Michael: Welcome to today's episode of HaBO Village podcast. I'm Michael Redman.
Kathryn: And I am Kathryn Redman.
Michael: And we're really glad you joined us today. Today we're going to talk about finances and just some realistic perspectives that we've seen as business owners ourselves and consultants and really assessing and looking at some of the implications of what happens. I think it's really important. Kathryn, we've seen a lot of different companies over the last 14 years of our business as we've been consulting. We own a business, so we've run a lot of stuff. We've seen a lot of different impacts on budget and trying to figure out how you see those things. Financial situations or financial challenges are not unheard of in companies. How am I trying to say this? They're not related to the size of the company.
Kathryn: So what you're saying is you could be a multimillion-dollar company and run into financial challenges that are just as significant as if you're making $100,000 a year. It's so-
Michael: Absolutely, yeah. Yeah.
Kathryn: No matter what company or type of business you're in, if you make 100,000 and you owe 100,000 and 10, you're losing money, and that's just reality. If those numbers are multiple zeros past that, it's still the same problem.
Michael: Yes. So what you understand is ... What we see all the time, and you know this, is that as leaders grow their companies, you start to hear this saying that's very true. It's just commas. It's just zeros, and that's always referred to in a positive sense, everything, and it's really true. Once you start getting to a point, there's a scale. Every size company has its own unique challenges, but when you get in there, the downside to that, or the other side ... I don't know if it's a downside, but the other side is that there is no magical place. When you're small and running a business, you think, "If I can just get to a certain size, a certain revenue, if my company were just making X amount of money, then a huge amount of our problems would go away." There's a half truth in there, right?
Kathryn: There's absolutely a half truth, and it'd probably be really helpful to give a little context around why we're even talking about this and why we're a little hot under the collar about it at the minute.
Michael: Why we're jumping up. We're seeing a lot of experiences, and we came into the studio today to talk to you all because we're really seeing some really pertinent examples in our own company and in the companies that we have friends in and different connections and stuff like that, and we're seeing it at multiple levels in budgets. Everyday we deal with it, but we've had some unique challenges, and we just had one of our clients call us. We won't say who, but one of our clients called us today, and they've been having some problems, and you'll ... We're going to be really transparent for a moment, at a certain level. Everybody out there, if you're running a business, you've got accounts payable and accounts receivable. You owe people money, and people owe you money, and the last thing you want to do is you want to get people behind in what they owe you. You don't want your AR, your accounts receivable, to be hopefully no more than ...
Kathryn: 60 to 90 at the worst.
Michael: Yeah. I mean, it'd be wonderful if everybody's books were between 30 and 60 days on the payable. For those people who still don't really fully understand AR, that means that when you send an invoice out, they're paying you within 30 to 60 days.
Michael: If they're 90, it means it's over 90 days since you invoiced them, and if it's 120, four months, you've got a lot of problems. We've got a client who's been slipping behind, and they just called us today and said, "We have some really big challenges, and it's a lot worse than we thought." This is a company that's been very healthy. They've been a client of ours a long time. They've been a great client of ours a long time, and now they're in some really deep challenges. You always say to people ... and we're consultants. We want to tell you, "Don't let people get behind in their bills," but sometimes you make exceptions for people. You make exceptions for people that you like, clients you like, because you want to keep them.
Kathryn: No, you've been in a relationship a long time with these people. They're maybe a significant client. They're somebody who actually is a pretty good size piece of what you do, and then the further they get behind, the harder it becomes for everybody involved.
Michael: 10 years ago, maybe seven years ago, we had a client that is no longer a client of ours, and this happened there. There was some challenges in relationship and everything else, and we learned a lot about how do you manage those type of things. You've got to be very careful to watch your accounts receivable and let those things in.
Michael: But all this comes down to ... This is a situation. We have another situation where some friends of ours have an organization where they have a division that is running into challenges too. Matter of fact, I can think of two or three companies right now that are struggling with their challenges in divisions. We even ran into a company last week at that conference we were at, that somebody was saying to me, "Well, we're doing really well, but we have to lay off two people." I'm having this conversation with somebody who has a healthy company, but they've run into a couple of hiccups in the midst of things in their market, and all of a sudden, they have to let two people go.
Kathryn: Well, when you have multiple divisions in a company and three of your divisions are doing well and making money, but one of them is absolutely sucking the lifeblood and really taking all of the profit from the three that are doing well and destroying it, then you have really hard decisions to make because you can't be in a position where you're running a company where one piece of it is consistently losing money unless you have the funds for that to happen.
