The CFO Reality Check Every Entrepreneur Needs: Leading Through the Numbers

Hey, everybody. We are here with another episode of Business Lunch with your host, my counterpart, Ryan Deiss. Hey, Ryan, how you doing?

Good, buddy. How you doing?

Good. And myself, Roland Frazier. We are going to talk about one of the most fascinating, cutting edge, insightful, exciting, exhilarating topics that either Ryan or I could think of to talk about accounting today. Accounting.

Welcome to. You got to set this up a little better than that because we're going to lose literally all the listeners. Why do you want to talk about accounting and finance? Because you're like, for the record, for everybody listening, Roland told me. He's like, yeah, I know exactly what I want to talk about on the, on that, you know, podcast today. I was like, oh, cool. You seem so excited. And right before we go live, you're like, yeah, it's accounting and finance. I'm like, what the hell? Like, I don't even want to be here right now. So why do you want to talk about this? What's going on and why does it matter?

Because I think that how you work with your CFO can be a positive or negative experience for the entire culture of the company. And having recently had a 10 years of reporting that I just couldn't stand anymore come to a head on one of our companies that we have and another company where the accountant. We went through some interesting challenges as we were talking about converting to GAAP generally accepted accounting principles to be in GAAP compliance so that we could be a better exit candidate when we want to sell the company. And we moved accounting. We changed accounting methods from cash to accrual, and it had impact. And, and I just wanted to talk about it because it's very easy to let the tail wag the dog when it comes to accounting. And I want you guys to know that you need to be vigilant about that not happening. And so I'll tell the story that Ryan and I have experienced for way too long. Way, way too long. That finally just got the better of me. And, you know, come on, let's, let's change this. It's completely unhelpful. So our accounting did not have in these companies really a budget. I mean, not a, a thought out budget. Had like ideas of what we thought things were going to be, but not a good formal budgeting process. And the report that we received daily for 10 years plus was always pretty much in the red because it assumed that all of the expenses that were coming were going to come, which is helpful to know what are the expenses that are going to come. But it's not helpful to continually feel like you're losing. And the reason that it continually felt like we were losing is because it didn't include any projections for any income. So it was basically if we look forward as much as 60 days, by the way, and we disregard the savings that we've got and we only look at the cash flow that we've got right now in our operating accounts and we pay all of the expenses and have no income, but don't get to draw on savings, including, by the way.

No new income from existing subscriptions, monthly recurring revenue, accounts receivable.

None of the historical income.

Yeah, not even income that has already been sold that we would expect to arrive in the period. Definitely no new income that we would expect to generate as a result of just business efforts. None of that was included. It was none of the good and it was all of the bad.

So it was nothing but depressing. And, and I, you know, we talked about it and talked about it a few times and talked with our accounting person about it and it just never did get changed. And I finally, you know, hit the breaking point last week because it was like, oh, we're opening up the next 60 days and look, you're even more, you know, and I'm just like. But we're not. This does not accurately at all present our financial position. And so let's get off our asses and put the fricking numbers that we expect and the ones we know are going to come in in there. By the way, these particular businesses are heavily income loaded to the back because of how things got sold on recurring. So like the last week is the one where most of the cash comes in. So my first thing is be careful because. And Ryan, I want, I would love for you to speak to how you feel about this too, but I was just mad every time I opened that and I would disregard it and just not open it for two, three weeks, which is not a healthy way to keep track of what's going on with the business because it was unhelpful. Not only did it not include the, the income that was expected and, and historical, but it didn't tell me really with any great specificity what I could do about anything. So it was just basically an exercise in depression. Every day when I looked at it, which was typically the morning. And so I just stopped looking at it. And then I happened to open it again, you know, it was like two weeks ago and I was like, I gotta look at this stupid thing. And it had just, it was with the message of oh, we're opening up expenses into this now and I'm like, no more, no more. So, so it's changed now and it includes forward looking things and things that we expect to come in so that it's not the completely depressing picture. Ryan, your thoughts?

