Episode 164: Fireside Chat - Common Cashflow Pitfalls with Peter Widmeyer

So the big question is this: how do small business owners like us grow our leadership, develop our teams, and scale our business in a way that allows us to get our products and services out to the world yet still remain profitable? That is the question, and this podcast will give you the answers. I'm Bradley Hamner, and this is the Club Capital Leadership Podcast. Hey, before we get into today's episode, did you know that Club Capital is the largest accounting and advisory insurance agency owners in the country, providing monthly accounting, CFO services, and tax preparation. Check them out at club.capital.

Welcome to another episode of the Club Capital Leadership Podcast. My name is Bradley Hamner, your host. On today's episode, we have Peter Widmeyer. He is an account manager and CFO forecaster at Club Capital. We're going to be talking all things cash and cash flow. If you're a business owner, which obviously almost all of you are, you know the importance of having cash in your business. As a matter of fact, it's really oxygen of your business. Without further ado, here's my conversation with Peter Widmeyer.

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Peter, welcome to the Club Capital Leadership Podcast.

All right, thank you for having me on. I'm really excited to be on.

Excited to have you. So as I mentioned in the intro, we're going to be talking about cash and cash flow. But before we get into any of that, I want to talk about— we always do a little bit of background. So why don't you tell people a little bit about your background? Absolutely.

So of course, I'm an account manager and CFO forecaster at Club Capital. I've been actually— this month is me coming up on 2 years. 2 years will be in just about 3 or 4 days, um, of me being on the team. Uh, my background, I'm from Maryland, which Club Capital is based out of Maryland. And, uh, grew up here, went to college at the University of Maryland and, uh, went to the School of Business, went on to work in the hospitality industry. Of course, we all know what happened. COVID kind of came through and hit, uh, as I worked in more the financial side there and cost control. Uh, it really segued perfectly into, you know, helping small business owners as I was looking constantly at profit and loss sheets and I was looking at controlling my employee expenses and marketing and hospitality translated perfectly over to Club Capital and, uh, haven't looked back since. So I'm very happy to not only be on the podcast but to get to talk about things like cash flow and how we can help some small businesses here. Yeah, awesome.

Uh, so you're Terrapin, Maryland Terrapin. Yep, had some good basketball teams, um, oh yeah, at times in the past for sure. All right, so I think I want to start here. I want to start in this idea because this was my personal journey. I mean, look, anybody listens to this podcast knows I'm an Auburn Tiger, and behind me is my degree. And that I got my degree in finance, and I'm embarrassed to say, but it is the honest truth. I got my degree in finance, and I might have been able to figure out net present value of an asset, but I could not figure out how to run business financials. I didn't know. I didn't know an income statement. I didn't know a balance sheet. I mean, I kind of loosely knew enough to pass and get decent grades in school, but I did not know what it means when it actually came down to business. And one of the biggest things with that, and I think I've shared this before, is I did not differentiate the difference of, um, uh, profit and cash. Profit and cash.

Yes.

And when I made the first profit in my business, my accountant at the time said, congratulations, made $30,000 in profit. And I was like, where is that money? Right? I need that money. Like, is that in some fantasy account somewhere that I need? And that is embarrassing to say, but that's honest to goodness truth. Let's just talk about that though, the difference in profit and cash, Peter.

Absolutely. And you know what's— it's hilarious, you know, as I knew it was gonna be coming on the podcast, I put together 5 very— what I saw was very strong points in this conversation. And quite literally, the, the very first bullet point that I had to talk about today is failing to realize differences between cash flow and profitability. Yeah, right. Um, as someone who has a lot of clients at Club Capital and I meet with probably between 6 to 7 agents a day that I talk to. And I get that response every time or every day at least of saying, okay, you know, agent from New York, seems like year to date you profited X amount of dollars and here's your tax liability as a result of that. They're like, whoa, hold on. You know, that, that number seems like you must have the wrong account. You know, I definitely haven't felt like I've made that much so far. This year, that must be somewhere. I can't see it. Exactly what you just mentioned. And between things like loan repayments, taxes, deductions from your carrier, all of these different things can factor into changing what you're actually making in terms of cash that's coming to your pocket at the end of the day. And similar to yourself, when I was in school, it wasn't really until I started operating. And first it was in hospitality, but now it's with my clients at Club Capital that I really did see, you know, what you're profiting on paper is and can be different than the cash in your account, which is also why, yeah, you know, when you look at a lot of our clients or people who might do their own books, for example, they might think that skimming their bank statement is gonna tell them how much profit they're making or vice versa. Looking at a just a P&L and having an idea of how much cash they'll have next month. Two very different conversations. Both may be important things to be looking at, but understanding the context of what report will give you what type of number and how you can plan accordingly.

