The Perfect Profit and Loss Statement with Adam Rundle

0:01Light that spark fire nation JLD here and welcome to entrepreneurs on fire brought to you by the HubSpot Podcast Network, the audio destination for business professionals with great shows like The Product Boss. Today, we'll be breaking down the perfect profit and loss statement. To drop these value bombs, I brought Adam Rundle in the EO Fire Studios. Adam is the founder and owner of Clever Profits, a strategic advisory firm for entrepreneurs. Services include accounting, taxes, fractional CFO, HR consulting, payroll services, and advisory services. And today, Hey, Fire Nation, we'll talk about the mishandling of finances.

0:40We'll talk about cash flow, growth cycles. We'll also talk about how to pay ourselves correctly and so much more, Fire Nation, when we get back from thanking our sponsors. Online Marketing Made Easy podcast, hosted by Amy Porterfield, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals with a focus on online business, including digital courses, list building content, and more. Online Marketing Made Easy breaks down big ideas and strategies into actionable step-by-step processes. A recent episode that will help you get more results with a whole lot less stress is on four ways to avoid burnout.

1:14Listen to Online Marketing Made Easy wherever you get your podcasts. Many EO Fire listeners have launched non-food franchises and Fran Bridge Consulting has guided them. Fran Bridge's founder and frequent EO Fire guest, John Ostenson, has done more placements than any other in the country and his service is free. sign up for a consultation with John or get a free copy of his book, Non-Food Franchising at FranBridgeConsulting.com. Adam, say what's up to Fire Nation and share something that you believe about becoming successful that most people disagree with. Well, thanks so much for having me and hello to Fire explanation um what do i disagree with well i think becoming successful is about um just tireless work uh and i don't know people always necessarily disagree with it but i think we like to believe that it was it's easier than it is um but i would say just tireless tireless work day in day out arrive at the plate swing as hard as you can and you may have to do it for a long time but those who do it for the longest are the most successful.

2:22Fire Nation, I'm loving this already because we're talking about the perfect profit and loss statement. We're talking about really important topics for you because Adam, let's just be honest with our listeners right now. The mishandling of finances is one of the top reasons that businesses fail. So I want to hear your ideology on the best way to structure our finances. Yeah, I think it's true. Unfortunately, we're in business to make money. And so when you mishandle that, that's when it goes south pretty quickly. And our methodology is relatively simple. I read a book by Greg Crabtree, Simple Numbers Beg Profits.

3:07I read Profit First and a number of other books. and realize that you need to simplify what you're doing in order to move the buck forward. And if we don't simplify it to a couple of key things that we can improve and measure and manage, we're going to struggle because we're going to get inundated in the complexity and we're just going to get overwhelmed by all the things to do. There's so many things to do every day to run a good business. So financially, we want to try and simplify it. So our viewpoint on finances is one, keep it simple. you know if you can't explain it to a fifth grader he's probably too complicated another point is you've got to know what you're optimizing for what are you actually trying to do you know if you're asking an olympic athlete what they're trying to do they're going to tell you i want to win olympic gold so everything they do every every waking moment they have they're trying to achieve that outcome so you've got to identify in your business what it is that you're trying to do and you know that's a subjective question because we're all going to answer it differently but the most common objective answer you can get, and I'm yet to be proven wrong in this because I think it's right and I would love for someone to prove me wrong.

4:19The most common objective answer is you've got to build a business that can actually make you money, real money, money that flows from your business into your personal pockets so that you can do the things you want to do. So you can answer all those subjective questions around living the life you want to live and caring for people and going on vacation and doing all the things you want to do. But you've got to have a business that spits that out, you know, spits out that money. And so that's what you're trying to do. So optimize everything for that. Create a system that leads every single thing to that moment in time where you take money out of your business and put it in your back pocket.

4:56And to us, that's the trick. And then, you know, how you go about that is there's some different steps. But, you know, that's the principle we follow is like, as an entrepreneur, how do you make as much money as you can make? not to be selfish, but how do you make as much money as you can make? And is your business geared to actually achieve that outcome? Fire Nation, why? Why do we as humans try to overcomplicate things? I mean, listen to the man. Simplify what we are doing. Keep it simple. Ask yourself, what am I optimizing for? And then optimize for that. And the question is, is your business making you money.