I think the rub is you have the entrepreneurial mindset is one that is incredibly positive, incredibly optimistic. And so we're always assuming that everything is going to work out, that everything's going to be great, that everything's going to be up and to the right. That is the general assumption of most entrepreneurs. If it weren't, you would never get into business because let's face it, it's kind of a ludicrous activity. I mean there's a fair bit of risk, a lot of walking very thin ropes without a net. So you've got to be incredibly optimistic to be an entrepreneur. I think because of that, a lot of non entrepreneurial types, so a lot of operational types, certainly a lot of finance and accounting types, feel like it is their job to be a foil to the natural entrepreneurial optimism and they somehow think that what they are doing is good to basically offset the rosy picture with the here's the worst case scenario picture. And I think to a certain extent they're right. But as with everything else, it's got to be kept into balance. So what we never want is we never want somebody who is in charge of accounting and finance to tell us what we want to hear. You cannot have that at the same time, if it's only doom and gloom, if it's only the worst possible version of the story, not only is it incredibly depressing and do entrepreneurs, and I appreciate you acknowledging, like I just stopped looking at it, right, because I think that this is the reason that a lot of entrepreneurs don't get into finance and accounting. Because it's intimidating and because it's ultimately a little bit depressing and so they'd rather just bury their head in the sand and that can be really destructive. So number one, it's depressing, but number two, it's also inaccurate. Like what, what, what we were looking at was inaccurate and in many cases it was causing us to panic a little bit and say like, oh, we need to pull some rabbits out of a hat and you know, know make some stuff going because we're going to be in the red when. No we're not. No we're not. We've been doing this long enough that we sort of had started to adjust, you know, do have our own mental adjustments based on, you know, those numbers. But I do believe that the biggest lesson is entrepreneurs, business owners. It is your job to figure out how do we do budgeting, how does our accounting process work and to partner with your accounting and finance people to produce numbers and results that, number one, you understand, you know, number two, are accurate and allow you to make decisions. Because if you just live in your bubble and they just live in theirs, you're going to have what we have had. And it's because none of us just wanted to just suck it up and have the conversation about these particular companies. I think we were all just tired. So that's, I guess, my take.

I think you, one of the things as an entrepreneur I, I know I am guilty of it and I suspect you are too, is when I come up against an obstacle that certainly if it's an obstacle that repeats itself or I find someone to be unhelpful, my immediate tendency is to go around it and not through it and to just basically say, that's dead to me. So this accounting person is dead to me. They're not helpful. I'll get the information I need to run the business a different way. That's also kind of lazy and irresponsible because you should, you should support the team that you've got to get the results that you need or you need a different team is the true, you know, thing that the, that the manager wants. But at least in that one I have the excuse of I'm not really the CEO, so, you know, I can talk about it and say this is not helpful. And so I stopped looking at it. Not to bury my head in the sand, which I do think is a risk for people, but I stopped looking at it because it wasn't helpful. And so I went around it to get the other information that I needed and just basically said, this thing is sitting out there. And I did talk about it, in fairness to me about five times over the ten year period saying this is terrible and we just never did anything about it.

But I was saying in fairness to the leadership team over there because yeah, neither you or I are CEOs of this, of these, this particular group of companies. They did actually create a budget, they did work out a framework for a new reporting process. It was never implemented. And that CEO also just kind of got frustrated, was like, I'm just going to do my own, like I'm going to be looking at my own numbers, I'm going to be going to the P and L. I'm just going to ignore that report. For the same thing. It's like I've, you know, I've got.

It in accounting resources to prepare the report.

