1.2.24 - The 7 Minute Advisory Conversation

Start 2024 off right by learning about a remarkable way to have Advisory conversations with your clients in 7 minutes. Mike Milan (Cashflow Mike) will cover his Home Run system that allows you to cover all the bases when having this conversation with your clients.

Use PROMOCODE "POWERHOUR" to save 25% on Cash Flow Mike's Clear Path to Cash Course: https://cashflowmike.com/services/ref/SOBDan/?campaign=QBPH

QB Power Hour is a free, biweekly webinar series for accountants, ProAdvisors, CPAs, bookkeepers and QuickBooks consultants presented by Michelle Long, CPA and Dan DeLong who are very passionate about the industry, QuickBooks and apps that integrate with QuickBooks.

Watch or listen to all of the QB Power Hours at https://www.qbpowerhour.com/blog

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Transcript

Michelle Long: 0:31

Welcome, everybody, to 2024. I hope you guys all had a good, safe new year. And we're very glad to have you all joining us to another QB Power Hour. And thank you, Dan, for our great intro music. And he's got a good podcast intro as well. Thanks, Dan, for doing that. So welcome to the seven minute advisory conversation with our special guest, Mike Milan, joining us today. And we're very glad to have you guys all joining us here for the start of 2024 as we get into our QB Power Hour. My name is Michelle Long. I'm very glad to have you joining us today. You guys know me. I'm the owner of Long for Success, speaker contract trainer for Intuit for a long time. Other five different books, you can check those out. On Amazon, there's a link to our Facebook group, and that's enough about me. Dan, go ahead.

Dan DeLong: 1:21

Yeah, my name is Dan DeLong, owner of Danwith. I worked at Intuit for nearly 18 years. I co host and today also at the Workshop Wednesdays, which is at schoolbookkeeping. com, doing some tech editing for the QBO for Dummies series as well. MiKe, Introduce yourself here,

Mike Milan: 1:42

Mike Milan and live from San Antonio. It's cash flow, Mike. Myself, I built 14 companies and including some software products that people know, like cash flow tool written a couple of books. One called the seven minute conversation and the other one called don't be a dumb business owner. Dumb doesn't mean unintelligent. It means I don't understand my business. And then of course, I've got the podcast as well called Mike and Blaine, where we talk about business, beer and BS. Join me in any one of those things.

Dan DeLong: 2:09

So how did you get into this whole name of, I was talking to my dad and, and nicknames were very interesting as far as what, where they came from. So where did

Mike Milan: 2:20

Cashflow Mike come from? Cashflow Mike came from while I was at Finagraph we were trying to sell to banks, right? And the bank sales process for software is nine to 12 months. So in order to bring money in, we created some training programs and sold them directly to banks. And what the bankers found interesting is that I stopped talking about profit. They didn't expect. A, business owner to not talk about product profit. I just talked about cashflow. So one of them threw out and says, Hey, that's cashflow, Mike. In the hallway and it's stuck. And then James Walter, the CEO of Finagraph ran with it. And I don't know, I can't shake it now. So I just decided to lean into it.

Dan DeLong: 2:59

Good idea. Thank you for joining us here today. And we appreciate the kicking off 2024 with this kind of conversation

Mike Milan: 3:10

a little bit about the details about the QB power

Dan DeLong: 3:12

hour webinar every other Tuesday and 12 noon Eastern, not eligible for CPE. For upcoming events, please check the website for for topics. If you need the PDFs of the slides and recordings and podcasts and other resources, we have a web page on our dedicated to all that, which is qbpowerhour.com/resources a little bit of the housekeeping, if you have specific questions about something that Mike is talking about today, please put them in the Q and a, especially if we have don't have time for everything today. Oh, great. To be able to follow up with that. If you have just general comments, like happy new year, please put those in the chat. And then, of course, if you need the handouts, you can always go to the links there in the handouts, as well as the archive. Now uh, something new is that we're trying a new tool, and unfortunately, I realized. I can't do that on the same machine that I'm that I'm doing the zoom on as well. So what we're trying to do is we're trying to share the information as broadly as we can when it live is when it happens. So when you sign up register for the webinar series you only have to do that once. But in order to join us, you gotta log into the zoom webinar. We're trying a new tool which will allow us to simulcast it on the Facebook group, the YouTube, LinkedIn and much, much more, right? Which allows more people to, to join in. They don't have to register. The event will be, you'll be able to add that directly on the platform. But there's with any technology, there's the"Yeah, But", right? So you have chat comments and polls are only gonna be available if you register for the webinar. But you can still be part of the conversation on that platform of choice, right? The challenge is that the Facebook group is a private group. You have to join the group first, and it's privacy settings. You can't see the posts unless you're a member of the group. iF you are watching in the Facebook group, and you comment on something, it's just gonna say, Facebook user, as opposed to your name. We can't. Keep track of who's talking what unless we're actually seeing it in the group. But if you were wanting to allow that tool to be able to see your name you just have to, Allow that, right? It's if you're watching on the group, and you want to be able to do that, you can just scan that QR code there, and that will turn Facebook user into your name, really all it's doing. We're

Mike Milan: 6:15

hoping to this will allow

Dan DeLong: 6:17

more people to see the power hour. So we're going to start off with a poll, because we're going to be talking about advisory. And Michelle what are your thoughts about advisory in general? Like in, in the, in this particular industry, the accounting industry, moving to advisory. That's been a big push, right? Yeah. Yeah.