Yeah, so, so true. What makes me feel better actually, because I was like, well, maybe I can't be the only one that's had that, had that experience. Because I'm looking at my bank account and the bank account has, has whatever, $1,000. And then you're telling me I made $30,000. I don't, I don't understand. They shouldn't— they match, shouldn't they match up? And yeah. And so what I think is, is that it's not about you having to be necessarily analytical. Okay. Some of some people listening are not necessarily a numbers person per se. But to run a healthy business, it's critical. This is a hat that you need to be able to wear so you can make better decisions in the business. So one of the— I mentioned obviously balance sheet, income statement. One of them probably most overlooked is the cash flow statement itself. And obviously we don't want to turn this whole podcast into just talking about cash flow statements per se. We can just speak, speak about that.

Absolutely. And this is something, you know, especially there are 4 very large or widely known accounting documents. You have an income statement, a balance sheet. You can think about like a general ledger that keeps track of all your transactions. And the 4th one is statement of cash flows. That is probably the least talked about, especially among maybe the layman. You know, maybe if you got a bunch of CPAs together, they might talk about that. But just talking about before you're talking about expenses or other general items that you're typically looking at, how much cash has come in the business and how much has come out, whether it be for your liability payments, loans, your credit card, the interest on that, your estimated tax payments. When you talk about owner draws or if you're a sole proprietor or even an S corp owner, the amount you're paying to yourself on a regular basis. All of these things factor in that might not be on a P&L. For example, the distributions that a sole proprietor takes is not going to be listed on a profit and loss sheet. Right. Likewise, if you're making liability payments, if you're paying off a loan, a lot of our carriers, like let's say maybe the Allstate, for example, or other agents who might own their book of business, you have a very large loan payment to make. Every single month, potentially tens of thousands of dollars that isn't going to be listed on the P&L, right? You have to figure into— and sometimes, and especially even with a lot of carriers, your carrier, after you make your total revenue, is deducting items from your main source of payment. So you may have produced $40,000 worth of revenue, but by the time you actually get that, uh, money hit your account from your carrier, it could turn into $32,000, $30,000.

Yeah, right. Yeah, absolutely. Good point. And that was actually part of the experience that I had. I was driving a vehicle as an example, because you were talking about loan payments, whether it's a loan payment to the bank for buying the book of business, or whether it was a loan payment for my vehicle. I was like, wait a minute, there's this— where's the $600 payment I've made throughout the year? And then it was we'll call it accounting technobabble. Yes, I could not understand. They said, well, that, that, that's a balance sheet item.

I said, what does that mean?

I do not understand what that means. And I got frustrated, but I said, okay, I've got it. I've got to speak the language. Matter of fact, I don't know if you've ever heard this, but Warren Buffett says the language of business is accounting. The language of business is accounting. And, and I think that the more we get to that point of kind of embracing the fact of like, okay, this is a, this is a role I need to own and understand. You can begin to lean into it so that at least you know enough to be dangerous so that whenever you're talking to Peter, you can understand what, why these things are so important so you can make better decisions in your business. So I'm curious, what are you mentioned that you talked to you know, several, uh, business owners every single day. And there are common— I'm sure there's common pitfalls. We'll call them some common cash flow pitfalls that you see every day. What are those? And I guess maybe what's the corollary? What's the opposite things? If those are the pitfalls, what are the opposite things that we can actually do that are healthy?

