Strategic Finance for SMEs: Key Reports & Growth Tips with Claire Hancott

Have you reached the stage in your business where you’ve outgrown your accountant? How will you know when you do? Maybe you’ve explored engaging with a fractional CFO, but wondered what value they’ll bring to your business. In this episode, I’m talking to Claire Hancott from profit Cash Growth, who is a fractional CFO, and we explore all the things that they do in language that we get rid of, all of the jargon, we dispel, all of the accountant language and we talk in plain, simple English what the forward looking accounts and reports that they will propose to introduce to your business and why they are valuable and how they’ll add value to you as a business owner. This is a good one because we’re nice. Kept it nice and simple.

Welcome to the podcast that’s dedicated to helping business owners to prepare for exit so that you can then go on and maximise the valuation and orchestrate an exit on your terms. This is the Exit Insights podcast presented by Succession Plus. I’m Darryl Bates- Brownsword, and today I’m doing something a bit the same, but a little bit different. I’ve got Claire joining me today, and Claire’s a CFO FD management accountant who works with SME businesses to get the finances up to scratch. And welcome. Claire, thanks for joining me today.

Thank you very much for having me.

Now we’re going to dig into the things that a lot of businesses take. Well, that a lot of guests CFO’s take for granted around the way that we should be as business owners running our businesses, and the way that we should turn, I guess, our accounting team into a finance function. And we’re just going to get into the nitty gritty a bit, I think is what would be really helpful. Dig down into those things that we always normally take for granted. How does that sound?

Brilliant.

Brilliant. So, Claire, why don’t we just start off and just give us a little bit of an intro to you. Why? How did you get into working with SME’s? In a surrogate CFO type role or a fractional CFO role is the favored term, isn’t it?

Yeah. So when I was growing up, my parents always had their own business. So small business is in my blood. It’s where my heart lies. As with a lot of people, to become a chartered accountant, you need a certain amount of work experience and the best place to get that is in the corporate world. So I worked for a number of years there and I, you know, I had quite a successful career as a finance director at various companies, and in particular a global retailer and distributor. And a big part of my role there was in starting businesses from scratch and buying businesses as well. That was a key part of the strategy. But my heart always, always was in small business, and I always wanted to have my own business as an accountant’s firm. And so, yeah, a few years ago, I left the glitz and clamber of the corporate world and started profit, cash growth. And we’re really, we’re trying to modernise the world of accountancy because it’s very, it’s fair to say it’s not got the best reputation. It’s a little bit like a state agency. People sort of roll their eyes when you tell them that you’re an accountant. But we are trying to focus exclusively on helping six and seven figure business owners. And we help them with management accounts and finance director services, and we just give them really insightful reporting and guidance that helps them to increase their profits, improve their cash flow and grow their business.

So, and, okay, so we all know that running a business, there’s kind of two sides, or maybe three sides to it, but one of it is we need our product and our proposition that we take to the market, and we need sales and marketing, and we need all that energy and activity to do all of the hard, hard work. And we need great people and systems and processes to pull all of that together with the marketing team and the delivery of it. And then we need to keep control of all that and make sure that we can afford to do everything, that we’re making a profit and that we’re not going to run out of money and we need to just hold it all together. That’s what we’re talking about, right, is keeping control of everything and making sure that we can keep running our business sustainably.

And it’s not just, I think often there’s like this fear factor around why you need an accountant. Like, you’ve just mentioned a few things there, like, can we afford things? Are we going to run out of money? But it’s also, you know, if you’re going to grow, if you’re going to spend money, maybe marketing or opening a new location, what’s the best way to do that? What’s your most profitable product lines? What’s your most profitable customer avatar? It’s all those types of things that if you’re a really sort of growth focused accountant, that’s really what you’re looking like, is more of the upside than avoiding the negatives.

Yeah. And, yeah, as you say, like, we need to know what our. So we’re an accountant or a CFO is really going to add value is to analyse our marketing activity. Or one of the things they can do is analyse our marketing activity and tell us what our lifetime value of a client is, tell us which routes to market, which sources are generating leads cheapest, and which of those sources of potential clients, our clients that stay with us the longest or become the most profitable over time. But we’ve got to do the analysis right, and we’ve got to have that ability to dig into the numbers and perhaps hide these people in a dark room and in a corner somewhere where they can just mull over the numbers and put them together in different ways until it comes up with information. So to process all that data and turn it into valuable information that we as business owners, the founders of the business, can then just take forward and make informed decisions.