Michelle Long: 6:43

Yeah, and I think more than ever, we have to embrace it because of AI, because of ChatGPT, and Claude, and Bard, and all this other AI stuff, and Intuit Assist Intuit's coming out with AI too, and because of AI, Now more than ever we have to understand this stuff and cashflow mike is at the forefront And he's been doing this for years and mike's well positioned to help us to do this mike you are in a great spot for this But as bookkeepers and accounting professionals, we have if you haven't been Embracing this, learning this, talking to your clients about this. This is the way we differentiate ourselves because basic bookkeeping and basic accounting and basic compliance work, it's still going to be there. We still need it, but the vast majority of it is being automated. We've seen that with the bank rules and all this stuff being automated where we're just monitoring it. And there's no real value add to that. The clients don't see a lot of value to that, but talking to the clients about their numbers, about their cashflow, about what they're doing with their business that's where the value add is coming into this advisory. But I think when people hear advisory, it's this all encompassing advisory, what does that mean? And that's scary. But when you say, Hey, cashflow, people can relate to that. Let's talk about cashflow. What does that mean to your business? And I think my, that's just a great area to focus on. Every business needs help with cashflow, whether they're growing, and that's something a lot of people don't realize is you can grow too fast. You can grow yourself out of business. Cashflow is a problem when you're a growing business. Because you can grow too fast and get into cashflow problems. Just if you're a struggling business, you can have cashflow problems. Advisory is more important than ever. And I think it is critical over the next three years or two years. We don't have a three to five year timeframe anymore. I think it's one to three years. I think it's critical in my opinion, and it's worth what you pay for it. What do you

Mike Milan: 8:49

think? Me personally, I've got to tell you that it's exactly what I wished my accountant CPA bookkeeper was doing in the early 2000s. When I first started out with businesses I'd get awesome reporting. I'd get awesome, job with my tax returns, things like that. But when I asked the question, Hey, okay, what do I do next? There was always a little hesitancy or there was a little I don't know. That's one of the things that I struggled with early on that I hope to be able to solve. And I think that's what the last decade or not decade, really 25 years. What does that a quarter century? How do you say that? And as done is allowed me to, uh, distill some complex financial concepts. Into some easy to use what can I do field expedient methods and get people to take action and improves their position. So I think it's critical. I really do

Dan DeLong: 9:40

And even Intuit is getting into the advisory training, right? In the pro advisor portal, there is. Three different modules on advisory. Now, Mike the seven minute advisory conversation. If you want to share your screen, so you can

Mike Milan: 9:58

Get that started there, but I

Dan DeLong: 9:59

wanted to kick things off with. The seven minute conversation. Can you, does it take seven minutes to create the conversation or seven minutes to have

Mike Milan: 10:10

the conversation? I can create it and have it in less than seven minutes. As a matter of fact, in one of the training videos in my course, I actually show it being done in less than seven minutes. It's six minutes and 48 seconds. And over the last year, I've created an app that makes it even faster. So I might change it to the three minute conversation. It just happened. Now, I'll give you a little bit of background, right? At one point in time I had a hotel staffing company three bar restaurants and nine multi family housing units, right? So I had, five different LLCs operating at once and I needed that quick, what's going on, right? So I created this template of how to analyze a company very quickly so I knew where to spend my time. And what it became Was a pattern of how I could evaluate any company in less than seven minutes to give me a gauge on what their health was, where they needed to focus. And lastly, what came about unexpectedly was education for a client or somebody that doesn't know a lot about how to read their financial statements. So this 1 tool gives you not only education, but insight and priority of work. So I'm really excited about it. And I've leaned into it as well.

Michelle Long: 11:22

Mike, I couldn't agree with you more that the clients really do need some education and they want that. They want to understand what their numbers mean and they want somebody who can Explain it to them that in a way that works for them, they don't want someone to just give them their reports or give them their financials or whatever. They want someone to really to help them understand what it means and how changes can impact their numbers and how they can improve upon it and stuff. And that was one of the things that I learned is they didn't want the numbers. They wanted what I would give them a picture book, charts and graphs. And if you would explain how, doing this can impact it and make a difference, they were all in and they were motivated to help see those numbers and improve those numbers and work towards improving the charts and graphs and stuff. And so we would always joke about here's your picture book. They love the picture, book the charts and graphs and making the pictures move, and they, once they understood it, it was huge. And so having those conversations, they want to learn and understand it, but if you come in there and talk to them in accounting terms, they, it just, it's like going into a doctor and they talk in all these big terms and lingo and you don't understand it. You need to talk to them in language that they understand, and that's what you do so well, Mike. Is putting in terminology that they can relate to that they can understand so that it can make a difference in the business. And I think that's where you really excel. And what you do is putting it in language that they can really understand and relate to. And that I think

