1995 – The Importance of Financial Leadership in Business Growth with Prosper CFO’s Jay Dotson

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1:05With us right now, it's Jay Dotson. Jay, you are a partner with Prosper CFO. You are a fractional CFO yourself. You're found on the web at prospercfo.com. Jay, it's great to have you. Yeah, great to be here. Thanks so much for having me. Excited for this. Yeah, well, give us an overview of your work with Prosper and who you work with and what you do. Yeah, so we are a fractional CFO accounting and tax firm based in Austin, Texas. We've got about 10 people on our team. We service the full outsourced accounting suite, like I said, from anything from bookkeeping, accounting to CFO. We're kind of industry agnostic at this time, which allows us to get really exciting projects, work across a lot of different industries and help people grow their companies to the next level.

1:59Yeah. Talk about a little bit about the customer or about the kind of the business life cycles, right? And we kind of get to that stage where we may start feeling like, you know what, obviously, we've had help regarding our taxes. We've had help regarding our accounting. but how might someone know that they're close to or getting to the point where they probably should start considering bringing in someone with that, some of that more financial leadership? Yeah, that's a great question. And we see that there's just a massive gap in financial leadership in the small business space, right? So like so many business, small business owners, they take on that CEO title with pride and it makes sense.

2:45But in the small business space, the CEO really means chief everything officer, right? Like we've all kind of heard that. But oftentimes we hope, or the people that we work with hope that their CPA or their bookkeeper kind of is holding down the fort on this side of the business, right? And then when they go to the CPA or the bookkeeper, they find out that they're unable to provide that level of support that they need. And so while, you know, CPAs and bookkeepers, you know, often focus on the past, all the things that you want are in the future, right? And so they find that they struggle to make those kind of future strategic decisions to be able to take their business to the next stage.

3:27And so as a result for us, the statistic out there is that 82 % of businesses fail due to poor cash flow management. It's unsurprising to me knowing that that is what is happening at this space. And so they fail not because of their product isn't good or their service that they provide isn't good, but because managing cash in a business can be very complicated. Yeah, it's a source of a lot of stress. You know, it's, again, I think it's absolutely a list I've looked at. It is absolutely the number one stressor for SMB founders. And in fact, two thirds report that it's a significant source of stress on a regular basis.

4:13And so tell me about for someone that has not had a CFO or access to a fractional CFO as part of the core team, give me a little bit of the before and after. It's like, well, before, here's typically how things are going. Afterwards, here is the value or how a CFO or fractional CFO alleviates a lot of that stress. Absolutely. So I give a quick story about this. I mean, we believe every business deserves the impact of a CFO. And right now we're in that one to about 30 million in revenue spaces is really what we focus on. So a quick story about one of our clients who has kind of experienced some of this transformation is they hired us late last year with poor historical financials, no proactive tax planning.

5:03It's kind of the, hey, this is what I've got at the end of the year. And the CPA is going ahead and just filing based on whatever that report says, but not really helping on a proactive basis to say, well, here's what you could be doing to potentially mitigate some of the taxes that you have to pay by doing some, you know, efficient, you know, tax efficient moves, right? So, and then really no clear picture of the future, how to reach their goals. And so what was most frustrating to this client who brought us on late last year, they were generating about 10 million in annual sales, but had no cash to show for it, right?

5:38I'm sure you've heard that before. That's not something new. They were chasing revenue, but realizing at the end of the day that really we've got no cash to show for it. And so in fact, for this client, the last 10 out of the last 12 months had kind of run at a deficit. And so the company had just been denied a line of credit and the business was now in jeopardy. And so, yeah, not a fun place to be. And so once the client hired us, we cleaned up the financials, we created a cash flow forecast. It became clear to us that there was about a two to three month runway that if we don't turn things around, the company's in jeopardy of going out of business.

6:21And so what we did was we quickly went into action. We restructured an unprofitable portion of the business and put a plan in place in order to lower the number of days that the client was holding on inventory. And so we put this massive emphasis on cashflow being greater than revenue, which was, like I said, what this client was chasing prior to hiring us. And so the result of us coming and do that was one, we made it through those two to three months. And in fact, we have now had six months of consecutive positive cash flow and positive profit in the business. Yeah. By the way, you share some pretty good stuff on your LinkedIn.

7:05I really love this post. And what I'd like to do is just kind of read it really quick and I'd love your insight on it. And again, this is an issue that plagues a majority of businesses. So to our friend that's listening, if you can identify with this, you're not alone. It's normal, but it's solvable. And that is how to increase cash in a business. Obvious answers, more clients, less overhead. But then you go on to the not so obvious ones of increasing price, reducing cost of goods sold, getting paid faster, delay paying, improve inventory turnover. Do you mind maybe just giving a little bit of a mini TED talk on cash flow?

7:46Yeah, I absolutely love this. So this is a framework that we have created. It's called the seven sources of cash. And that's actually going to be my, you know, takeaway for one of my free resources that I'd give away to your audience here. If you go to sevensourcesofcash.com and what you'll find there is this framework, this calculator that we've built that helps determine how, you know, what are the biggest opportunities to create cash in your business? And so this LinkedIn post that you're talking about is truly if you ask most business owners, how do you create cash in the business? The obvious answer, just as you said in the LinkedIn post, is that people understand, let's go get more clients and let's go reduce our expenses.