Absolutely.

So you’re a fractional CFO, you get a new client. What’s the first thing you look for when you start with a new client? They’ve said, Claire, that’s wonderful. We’re ready to take control. We’ve grown to the size where we need to be more proactive than just looking at the bank account. What’s the first thing you look at?

Well, the first thing that I look at when starting with a new business is actually we tend to have to go to the very basics, because most of the time my clients will come to me and they’ll say something along the lines of, I’ve outgrown my accountant or I’ve got a bookkeeper, but, you know, they’re just, they write, when I was a bit smaller, but they’re not quite right for me now. And really, we have to go right back to the very basics of setting their finance system up to use for insightful information. Because nine times out of ten, somebody’s had an accountant or bookkeeper set up their finance system, be it Xero, Sage, Navision, SAP, whatever it is that your business has got that’s normally been set up with the sole purpose of doing your VAT returns, doing your tax returns, and just keeping on top of your bookkeeping. And so before we can even.

That’s what we call compliance.

Right.

That’s that compliance thing where we’re just doing what we have to do to stay legal.

Absolutely. Yeah. But really, if we want to start using that data to add value to your business, we’ve got to make sure that we’re recording everything that we need to be tracked. So a lot of it will be non financial as well. So, you know, like, do we have our quotes recorded digitally? And do we record purchase orders? And, you know, all of these types of pieces of data that actually become really valuable, particularly when we’re talking about lost opportunities for profitability or cash flow, things like that is all of the data that your business has got. So we have to go back to basics and assess everything that a business has and set it up so that we can then use that to really get value out of your data and out of your numbers.

Right. And just as you started on that, you made a statement that I think requires clarification. You said, when people come to you and they say, Claire, I’ve outgrown my accountant, how does someone know when they’ve outgrown their accountant?

Probably what I hear the most is people saying to me, I’m asking for information, but my accountant isn’t giving it to me. And it’s purely because you’ve gone and got a compliance accountant. You’ve got a specialist accountant that was trained to do year end accounts and tax returns and bookkeeping, whereas I did a qualification that trained me to do management accounts. Just, you’ve gone and got an optician when you’ve got a bad back, you know, that’s all it is. You just don’t have the right accountant for what you need.

Well, it’s great if you got eyes in the back of your head. So is that kind of the metaphor here? So when we’re just doing compliance, that’s the bare essentials that we need, and it’s because we’re complying with the laws that we have to do just to stay in business. So we’re collecting all this data just to keep the government happy, essentially, and to remain legal. And are you saying we’re now grabbing all that data? That’s a history of our business and looking back, and that’s what our tax accountant does. And that’s a really important role. Let’s not undervalue the role that is, because that can save us a lot of money and a lot of heartache, and we don’t want to mess that up. But now we’re getting all that data and we’re looking forward, and you’re saying, I need to prepare everything and I need to make sure you got the right system. At the most simplest level, the bare bones. Looking forward, what are we going to be doing? What information do we need and how do we want to present it? I guess I’m just asking at the very basic starting point level, what do we want, what information are we asking for? Should we be asking for?

So the most important thing is up to date information. And it sounds like an obvious thing to say, but I would say that this is the number one barrier to businesses that I’m working with, is that they just don’t have timely information. You know, there’s not actually that many similarities between corporate finance and small business finance, but some things do cross over. And when you work in the corporate world, you know, normally by day five, you’re sitting down with your board and reviewing the management accounts. And I think that’s really important for small businesses to learn that because there’s no point if you haven’t made profit, you need to know right now, or if you’re going to run out of cash flow, you need to know right now. You can’t be finding out in several weeks or months time. So that’s the first thing is to work on the processes so that, you know, everything is up to date and instantaneous. And we can make snap decisions because we don’t want to be analysing numbers forever and sitting down and discussing things forever. We just need to give you the one piece of information that you need to make a decision and let you do it.

Okay.

And then probably the second thing that I find small businesses and SME’s benefit from the most is having some sort of method of capturing, maybe some people might know the phrase like cost centers or profit centers or project costs, things like that. So depending on what your business is and what industry you’re in, understanding the different elements of your business. So if you’re a location based business, maybe, I don’t know, like you’ve got retail shops, you’re going to want to know the profit per shop. Or if you are maybe a service based business, you’re going to want to know the profitability for maybe different product ranges or different customer bases that you work with. So we really dig into what is it that’s really important for your business, and that usually involves capturing costs so we can understand profitability of different business units.