Michael: Yeah, absolutely. So let's talk. We're going to run down, in this episode, a couple of things. We're going to talk about profit versus nonprofit organizations, because we consult with both, and both are going to be listening to this podcast. Hard choices. We're going to talk about realistic projections and making realistic projections, but every time you talk about realistic projections, you have to counter it with the tension held in vision and optimism. Then we're going to talk about hope and faith. Whether you have any kind of religious faith at all, like we do, or not, there's a measure of hope and faith that exhibits in people's business. We were just hoping it would get better, and we had faith that it was going to be okay. For those of you that are faith-based in more of a religious sense, that's a really big deal because that can complicate how people evaluate costs, and especially for leaders. So we're going to talk a little bit about that.
Michael: Let's start with profit versus nonprofit. Kathryn, what do you think the big difference is between profit versus nonprofit when it comes to budgets and being realistic about budgets? Do you think there's a difference?
Kathryn: Well, I think there's a difference because with nonprofits, it's difficult to project recurring revenue, because you're typically dealing with people who are just giving you money, and they could stop any time. You can't hold them accountable to giving you money. You're not really in a position to force somebody who's donating to your organization to continue donating. So you can project based on previous years and donations, but you cannot necessarily force those folks to keep giving, and that makes it really challenging from a budgeting perspective.
Michael: Yeah. Well, and for those that are listening right now that are not involved in nonprofit leadership, I would imagine most of the people listening to this podcast donate to nonprofits.
Michael: There are some nonprofits that are dear to them. So this kind of information might not be primarily relevant to them and their organizations that we're talking to right now, business leaders, but even if you donate and give and you have some nonprofits that you really care about, this is really important because that very issue is a little bit different, the way they survive. Some nonprofits now are mixing in some services and products that they charge to help create a sustainable model, and the US tax codes allowing some of that stuff to happen finally. But it's relevant to all of us, whether it's a primary relevance to our organization or a secondary relevance because we give to nonprofits.
Kathryn: Well, and what's interesting in a nonprofit is it's not actually atypical for a nonprofit board to pass a budget that's thousands and thousands and thousands of dollars in the red and have hope and faith that they're going to raise that money. That's a very interesting situation to be in because you cannot guarantee that. Yeah, you're budgeting your services and your payroll based on actually achieving that number, and if you don't achieve that number, then you're running into major problems with layoffs and cutting back services, which, in a nonprofit, the more services you cut back, the less people want to give to you, and it becomes this interesting Catch-22. So there's a sense in the nonprofit world where I really think that you have to be able to be realistic about your budget so that you're not putting yourself in such a difficult position that if you can't make those numbers, you're cutting payroll.
Michael: So how do you project, then, in the midst of it? How do you think you deal with projections? Let's take our company. We're growing at somewhere between 10% and 20% a year now, and for those of you listening, we're revealing some numbers, but that's kind of where we've been for the last couple of years. We've been seeing a really comfortable 10% growth every year. This last year, it looks like it's even better, and that's encouraging to us.
Michael: Now, we got this phone call from a client of ours that says, "We're not going to be able to pay much, or at all," because they're having problems, and they're having serious problems that are impacted in different ways in their operations of the organization.
Kathryn: So suddenly a chunk of what actually makes that growth-
Michael: Our projected revenue.
Kathryn: Right, and we talked, I think, in one of our podcasts early on about cash versus accrual.
Kathryn: So we're in the accrual method, which basically means that money is recognized on my books, and I'm going to be taxed against it, and yet I'm probably not going to see that money until next year. So that becomes a very interesting situation. Our CFO is prone to be the very careful guy who says, "I appreciate that it looks really good, but until you get that money ..."
Michael: You don't have it.
Kathryn: "... you actually don't have it, and it's possible that you won't get it."
Michael: So the point I was trying to drive in, I guess, in the midst of this part of the conversation is how do you deal with living into projection, especially when growth is a trend? I mean, it's like, "Okay, we're going to make an extra 10%. We're going to grow. We have to staff for that growth. We have to make sure we have the stuff for the growth. Maybe we want to invest in a new product or service this year." You don't just ignore that, right? You have to live into it.
Michael: So I think the point in the midst of it that I'm trying to drive at is ... It's not really a great question here, but is that you have to be okay with that, but you have to figure out where is that safe tension when maybe things change and all of a sudden you don't have the growth revenue that you thought you were going to have? Have you set up your management? Do you have money in your savings account or other things where you can adjust? There are multiple ways to adjust for that kind of thing, and hopefully you don't have to lay people off, but that's one of the things that can come in a company with employees.
Michael: So you're not saying to anybody out there you shouldn't project into the growth.