Nobody looks. Exactly. And then ultimately, and I think this is the problem, and this is where it is very, very important as a business owner, as a CEO, that you realize and acknowledge that these people, they work for you. And this is not a power play kind of thing. Right. It's not a oh, I'm more important than you kind of thing. But I do believe those of us who are entrepreneurial leaders who don't necessarily have a background in finance and accounting, we can let the finance and accounting types intimidate us and we can let them say, like, oh, well, you just don't understand. This is how it's supposed to be done. This is how I have to report this. And there's a difference between, yeah, this, I've got to report it for tax purposes and this data is not helpful for me. And so to push back and say, this isn't helpful, this isn't realistic. I can't make decisions based on this data. And you, accounting finance person, need to figure out how to bridge the gap between what is and what I need. That is your job. And if you can't do it, you can't occupy this seat. That's what we need to demand. And I remember this particular person who was on our team, on the accounting finance team, when we pushed back. We're like, I don't want this. Like, this is not helpful for us. So, like, well, I'm going to continue creating this report because, you know, it's helpful. It's helpful for me. And so, like, basically the reason that this was never fixed is because kind of the, this individual just sort of, if you've ever, like, had a toddler throw a temper tantrum and they just go limp, right? And you're trying to move them and they're literally like, you know, this sort of limp body and you can't. That's. That was basically their defense mechanism, you know, through this. And they just figured out, if I go limp, if I go, oh, yeah.

I'll get to that.

And they never get to it. And if we don't follow up. So that's a problem. And that's a problem that unfortunately, like, we're going to have to, you know, address and, you know, and deal with. But that was basically what happened. And this person felt like it was more important for them to produce reports that mattered to them than it was for them to produce reports that matter to the entire executive Leadership team. And that's a failure of realizing the team that you're on is more important than the team that you lead. And this is across the board and.

This is like a failure of leadership to correct the issue. So it's, it's a whole, whole lot of things for you to think about.

Yeah, but I mean, it's equivalent to if a sales manager, a VP of sales, something like that, wants to change up a comp plan because it's going to make it more likeable and more popular with their salespeople, even though it's not the right thing for the company. When you are a part of a leadership team, whether you are leading that leadership team or, you know, let's say you're listening to this and you're, you know, you're a VP and you're, you know, are an executive on a leadership team. That team that you are on is team one. That is the most important team because that team lives to serve the company. That team is more important than the team that you lead, and it's more important than your particular needs and proclivities. And so making sure that we're first running it through the filter of is this right for the company? Then we can say, is this right for the, you know, for the, for the team? Is this right for me? And if those things become misaligned, well, the company's not going anywhere, but maybe the person needs to.

Yeah, exactly. So I think that's like the, the first thing is, is you've got to be able to get the information that you want and need to manage the business. So that's the thing. One thing two is very often you will find resistance to getting you what you need and you need to stay on top of it. And as Ryan said, it's either that person that's occupying the seat to get you that information and data can get it, or they can't. And I'd say, you know, you're looking at a three month, maybe Runway of support and educate to terminate if they can't do it, it's that critical, particularly with your financial information. It's the lifeblood of the business. So that, I'd say, is one of the things to think about. And the other is that be careful to structure the information that you receive in a way that, that empowers the company. It is empowering to know if you are in trouble. But if it's all the bad and none of the good, if there's no gamified winning that's taking place, then you really will disincentivize yourself and your team to even look at the information. Right. If you're looking at a horror show every single time you look at the email or the financials, then ultimately you're going to be negatively reinforced to the point where you just don't, or you glance at it or you say ah, yeah, but you know, most of that's just doom and gloom and you might well miss something that's really critical that's coming at you in terms of a trend or something like that. So that, that, that's the first thing I wanted to talk about. Any, anything else on that before we hop to part two.

Yeah, I do think just making sure that, that the information that you get is anytime you're looking at data, asking the question, does this data produce like informed decisions? Like does it lead to action? Because if you're looking at, if you're receiving data that you never are looking at because you find it's unhelpful, then kill that report. Okay? Just get rid of that report. More data is not necessarily a good thing. And if you're getting data that's causing you to take bad actions because you're panicking all the time, then there's a problem with the report. So look at the fruit on the data tree. And if the fruit of the data tree is rotten, then there's a problem with the tree. It's not a problem with the fruit.