Mike Milan: 12:53

is huge. I definitely appreciate that. And the thing we're going to go over and I think this is important is the seven minute conversation. There's six calculations to just looking at your financial statements. And I call it the home run financial system. And I'll tell you why. It's because it touches all the bases. It touches the income statement, the balance sheet, and the cash flow statement, and just see six calculations to tell a data story. And that's what we're doing. If you don't have this book, it's okay. You can get a free download of it. Just go to cashflowmike.Com, download the e version of it. It will walk you through step by step how to do these. And of course, if you have any questions, you can contact me or Dan or Michelle to get in touch with me and we got Facebook as well, but I do call it the home run financial system. Today, what we're going to go over is the 6 calculations that I use. We're going to show how these 6 calculations point to huge problems in a company and give you a different way to interpret the cash flow statement. If you haven't done this before, I have a technique. That allows anybody to interpret the cash flow statement in 15 seconds or less. And of course, I'm going to give you two big mistakes companies make while they're trying to grow Michelle. You said it perfectly. It isn't just your small companies. It isn't just companies that are struggling for sales and things like that. That could have a cash flow problem. Even some of our large successful companies fall into those cash flow troubles. Dell is 1. There's a ton of them that have that same exact problem. Let's start off with some math. Just get our math muscle working because I'm going to go through a lot of calculations. But this one, these two questions always are interesting to me. Let's just pretend you're a retailer that buys a shirt for 26 and you sell it for 40. What's your gross profit margin percentage? How much did you make? You can throw it right there in chat or, we'll just wait for a couple answers to come in. How much would you make? On that shirt, if you sold it for 40 and you bought it for 26, anybody 35 percent and that's right. 35%. There we go. So if you got 35%, that's a, that's pretty that's pretty, pretty good because that is the most important number on the income statement that gross profit margin percentage gross profit is the only place you can get cash. To spend or put in your pocket. So you have to remember it that way. You can't spend sales, you can spend gross profit. So my courses, my techniques focus a lot on gross profit. With that in mind, let's do another one. First of all, I buy an item for 54 and I want to make 25 percent gross profit. What do I sell it for? Now what's interesting is this question, as simple as it seems and looks, I've had people reprice their entire store because they got it wrong. So I bought something for 54 and I want to make 25%. How much do I sell it for? 6750, 6750. You can see we've got different answers coming in, right? 72, 6750. All right. So the correct answer is, or should I say the most incorrect answer is 6750. The correct answer is 72. So if you got 6750, chances are you did this. You took 54 and you took 25 percent of 54, which is 1350 and added it back to 54. Now, let me show you why that's wrong and how to do it correctly. And if you want, I have a gross profit pricing calculator spreadsheet. I'll give out to anybody. I'll send it to Michelle and Dan and you can get it from them. But it's just a free calculator. We don't ever get this wrong again. I use a technique I call the mini P& L. Michelle, do you ever do Sudoku or Su What is that? Sudoku? How do you pronounce that? Do you ever do those puzzles?

Michelle Long: 16:36

I've done it once or twice, but not a lot. Yeah,

Mike Milan: 16:39

the whole purpose of the game, though, is there's nine boxes,, only one number fits in any box. That's exactly how I set up the mini P& L. If you get it right, only one number should fit. Into one box. Yeah, Leslie goes, it's simple. Just divide by 0. 75 that works, or what if you're 37. 7, right? It makes a little bit harder when it's not round numbers. But here's what happens right now. We get I take a word problem and create a mini P and L. So this is 2 versions of the same thing. I'm going to show the way it should be and what happens when you get it wrong. So all I do is fill in the blank of things that I know. I know that I bought something for 54. So that's cost a good soul. I know that I want to make 25%. So I put 25 percent there, the percent side, and it is always a percentage of sales. So sales is always a hundred. And then the dollar side is whatever it comes up to be now operating expenses. I'm just giving you that. Cause I want to show the example of why this is good or bad. So operating expenses, we'll just say it's 15. So if you're going to do this. You just go, what do I know? What can I do next? I know I want to make 25%. If that's true, 100 minus a number is 25. That's 75. So right there, we know automatically that 54 is 75 percent of sales. So Leslie was right. 54 divided by 0. 75 is 72, right? And 72 minus 54 for cost of goods sold is 18. Now, to check yourself, this is why I call it a Sudoku puzzle. 18 divided by 25 should be 72. Is that right? Anybody? 18 divided by 0. 25 should equal 72 as well. So it doesn't matter which way we slice and dice this. We get it the same answer. So 18 minus 15 equals 3. Now here's what happens in real life. I do my Excel spreadsheet. I come up with my price. I hand the pricing gun to one of my employees and I say, Hey, I want to make these 25 percent make you make sure you mark up everything. So we get gross profit of 25%. They do a quick calculation, come up with 67. 50 and go click on everything in the store. Now, all of a sudden, what I have on the Excel spreadsheet doesn't match the prices on the shelf. And we're wondering why we didn't make money. If we got it like that, we have 67. 50 now. Because we did the calculation wrong. 67 50 minus 54 equals 1350. So if we did it right, 1350 should be 25% of 67 50. Who can do that? 1350 divided by 67 50 tells us what percentage, what gross profit percentage we have. Anybody have that? 13. 50 divided by 67. 50. Yeah. 20%, right? Larissa is right. 20%. That means we will have 5 percent in the pricing gun just by making a simple, quick little error. iN that case, when we bring in 13. 50, our expenses didn't change. That makes the difference. That's why we sometimes lose money. We don't understand why. It could be we did a simple calculation just a little off. So that's just to get your math muscle working. This has nothing to do with a sub minute conversation. It's just to get your math muscle working, but it's important because cash. Derives itself from gross profit. So the seven minute conversation is built on what I call the home run financial system. And of course, there's three statements that we all use. Now, if you talk to a business owner, sometimes they'll say there's a fourth statement and they're talking about the bank statement. And here's what I can tell you about the bank statement. It's only going to tell you if you have a good or bad day, right? Do I have money or not? That's it. That's the only thing you can get from there. Now, the other one they lean on a lot, business owners, is the income statement. It's like a report card. How much should I sell versus how much I spent and what's left. But the income statement is only going to tell you if you have a good or bad month or quarter or year. And then it starts over. How do we get to start over? How do we get to start over? We're like going, Oh, we blew it in December. Don't worry about it. We'll get them in January. How do you get to start over? What's the mechanism? Anybody know? Michelle, I know you know this one. It's okay if you don't.

