116 | Designed to Last A Strong Financial Foundation

[00:00:00] Have you ever looked up and thought, I’m making more money than I ever have, so why does this feel more complicated instead of more freeing? Welcome back to another episode of the Vital Wealth Strategies Podcast. I’m your host, Patrick Laden. And today we’re kicking off a brand new series called Design to Last, where we break down what it really takes to build a business that can grow, scale, and sustain success through every stage.
In this episode, I’m joined by Michael O’Keefe, an advisor here on the Vital Wealth team, and he’s flipping the script a little bit by interviewing me and we’re diving into something most entrepreneurs don’t expect as they hit higher income levels. Financial confusion, because the truth is. Seven figures doesn’t simplify decisions and multiplies them more money brings more moving parts, more accounts, more tax thresholds, more complexity.
If you don’t build clarity on purpose, the pressure starts to compound. We’re going to walk through the real financial framework. Behind a business [00:01:00] that’s designed to last. Starting with why profit matters more than top line revenue, how messy or delayed reporting can quietly sabotage your decision making and the simple systems that create confidence, calm, and control.
We’ll also get into why even profitable business can feel cash tight. How to avoid the house of card situation that keeps entrepreneurs up at night, and strategy that helps you stop reacting to your money and start directing. And you’ll wanna stick with me all the way to the end because I’m going to connect the dots between these three pillars and show you how they’re going to work together to help you grow faster with more confidence without burning out second guessing every decision or feeling like something is slipping through the cracks.
Now, if you’re listening to this and you want the resources from today’s episode, I want you to take a simple next step. Head to vital strategies.com/cashflow to access the assessment we talk about and start building clarity into your business on purpose. Again, that’s vital strategies.com/cashflow and it’s the perfect place to start if you want to strengthen your financial [00:02:00] foundation and build something designed to last.
And before we jump in, if you’ve been getting value from this podcast, I’d really appreciate it if you take a quick second to leave a review. It helps more entrepreneurs find these conversations and it let’s us keep bringing you episodes that actually move the needle. Alright, let’s get into it. Hey everyone.
I’m Mike Loki, an advisor here on the Vital Wealth Team. If you’re waiting for Patrick to jump in, don’t worry. He’s here. Today we’re talking about something most entrepreneurs don’t expect at higher income levels. Financial confusion. Seven figures doesn’t simplify decisions. It multiplies them, and clarity doesn’t show up automatically with success.
It has to be built deliberately. Michael, thank you for joining us here today. It’s kind of fun to be on the opposite end of the, uh, the interview, but, uh, I’m looking forward to this. I, I think this is going to be exciting. We’re, we’re kicking off a series, uh, called Design to Last, and we’re, we’re thinking about what does it really take to build a business, uh, designed from the, the ground up [00:03:00] and allow it to be successful through all the stages of growth in scaling.
So we’re, we’re gonna get started today and start looking at. Really the, the financial framework that it takes to, uh, build a successful business. Yeah. Awesome. Well, thanks for having me. I’m Pat, super excited. Um, but why don’t we start here? Um, why does making more money often feel more complicated instead of, uh, more free for entrepreneurs?
That’s, that’s a great question. It’s, it’s interesting when you think about complexity. If I think about a very simple situation, it’s, I have $5 and, uh, no real income. And the way I solve that is I go start making some income. And, uh, when I start making some income and I start saving more money, uh, I’m able to pay my bills.
Now, now my complexity just continues to, to grow and increase. I, I have additional questions that. That begin to pop up and, uh, I start hitting new [00:04:00] tax thresholds. I start hitting new, uh, entity structure and asset protection thresholds. And so I, I now have all of these additional problems that, uh, I didn’t have before.
And I, what went from a simple problem of like, make more money now is a very complex problem that also includes make more money, you know, if I wanna continue to grow and scale, but all of these other issues that I need to address as well. So you talk about, you talk a lot about entrepreneurs feeling tension even as income grows.
If we step back, what problem are they actually facing? Yeah, I, I think there’s a, a, a few problems, but when, when we think about that, we’ll say external problem, uh, I’ve got more money, more accounts, more decisions, and. You, you think about the entrepreneur in general and the, the decision making is, is expensive.
My mental energy is, um, and, and I’ve got an interesting story around this. Like if I go to Subway or a restaurant, I rarely, [00:05:00] I rarely order, I ask the server what’s good and I just order that, it just takes a, a decision off my plate that I don’t have to spend a, uh, spend a brain cycle on. And so I think about that from the entrepreneur’s point of view, and it’s like, geez, I just, there’s all of these things in my external world that I, I’ve got.
To make decisions on, and I’ve got some complexity without any coordination. I’ve gotta figure it all out. And my financial systems, you know, oftentimes grow accidentally, you know, I, I start to build this, this structure that, uh, uh, I, I inherit as the, the, the business starts to grow when we think about things like QuickBooks and my payment processing system.
