysis when I see a low, you know, when it's, this has no real usage. No one's using it. No strategic importance, no alignment with company goals. I'll fire out a quick message. Is anybody using this? Especially if it's got a comma in the monthly price. You know, I do that every email I get on a rebuild.