Michelle Long: 20:58

How do you start over on the P&

Mike Milan: 20:59

L? Yeah. How does it just reset the next month?

Michelle Long: 21:03

Because the P& L starts over, it all goes through retained earnings.

Mike Milan: 21:07

Yep. We take the result, net profit, and we put it onto the balance sheet in the form of retained earnings, right? So that's all it does. It just resets it. It takes the result. Puts it onto the balance sheet. So it doesn't just disappear. It goes somewhere else, right? Connects to the balance sheet in that line. Now the balance sheet is interesting because most business owners will look at it and go, huh. That number matches that number bookkeepers doing a good job. That's about as far as they go is they don't really understand how to use it But what the balance sheet is that it is the most important financial statement you have because it is the the life of the company. It is every decision you've ever made. The culmination of all those decisions in one living document. So what I bought, what I own, what I owe, who owns part in the company, it's all right there on the balance sheet. It does not start over. It just lives on in perpetuity. So the balance sheet is the central thing. And if you know how to read it, it tells you if you have a good or bad company. So one says good or bad day. The next says good or bad month, quarter year. This says good or bad company. Now, where people get really confused is on how do I use the cash flow statement? The cash flow statements main purpose is this. It's the tattletale of your business. It tells on you. Anybody that knows how to read it knows where your money came from and what you did with it. No matter what story you tell me, I can look at the cash flow statement and figure out where money came from or where it went. Now, why people get confused is because we're used to vertical math. In the income statement, it's vertical. I start with sales, I end, I keep subtracting until I got net profit. In the balance sheet, it's still vertical math. I take money out of the checking account, it goes down. I put money into the checking account, it goes up. Vertical math. The cash flow statement is considered to be horizontal math, right? So it's looking across your company period over period. It doesn't go up and down. It compares the changes in one period to the next. So what happened in January last year to January this year, it just, the number is the difference between two periods. It's horizontal. So that's where most people get confused because they can't just add up transactions and come up with a number because they have to take the difference in the two accounts. So Getting a client to understand that first really illuminates what they're looking at, right? They know what to look at next. So here's how it looks, how the money numbers run through there. You got your income statement, right? That profit goes into this thing that most business owners never see, statement of retained earnings. But that's where we just figure out if we paid somebody or not, paid off some of the owners. And we take the end result and put it into the balance sheet. The cash flow statement also flows into the balance sheet with ending cash becoming your cash balance on the balance sheet. So everything is flowing into that balance sheet, making it the most important one. So today, I'm going to use SAMI. SAMI is one of my favorite. Clients of all time. This isn't him, but it's a funny picture of him because I lived in Missouri for 2025 years. He owned a paint manufacturing company outside of ST Louis and Wentzville, Missouri, and he ran it for, about 30 years. His dad ran it for about 20 years before that. It's 50 year old company. He wants to pass it down to his son, and he also wants to grow the company. So the reason why I say that is because when I give you the the calculation results. It has to connect back to the story. What is this person looking to do? Because in advisory services, it isn't just we look at every company in a silo and say, Oh, you fit in this box. No, it's how does your financial position connect to what you're trying to do or what you've already done, right? That's the skill, right? It isn't just doing the math. It's connecting it to the end result, the transferable value. So here's the financial statements I'm going to use. They're in the slides that I gave you. They're also in the book, right? So you've got financial statements in the book as well. So if you downloaded that book, you'll have them. I've got 5 years worth of balance sheet and income statement and year 1 is the oldest year, I think 2021 to 2025, if it helps, if you need numbers to do that. Year one's the oldest year. Year five is the current year. Michelle, I heard somewhere that CPAs do it backwards. Is that right? Where the current year is on the left side, not the right side.

Michelle Long: 25:36

Yeah, that's, I like to read left to I like how you have it. It works for me.

Mike Milan: 25:41

All right. Then let's use it and let's get started. Now, the reason this came about is that I had all of these companies running at once and it seemed like I was always just too much information. There was too many pieces of paper. There was too many different reports I was looking at. So I need something real quick that we can do. So I said, here's what I want. I want a little bit from all of them. The main things that I think are trying to impact my company the most and we came up with the six things. Now, everybody kind of attacks the financial statements differently, but we all start off with this thing called trends. So when I use trends. I use the kiss method. This is what makes it so fast. What you guys, Dan, what's kiss to you? What, a kiss is keep it simple. You're starting off negative. You're starting off negative with the new year. It's keep it super simple. There you go. Come on, let's go. Hey, keep it simple. Sweetheart. There you go. Alright, so what I do is I don't do the math. I just look at it and go it's close enough because it's doesn't matter here if it's pennies and dollars and things like that. Just get me in there in the area. And I look at the relationships between them. These don't operate in silos either. I look at, do I expect it? So the two questions I'm going to ask on all four of these trends and it's sales, gross profit, operating expense, net profit is a, is it good or bad? B, do I expect it? Those are the two things that I look at. So sales here is we're going to agree that it's down, right? And if I just guess a little bit is down about a million dollars, is that good or bad? You can do this. It seems bad. We don't know if it's bad yet, but it seems like that's not what I want. That's not what I expect. So we'll look at the next one. The next one is gross profit, right? Remember I said gross profit is the most important number on the income statement. So I pay really close attention to this. It's also going down and it's going down about 450, 000. So the question is this good or bad? I think it's bad because that means I had 450, 000 less to spend. That's the way I look at it. And do I expect it? The answer is yes. I actually do expect it because if sales are coming down and I'm managing to gross profit, they should move together. So I think I should expect that. What happens if I don't see that and I see something opposite, right? Where sales are going down gross profits coming up. Anybody? Sales down, gross profits up. We don't know, but that seems pretty good. Yeah, but it's good, right? I'm doing less work and making more money. Yeah. It seems pretty good. They should