5:31That needs to be a focal point. Now, Adam, cash flow and growth cycles, they're just part of the entrepreneur's journey. And especially if it's a flourishing business, you have cash flow, you have growth cycles. What is your advice for how we can best manage these cash flows, these growth cycles to optimize? Yeah, I mean, cash is king. It's the the lifeblood, the fuel that drives your business forward, whether you like to believe it or not. And if we could all just, you know, be these tech startups and get an unlimited amount of money shoved down our throats to do what we want to do, I guess life would be different.

6:11But, you know, run-of-the-mill entrepreneurs, the only way we get money is by making money. You know, we don't have endless pockets. And so for us, there's kind of three things. You really want to build a profitable business, profitability is our number one kind of pillar of success to optimizing your finances so something that's profitable and efficient for every dollar you generate how much can you keep of it and then number two is cash flow management and it's all about growth and then number three is how you pay yourself and if you get those three right we believe hey you're going to move in a good direction and unfortunately they're quite hard to do to get simultaneously at the same time and that's the real trick is like can you get all three to work effectively But if we focused on cash, the big thing about cash and cash flow is that growth is a sprint.

7:05Growth is very hard to do over a long, long period of time. So when a business grows, it's sprinting. It should be going as hard as it can, expending as much energy as it possibly can in order to achieve its outcome. But when you're trying to run a profitable business, you're kind of running a marathon. So you need to think like, hey, I've got a loss for a long period of time here. I can't just run out of energy. And if anyone's watching the Tour de France that's happening right now, you get a very good sporting description of this analogy of like, well, how do you do both at the same time? They're really hard.

7:38And so when we look at growth, we say, okay, we're sprinting. So we need to understand what does a sprint look like? How do I prepare for the sprint? Can I last the duration of the sprint? And what do I want it to look like at the end of the sprint? And I would say the reason why most people fail in the sprint and the sprint is, hey, I'm making 200 grand a month in revenue, but I want to scale to 300 grand or whatever the number is. That's the sprint. And so the sprint is subjective. You'll decide your own sprint. How do you want to break that down? But I think one of the biggest reasons people fail in the sprint is because they're not prepared for the sprint.

8:14And the only way to prepare for a sprint is to ensure that you have the cash flow to manage the sprint. And what people do that I think is really hindering their long-term success is that they're not understanding what does it look like to be prepared to sprint. And they're just sprinting. They're just getting there and they're going. Like, let's sprint as fast as I can. And, oh, I smashed through 100K. Then I got to 150. And then I got to 200. I'm not going to slow down. I'm just going to keep going. And I'm not saying you have to slow down, but you have to check yourself and say, is this working?

8:46And am I prepared for the next sprint? And to us, that goes then back to profitability and understanding how to generate sufficient cash flow to get that energy so that we can last. Because the problem with a sprint is if we think it's going to take six months, it may take longer. We can't control the variables. We can't control people. We can't control algorithms on Facebook or Instagram. We can't control the buyer cycle. We can't control offers. We flog every day. We do as hard as we can, but sometimes it doesn't go as planned. And so the sprints can get longer and longer and longer. And that's what kills us.

9:21And so our biggest advice here at Clever Profits is, yeah, let's sprint. Let's sprint as hard as we can, as often as we can. But let's just understand that we've got to be prepared for the sprint. And we've got to know, hey, how much money do we need? What is our business doing? Do we have sufficient cash flow? Do we have the base that we want? Do we have the springboard to get into the sprint? Back to my Tour de France analogy, do we have the guy, you know, are you sitting in the pocket of the guy that's going to release you so that you can hit that sprint? The longer you do that, the better.

9:49So the longer you're running a profitable business, the more money you're going to have, the easier it's going to be to grow and scale. And then it's just micromanaging every step. You know, hey, are we hitting our marks? Are we hitting our marks? Because the thing that kills every business is in the pursuit of growth, they run out of energy. You run out of cash and you then can no longer move forward. And that's just sad because, you know, let's say, for instance, you can get to 50, 60, 70, 80, 100, 200K a month in revenue. You've got a business. it's quite sad to see a business fail because it couldn't get to 180, but it was perfectly fine at 120.

10:24That's just a sad stat because maybe you should have just stayed at 120 for longer. But now the business has failed. And so those kind of two things, prepping for it and then keeping your finger on the pulse around growth, especially around cash, is to us the trick around managing that cycle. Value bombs, Fire Nation. And the main thing I want to reiterate, I loved this, was people fail in the sprint because they're not prepared for the sprints. You need to ask yourself that question. Can you manage the cash flow? Do you have the cash flow during this sprint? And we have a lot of things to talk about around these topics when we get back from thanking our sponsors.