Do you remember this was maybe four or five years ago on, on that same report that underneath There were like 40 different graphs and things and we had a conversation like, and we were all like, there's absolutely nothing helpful in any of those. I don't look at them. And it was all being created manually by the accounting team. I think we ended up like not needing one or two people after we, we all said don't send that.

Yeah, there were two people whose full time jobs was producing these charts that literally nobody looked at and we never even asked for. And I do think that this, that it is important that you, you pause from time to time and you look to purge both your data and reporting and also your meetings. Like so I think once a quarter you, you need to take a good look at what are the reports, what's the data that I'm looking at, what are our scorecards and ask what on here do we no longer need? What is no longer helpful?

Purge it.

If you find you miss it, add it back. It's really simple. If you're like, God dang, it turns out I do miss that more times than not. You will never miss it. And the times when you do, you'll know where it is and you can go and get it if and when you need it, but you don't need regular reporting on it. Same thing with your meeting rhythm. So what we're really talking about, communication architecture. We're talking about the user interface of a business. And just like most of the products that you know and love, the products that you love the most are the products with the simplest user interface. You know, the, the original Apple iPhone with just a single button and now no buttons. Right. We simplify the user interface of your business and that looks like your scorecards and your beating rhythm. Hey business owners, I've got a quick question for you. Do you feel like you're missing the data you need to make strong business decisions? If so, it's probably time to build a CEO dashboard. It's an easy way to get everyone in your company literally on the same page, focusing on the numbers that matter. So the scalable company put together a free spreadsheet template that will give you everything you need to deploy your own dashboard. And to make it even easier, Ryan Deiss recorded a short training on how to use it. If you want to get your hands on the template, go to businesslunchpodcast.com dashboard that's businesslunchpodcast.com dashboard and you can download it for free.