Michelle Long: 28:22

trend together, like you said. They usually trend

Mike Milan: 28:24

together. They usually trend together, but sometimes you'll see them different. And the reason I put the arrows is that in this book I have a trends cheat sheet that says if you see these arrows going this way, up and down up down, whatever it is, it tells you what's happening. So there's a trench cheat sheet in the book. Now, operating expenses are also coming down, right? And they're down about 350, 000. And I'm like going, okay that seems good, right? At least we saw sales coming down. We saw gross profit coming down and we made adjustments. We don't know if it's the right adjustment, but we know we did something. Do I expect it? And the answer is no, I don't expect it because this one does not move with sales. It takes a management decision to add or reduce expenses. Somebody has to do something, right? It just doesn't happen. So I'm actually going to give Sammy a pat on the back there for cutting expenses. And then here's the result. We can't do anything to net profit. It's just a result. We have to deal with one of the other three categories. And this is just what happens. Then I start to see relationships form. When I do it like this, I'm like, okay, 450, 350, the difference is 100. Oh, because I had 450, 000 less to spend and I only spent 350, 000 less. Yeah, I paid out of my own pocket. 100, 000. I start to see that form and rather than try to communicate it that way to the client, I go to calculation number two, right? Calculus. But calculation number two, first of all, in the trends, my first impression of this company is, Hey we're in trouble. Something bad is happening where we're selling less. We're making less money. And we're losing out in profit. So I go to the next step, which is let's see if we cut enough expenses. This is expense control and expense control is a hard, fast rule. If you violate this rule, you will kill your company over time. You just will. You will kill a company. And the rule is this. When gross profit decreases, you should cut operating expense by the same amount. So let me say that more simply. Gross profit is the amount of money you have to spend. Operating expenses and how you spend it. If you have less money to spend, you should spend less money, right? If you took a 2, 000 pay cut at in your household, something would have to change. You might still be able to cover your bills, but you might not be going to Taylor Swift concerts, and you might not be going, you might not be going, out to eat or investing, you might not be going to cheese football games, anybody, might not be even traveling the country in an RV. All these Hey don't, don't think about that as a dig on you. Cause I'm envious. So don't think of it that way. All right. So if we look at sales over time in most companies, you'll see a growth ramp up and then it ebbs and flows right over time. And if we're doing it right, gross profit kind of runs with it. oPerating expense. When I've graphed these out for companies, they don't tend to move this way. They tend to move in stair step uh, patterns because we only add expense. When we're growing and I have to, I have employees that are saying, if you don't give me help, I'm going to quit because there's too much work. So we hit capacity levels and we're like on, oh, we need to add an employee. Oh, we should add another truck. Oh, we should do. We're adding expense to keep up with. Our growth. In this case, the difference between gross profit money coming in and operating expense going out, the difference there is just profit. That's how much money we're making. And I hold it flat because the longer I can hold it flat, the more money I make, right? That's why we do that. And I only add expense when I have to. Now, what's interesting is look at the gap here. Look how close it becomes. I'm making less money. I'm selling more, but making less money when this line operating expenses touch, uh, gross profit. What's that call anybody? Gross profit equals operating break. Even I like to call it practice and working because we don't do it for money anymore. We just go in and do things and we don't make anything. We just do it. So we're practicing going to work. But this is the exact position where you see headlines in the news. You know a company is doing this when you see Meta lays off 7, 000 jobs. How do they know to lay off 7, 000 jobs and not 10, 000 or not 2, 000? It's because the change in gross profit equals the salary of 7, 000 people. So they make this decision and cut 7, 000 jobs because then they can get back to making the same money. Even at a lower gross profit value or even at a lower sales value, you can make the same money. Now, some people don't make that change. Some people just keep it going. They just keep it going like that. This is operating expenses over gross profit. That means I'm spending more than I'm bringing in. So all of this is lost. Now, when I was a state trooper, some people on the call know that I was a state trooper in Missouri. Never ran across Michelle while I was a state trooper. But I used to go to networking parties and people always ask you, Hey, what do you do for a living? And I say, I'm a state trooper. What do you think is the second question they ask a state trooper? Most of the time, 80 percent of the time. They go, all right, Mike, come on. Tell me how fast can I drive? That's I got that question time and time again. And my answer was the same and it was never. You should drive the speed limit, sir. It was more like you can drive as fast as you can afford. So if you can afford a 50 ticket, drive that fast. If you can afford a night in jail drive that fast. Cause I can give out both either one. So anyway, that's what happens in business. How long can I keep gross profit? Over operating expense was long as you can afford. As soon as you run out of cash, you've killed the company. That's why I say that. So let me prove it to you. Mathematically, we have gross profit minus operating expense equals net profit. In Sammy's case, he had 450, 000 less to spend in gross profit. He cut 350, 000 in operating expense, and the result was he lost 100, 000 in profit. What if he would have done this? See, 450, 000 minus 350, 000 equals 100, 000. If instead, he's down 450, 000, he cuts 450, 000. His net profit actually stays the same. If you cut the same amount that you lost in spending, you can make the same profit, no matter the sales level, just by maintaining that's called a spense control and that's number two. You guys want to try a poll? I've been windy for a little bit. Yeah. Let me let me launch another