11:06If you're a sales leader, then you know that expectations are at an all-time high these days. You've got cold calls to make, relationships to maintain, and deals to close, and that's not even the full picture. You're also expected to leverage a slew of different tech to-dos like digging into the numbers, monitoring the best strategies, and switching it up when things aren't working and collaborate across other teams within your company. Are you exhausted yet? Here's the good news. There's a better way to win. It all starts with the HubSpot Sales Hub. HubSpot Sales Hub unifies your data, tools, and team inside a smart and powerful platform that includes a new prospecting workspace, deal management tools, and AI power tools to help reps optimize based off real-time results.

11:48And at a bonus, reps can automate their busy work so they can focus on doing what they do best, closing deals. It's smart software for smart sales teams that feels good to use. With Sales Hub, closing deals is no big deal. Try it for yourself at hubspot.com slash sales. More and more entrepreneurs and investors are discovering the awesome franchise opportunities that exist outside of food. Franchising can simply be the better path, and interest in franchising is at an all-time high. Lucky for you, John Ostenson, founder of Frambridge Consulting and a frequent EO Fire guest, is here to help you explore the premier franchise opportunities.

12:23Today, John and his Frambridge Consulting team are part of the largest brokers in the U.S. and have vetted the market thoroughly. Frambridge is hands down the premier source for the best opportunities in the non-food franchise world. They represent every type of non-food franchise from healthcare to dumpsters, youth sports to business services, specialized senior care to pet grooming to insulation and floor coatings. John has served as an Inc. 500 franchisor, a multi-brand franchisee, and he does more placements than any other in the country. Sign up for a free consultation call with John today or get a free copy of his book, Non-Food Franchising, at FranBridgeConsulting.com.

13:01That's FranBridgeConsulting.com. Adam, a challenge most entrepreneurs face is how to properly allocate resources to our marketing efforts, to our team. Share some tips, share some tactics that you've seen work in these areas. You just mentioned the two most important drivers to any business. Acquisition and fulfillment is what we call it. The verbiage we use here is unless you've got someone who's going to pay you money, you don't have a business. And unless you've got something to deliver, you also don't have a business. So go back to my original point of simplicity. If you want to simplify your finances, our first thing that we do with everyone that we work with is we break finances down into three buckets, acquisition, fulfillment, and overhead.

13:50And yeah, there's a whole bunch of subcategories and all that kind of stuff. We're still accountants, we still do the boring stuff. But in essence, you want to look at those three things and you want to say, okay, overheads don't drive your business forward. They keep the lights on. So we're not going to go invest in overheads to move our business forward. You invest in them to keep up. So more software or bigger rent space or whatever it may be just to keep up with where you're going. So if you want to grow and scale, you've got to be investing into acquisition and you've got to be investing into your team.

14:21Acquisition and fulfillment is the verbiage we use. So the biggest trick is trying to identify, and this goes back to the perfect P &L, This is why we developed the perfect P &L. It's because we wanted to say, well, what is the right amount of money? What's the right ratio? It's all very well. You say, am I doing pretty well? Oh, you've got a 20 % profit margin, 25 % profit margin. Okay, well, that's great. You need to know the details. So we want to know how much should I be investing in acquisition and how much should I be spending in fulfillment? And if you can get those two right, you can get the mix between those two right, we call that the golden ratio here, the likelihood is you're going to run a very profitable business.

14:59And then on the flip side, if you want to start investing into growing your business, that's where you're going to invest. So if you understand those metrics, you understand then to get prepared for the sprint, you're understanding what does the sprint require for me to then be effective in the sprint. And for us, every business model is a little bit different. So it's hard to give you like just, here's each and every single little step. But we look at around about 55 % to 60 % of your top line revenue should be invested into acquisition and fulfillment. And then how you split that up can get a little bit interesting.

15:31We see most agencies are around 45%, 50 % fulfillment. So team costs, about 10 % acquisition. You can look at digital products can be 45 % acquisition and 10 % team costs because you're just flogging volume. And so it's really just trying to play in those realms of what is the correct ratio there. And when you get the ratio right, and everyone's a little bit different, but you want to find what ratio works. And then that becomes kind of your guiding principle. And that, when we say the perfect P &L, we're meaning, well, that is it. Like that's the thing that's going to drive you forward. And you've got to keep going back to that point.