Yeah, the, the second place I wanted to kind of go is, is in a different business. We have been going through this, let's get ready to exit, let's position the company. A pretty typical thing is to move from cash based accounting to accrual based accounting and to very often upgrade the finance team. So in this company, the person that was handling finance was doing it in a very rudimentary way. It was basically a one person, two person show. And they came and said, hey, the business has gotten to the point now where I'm out of my depth. I think I need to go and you guys need to find somebody better. It's good because that was something that we knew needed to happen and it just was able to happen in the best way possible way. We did a search, found a experienced cfo. The CFO came in, CFO hired an FPNA financial planning and analysis guy and a, or person, I should say, and a controller who does the accounting stuff. So we had that big three triumvirate of very expensive accounting personnel and we still have them. And, and a few things happen. One is the rest of the company, I think initially and still, because it's still relatively new, sometimes has a challenge with, gosh, that's a lot of money that we're paying for that team. And what are we getting for it? Well, what we're getting for it is the ability to sell the company for a lot more than we would be able to sell it if we had the other very, very not, not adequate reporting for going to the level we were going to or we're already at really. And you kind of have to have those people and they cost what they cost to get a good team. And so what you get is, if nothing else, you get clean financials and you get to know where you stand and you get to sell. But part of the process in moving from one accounting method to another is that numbers are going to change. And so if you lay out a post accounting method change pro forma looking forward statement, which has all kinds of assumptions that we were just talking about, which is where these things I think come together against a historical cash basis accounting statement that didn't have all of that stuff in it, that was basically looking at how things actually went. They're not apples to apples. And so what happened was this past week we had a side by side historical last year statement put up against a year to date plus pro forma looking forward statement. And it freaked a lot of people out because it was about 70% lower in profit than it was last year. Now is the company performing at 70% less than last year? No, actually revenue is up, profit margins are down and we've hired several new people. But it's not, there's not tens of millions of dollars of difference in profit. And so the important thing is like number one, be sure that you're looking apples to apples when you go through something like this or even when you're thinking about it. And what might have been a smart exercise, now that I think about it, that we might, I mean, I guess you end up there anyway. But you might want to have a, if you've got the bandwidth, you might want to have the accounting team apply their assumptions to the year before with the accounting method the year before to show you what the year before would have looked like so that you can see the act, the apple in the orange with a period that you already know. Because when you're looking at what you know and what you don't know, it, it's different right now. So here's some of the things that happened. Like when we were going through that, it was, well, we had to change how two of the people who are effectively principals of the company who receive millions of dollars of distributions basically got reallocated to compensation or independent contractor compensation. So that reduced by millions of dollars the net profit of the business in the next year. Also, the revenue recognition rules of GAAP for subscriptions say that income has to be recognized basically as the services are received as opposed to all at once. So the company before was cash basis is just cash came in for something like a tax return that wouldn't be prepared for years, you know, for maybe a year or two in the future. And there are other examples of things like that too. Like in a digital marketing agency, maybe you need a lot of information from the client or maybe you've got a, you know, particularly in services, you've got a book that you're helping somebody write and it's going to be a 18 month process. Like there's lots of scenarios where the thing is going to take time to perform and so you're not really allowed to recognize the revenue at that time or. Well, that's going to. Your expenses are recognized when you incur the expense. So if you, and not even when you pay it. So you might even incur an expense and be able to pay it over time. But you've got to recognize it now and you've got to defer your revenue recognition. So you've got immediate expense recognition which lowers profit and then you don't even get to recognize or offset it against the revenue that you've got coming in because that's got to be recognized a different time. Even though you have the cash. Even though you have the cash. And even though you have the cash and didn't put out the money for the expense, which means a pretty wide gap sometimes. So we went through the financials and we have a meeting on it this coming week. So it's very, very fresh in my head to talk about this. But my suspicion is by the way, true to good accountants, not necessarily good financial practice, but, but they did, they didn't assume any of the growth or at least my understanding is. So I'm, I'm not, I'm not completely clear on that yet. Thus the meeting. But my, my understanding from the COO is that none of the anticipated growth it of things that are in process was accounted for there. And of course the accounting team can say yeah, but we don't know if that's going to happen. And you know, that's a fair discussion. But in a pro forma, a pro forma is looking Forward. It should. It. It's not, to me, something that should be ultra conservative or ultra aggressive. It should be what we think is going to happen. And so if you bake that stuff in and you get the accounting method worked out and the changes to compensation and a couple of other things, then it probably is going to be very, very close, if not better or slightly better or slightly worse than last year and God forbid, any of the initiatives that we have. I mean, the business has grown historically year over year, every single year by double digits. So, you know, let's assume that happens again too, then life is looking pretty good. But if not, you're like, oh my God, stop everything, cut everything off, turn off the water, you know, fire these people. And, and that's not healthy. It's not really a good way to, to be. So I think you want to be careful when you're getting into accounting to be sure that you understand the full story. Because a lot of us, you know, as entrepreneur founders don't speak accounting. And, you know, if you don't, then you don't. You might not be thinking about these things. You might not know them at all, or they, you might have them like in the back of your head from your, you know, early days in the accounting classes you may have taken. But it's not something that's top of mind. Now that also applies to how you structure things. So in this business, one of the issues with going to GAAP was it was going to be very expensive. We're looking at an exit three to five years from now. So it was like, well, we need to go back three years. So we have three years of audited financials and we're going to have to convert all those to gap. And, and it's going to cost a lot of money and it's going to be a lot of hassle and everything. And my, my answer to that was, why do we need to go back three years? So we need to go back three years so that we have three years of audit financials to get them. I said, well, if we don't start our process for a couple of years, why don't we just start doing the audit now? Why don't we go to GAAP now, not retroactively, and then we'll have three years come the time to exit, and God forbid that somebody comes in tomorrow and says, I need to do it and I need these, then we'll create them, right? So why go through all that hassle if you don't have to? Similarly, with revenue recognition, it was. Well, because there's a giant, there's a, there's a large payment that's upfront right now and that takes care of sales commissions and initial expenses and things like that. And then the thing that they are paying for isn't going to be done. Like I said, write a book, digital marketing agency, tax returns, all that kind of stuff for some time in the future. So we have to recognize the revenue in a different way than we're recognizing it right now. So you know, $10 million of your. Let's just make that up, right? $10 million of your revenue is gone for a year. They'll catch up next year and then after that we'll, we'll have it again. But sorry about that. 10 million this year. Well, I mean, what if we look at how we contract for those services and we contract for them in a way that allows us to have the revenue recognition now as much as possible, but recognizes the value of the thing that has the actual completion of the thing that has to be done that is considered the right now the ultimate performance of what we're doing and let's restructure it. So I looked at it and said, look, if we basically provide this as a service and we look at the final thing like the delivery of the book or the marketing campaign or the tax return or whatever, if we look at that as the actual cost that somebody would have to pay to have that done versus this big array of services that we say that they are getting, then we can allocate and agree in our contract on the allocation of the reasonable, has to be reasonable allocation of this. And most of it can be now because this end thing is really the culmination of all the things that went before. And so we redid the contracts and now effectively about, About 15% of the money has to be deferred and 85% can be recognized immediately.