Kathryn: No. You know, it's an interesting thing. I know that ... those of you that know that we're married, and so we have those exciting personality differences that allow our company to function well. Michael is the dreamer. He's the optimist. He's the one who's like, "We're going to invest in this," and I'm the one who's going, "Um. Um. Um. Um." That's been our MO for 14 years, and that's okay because without Michael's willingness to take the risk of stepping in, we wouldn't grow, actually, because we wouldn't have added services. We wouldn't have added people when I was like, "But what if this happens?" which is my MO, right? You get this phone call from the client, and I'm like, "Well, see. Told you we shouldn't have done ..." I didn't actually say that, and I'm not even saying it to him now, honest. I promise. But there is that reality that those of us that are more conservative financially get pushed by those that live into faith and optimism. There's a balance in a company that I think is unavoidable.
Kathryn: We talk about our outside CFO who comes in, and he did look at both of us and say, "I want you to not do anything else beyond your norm until some of this other stuff has settled out." There's times when that's just really good advice to hear from the outside.
Michael: Yeah. Yeah, absolutely. This whole issue of profit versus nonprofit, there are some dynamics that ... For those of you who are listening, if you're in a nonprofit world, you have to project, and you're hopefully projecting ...
Kathryn: Against a historical-
Kathryn: ... trend.
Michael: Historical trend and your ability to actually fundraise. I mean, can you realistically do it? If you can't hit your projections, have you set your system up, have you set your company up, your nonprofit or your for-profit company up, that you can make adjustments? If you don't hit your projections in your cashflow and in your revenue, are you going to be able to adjust for that so that it doesn't hamper or negatively impact your company or your growth? Because if you overextend, you can be out there.
Michael: Now, that means you have to make hard choices.
Michael: You can either make hard choices in your organization on the front end or the back end. Some of you, this is the first you've heard anybody really talk about this. Some of you, this is normal conversation, and you're nodding your head going, "Yes," and I'm hoping that, for you, this is both confirmation, because this doesn't always get talked about, and that you're listening to a podcast that at least is being honest about this. Maybe you'll hear a different perspective that either affirms where you're at in making those hard decisions or you're at the place where you're going, "Okay, this is new information. I've accumulated maybe a nugget, but the hard choices are either my experiences either on the front end or the back end."
Michael: The hard choices are, how do you not go after all of the potential you think you see? How do you not get ahead and get excited and be presumptuous about certain things on the front end, or how do you at least set up some basics, some savings? How do you start thinking about those things and making sure there's some margin and you allow your growth to have that margin where you can find investment capital to help you fund growth? Those are the hard decisions on the front end, I think.
Kathryn: Well, and the reality is, in any organization, 80% of the stuff that costs you is going to be people. It's going to be wages, and so those decisions that you make impact real human beings with families. So if you, in faith, believing that it's all going to work out, offer somebody a job but you actually haven't projected well, or you're hoping income's going to come in that doesn't come in, then that person's life gets impacted. It's pretty serious stuff.
Michael: Well, and this all impacts ... I mean, we've come back around ... passion and provision companies. For us, as leaders, to have a passion and provision career and a passion and provision company, that means that we're also providing passion and provision for our employees. There's a measure of risk in business, and there's a measure in risk in any job, and there's no guarantees for any of us. But that said, you've got to be thinking, "How do I continue to make decisions that support and reinforce a passion and provision model?" The hard choices on the front end are really all about self-discipline. The hard choices on the back end happen in two categories that I'm thinking of. One of those categories is when you didn't exhibit self-discipline on the front end at all. We're in good shape with this decision of our client right now, managing their company. We're having to look and make sure that we shore up a little bit, and we have to adjust so there's some safety margin in the midst of everything, but-
Kathryn: And we have to not do some things that we were hoping to do in the next couple of months-
Michael: Exactly, because we had some-
Kathryn: We've got to delay that.
Michael: We had some plans between now and the end of the year that we're going to be investing in a couple of different things, and one of them was investing in some new products, and we had a path on how we were going to develop those. Well, now we have to figure out a new path in the midst of ... Are we going to develop those products, or do we wait? We have to make some decisions, but if we do go forward, we have to modify our strategy and see what that works.
Michael: When I'm looking at that kind of stuff, we made decisions on the front end this year not to completely go crazy spending all this money, or our potential money, that we had on our books, and so it's not going to kill us. But on the back end, sometimes people make decisions, and then all of a sudden there's no margins, and you have something that hits.