Dan DeLong: 35:22

poll. This is the next one. But when do you typically make gold? And directions in your business. I was curious about that because you do it in the end of the year or do you do it after the

Mike Milan: 35:39

year is started? I tend to do it in month 9 or 10, right? Preparing for the new year because when I wasn't doing that way, when I was waiting till January, February, I felt like there was an air gap. Oh my God, I just wasted January, February trying to get my whole year put together when I'm on the calendar year. And the reason I say month nine or 10 is because some people are on fiscal years that are different than the calendar. So I like to have it done and we've already made preparations to start January 1st with anything new. What about you? If you do it in December,

Dan DeLong: 36:15

you've got, that's the busiest time away from your business, right? Especially if you're in the retail. Yeah,

Michelle Long: 36:23

I was gonna say I think for some businesses it depends on their seasonality if you've got lawn and landscaping business, you're not going to do it the same time as necessarily a construction company or something or a retail company, so it depends on the business. Like you were saying, if they have a different fiscal year or something, or just the seasonality of the business, and sometimes I think it helps to. To visit the company on, twice a year, not just once a year, take a look or quarterly would be a great idea. And once you've set the budget, visit them quarterly, let's see how they're doing, let's compare these things and let's look at these things throughout the year and see how they're doing so you can make adjustments if you just wait until the end of the year and say, oh you missed it. You got to look on a regular ongoing basis and make adjustments and fine tune it and things like that to help keep them on track to help them hit it, especially when they're new to this stuff. In my opinion, help keep checking in with them and stuff like that. Don't just set it and forget it. In my experience. Anyway, you have to hold their hand, especially when you. When they're new to this process once, if you've been working with Sammy for five years and he's got it you can check in with them once a year, but if you're new working with Sammy the first year, maybe you got to check in with the monthly or quarterly and then twice a year. And then maybe just once, just like with anything, if they're new to it, you got to hold their hand a little

Mike Milan: 37:44

closer in the beginning. Yeah, I like that. I like that. All right, and if you're only going to take three minutes to have these these kind of station, you can do them at regular intervals. That's true. That's true. Three minutes was a guess. Three minutes was a guess. No, it's not.

Michelle Long: 38:03

And one more suggestion is some people now what they're doing is, at the end of the month or whatever, they're creating a little video or whatever to send with the financials and say, hey, here's how you're doing. Keep working on this. Keep working on that. You're doing great. They can send them a little video going over the results of their financials with them on a monthly basis or whatever, so that you can share that with them. It doesn't necessarily have to be a long meeting or something you could do it.

Mike Milan: 38:29

Yeah, exactly. All right. Exactly. All cool. Hey, the third one is debt to equity ratio. You're like why are we doing that? Because it's a measurement. How much do you believe in your own company? And it's one of the things that banks. Tend to lean on, right? It's one of those things. How much do they have in the company versus you? The reason why I included is because what I found out is that the banker was giving me one piece of advice and the accountant was giving me the other and they were opposite. You're telling me to do opposite things. For instance, the accountant's motivation in my case was he wanted to minimize my taxes. So he had a tax strategy that reduced net profits. So I paid less tax, but it also reduces equity. The banker who's trying to give me a loan needed to lend against the equity. So when I reduce the equity or had losses that also reduces retained earnings. Which made the equity go down as well. So I'm like there's got to be a balance. So the balance is this. In the business owner's mind, they have to answer the question. Do I think I need a loan next year? Why? Because that number, this debt to equity, needs to be at about 2. 5 or less for about 12 months. Because 2. 5 is the maximum they'll lend you on this. So if you want to know the answer to the banking test on this debt to equity, and your client wants to go get a loan 2. 5 or less is where you need to be. So in Sammy's case, he had a 1. 45. Is that good or bad? Is that good or bad?