8:36But there are truly seven ways that you can impact cash in a business. And that's only two of those ways. And then we're talking about from an operational standpoint. We're going to forget about going and getting funding through the bank or investor, looking more so at how to increase operational cash flow. And so those seven sources are, one, you can increase prices. You can increase the amount of customers you serve. You can decrease your cost of goods sold. You can decrease your operating expenses or your overhead. You can accelerate the speed at which you get paid. You can delay the speed at which you pay out.

9:16And you can better turn over your inventory so you're not holding on to that. And you can convert that into cash at a quicker pace than you currently are. And so what this calculator does that we've created is that you put in 10 or so metrics that are basic metrics that most business owners should know, and that you get to identify, let's see, what is a 1 % increase or a 5 % increase to any number of these seven sources? What does that mean from an operational cash flow perspective? And what is the greatest opportunity? So in, let's say, most retail operations, right, you might have a 50 % margin on gross profit.

10:01Well, to increase your prices, that would mean that you have double the impact on the price increase than you would on a client or a quantity increase, right? So it would take a 10 % increase on clients or quantity that you're selling to equal what a 5 % increase on prices. And so that's just a one example, a microcosm of an example there that is really basic math. But when you start playing with these different functions or these different sources on how you can increase cash in your business, you come to find out that the value of, say, on the balance sheet side, the working capital side, the value of increasing the speed at which you get paid can absolutely increase the amount of cash that you have in your business, which would also increase the enterprise value of your business.

10:56And so we're not just looking at necessarily on how much cash you can just generate in a year, though that is extremely helpful when cash is always tight for these small business owners, but also the multiple that you're receiving on the exit of the business, right? So it might be, if you've got a 5X multiple, it might be a$500 ,000 increase in cash today. But if you've got a 5X multiple in your business, when you go to sell that, the value of solving that problem is not only$500 ,000 today. It's also$2.5 million at the time that you want to go and sell, if that makes sense. Yeah. I would love to hear a little bit more about your CFO packages because this is really cool.

11:42I have not seen this, and I'm on your services, your CFO services page, you've got three different levels. You've got CFO Lite, CFO Core, and CFO Advanced. Do you mind maybe talking about those? Because this is pretty innovative, especially, I think, for someone who's like, wow, we could really have, again, kind of a very light, fractional CFO leader that we could connect and engage with. and if it's their budget. Right, right. No, absolutely. So I'll just say a quick story on why this kind of got started and what we've created, why it came to be. I was looking for these services whenever I was kind of cutting my teeth, growing as a finance leader in a past business.

12:33I was a financial analyst and three months into the job, found out that the CFO was was leaving the business. So all of the financial leadership components kind of fell to me. And so I had to really learn on the job and figure it out. I mean, so we searched for these services about three times and, you know, really struggled to find what we were looking for. And so this has been born out of that need that I felt whenever I was running, you know, helping run the finance and accounting department and helping that company scale. And so I ended up becoming a senior leader, senior finance leader on their senior leadership team and serving that business for a number of years.

13:17And so this is my look back and saying, what do I see as the problems that small business owners really struggle with? Because I found myself in that exact space. When you're trying to go to the CPA and they start explaining accounting terms with other accounting terms and your head spins and you don't really know how to move forward. And so we've structured our whole offering with simplicity in mind. We want there to be nothing that the business owner has to think about and it's outsourcing this entire function. And so what an engagement looks like with us typically is that we start with the goals.

13:58What are the personal goals of the owner? Because we don't want the tail to wag the dog here and have the business goals really structure or take priority over the business owner personal goals. Because we find that, you know, when that happens, you risk building a business and a life that you don't want. Right. So you have to have those in right priority order. then the, so the personal goals structure, the business goals, the business goals then inform our cashflow forecast and the desired outcome that we hope to create together. So we then go into the business and create this cashflow forecast so that you can understand where you're heading today.

14:39If nothing changes in the business. In that example, earlier, I talked about, we found out there was a two to three month runway. Well, we better get to work and make sure that we've got a solid plan in place so that now we can forecast the desired outcome that we have. And so as a result from that, now we create the cash strategy, which is that seven sources of cash I talked about. So what is the cash strategy that's going to take us from where we are today to how we get to where we want to be? And that's increasing cash flow in the business in order to facilitate the strategic direction of the business.

15:14And so we meet with our clients. That's kind of the standard of what we do with every single client. Because every business owner has different goals and different industries, we also do all sorts of ad hoc analysis and things like that based on whatever the client's needs are. But the standard that everybody's getting is you're getting touch points, specific meetings that are on the calendar, and we're driving every function that would be necessary in the small business space from a CFO perspective. Yeah. Your website, prospercfo.com to our friend that's listening, what would you recommend their next steps be if they're listening to our conversation?

15:53They're kind of motivated, they're excited. What now? Yeah. So I would say that that resource would be a great resource, the seven sources of cash.com. So if you go to number seven sources of cash.com, you'll be able to find this this free giveaway that we're offering and, you know, begin to tinker with it. Begin to see what is the impact of how you can start to create cash in your business today. I think that would be a great first step to help you understand what is the potential and what are you missing out on now by not moving forward. And so how you would want to connect with me personally, you can connect with me through LinkedIn.

16:32I am just as you have found me there. I am I am searchable by those in your audience as well. And so send me a friend request, connect with me. I'd love to hear that you heard of me from this podcast and see how we can take things to the next step. I love it. Jay Dotson, partner with Prosper CFO, found on the web at prospercfo.com. Thanks so much, Jay. Yeah, thanks, Josh, for having me.

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