Michael: One of the things that can really impact you on these budgets is when you have a client that takes up too great a percentage of your revenue. Now, we're in the agency and consulting business, and what we don't want is something more than 25%. We don't want a client to be more than 25% of our monthly billables, our monthly revenue coming from ... because if one company has a problem, like one of our clients is right now, that just radically ... You can't adequately prepare easily in any company for 25% of your revenue to disappear tomorrow.
Michael: We have actually tried to keep, in most cases, that number down around 10 to 12, or at least under 15% in our company because we believe that gives us a little bit more sanity.
Kathryn: Yeah, and there are seasons in which a client's going to bump up because of certain projects or whatever, but really 10 to 15 is going to be the max that is really doable for any one client to take on.
Michael: For some people, you've never heard that percentage before. You've never heard that at all. So, if you don't think about those percentage margins and setting your budget and making sure one client doesn't take up so much of your time and energy and your revenue, if you make sure that you're looking at your margins a little bit and your cashflow and making sure that you have enough going to the net ... and that's not always easy to do in a growing company.
Michael: But that said, if you make those decisions on the front end, you have to make less hard decisions on the back end. It's easier to make decisions. If you don't have those margins at all anywhere, you have to start doing things like laying people off, cutting salaries, making some major changes. If you have experienced those, you know how painful those are. You're part of the club with us of having those experiences and those of us in that club of having the hard experiences where it's just been awful. We want to just encourage you, that haven't had that situation yet, be wise.
Kathryn: Well, and I have been thinking about that, obviously, 14 years in business. We went through a pretty solid economic downturn a few years ago.
Michael: Biggest recession.
Kathryn: Yeah. Yeah, that little blip on the map. One of the hard choices that we had to make was so hard for us to make because it had to do with laying off somebody who maybe wasn't even a perfect fit. But in reality, her salary, this person's salary, was more than we could manage given the downturn in our clients and everything else that was happening in the economy.
Kathryn: What we did that was challenging that I'll just own is we took too long to make that happen, because we so didn't want to make it happen, and we kept wanting it to get better. So we just got further in trouble because we were unwilling to make that hard choice because it was so painful. That's a dangerous thing when you have ... especially with people's salaries. If you're starting to die on the vine and you know in your core that that's going to have to happen, then you're better to do it sooner than later.
Michael: So let's talk about realistic projections versus vision and optimism. Yeah. We were having this conversation earlier in the office today about leaders, because we were talking ... We'd gotten this phone call, and we were talking about this leader of this company and everything else. They're extremely optimistic, and everything's going to work out. It's going to be great. This person is incredibly intelligent, sometimes overextends themselves. It is easy to make decisions and believe it's all going to work out. I get that. I was a lot more like that in the early days, and I have a measure of conservativeness in me that didn't ever exist before.
Kathryn: It's true.
Michael: Thank you for-
Kathryn: And I am grateful.
Michael: Thank you for acknowledging that in front of everybody.
Kathryn: I am grateful.
Michael: But what you have is you have this really interesting dynamic. I'm going to talk at an abstract level for a moment, and most leaders are going to get this, any great leader, any great company that has done amazing things. The difference between those people who had huge dreams and achieved them and the ones that had big dreams and never achieved them is a very thin edge, because you evaluate the sanity of the dreamer in many ways, at many times. You basically say, "That guy, or that gal, is a crockpot." I mean, they're crazy. They always have these big dreams, big ideas that never go anywhere, and they never do anything." Then all of a sudden, you look over here and go, "Oh, this person was so smart and so wise. They knew just when to gamble and just when to calculate, and everything was amazing. Look at their company. They're Bill Gates. They're Steve Jobs. They're fill in the blank."
Michael: Those people, some of their visions were insane, and getting there, there were many times that there was a lot of self-doubt for them, when you look at biographies and everything else. The American Revolution. We're watching a TV show right now that's half fiction, but the American Revolution took like ... What did we say last night? Eight years?
Kathryn: Yeah, something like that.
Michael: Eight years.
Kathryn: George had a few moments of despair where he was quite convinced that it was all going to hell in a hand basket and that he was not the right guy to lead it.
Michael: Three years in, they actually were having moments where they thought that the next battle was going to be the last battle of the war.
Michael: I mean, if you look at the moment, sometimes sanity or insanity is very hard to evaluate in the middle of achieving a business, a goal, and driving after that. There's a place for vision and optimism, and sometimes faith looks insane. You look at any writings in history or religious books or anything like that where the moments of faith in characters and in people at the moment of faith, they were truly acting in faith, which means to believe in something that there is no evidence for and trusting in it. Yeah.