Uh, my bank accounts, and sometimes we have, we’ve seen clients that have a personal bank account at one bank and a business bank account at another bank, and it just, it creates complexity in their lives that, uh, uh, can be, can be frustrating. Yeah. Yeah, that makes a ton of sense. And, um, we, we talk about the external problem there, [00:06:00] but my, my mind shifts to, um, what about the internal problem for the entrepreneur and what’s the internal struggle that entrepreneurs experience?
As this complexity increases. Yeah, that’s, that’s good. And I, I touched on this a little bit, but the, we’ll call it the mental load of all the decisions that need to be made. Uh, that’s, I think maybe the first one. And then there’s this, this thought process of like, man, am I missing something? Is there, is there a problem that I’m not seeing?
You know, I’m uncertain about, uh, all of these things that are, are going on out there and can create some anxiety in inside of me that, uh, you know, I am, I’m now. Not just worried about, you know, my, my team and my clients, but I’ve now got additional financial questions that are, that are out there that, uh, I’m concerned about as well.
Well, you know, we as a team here at Vital Wealth work with successful entrepreneurs every single day, and we see their financials up close. You know, we see their p and ls, we see their balance sheets, um, in all aspects of their business. [00:07:00] From that vantage point, what patterns are you consistently seeing?
Explain why so many high income entrepreneurs still feel financially unclear. Yeah, I, I think there’s, there’s a few and, and it really breaks down to, you know, the, the first question is just clarity around like, how much money am I actually making? You know, what is, what is hitting the bottom line? ’cause I’ve got, I’ve got money in my bank account.
But is that, is that a true reflection? Uh, so I, I think there’s a, a piece of having clear. Clear picture into like my profitability. I think that’s a, um, you know, a, uh, a good point that a lot of times entrepreneurs are unsure of, you know, they’re, they’re not sure how much, uh, money’s going to hit the bottom line.
Uh, they can forecast and they can have a rough idea, but, uh, you know, really getting crystal clear on that is, um, I, I think, uh, important and then it really does become, you know, when we think about what the. Entrepreneurs should be spending their time on. It’s their [00:08:00] thing. They’re uniquely qualified to do.
I think about our, our situation, uh, in our business. Like we should be spending our time focused on solving complex financial problems for entrepreneurs. You know, and there’s, there’s lots of different problems that pop up and we wanna be the central source for being able to, to do that. And anytime we’re doing things outside of that, you know, like, let’s just use our example, uh, dealing with HR or, you know.
Uh, 401k or some other issue that is like distracting us from the, the, the main problem at hand. Like we’re, um, we’re not driving and generating as much revenue for the organization as, as we could because we’re distracted by those things. So it’s like, you know, the entrepreneurs should be spending their time and energy focused on the main thing and have people and processes in place to, to manage, uh, the rest of it.
Yeah, that’s, that’s really good stuff. And, um. I want to transition into kind of like a guide, [00:09:00] um, that the entrepreneur can, can use to, to build on all these things that we’re talking about. Um, so I want to ask what actually needs to be true for an entrepreneur to build something designed to last? Yeah. I think the first thing, and, and I’m gonna, I’m gonna hedge this just a little bit, but the first thing is you have to run a profitable business.
And that, that seems to be self-evident, but we can get into other factors. But oftentimes it’s interesting to see like a, a beginning entrepreneur getting really hung up with, you know, my entity structure. And, and not that those things aren’t important, but you don’t have a business until you have a profitable business.
Right? Uh, otherwise it’s just a hobby or it’s an expense. And so. When we think about, you know, I need to go generate revenue, I’ve gotta manage my expenses to the point where I have actual money hitting the bottom line. And, and that bottom hit, that money hitting the bottom line should also take into consideration my time and energy invested in the business.
Um, ’cause I think there’s also [00:10:00] a distinction between a, uh, uh, what we’ll call a, a business and a self-employed. I own a job, uh, scenario and I own a job scenario is actually. Pretty, pretty rough spot to be. Um, and I think that’s where most entrepreneurs that, that start businesses, and the, the reason why so many fail, uh, is that where is where most people live.
Uh, they’re just trying to do more and then they figure out that, um, you know, all of the promises of entrepreneurship, like, oh, I’m gonna have all the money and all the free time don’t actually exist, especially in the startup phase. Uh, you’re the last one to get paid and if anything needs to be done, uh, you’re the one that ends up doing it.
And so, uh, I think there’s. Uh, there’s, there’s something to be said about driving profit into the organization, and, and we’ve seen some, some good size organizations, uh, that are very unclear and unsure of how much profit they’re, uh, they’re driving. And, [00:11:00] uh, you know, there’s, and that can be okay if there’s a clear path to profit.
You know, I can invest heavily in my business and not, and have very small profit margins because I’m. I’m hiring people, I’m buying equipment, I’m, I’m doing things along those lines. But I, I know once I get to a certain threshold that we’re gonna have, um, lots of profitability, my margins will stabilize and I’ll be in, in good shape.
But that’s something that has to be done intentionally, and you have to have to know your numbers well, and when I start hearing a client, uh, or a prospect or an entrepreneur in general, talk about top line. I don’t care that much about top line. If you’ve got. A hundred million dollar business and 1% hits the bottom line.