Okay. And you started again there with another term that we might want to break down because we can take it for granted. And you said we’re going to start with management accounts.

Yes.

What are management accounts?

So management accounts, I think everyone’s heard the phrase accounts. And normally when business owners see their accounts, it’s at year end and it gives you a summary of your twelve months and tells you how much profit you’ve made. It normally shows your balance sheet as well but what management accounts are is they are accounts that are used internally by the business. So there’s no set format. It is literally whatever is beneficial to your business, you can have in your management accounts. But typically for most businesses, it will be their profit and loss statement. It will usually include some sort of like, key performance indicators. So maybe like information that you don’t get on your profit and loss. So, you know, maybe like quote conversion, lead generation, or that type of thing. And then also there’s cash flow forecasts and balance sheet information in there as well. But management accounts are used internally by a business, so they’re not meant to go to your bank or anybody like that. And really, management accounts should be designed to be telling you what is and isn’t working in your business. That should be exactly what management accounts should tell you. They tell you what isn’t working so you can fix it, and they tell you what is working so you can replicate it.

And as you mentioned, that these are up to date reports. So I’m guessing the owner can look at them and go, hey, this is from this month’s trading or what have you. So let’s dig into it a bit. You’ve mentioned three reports. You mentioned the profit and loss, you mentioned the cash flow, and you mentioned the balance sheet. Or did you mention another one and I missed it?

I talked about KPI’s. So non KPI’s.

KPI’s. Yeah, yeah. And so they’re the reporting. Okay, so let’s, let’s talk about, let’s unpick each of those. So the P and LD, what should the management, accountant, or someone like yourself, presents the owner with a p and l? Profit and loss. And these three reports, for the first time, they go off and go see their other clients the next day. And our business owners sat there with these three reports in their hand. What should they be looking for? What do you look for in these reports with your customers, your clients? And go, this p and l looks good, because this is what you’re seeing. This cash flow looks good. What am I looking for in the cash flow? In other words, how does a business owner use these reports?

Yeah. So firstly, I would say that no accountant should ever just send these reports to somebody. You know, it should always be like a collaborative discussion where the accountant should be explaining what’s happening in the numbers. Because also, from an accountant’s perspective, you know, my, I’m most successful at my job when I know the business. So when I look at a set of management accounts, the most important thing is that you’ve got trends you want to see, you know, normally twelve months. So I tend to work on, like I always want to see twelve months of history. And the reason that I want to see that is because I’m asking two questions. I simply want to know, is that number consistent? So month on month, is that number changing? Is it varying? Is it fluctuating? Is it always the same? What’s happening with it? And then I want to know why that number’s changing. And that’s probably the two biggest questions that I’m looking at. And it doesn’t matter whether you’re looking at your profit and loss, your balance sheet, your cash flow forecast, it’s, is that number changing and why is it changing?

And I guess the implied is, is it changing in the right direction or the wrong direction? So obviously, expenses, if they’re going up, are they out of control? Are they going up in control? Do we know why they’re going up? And was it expected? And these are the sort of follow up questions, I’m guessing, that you’ll sit down and you’ve already said, like, when we work with our tax accountant, we might see them one, two, four times a year, whereas it sounds like you’re working with your clients a whole lot more regularly than that and digging into the numbers and sitting down with them, by the sounds of it, making conversations and choices around what we’re going to do moving forward rather than what we should have done in the past.

Yeah, absolutely. And the management accountants, you know, one thing that I always have them do before they prepare the management accounts is I’m like, get on the website, make sure that you’re on the business’s newsletter so that you’re up to date with what’s happening in the business. You understand what they’re focusing on, what their strategy is, how they’re marketing themselves to the customer. You’ve got to really act like you’re an employee of that business and that you understand fully what their culture is and fully what their strategy is. And only when you do that can you really add value in management accounts. You can’t just crunch numbers and send a report to somebody. It’s of no use to people.

Okay, so we’re getting familiar with the business. We’re looking at the reports. We’re looking for trends that are appearing in the, in the reports. One thing that owners sometimes ask me is they go, look, Darryl, I get the P and L. That shows me where my expenses are. I can see the profit and I can feel good about that, but there’s the p and l, but I’ve got to pay tax on that. And I don’t know, I’ve got the timing of when I’ve got to pay the tax. I’ve been running my business on my bank account without looking too much. Given the timing of cash flows, is there anything wrong with that? Could they be doing things a different way?