16:07So whenever you're growing, you keep going back to that and say, well, we know it should be these ratios. Are we moving in that direction? Are we moving away from that? And yeah, every model, every business is a little bit different. So you've got to use some historical numbers. You've got to say, well, what is historically acquisition cost? what does it historically cost us to fulfill and then you got to look at can you get some efficiencies um but that 55 to 60 percent number is kind of the number that you got to be thinking about um and anywhere in those as long as those two cost you that amount of money and your overheads maybe cost you 15 percent you're gonna be running a really good business 20 25 profit margins you're gonna be really happy most people think you can run more than that of course you can uh you know Our biggest argument is part of fulfillment is you as a business owner.

16:52So there should be a salary in there. There should be some form of compensation there that's reasonable for you. So as long as that amounts in that ratio, then anything more than a 25 % to 30 % profit margin is really hard long-term to sustain that long-term, provided you're paying yourself a reasonable salary and you're taking care of yourself. The minute you remove an owner's salary from that 55 % to 60%, then you get profit margins out all over the place. And that's fine. It's just we don't like to measure it that way because we don't believe it's a true reflection of what does this business need to move forward?

17:24You're probably the most important part as a business owner, so let's put you in there. And so that's kind of the principles we think about in those two. But simplistically, that's your lifeblood. Everything you do should be geared around better acquisition, better fulfillment, because that's what's going to drive your business forward. The rest is just smoke and mirrors, I guess. Get to that golden ratio, Fire Nation. like understand what that is, and then work to see how you can get there. And you mentioned this briefly, Adam, but I want to double back on it. And that's paying ourselves. Because typically as entrepreneurs, we pay ourselves last, which means that we often don't get paid at all.

18:01So how can we pay ourselves correctly? We've got this LMS system, learning management system in our business. And there's a slide around owner's compensation. We talk about how we think about this. And the line below owner's compensation is like the entire purpose that our clients are our clients. Because that's why you're an entrepreneur, to earn money. So if we don't get this one right, then, you know, what are we doing? Kind of what's the purpose? And so, you know, the biggest challenge with owner's comp is that it's where everything collides. You know, it's where every single aspect of what you do collides into one moment, whether it's trying to generate revenue, manage your costs, manage cash flow, taxes, everything.

18:45It's the melting pot. It's the final point of when everything actually makes a difference. So everything along the way that is done incorrectly, incorrectly is not a nice word to use because it assumes that there's a correct way. But, you know, that's debatable. But everything that's not done as effectively as possible is compounded at that moment. So, you know, a little bit off on revenue, a little bit off on expenses, a little bit off on cash flow, a little bit off on taxes. It's compounded 10, 20, 30, 40 fold by the time it gets to you and you trying to manage how you pay yourself. So that's why we optimize for that moment because everything must lead to that positive outcome, not negative outcome.

19:24But when we think about it, we do a little bit of an interesting kind of, I guess, a little juggling act to get to this outcome. because you can answer this question in many different ways, but there's probably two primary thoughts out there, how to answer, how do you manage paying yourself? Like how do you think about this owner's compensation kind of conundrum? Like how much should I pay myself? How often? What's the amount? What's the mechanism? You know, all those different questions. The most common answer is always a tax answer. So everyone goes, okay, well, what's the most tax effective?

20:01So I need to be an S Corp and then I need a reasonable salary and all that kind of stuff. And I agree with that. You want to be tax effective. If you're not being tax effective, then you're being really silly because that's something you can manage. You don't want to do all this hard work and then you mismanage your taxes and then you're tipping the IRS. That's just silly. So yes, you want to do that as effectively as you can. But our belief is that in order to get to that answer, you've got to do it financially. So you've got to look at your business and say, okay, well, how much can I afford to pay myself?

20:33Forget about the mechanism. Forget about S-Corps and reasonable salaries and distributions and all that gibberish. Let's just look at numbers. Let's just look at pure monetary figures. Like how much can I afford to pay myself? And your business will dictate that. I gave you that golden ratio number. I said 55%, 60%. You take all the people that you employ. You take all your acquisition. You write your own name down. You have a little field to play in. 55 60 percent like let's stay in there it's going to start giving you a number it's going to start to say well maybe i can pay myself 100 grand a year whatever the number is so that's the first indicator you can go well if i if i found someone to do my job like how much would i have to pay them that's another indicator it's not an exact science but you can get an idea of like hey the job that i do in my business i can afford to pay myself a hundred thousand dollars a year and so that's what you want to say is like okay my salary not taxes now i'm talking about taxes talking about finances, my salary for the work I do is$100 ,000 a year.