Michelle Long: 39:58

It depends. It depends on the

Mike Milan: 40:00

industry. Yeah, but at least we know it's less than what the banker wants, right? The banker wants 2. 5 or less. The higher this number is, the more risk to the bank. Think about when you buy a house. You put in 20%, the bank puts in 80%. So 80 is the debt, 20 is the equity. 80 divided by 20 equals 4. Yeah, you got a four, but if they only gave you the option to put in 10 percent and they put in 90, 90 divided by 10 equals a nine. It's more risk to the bank, the higher the number. So that's how you got to look at it. They want on a business. So not to give you 4, but only give you 2 and 50 cents or thereabouts. So that's the goal. If you think you need a loan, long term lending, this is where you need to be. So in this case, he's actually pretty good. If he needs a loan, he's in the ballpark. Now, as you said, Michelle, you want to compare this to industry average? Cause what if everybody else is at 0. 5? He may not be managing debt as well as others. That's the way they're going to look at it. All right, that leads me to the next one is EBITDA, right? And I bet nobody on this call has clients calling them up saying, Hey, what's my EBITDA this week? What's my EBITDA this month? Unless they have a banker that's pushing them to. Because this is a substitute word for cash flow. To the bank, they use EBITDA, synonymous with cash flow. And the purpose of this whole calculation, earnings before interest, taxes, depreciation, amortization, is to put companies on a level playing field to compare each other. You're like going how do they do that? This calculation takes out all the effects. Of management decisions we make about financing and accounting financing because some people do equity. Some people do debt. If I throw in interest, it doesn't matter because the debt financing is covered with the interest. So we look the same as equity financing taxes are just result. There's no operational expense. So they just ignore that and throw that in. Then the depreciation amortization. That's non cash. Nobody ever writes a check for those things. And we all use different methods sometimes, even though we most of us use straight line. Okay. There's a such thing as double declining balance or depletion or activity method. All these things are different and change the way that we pay taxes. So we add it back in and we all look the same. So this is a way to equalize all companies and show what they call true cashflow. What's the real cash that's coming through the business. So it's a substitute word for cashflow. Here's how the business owner and you can use it. In general, across the country, EBITDA times three will equal your long-term debt ceiling, right? EBITDA times three. So if you have a$300,000 ebitda, they're gonna lend you up to about$900,000. That's about how much they can afford to pay. Why that's important is because business owners will go in and go, Hey, I need a loan, and they'll ask the banker, right? I need a loan and the banker says, how much do you want? And the business owner goes, I don't know, how much will you give me? That's not the position we want to be in, right? It's asking the bank how much they'll give them. Because the banker needs to know that you understand debt and how to use it properly in your business. This gets you close in the ballpark, right? So you don't ask for too much and they decline your original amount and come back approving a lower amount. They used EBITDA to calculate how much you can afford. You mean you can't

Dan DeLong: 43:24

haggle with a loan?

Mike Milan: 43:26

yoU can't negotiate the number, meaning the, how much they'll give you, you can negotiate the term, how long and the interest rate, right? Yeah, so you can do that, but the number, they're not going to give you more than EBITDA times 3, roughly. Now, here's the other number that they use EBITDA for, this debt service coverage ratio. Now, I won't go through how to calculate it, I'll say it for the video. It is EBITDA divided by the current portion of long term debt plus interest, right? That's how you calculate it. But here's what you need to know. That number should be 1. 25 or higher. And what that means is for every dollar you owe in debt, you have 1. 25 or more available to pay for the debt. That's what they're saying. So 1. 25 EBITDA is pretty important. If you're thinking about lending as a way to grow and if you're trying to well, first of all, this is Sammy's numbers. Sammy actually had 385 gives him a long term debt capacity of 1. 1 million. When you do this calculation for your client, go look and see what they already have out, right? Cause it's like having a credit card. They are, they already have a balance on. So I'm going to subtract out what's on the balance sheet. That means he can only take out a loan for about 442, 000, 442. So that's, that kind of gets you in the ballpark where he's not asking for a million. Cause they'll only give him about 500, 000. All right. Speaking of debt, I'm going to go through this one pretty quickly. This is called mismatch financing. It's using the wrong loan product to buy something. And the why that's important is that when you use the wrong loan product, you chances are you're paying too high of interest. The example I can give you, nobody's going to buy a house with a credit card. 30 percent interest versus seven. It's just, you're just not going to do it. That's the same thing that we do in business. So we'll go buy something that we can depreciate on a credit card. Meaning we can actually, spread out the expense of this over three, four, five, seven years. But we're putting on a credit card that needs to be packed, paid back in one year. This is saying that you should use the right loan product to buy things. And here's the rule. The rule is the length of the loan should match the life of the asset. That's the big gist out of this. The length of the loan matches the life of the asset. So if I'm going to use debt and I go buy something I could appreciate for five years, then I should buy that with a term loan for five years if I don't use cash. Because when the when the payments end, so does the depreciation and it's a good time to replace or upgrade or actually take the benefit of a capital or a depreciated asset. Here's how you find it. You look to see if somebody bought something, right? So I'm looking for gross fixed assets to go up. In this case, it did. And this is a variation of the basic accounting formula, which is assets equals. Liabilities plus equity, right? That's just a variation. It's just ignoring short term debt. If this doesn't equal, chances are you purchased it with a short term debt product. These should equal, right? Long term debt is, went down, in Sammy's case, and retained earnings went up. if We did it and we used whatever we purchased here, our gross fixed assets, If we did it right, we should have used long term debt and cash and like on that's retained earnings. Mike, that's not cash what's profit that comes into the business as retained earnings, but it's also cash in the bank account from profit and sales and a K. A. R. from profit and sales. So that's the opposite end of it. But these 2 numbers don't equal as an account in the bookkeeper. If you see this, turn this over to a bank. Just say, Hey, listen, we need to get you involved with a bank because we can move the debt off of whatever your line of credit, your credit card into a term loan, reduce your payments. It doesn't increase your debt. It just keeps you from pushing cash out into the world in the form of interest. So in this case, this company's mismatched financed. And what we're looking for is an increase in gross fixed assets should equal an increase in long term debt and retained earnings. This is, if you go get the book, this is spelled out exactly how to do it inside the book. All right, last one. I told you and promised you that I would teach you how to read a cash flow statement in 15 seconds or less. If you know how a cash flow statement is set up, it has operating activities. That's our core business. Investing activities like buying equipment. Or thanks for our business to grow and financing activities, who actually has kind of ownership in this business, the bank from debt financing or, shareholders with equity financing. The only thing I need to do is look at three numbers. What are the ending balances for those three activities? And in this case, I got them in blue cashflow from operating cashflow from investing cashflow from financing. The big skill you got to have is, can I tell if that's a positive or negative number? DaN, is that a positive or negative number? That would be positive. Yeah, so I just put a plus, right? She just put a plus. Michelle, you know this one? I had a 50 50 chance. Yeah. That's negative, right? And then this one's negative. That's all you have to do on a casual statement. Put a symbol next to these three numbers. Is that positive or negative? And then if you keep them in this order, operating first, investing, then financing, there's only eight possible combinations they could be, plus minus in this case. So I've given you the cheat sheet. This is how you read a cash flow statement. Plus minus. This company is using cash flow from operations to buy assets and pay down debt. Boom. Doesn't matter what story you told me. Didn't take me a long time. I just went plus minus and read the chart. So this is how you can interpret a cash flow statement very quickly. Just to read the chart. Do we have another poll or anything I get before? I don't know how many we've done before I finish up. Let's throw another