Absolutely. So like I mentioned, I kind of had and came into this with 5 items that just, I call maybe even similar to FAQs, right? What am I hearing every day, or what am I talking to even my clients or our Club Capital clients, or when we're forecasting, what are we looking out for? So the first one we already mentioned, just understanding the difference between the cash flow and the profitability, um, which we got into that just a moment ago. Uh, one of the very common ones that maybe agents who have already established a book of business, you've been open for a couple years, A large one there is your renewal cycle. You know, a lot of it we talk about, okay, well, we're talking to other P&C insurance agents who work off of a renewal base. Very large question comes up. Okay, well, how large is your book? Right. That question kind of helps determine, okay, well, if you're making, let's say, 10% commission on what you get on your book, generally you can just divide that book size by 10 and you know how much revenue you're going to make for the year for renewal.

Right.

Uh, if that was $120,000 in renewal commission, that'd be $10,000 a month.

Mm-hmm.

The difference is it's not always exactly $10,000 a month. So when it comes to cash flow, very commonly, let's say November and January tend to be very low months for people renewing, whereas June, July tend to be very good. So as you go into the winter months, maybe typically your checks for renewals are looking more like $10,000, $11,000, $12,000 in that example. But come November, all of a sudden for you not really doing anything wrong, but now you're talking about maybe a $7,000 or $8,000 check, right? Yeah. Now at Club Capital, for example, especially with CFO services, we take this into consideration and plan ahead for it. But if, especially if you're a relatively newer agent or you've recently gotten an assignment, or your new book of business, you may not be familiar with when people are going to renew and when those big changes come. So especially if you're trying to grow or scale your business, if you're not looking out for that, it can be quite a surprise when you get that check come in and you look at that compensation statement from your carrier and you're like, whoa, you know, where did this big variance come from? You know, it should be double this amount. Uh, what happened? Well, people just weren't renewing at that time.

Yes.

Which greatly affects cash flow. Good point. Right. That is one of the areas. Another area is, and we see this with especially carriers that offer different bonus programs and incentives at the end of the year, or I guess toward the beginning of the year, when agents get those large end-of-year bonuses, treat those almost as like the cash cow of the year and maybe not operating on a profitable level monthly. I've personally seen this, and it can be very deceiving where you could have a very healthy— you could have a large agency, you've been open for quite a while, and you could be getting a 6-figure— at State Farm we call it a scorecard, other carriers they have like an annual bonus and most of the carriers will do it in the first quarter of the year to help people out with taxes. But when you receive that, that's a lot of cash you're getting upfront. But on a monthly basis, you might be at a break-even or potentially losing money.

Yes.

Now you're able to operate your business still, but when you're coming into that, you're receiving cash at one time and that makes it very difficult to then plan proactively for us for the rest of the year and also be able to adjust to other issues as they come up in the office and for growing and scaling. Yes. Not to mention, you know, those bonuses, there's no guarantee that they'll always stay the same. Yeah. Especially for those who are listening who may not be or who are with different carriers. A lot of our carriers, especially with the way that we've had rate increases and large changes to the commission structure, they are subject to change at any time. And you don't really want to be in a position where you're not used to running a profitable business monthly. Absolutely. Or on a normal, regular basis. And you're only living for that scorecard to come through. Or, you know, if you're waiting until March or February for that annual bonus to come in, in December you start sweating a little bit. You're like, man, you know, this is, I gotta start, uh, reducing how much office paper I'm buying here. Or how much printer paper I'm bringing on because I got to kind of wait for that bonus to come in.

Oh, so good. That's so good. I mean, it's just solid business to be profitable every single month and not have this get out of jail free card, right, that you pull once or twice a year that then covers all of the sins throughout the year, right, of like, I'm not profitable now. You would also say too that if somebody makes this strategic decision, they have forecasted, they've worked with someone like you, and that I have made the decision that I am going to run the business unprofitably for this period of time at this amount, and they go through and they execute that because they believe in this larger payoff that happens in the future. And that's the decision you want to make. You have the ability to make that decision as the business owner, but you're being proactive and intentional about it instead of it just happening and not realizing.