21:28And you want to pay yourself that. You want to say, hey, I'm committed to paying that salary in the same way I'm committed to paying the same salary or 1099 payment to the people that work with me. I'm prepared to make that payment. And then you've got to do the big cash flow piece and say, well, if that's all working, great, then how much money can I actually take out above that? Because I'm hopefully running a profitable business. There's some cash flow at the end of the year. I've got some surplus. What's my distribution? How much can I distribute to myself? And so then you'll look at that and say, okay, maybe it's another$80 ,000.

22:02And so then you can say, okay, I can earn$180 ,000 a year if I do all the things I need to do. My business should be pretty profitable. It should be effective. I should manage cash flow. That's great. Then take that 180 and then send it to the tax CPA and say, well, that's what I'm playing with. I'm playing with 180. How do I do this? And then they'll answer the question. They'll say, okay, let's be an S Corp. Let's do all the, if you want to do a 401k, let's do that. Let's do all the clever things, Augusta rules and reimbursement account plan, whatever they are, all the fancy things we can do from a tax perspective.

22:35Let's do all of them. Let's set your salary at X. Let's set your distribution at Y. Let's create this scenario where we're being tax effective, but I know I'm working with 180. And the reason we do that is because if we don't know we're working with 180, the tail's going to wag the dog. So the tax people are going to say, no, no, no, you got to do all these things. And that's going to put us in a bind because that may not meet the financial realisticness of the business. And so that's kind of the thing we do. But I would say the most, try and keep it more simple, is you got to find the amount to pay yourself and you got to start paying yourself that.

23:11And I'm not a wealth advisor and I don't want to be a wealth advisor, but I'm going to give one little tidbit of wealth advice is I would say the thing that kills entrepreneurs the fastest is an unhealthy relationship between them and their business and treating their business like a bank account. And so in the months that you're doing really well, you live really well. In the months you don't do really well, you don't live very well. And it's that inconsistency that I think creates a perpetual cycle of trying to, it's hard to get out of. So you want to figure, if my business, looking at it objectively as I can, it can pay me a hundred grand, find a way to live within that a hundred grand, find a way for that to be your reality.

23:55And don't put extra pressure on the business to now all of a sudden say, oh, I've had three good months and now I'm going to live a$150 ,000 lifestyle because now your business has to keep up with you. And that's really hard. Your business is hard enough to keep a business going by itself. But now it's got to keep up with you as well. That's harder. And so when we're looking to pay owners, we're saying we'd be taking all those things I've just mentioned, but we're also actually just looking at the owner and saying, let's get your expectations right. Let's get a clear understanding of what your role is here.

24:22Let's not treat your business like a bank account. Let's be respectful of that because this thing's hopefully going to last you many, many years and give you everything you want. Let's not kill it before it starts. In Fire Nation, it really sticks and keeps with this theme of keeping things simple. Keep things simple because that's going to help you in every facet of what we're talking about here today. Now, Adam, if Fire Nation wants to learn more from you, wants to connect with you, what is your call to action for our listeners today? Look at us on YouTube is probably the best one. We've got a bunch of videos around our methodology and how we think about finances and kind of building on these topics that I've just mentioned here around perfect pnl and growth cycles and just a bit of insight about you know how we think i would say that just go check that out um and if it resonates with you and you think hey this is helpful and i'm not doing this in my business or i don't have a clear line of sight or i don't think i may be mismanaging something then you know through that you can say what's up and get on a call with us and we can chat to you and see if there's any way we can help you but to me that's always the easiest is you know finances are like doctors and lawyers you know You don't just listen to some random guy for a couple of minutes and then give him your money.

25:33You got to be comfortable. You got to make sure that you're really happy with what we believe in and how we work like you would with any lawyer or doctor. So take some time and absorb some more content and ask some questions. As you are pondering your thoughts, you can watch some of our YouTube channel. You'll probably get a little bit of insight into who we are. If that resonates with me, I would love to. Have a chat. Fire Nation, you're the average of the five people you spend the most time with. You've been hanging out with AR and JLD today, so just keep up that heat. And for links to everything that we talked about, visit eofire.com.

26:07Type Adam in the search bar, and the show notes page will pop right up. And Adam, I want to say thank you, brother, for sharing your truth, your knowledge, your value with Fire Nation today. For that, we salute you, and we'll catch you on the flip side. Thanks for having me. Cheers. Hey, Fire Nation. A huge thank you to our sponsors and Adam for sponsoring today's episode. And Fire Nation, successful entrepreneurs accomplish big goals. That is why I created the Freedom Journal to guide you in accomplishing your number one goal in 100 days. And we're talking step by step. Visit thefreedomjournal.com and I'll catch you there or on the flip side.