But that's $85 million swing, right in the, in the $10 million scenario that you, you said before.

Yeah, yeah, exactly. So, so the my point is, is that there are many things and then going through this, there are many things that we've identified that, that are similar to this. So when your accountant or your finance team comes and says we've got to do it this way, think about the business case for it. The example of do I need three years of historical done right now? Because if I don't, why spend the money and go through the hassle if it's not an absolute necessary thing when you don't have to do it, they want it because their job tells them they need it. But you, as a business owner, leader, CEO, that's, you know, listening to this program, have to say, but do I? And then you can make that decision because ultimately it was like, well, I guess, I mean, we don't. But then you won't have it. But if we need it, we can get it. Yeah, but it'll take time. Absolutely. Yes, it will. Happy to take that risk. Or they come to you and say, oh my God, look at the pro forma, we're down 70% this year. You can accept that at face value even when they put it in writing and there's a column of numbers here and a column numbers here. And it came from somebody with an accounting degree.

Right.

It's got to be, why are these numbers different? Line by line. I'm going to go through. The very first thing you should do when you get something like that I just did it, is you go through and you see where are the big differences? This one was 100,000. This one is a million too. That's a big difference. This one was 4 million, this one's 10 million. Go through each of those numbers line by line for the ones that have the big differences and then have a conversation, because it is a conversation. It's not that your accountant's dumb or trying to pull one over you on doing things wrong or anything like that. They're doing it the way that their guidelines tell them it has to be done. Now it's up to you to say what are the assumptions and what's the why behind the delta, what's the assumption and the why behind what's going on here. And then when you see that and go through each of those line item by line item, you can get to the bottom of it and see what the true difference is or is not. And then you can make a decision that's based on apples to apples truth instead of apples to maybe oranges or tangelos, you know, different. Right, That's. That was what I kind of wanted to say. So I'm sorry for the ramble, Ryan, but I'd love to get your thoughts and perspective on that as well.

Yeah, I mean, I think there's, there's a couple things. Number one, important to remember that, that your account, accounting and finance team, they're not dumb and they're not the enemy.

Right.