Dan DeLong: 49:14

poll question. It's just would you like to learn more

Mike Milan: 49:18

about the clear

Dan DeLong: 49:19

path? The cash because we're running up on the top of the hour. Let's go ahead and continue on while people are

Mike Milan: 49:29

answering that. Yeah, and the ClearPath to Cash is the eight concepts I teach. This is one. This is just one of the eight concepts that I teach on how to maximize cash. Why this is important. What you can also do is you can see typically what the cash flow statement tells you about each company. This is normally startup growth maturity decline. I just call them wonder blunder thunder and under because it's funny. And it makes me talk about blunder, which is the blunder phase. Growing broke is when you outrun your operations, which means getting a big contract, trying to fulfill it. If you work with Costco, make sure you have enough money to be able to fulfill all the orders for three, four months before you get paid. There has to be enough money to be able to do this. People get into. Cashflow problems because they grow broke because a concept called the financial gap gets too large. You have to have enough money to cover the financial gap. The smaller the gap, the less money it takes, right? So if you look at the end of that, growing broke is that specifically. The last one is sideshow ventures. This happened to me. Anytime they're starting to grow and people see it, they think that, oh, you're good at this, you should do that, or we should partner on this other project. These are sideshow ventures because they're going to distract you from your main business, the one that you're actually making money with. In my case, I had hotels, restaurants, and properties. I had no business getting into herbal supplements. There's no connection between them, but it's a quick way to lose 200, 000 is to combine all those together. That's what happened to me is I lost 200, 000. I had a friend lose 1. 2 million. Cause he was great at construction. He and his wife tried to buy a bed and breakfast. The two didn't match. And what happens in a sideshow venture, you'll have one successful company feeding and supporting another unsuccessful company that doesn't match. So you can't really take synergies between the two. So those are the two big mistakes you can make in the blunder company is grow too fast or add something that doesn't really match with what you're currently doing. So Dan, that's what we went over today is the. Six calculations, a new way to interpret a cash flow statement, and the two biggest mistakes. And of course, if you didn't get the book and want to know more about these more deeply, you can go to my website and grab it here. You can contact me and we have a 25 percent off, one of the largest discounts I give. Is because I love Dan and Michelle.

Dan DeLong: 52:01

Thank

Mike Milan: 52:01

you.

Michelle Long: 52:03

You've got great training and a great program and everything. Can you just mention a little bit what you do for other accountants and bookkeepers and how you help them? Because you've got a great program that you do for people. Can you just mention that briefly?

Mike Milan: 52:17

Yeah originally it was just the clear path to cash, right? So the clear path to cash is just teaching mathematical concepts to be able to find out where hidden cash is inside a company and how to go grab it. thEn I had accountants and bookkeepers come to me and say, Hey, listen, we have, we're being pushed towards advisory services, but we got two big problems. One, there's not something out there that I can just start with. I don't want to start from scratch. There's no kind of template to build this thing out. And then two, I don't feel really feel confident giving advice yet. Because I haven't done this skill. I've done all the other things that accountants and bookkeepers do for years, but I haven't done advisory type services. So I built the second course called Pathfinder. And what Pathfinder does is teach you the concepts in the clear path to cash, the math, the technical side. And then the advisory services side, how to it's an out of the box advisory services program focused on cash flow. That's pathfinder. The 2 together create the certification, the clear path, the cash professional that actually administer through a 3rd party. It's a great way to actually introduce cashflow advisor services to your client because it's out of the box ready to go. Wonderful.

Michelle Long: 53:26

And so if people are interested in that, they can check that out on your website, but regardless, they can get that free ebook and download that. So it's great information. You do a wonderful job as always. I'm so glad that you came on. That's awesome.

Mike Milan: 53:39

Yeah, thank you very much. I appreciate it. And as always, man, anything I can do for Power Hour, please let me know. Great to see

Dan DeLong: 53:47

you. All right. So we'll see you next time on the QB power hour. And hopefully we'll have this echo out of my head.

Michelle Long: 53:56

Thanks, Dan, for everything you do. Thank you, Mike. And Happy New Year to everybody. Thank you all for joining us today. Great to see everybody. And I hope you guys all have a great day.

Mike Milan: 54:06

Happy New Year.