Yeah. So the most obvious thing to say is that do a cash flow forecast. But I always say to business owners that the ideal bank balance is zero because that means that you haven’t had to, you haven’t gone overdrawn. And don’t worry, I’m not saying that I run my business like this. I’d have a heart attack.

But the ideal number is zero for everyone else.

And the reason that the ideal number is zero is because money is a resource in your business. Cash is a resource. You know, just like an employee, you don’t have an employee sitting there just in case you get busy and need them. And when people start thinking about cash like that, that actually this is cash that we could deploy to grow the business, you know, what could we do with that money if we had confidence that we could get a return on it? And that’s then where the data comes in because it’s like, okay, well, what things have we consistently done in the past that have delivered a return and how quickly has it delivered a return? And therefore could we do that with this cash as well? So that’s why I think it’s really dangerous to run a business off your bank balance. And you need to be a bit more strategic about your finances. You need to know how much cash you need as a minimum for the next three months, but ideally for the next twelve months. And that would also cover any tax bills that need to be paid as well.

So the cash flow forecast forecast is in the nature. It’s a, it’s a tool that someone like yourself prepares for the business owner to go. Here’s all of the cash in and out, I guess, of the business and should be a, I guess a semi accurateish prediction of what you’ll have in your bank account based, assuming no one revenues come in and no one expenses go out and then high confidence predictions as well. So we know. And that’s taking into account the tax as well. Okay, so there’s the cash flow. What about the balance sheet? How does a business owner of your typical business SME business use their balance sheet as one of their management accounts on a daily, weekly sort of basis?

Yeah, so the balance sheet, I would say, is the least used by business owners, and I think they just don’t really understand what they’re looking at. I think people have got more comfortable with looking at a profit and loss. And certainly when we’re talking about cash, cash flow, you know, regardless whether you’re rolling in cash or nothing, cash flow always seems to be a stressful topic for everybody. So the balance sheet, on the other hand, gets forgotten and it’s the least understood. But there’s some really critical numbers on the balance sheet. You know, if we’re talking at the most basic of levels, the balance sheet tells you what assets you own, what you owe to people, and what’s owed to you. So probably two really simple numbers that you should be getting from your balance sheet every month would be your creditors, and that’s how much money you owe to all of your suppliers, buyers, and then your debtors, which is how much money your customers owe to you. So where you’ve issued invoices and they haven’t yet paid you. So they’re two really critical numbers. But also, you know, when you start getting, particularly thinking about bigger businesses, maybe not businesses that are a few million, but when you start getting maybe over five to sort of 50 million, like more of the medium sized businesses, there are some other really insightful numbers on the balance sheet as well. When we start talking about, for example, accruals. Now, an accrual is something where we know we’ve incurred a cost, but somebody just hasn’t sent us an invoice. So we would effectively put a dummy invoice into the system because we know that we owe money to people. So you can start looking at these things and building up a bit of a picture, and all of that feeds into your cash flow. So for very small businesses, debtors and creditors is an absolute must. And if you’re a slightly bigger business, then start looking at things like your accrues as well.

Okay. And that sounds like there’s a bit of overlap between what you’ll see on the balance sheet in, I guess, a snapshot form, and that’s going to be on the cash flow forecast, spread out over time when you expect to see the timings of those expenses occurring, I’m guessing.

Yeah. And that’s why the balance sheet is so important, because if you can’t, if you can’t interpret your balance sheet and understand whether your balance sheet is correct, then you don’t know if your profit and loss is correct, and you don’t know if your cash flow falls is correct. So as a management accountant, when I review any board, pack any accounts for any business, I always start with a balance sheet, because if the balance sheet is correct, your profit is correct, and your cash flow forecast is correct. And that’s the only way you can know that. If you just look at your profit and loss or you just look at your cash flow, you’ve got no way of knowing if it’s correct. You have to look at all three.

Okay. And from a business, so there’s the management accountant’s perspective. That’s how they do things. From the business owner’s perspective, are they always going straight to the cash flow forecast? Is that what you see?

They want to know how much money they’ve made and that they’re not going to run out of cash.

Yeah.