That's the first thing. But also they're not all powerful, all knowing, and their decision is not final. And so it's important to ask the question. And by the way, same is true of legal teams, like to ask the question, okay, you're saying that I need to do this. If I don't do it, am I breaking a law? Like, is this illegal? And if they are like, yeah, if you don't do this, you're breaking the law. Same with like your tax. Yeah, if you don't do this, you're in direct violation of like tax code VR549. Like, then, you know what? Fine. Because you don't want somebody with missiles and jail cells to come and take you away or to take all your stuff. Like, you don't want that. But there's a giant gap and I think this is what a lot of business owners don't realize. There's a massive, massive gap between this is something you absolutely, positively have to do and this is something you probably should do. And that gap is called what's the business case? And it is your job as the, as the CEO, as the business owner. You don't have to know all the answers, but you need to say this is the business case that we're business outcome, we're looking to achieve. It seems like if I do what you're telling me to do, it's going to make it harder to achieve that business outcome. So I need you professional to explain to me the business case behind this decision that you're making and put it back on them. It is not your job to have all of the answers. It is your job to ask the questions and, and to push back respectfully and to say our business objectives are X. If we do what you're telling us to do, that puts us farther away, not closer to those objectives. So you need to make the business case for why we have to do this. And ideally, give me some options, give me a good, better, best, give me a, you know, levels of. Because it is a spectrum and you're dealing with binary people, black and white, right? You're like, no, no, no, come on. Like on a scale of 1 to 10, you know, you're saying this is a 10, give me a 7 and give me a 4 and let me make that choice. And when I do, tell me all the risks that are coming up because then maybe we can have discussions around how we mitigate some of those different risks. That was kind of my first takeaway. The second thing I would say is I get asked a lot. I know you do as well. This concept of open book management, like how much should you open your finances to everybody in your company? And there's been books written on this concept and lots of people who say, like, this is the way, the way that you get your teams to think more like owners is to just open up all the finances. I have never been a big fan of this for the reason that you're describing right now. Most owners themselves don't understand their finances well enough themselves, and yet they somehow have to educate with confidence their entire team. When in reality, finance and accounting, it's not like there's just one magical document or report that you're looking at. There's three at a minimum, right? Like three big ones. You got a balance sheet, you got a P and L or income statement, and you got a statement of cash flows. And to truly understand what's going on, you have to look at all three. And the way that most business owners manage their finance and accounting is they look at their bank account and they ask the question, is there more or less cash in here than there was this time last month? Right. Which is very simple cash accounting. But to transition from that to real accounting to ultimately the type of accrual based gap level accounting that's going to be required at scale is a level of sophistication that a lot of people simply don't have, including very competent, very capable business leaders, business owners, CEOs. So to think that everybody in the organization is going to understand it is just kind of foolish. So I would, I would not share absolutely positively everything. And the third piece is you always have to ask, anytime you're going to roll out something new, what's the worst possible version of the story that somebody could tell? And in that case, what's the worst possible version of the story? Well, somebody could look at this and go like, oh, we're behind 70, we're down 70%. Well, is that accurate? Well, no, of course not.

There's this, okay, find a new job, right? Exactly. The business is going out of business. We gotta, we better look, start looking resumes out there, right?

I knew the economy's been tough. I didn't know it was that tough. Yeah, I know. So anytime you're going to roll out anything new, any change, you have to ask yourself, what is the worst possible version of the story that someone could tell about this? And how do we make sure that we mitigate or better yet, inoculate against it? And what inoculation looks like is, I'm going to show you this. Now, before I show you this, I need you to know when I pop up these figures on the screen or when I, when You open up the email that I'm going to send you, it's going to look like we're down 70%. I have good news to you. We are not down 70%. Some of the, you know, income that we would normally have shown and have shown in the past is getting pushed out of the future. Some of it had to get captured in the past. And so it looks like we're down because the way that we move things around, if you look at cash and where things are coming in, we're actually good. If you look at sales, we're, you know, know we're up. So just know that going in this, if that's communicated and inoculated against ahead of time, generally fine. So just those are kind of the three takeaways that I, that I would have from this.

So two, two things, one you said that I didn't mention and it's very, very good that you mentioned it because I think it's important is particularly when you go accrual, you want to look at the statement of changes. Excuse me, you want to look at your statement of cash flows.

Yeah.