Kathryn: Well, and what's so interesting, when I look at nonprofits and I look at ... especially those that are faith-based, sometimes the person leading the organization has a level of faith and optimism that is not shared by other really important people in that organization. That's when the going gets really difficult, because the expectation of that leader is, "Well, of course we'll be fine. God's in it. We should be good," and yet if the numbers don't actually pan out, there comes a place and a reality check of, "We're not okay, and we're not going to be okay," and the plan you put together isn't going to actually achieve what we need to achieve. Those are very, very difficult conversations.
Michael: Yeah. You have to run an organization, profit or nonprofit ... It has to bring in more money than you spent. In for-profit companies, we call that a profit. In nonprofit companies, it's still a profit. It's just classified as something else, but it's still we have more money than we spent. Goal is we have to ... and a lot of times, in nonprofits, they have to spend it, or they can put it in ... There's all kinds of different categorizations, But that realistic projection of vision versus vision, I think it's just important because ...
Kathryn: Vision versus vision?
Michael: I'm sorry. Realistic projections versus vision and optimism.
Michael: Good catch. The biggest thing today ... and I want to wrap this up ... is that there are moments where I think that this podcast is going to be a window into what we're seeing as consultants and an honest window into some of what's going on in our business. I'm hoping that we will continue to be able to talk about things that are current and real and happenings that we're seeing examples of, because our goal is to continue to help you, our listeners. We want to help as many of you as possible achieve passion and provision careers and companies where you, the company, and everyone in it thrive.
Michael: That's our goal. That's what we strive for. That's our core value in the midst of it, of making sure that that's our north star. That's our target. We've got certain values and ways we do things that guide us along that path. Our goal is to help you do that, and part of that is to have these realistic conversations, because I want to be warning you that the minefield is to your left and to your right, that these are some of the things that you can get tripped up on.
Michael: Some of you listening today are going, "I'm going through that," and you're writing to me. We got an email recently from one of our listeners that said, "Thank you for creating a podcast just for me because ..." and that was really cool because when he said that, or when he wrote that, it validated that there is a need for these conversations, and there's enough leaders that don't get to hear them because it's just not happening easily.
Michael: So we're hoping that this podcast does that for you and, in this episode, that we're really hitting some of those places of finances. We'll talk about finances periodically, probably pretty regularly throughout this, because there's lots of different pieces and parts that are just important for somebody to keep them in front of you. We have people keeping them in front of us.
Michael: So, Kathryn, do you want to add anything else to this whole subject today on this issue of, really, are you going to stay profitable, and you've got to keep your mind, your eye on the books so that you are?
Kathryn: Yeah. I was just thinking about the proverbial ... What is the animal that puts its head in the sand?
Michael: The ostrich?
Kathryn: The ostrich. I was going to say stork, and I was like, "That's not right. They bring babies." So the ostrich, that sense in which one of the things you can't afford to do is ... and I think this happens when you get busy sometimes in a company and running a company, is you just don't want to look at the numbers. You actually just want to bury your head in the sand and hope that it's all going to be okay, especially if you're a smaller shop where you don't have somebody who's doing that for you and really managing that for you and putting it in front of you to call your attention to it on a regular basis.
Kathryn: So just want to encourage you not to be an ostrich, just to make sure that you're actually looking at your numbers and you're being honest with yourself about what is and what isn't, while also, as Michael continues to say ... and he's absolutely right ... trying to maintain a sense of faith and optimism for the future, because we're all trying to grow our businesses. We're all wanting to improve and get better.
Kathryn: We wouldn't be in it if we weren't. There is a place for that, and certainly you create a budget with those goals of growth in mind. But if you hit a wall, like the little bit of the one that we got, at least a hurdle, today, you've got to be able to have enough margin that that hurdle is not going to trip you up ...
Michael: That's good. That's good.
Kathryn: ... in a dangerous way.
Michael: That's good. So that's it for today's podcast. Thank you for coming to Half a Bubble Out's Passion and Provision, or the HaBO Village. As Kathryn's talking, I just want to think a couple of things. One, go to our website, halfabubbleout.com, and go to the podcast and go to the show notes page. We would love your comments on this.
Michael: There is no other way right now that we have in place to get comments except for on the show notes page on our blog, on our podcast blog. So if you'd go there and make any comments, we would love questions. That's a great place for questions. We can answer some of them on the comments on the blog, but we'll actually bring some of those comments back into the podcast and talk to them. That is really helpful. We want to be able to speak to those real questions. Then if we can think of any other resources that might be helpful in the midst of it, you're always going to find them on our show notes page.
Michael: We just thank you. We wish you the best today and this week, and we wish you a passion and provision company [inaudible 00:31:27]. Thank you for joining us.
Kathryn: Thank you.