And those two things, ultimately, that’s what I’m there to answer. And often, sometimes they want to make more money, sometimes they want to grow more. The business isn’t as big as they want it to be, or they want to buy a business or open a new location somewhere. And all of these things need profit and cash to support it. Absolutely. Profit and cash is really, really important, but there is huge value and information in the balance sheet as well.

Yeah, and that’s great. So if we’re to take it to the next level now. So what we’ve been talking about is, I guess if we’ve been growing the business steadily with organic growth, but at some point, our cash flow or forecast cash flow from our current growth rate, our plans and our strategies are going to outgrow our cash flow and we’re not going to be able to fund growth from cash flow. So I guess that’s when you get involved in finding the best way to fund the growth, whether it be debt or equity or if the bank says no or look at all those various options.

Yeah, absolutely. And I think that’s the key thing. When we’re talking about cash flows understanding, are we talking about day to day cash flow? So is your business just ticking over and you’ve got cash flow problems, or are you needing extra cash because you’ve got growth plans? And they’re two very different issues and two very different approaches to them. Like, normally with growth, the way that you would fund that would be through debt. So it’s very normal for businesses to go and get debt, and it’s not a bad thing. But what we see is a lot of businesses that are struggling for day to day cash flow, and they go and get debt to plug that hole. And really, most businesses will be able to sustain themselves on a day to day basis without any external finance. That should be where you can get your business to.

Yep. Okay. So we’ve touched on the fundamentals, Claire, and it’s been really helpful. And I’m sure the listeners out there who are not quite there, maybe one or two mil, and they haven’t got a management accountant in yet, could start to see now what some of the benefits are and some of the terms that they’ve heard thrown around. What are some of the keys and what are missed by business owners when they first start going down this track? How can you accelerate some of their learning, perhaps?

Yeah. So the biggest mistake that businesses make is they just simply don’t look at the numbers. And then when they do look at the numbers, they’re just looking at the profit and loss. And I think that is probably quite difficult sometimes to get across to business owners because they think their accountant has got them covered and they’re looking after their finances. And unfortunately, it’s not the case. You know, as a business owner, you are responsible for your finances as well as you’re responsible for sales and HR and everything else. So you can’t just leave it to your accountant to do. But also, one thing that I find can really make it a lot easier is to simplify it as much as possible. You know, these online bookkeeping systems that we’ve got now in these digital systems have made it much easier to be an accountant because you’ve got data at your fingertips. But interpreting it is quite complicated. So you really need to set your system up to condense it, so that you’re just looking at, you know, a few summary lines. As a business owner, you don’t want to be looking at the fact that you spent 50 quid on insurance for the last twelve months. You don’t care about that. You know, you. You want to look at the big numbers, the things that matter. So you need to try and simplify your numbers, group things together as much as possible so that you’re only looking at really what needs your attention, and you’re not looking at the mundane stuff all the time.

All righty. So we’re now getting in the habit where we’re getting our accounts, where we’re looking at the right numbers, we’re looking forward, we’ve got the reports, and we’re looking at them and read them and we’re understanding them. What else should we be doing? So should we be doing any other sort of forecasting or budgets or are these reports enough to keep things going?

Yeah, I’m not a fan of budgets. I’m not going to lie. You know, I spent years in the corporate world. I spent years in the corporate world doing budgets for budget sake and forecast every blooming month. And I just think there’s very little value in them, if I’m honest. I think what is more important is that you’re actively managing your business on a monthly basis. If you do have a plan for growth. So say, for example, you’re going to buy another business. I think you need to do a very specific financial analysis around that scenario to make sure that that is profitable and you can afford that. But for doing a budget on an annual basis, particularly in small businesses, when they’re very agile and things change quickly, you know? So you find with the budget that as soon as month one comes, you haven’t done your sales number and everything’s out the window, and then you just spend forever redoing the budget every month and it just means nothing to businesses. So I actually think, don’t waste any time doing budgets and forecasts whatsoever. Manage your numbers on a monthly basis and just make sure that you’re making the profit you want to make.

So perhaps I’m reading between the lines here. Are you suggesting that if you’ve got a strategy or some sort of business plan where you want to introduce new products or even attack new markets or try and sell more or penetrate more into existing markets and do some marketing and grow your market share? Am I hearing. Yeah, go for that. But you need to just be monitoring the numbers and seeing what you’ve got in your forecast and almost being a bit agile rather than being a bit dot the I’s, cross the t’s and do a big corporate style budget of, you know, you know what your expenses were last year, they’re going to be pretty much the same this year. If you employ an extra person, you add an extra 50k in the budget or whatever it is and be a bit almost gung ho.