Absolutely. And in that exact scenario, if you're going to have that type of strategy, to play that strategy effectively, you have to be very in tune on a very— on a monthly basis of exactly how much you're able to go in that negative. Very— and too often I've seen where you have that strategy, but it might be, okay, I make a lot of money in the year. At the end of the year, I make this large amount of net profit and I'm taxed accordingly. I can just go negative a couple of months or break even. Generally speaking, would that be strategy? It would. But can you quantify that? Can you say— and this goes into my next topic for burn rate— how far can you go? Are you actually every month measuring that tactic to make sure you're not going too far? Because you can't really arbitrarily say, I'm just going to be comfortable losing money. Well, how much? Like, exactly how much are you trying to reduce your tax liability? Having a meeting at that point monthly would be necessary to make sure you have a finger on the pulse there to make sure you're not going too far behind.

Yeah.

Now, if you're able to do that and if you have a service like ours or you are using us or forecasting that ahead, that could be a viable strategy. It's just for the typical agent who might already not be paying that close attention to their books, that would be very risky position to put yourself in.

Yeah, yeah, yeah, I agree. Yeah. Next one, burn rate. Absolutely.

So, and this actually, I kind of tie this into something I'd heard on the podcast a couple weeks or months ago. Growth and scaling is, then they're two different things. And I've always, I've had an idea of that for quite some time, but I think it was Coach P, if I'm not mistaken, broke that down couple episodes, a couple episodes ago. I'd suggest anybody who's listening to this podcast go back and listen to that one. Um, I kind of view it where if you're an agent looking to grow the business and make efforts there, or you're looking to really make that next step, go to the next level and scale the business, when you want to do those things, obviously, if whether it be bringing on more team, maybe even increasing the size of your office or moving typically you have to use cash and front cash to get that. So for example, if you do want to really change the structure of how your team works and maybe separating out dedicated service employees and dedicated sales employees, or having people that are working on life and health sales dedicated and splitting that out and scaling that way, you have to, of course, train people and hire them and pay thousands of dollars to do that. Now, when you're doing that, you have to very like— pretty much what I was saying with the agents who might look at having and expecting to have a loss over the next couple of months. Burn rate measures how long can you go with being able to take that loss versus the amount of cash you have in your account right now and the amount of money you plan on bringing in. So for an example, let's say you hire a new employee at a base salary of $35,000. When they're brand new, you're training them, they're not maybe licensed just yet, and you're paying their base salary for maybe 2 months worth of time until they're able to produce. From that point, once they actually start to produce, they're producing a couple policies per month, maybe adding some dollar value and helping to offset their base salary. So you're losing a little bit less. Then as time goes on, they're making more money, they're selling more policies. You as the agent are losing less. And by the time you get to about 15 months, when they have enough through the renewals they've generated and the new policies they've sold, then you're actually making some money each month. The difference in between day 1 and that month 15 or so you have to realize how much each month you're losing and how much you need that employee to produce in order to slow down the burn rate. If you could imagine each— oh, go ahead.

Yeah, no, I think that's so good because— and then given 15 months, you have to be— that's assuming everything else stays exactly the same. And that you as the owner are able to be disciplined about not going into the cookie jar, let's just say, and pulling cash out, right? Because you expected a $2,000 a month loss burn rate. Okay, I can do that. But then you were like, oh, I forgot about the $400 I pulled out of the ATM. Oh, I forgot about this. I forgot about that. And now that $2,000 becomes $5,000.

Quickly, very quickly. And that's where you get back to— you sit down at the end of the year and say, oh man, I didn't think I had made this much. Or yeah, where did this— where did this money go? Where it's all sitting here on paper. And yeah, really what it ultimately comes down to is just like you would hold your employees accountable, your team members accountable in that situation, you need them to over time produce a certain number of policies to make up for that difference. But you also have to hold yourself as the business owner accountable as well. And that's especially with insurance. Most of the time we're single owner, single operator businesses. You may not have that person in your corner kind of holding you responsible to those production numbers.

That's right.

Right.

Yeah. All right. We'll bring it home with number 5. All right.