So typically you would get an income statement, a balance sheet and a statement of changes in financial position. The cash flow statement is not talked about nearly enough. But when you want to see can I pay my bills as they come due from the cash that I will have available, that's when that cash flow statement is really, really critical. So thank you for mentioning that because that is a very good reality piece compared to accrual based accounting. Right. Like I mentioned, you might have to defer revenue, but you got paid for it today. So now your cash statement is going to show you got the money that that's there or that's going to come in the next 30 days. And then expenses might be also not recognized. Right. Until later. So they may be deferred even though you have to pay it now.

Right.

So it's to pay something or maybe you elect to pay now to get a discount, but it's going to be something that you paid for a year of in advance. And so your accounting team's going to say we can't write that all off now. Part of it's going to be this year, part of it's going to be next year because, you know, we, we divide it. But you paid it now. Now for taxes, which is a different set of books typically not in a bad way. They're going to write all that off now because they're allowed to, you know, so it's, it's Really a lot of things at play. There's the accounting gap way, there's the tax way, and there's the cash way. So there's three things that you mentioned. You guys have to be thinking about all of those. So I think it's really, really helpful to be thinking about that. The other thing I didn't mention about this particular deal was that several million, several million eight figures of profit got moved from one company to another company as a result of deciding to not do something in house that was outsourced. So significant profit from year before got shifted from one place to another but did not go away. It will still come in to the company as a whole, even though it's not going to show up on the financial. Maybe until the end of the year, maybe, you know. So that also, I don't believe was accounted for in there. Again, I don't have it all, all the information yet. It just happened last week. But it was a pretty big thing where everybody was like, oh my gosh, things. I knew things were going to be different, but I didn't have any idea it was going to be this bad. Right. But it is. It. Is it this bad?

I don't know.

I'm not sure. So I thought it would be a really good thing for us to talk about so that you were all considering these things too. Because I've kind of come across this in a lot of different businesses and I think it'd be very helpful to you to understand. Do not let the accounting tail wag the dog of your business. Do not let accounting cause you to make decisions about your business until you know why and how and under what assumptions the accounting team has given you the information they've given you. Because there's a good chance that it's fine for their purposes but not helpful for yours or not completely accurate for yours. So you don't want to make the strategic and financial and personnel decisions on something that isn't the reality of the cash situation of the business.

Yeah, it's not the most fun discussion, but it's a necessary one. And it's one that if you don't educate yourself on, you're either going to wind up in a position where you allow the accounting tail to wag the dog or you wait too long to make some of these, you know, professionalized decisions. And when it does come time to sell, to sell your business, you wind up taking a haircut on the valuation. Sometimes it could be pretty significant or sometimes you can't sell at all. So that's it is a balance, though. That's, that's why it's good to have good. It's vital to have good mentors who've been there, done that. It's vital to have to build a good leadership team around you who has more experience on this stuff than you do. But remember, it is still your company. And so if you're not satisfied with the answers you're getting, keep asking questions, go out there, get a second opinion, talk to other folks, get in a good network of folks who know these things. Don't just settle for somebody telling you something that doesn't make sense to you. You're smarter than you think you are.

And remember, whenever accounting tells you something that you're not happy with, remember the what would have to be true statement. So just say, okay, I understand that that's what you say has to be the case. What would have to be true for that to be different in this way that I want things to be. And then they may initially, if they don't have any muscles in this particular space, say it absolutely can't be done. And then you have to say, but what if it could? What would have to be different in what universe, in what reality that's different from this? Even if it's crazy, would this not have to be this way? Would it be this way instead? And it will at least start some cracks, some chinks in the armor of this is the only way it must be done.

Black and white accounting, finance people, yeah, you're going to watch their souls die inside, but it's good for them. It's like exercise.

I hope that, I hope that this was helpful to you guys. To me, it's an absolutely wonderful, fun thing to talk about because it allows you to really have a deeper understanding and control over your business. And, and so hopefully you found it helpful. If you did, please share it and we'll see you next time on the business launch podcast.