I mean, hitting your budget, coming in on budget tells you nothing other than you can do a good budget. It doesn’t tell you whether your business could have done more. It doesn’t tell you what you could have done if you’d taken different paths because you could have spent more money, but you were afraid to spend more money because you went over budget. All of these things that might constrain you and hold you back. So I think it’s much more important that small business owners and SME is any size business, really, if it’s your money in that business that you feel empowered to make the decision that you’re comfortable with at, at the time, and you’re much more agile rather than being constrained to these annual budgets. Don’t get me wrong, setting goals is different, and you should set very high level goals around turnover, profit and cash. But outside of that, why does it matter how much you spend on marketing if it’s delivering value to your business? And I think that’s more important that we’re tracking your financial numbers to make sure that whatever decisions you are making are adding value to your business. And as long as you’re adding value, it doesn’t matter how much you spend, matter when you spend it. If it’s adding value and it’s making your business better, more profitable, more cash rich, then do what on earth you want.

Well, I’m glad I was sitting down to hear that news about the accountant saying don’t do a budget. Or the finance person, dare I say it, saying, don’t do a budget. And then she redeemed herself and going, but keep control, but don’t go too granular. Okay, so let’s pull it all together, Claire. We’ve focused on doing some cash flows. We’re looking at our p and L and our balance sheet every month or more regularly. We’re probably going to ask our finance person to pull those together for us and sit down with that person and analyse them. And we’re looking for trends, if I recall correctly, on those numbers, and we’re analysing if they’re moving or if they’re moving in the direction that we want. We’re also going to include some other KPI’s to look at our sales productivity or efficiency and how many sales we’re closing and our sales rate. So we’re keeping track of those numbers as well, whether they be quotes or what have you. Depending on the industry we’re in, we’re not going to be too fussed about doing a budget, but we are going to have some goals and business planning to strategise new ideas and how we should be taking the business forward. What have I missed?

I think the key thing that people need to understand when they’re building a business is that when you’re starting out, you can go for this sort of mass market, cookie cutter advice. If you like, you can go on a website and it says you, you need to track these key numbers and keep your business on track. But when you get to seven figures and above, you need to be thinking a little bit more bespoke for your business. It’s a little bit like when you come to selling a business or buying a business, the attributes that you’re looking for in a business to buy will be completely unique to you. There are some basic things like profitability and cash flow that everybody’s interested in, but the market, the customer makeup, everything like that’s unique. And therefore, your finances will also be unique. A good gross margin, yes. You can benchmark against your competitors, but they don’t have the same cost base as you. So it’s, you know, you’ve got to be looking at everything for the eyes of your business and what matters to you. And that’s where you need to identify probably four or five KPI’s that if you can keep those KPI’s on track, you can be fairly certain that your business is on track in terms of achieving your sales goal, your cash goal, and your profitability goal. So that’s a really critical thing that I spend quite a lot of time with business owners doing, is saying, I want to talk to you about these five key numbers. Everything else in the background, we’ll look after, and when there’s an issue, we’ll let you know. But as long as these five key numbers are on track, you know, your business is healthy and it’s moving where you want it to move.

Yeah. So the owner should be having some sort of dashboard.

Yeah.

So let’s put you on the spot, Claire. If you could only track three numbers, what would they be?

The first number is one that I’ve honestly not heard many other accountants talk about, but it’s called drop through. And in a nutshell, it tells you for every pound of sales growth that you have, how much becomes profit? Because really, the only reason why you want to grow your sales is to make more money at the end of the day. And it tells you, you know, if you’re doing an extra pound of sales, are you getting 20 pence profit? Are you getting 80 pence profit? What’s happening? So that’s a really key number that gives you an idea of your profitability and what’s happening in your business, particularly when we’re talking about medium sized businesses. You know, as our sales number increases, we don’t want to keep overloading on more and more overheads. We want to be getting some scalability and becoming more profitable, rather than just, you know, we’ve done an extra 100K sales. We need to get another employee. You should get some efficiencies and drop.