And of course, this is As an account manager and forecaster at Club Capital, I'm going to be saying this, but having accurate historic financial data to anticipate changes, it is exceptionally important. And I want to highlight the accurate part of it. If you're going to work on any project, if you're, let's say you're a DIYer, if you're really working on anything, one of the most important tools you're ever gonna have is that tape measure or that ruler. Imagine if your tape measure, your ruler was just wrong. If it was a quarter of an inch off on every increment that you use that tool on. Yeah, you might as well just not use it at that point. It's not— it's no longer helpful. We know that in this world of small business, A corner that is too often cut is at looking at having either a firm or a process that gives you accurate and up-to-date financial data. Without that type of tool in your tool belt or in your toolbox, you're really not gonna be able to, be able to measure and apply your strategy that you want. We mentioned that with maybe agents having certain strategies for taxes and whatnot. If you can't really measure accurately, measure that throughout the course of a year, you know, good luck getting that strategy to be as efficient as possible. Yeah. If you want to stand on the deck by somebody who doesn't have an accurate tape measure, I might stay inside, right? That might be a better idea for me. And of course, that's why we as a company, we have grown even in the short time I've been here by hundreds of agents and been able to provide not only the level of providing accurate financials, but then also forecasting. For that reason, we just see kind of a lack of it in this space.

Yeah, yeah, I agree. I totally agree with you. Yeah, definitely the forecasting piece of being able to look forward to accurately plan, not just always looking backwards on what happened in the past, is a, is a big change for sure. Well, here are some of my big takeaways, obviously, from the 5 kind of pitfalls or FAQs that you guys get. Profit is not cash. And I shared a little bit of my story, understanding the renewal cycles, the cash cycles, uh, in the business, which that's business 101. I mean, any business understands, you know, if you're an ice cream shop, you're probably going to have more revenue in the, in the summer months than you are in December.

Exactly.

November, right? Um, and, and why would an insurance agency be any differently? I think, um, uh, not relying on your bonuses, um, those once a year, twice a year time frames to be able to cover some of the losses throughout the knowing the burn rate, knowing your burn rate of what that's going to be so that if you make investments, how long is your cash going to be able to withstand? And if it doesn't, you better have access to cash, access to cash, whether that's through a line of credit, through the bank. And then as you mentioned, and very clearly spelled out, having accurate historical data. And I really thought that was a good analogy around, you know, if you're measuring it's a quarter of an inch off everywhere, that adds up over, over time. You might as well not do that. I thought that was really good. Peter, anything else you want to share?

Oh, really? That's, that's a lot of what I had. Like I said, I really think that a lot of these ideas around cash flow really can trip you up. I know that it might not be or might not seem like the biggest difference, but believe me, once you do an end-of-year evaluation and you have that conversation like we both mentioned of, why do I feel like I didn't make this much money? Then you might want to look into it a little bit.

Yeah, absolutely, absolutely. Hey, if this podcast has been helpful to you, would you consider sharing it? I'm sure that maybe, like many of you, you probably had the podcast referred to you from someone else. And so this has been helpful, pass it along to one of your small business owner friends. Want to give a big shout out to our podcast sponsors. Obviously we couldn't do it without Club Capital, so make sure you go to club.capital, book a demo with somebody on the team so that they can— you can become, uh, part of, uh, the club and have an amazing account manager like Peter coming on, and he can sit there and walk through with you every single month your financials so you can make better decisions in your business. Also, Coach P Consulting. It's so important to be able to invest in your team and know that you are— have the money to be able to invest in the development of your team, because your team is your absolute best asset. And you get A-players like Peter on. And then of course, um, if you know you need to be recruiting on a regular basis, that's where our newest sponsor, Autopilot Recruiting, comes in. Go to autopilotrecruiting.com and use the promo code Club Capital. Peter, it's been great having you on, my friend.

Bradley, thank you as always.

All right, everyone, lead well.

So the big question is this: how do small business owners like us grow our leadership, develop our teams, and scale our business in a way that allows us to get our products and services out to the world yet still remain profitable? That is the question, and this podcast will give you the answer. I'm Bradley Hamner, and this is the Club Capital Leadership Podcast. Hey, before we get into today's episode, did you know that Club Capital is the largest accounting advisory firm for insurance agency owners in the country, providing monthly accounting, CFO services, and tax preparation? Check them out at club.capital.