So I like the sound of that. And what does it take into account? Does it assume a linear increase in cost of sales? Does it if all your resources are operating at 70, 80%, or if all your resources are operating at 50% and you don’t need any more resources, extra sales are great because all that money goes to the bottom line. But if you’re already operating at 70, 80% and you do extra sales, where you’re going to need to invest in more resources or people, does it take all of that into account?

So that’s where, when we were talking about planning for growth, one of the things that we will do is we’ll do the financial analysis and we’ll say, okay, out of all of this, we expect our drop through to be 30%. And then in our day to day management accounts, when we’re actually executing the growth, then we’re just tracking to make sure that the drop through is what we expect it to be. So we’re making, our growth initiative is making the money that we expect it to make, and that’s how you can track that.

That would drop through, and that’s why we’ve got a good CFO working with us. So there’s the first number I jumped in. What’s the second number for me to get all excited about?

So the next two numbers are together. So a really easy one is your cash balance, but I’ll tell you how you can make it really powerful. And the third number is equity. Now, equity is how much shareholders money is in the business. So it’s everything that belongs to the shareholders, which is normally one or two people in a lot of SME’s, and it’s mostly comprised of your retained earnings. So it’s all of your profits year on year that build up, and you haven’t yet taken as dividends. So I always look at the difference between your equity and your cash balance. Now, I was recently taking on a new client, and they had about 1.5 million. They’ve been going ten years and they’ve got one and a half million of equity, and their cash balance was only 300 grand. So there was a difference of 1.2 million, which technically that business owner could have taken as dividends if the cash had been there. And when I showed that to him, because, you know, he was an older guy, he was thinking about exiting his business and selling it and, you know, preparing for his pension and investing in his pension, all these types of things. And he was staggered to find out that, you know, he’s only been earning fifty k a year for the last ten years. And actually he could have been earning 150k if his cash flow had supported it. So that’s the first thing is we look at equity versus cash and then we figure out, why is there a difference? And it could be that you’ve legitimately decided to leave the cash in your business because you want to reinvest and you want to grow, and you’ve bought equipment and you’ve got cash tied up in stock and all of these types of things. But it’s understanding, why is there a difference between cash and equity? And is it because you’ve got a little bit sloppy with managing your cash flow and how can we reduce that gap as much as possible?

Yeah, and growth requires capital. Right. And that’s reinvestment of profit. So, yeah, you can’t grow the business without spending money.

Absolutely. And normally that gap, so that 1.2 million, we could go through that and we could say, okay, well, you bought six hundred k of assets, so that’s half of that. That’s where that money is. And then you’ve got x amount of stock and you’ve got x amount of debtors where your customers haven’t paid you yet. So we could explain quite a lot of it. And I think that’s the key thing, is understanding why that gap exists. And then are we okay with that gap? Or actually, do we think that some of these numbers are a little bit out of kilter and we might need to have a look at your cash flow and improve it a little bit?

Yeah. And that’s part of the thing that we do with the exit planning, is work with the CFO to tidy that up and get it presentable so that everyone’s expectations are aligned when the deal happens. So, Claire, appreciate you sharing your thoughts. We’ve started the very basics of looking forward and analysing our numbers and gone through some of the jargon of management accounts and what they mean and what to look for. Is there anything specific? Is there one clear point that you really want to make sure that listeners to the podcast today take out of our conversation?

Yeah, I think the one phrase that pretty much sums up why I do what I do is that that gets managed, gets measured. Sorry, messed up, didn’t I? That that gets measured, gets managed. So whatever numbers you’re looking at and you’re tracking is what you’re going to drive. So that is really, really important, is that you’re tracking the right numbers to achieve what you want to achieve out of your business. You know, if you’re just somebody that wants a great lifestyle and you want to maximise your earnings and take as much out your business, then you know that’s profit. But if you’re a business that wants to grow, then that’s going to be sales. And if you’re a business that wants to sell, then you know you’re going to be looking at assets and value and things like that. So you really need to find what matters to your business and really closely monitor those numbers and not try and look at everything because there’s so many numbers in a business and it will be overwhelming.

So measure what matters. Brilliant. Claire, thanks for sharing your exit insights with us today. If people want to get in touch with you, what’s the best way to find you?

And you can go to my website, profitcashgrowth.com.

Brilliant. Alrighty. That’s, we’ll put all that information in the show notes as well so that people can find you in case they didn’t hear that. But Claire, appreciate you sharing your insights with us today.

Thank you so much.