If you make a million dollars off that a hundred million dollar business, like it doesn’t take much for that thing to be upside down in a hurry. Versus if I have a $2 million revenue business and a 50% profit margin and a million dollars hits the bottom line, I’ve got all sorts of room there for, [00:12:00] uh, you know, the business to wobble a little bit.
And, uh, I’m not going under, I’m not going bankrupt. So I think those, those distinctions matter. I would much rather have a high margin, high profit business than something that’s operating on super slim margins because, uh, you know that that can go, go sideways in, in a hurry. Yeah, that’s, that’s great. And I think having a profitable business, that’s like pillar number one it so important.
And one thing I think of, I’m reading, reading a book, uh, right now called Simple Numbers by Greg Crabtree. It’s a great book, highly recommend so far, but one in the book he talks about, um. Owner paying himself a, him or herself, a reasonable salary and mm-hmm. The reason why that’s so important is because underpaying, the owner creates fake profitability.
And when the owner pays themself below a, uh, market compensation, the p and l is overseeing profit. And that can cloud the entrepreneur’s, uh, vision and it might create a sense of [00:13:00] them thinking that they’re more profitable than they actually are. Mm-hmm. And, um, I think. Finding that out for the first time can be a reality check for the entrepreneur.
Um, so that’s one thing I think of. How important do you think that is? Yeah, I think, I think you’re hitting on a, a really important piece. ’cause when we, there’s, there’s a few reasons that people build businesses. First is that thing we, we already discussed. It’s like I, I have, uh, free time and healthy cash flow, you know, money that, that hits the bottom line.
The second is enterprise value. At some point in the future, I can sell this thing for, uh, a, a figure that is, uh, that shows that this is a great investment. And, and I think the thing that happens is if I’m underpaying myself, I’m, I might be a little delusional on what my business is worth because if I’m showing large numbers, hitting the, the bottom line and, uh, we’ll, we’ll call that, that bottom line [00:14:00] figure ebitda.
Right. Um. And when somebody comes and looks at that, they’re generally paying me a multiple of ebitda, but they’re also going to pay really close attention to my fin financials and go, all right, what is, what is the compensation for everybody in this organization? And if you’re a key driver and you’re paying yourself $60,000 a year, but to fill that role, it’s gonna take, you know, a quarter million dollars, uh, to, to put somebody in that spot.
And, and let’s just pretend I, I have a, a four times ebitda. Um. Figure, or let’s make it five times. Um, and I’m gonna adjust the numbers. If I’m paying myself 50 K and it’s gonna take 250 K to fill that, that role, um, I can, I can be diluting myself. I can be delusional by a million dollars on the value of my business.
And the reason being is when I add that $200,000 of additional compensation that needs to go in there, that’s going to come off the bottom line and I’m multiplying that times five x right. [00:15:00] So now I’m, I’m mistaken by a million dollars on what my business is worth. And, um, that can be frustrating. It can be awfully sobering to the entrepreneur when they’re, they’re starting to, you know, they’re spend their money from the, the transaction on the business and, uh, they’re, they’re off by a million bucks.
So I think that is, uh, uh, a key thing that, um, you’re highlighting that, that makes a lot of sense. Like, we, we’ve gotta pay ourself a, a market rate or just be realistic as to like. This is going to have a, a real impact when I, when I go to exit the business. Yeah, absolutely. Couldn’t agree more. Um, and wanna transition here, um, and, and get into why do so many successful entrepreneurs still feel unclear about their numbers?
Yeah. It’s so interesting to see the evolution. Uh, this year. We’ve had a couple businesses that have, uh, transacted in the. 75 to a hundred million dollars range. You know, they, they’ve taken on either, uh, they’ve [00:16:00] sold their business or taken on some minority, um, investor positions to, to sort of take some chips off the table.
And, and we’ve been a part of these businesses for, for years and we’ve seen them, seen them grow and we’ve seen their financial picture and their financial infrastructure grow and, uh, so often. Uh, we see clients come to us and we, we get the whole spectrum. We have clients making a million dollars a year that have, um, their entire business run out of a Google sheet.
And you’re like, how is this even possible? You know? And it, it, it’s a testament to the entrepreneur that’s just like, I will go find a way. And it, it goes back to my early comment about, uh, if we’re, if we’re going to be in business, the number one thing is to go generate profit, right? And that’s what they’ve done.
They’re like, okay, we’re gonna go generate profit and we’ll worry about. Some of these infrastructure things later. Now, once you start generating a profit, we’ve gotta get the infrastructure in place to be able to sustain and grow and scale that profit. And so it really comes down [00:17:00] to having, uh, just great financial reporting mechanisms in place.
And if I had to pick, uh, the number one thing that needs to be put in place that is, uh, effective way to run your business is a profit and loss statement, and having that done in. A software that I can slice and dice the data in ways that, that helps me, uh, see what’s actually happening. Personally, I think every entrepreneur should start with a QuickBooks online account.
Now, uh, we’ve got some clients that have the desktop version that run manufacturing operations that, uh, are trying to get out of that desktop version. But, uh, ’cause QuickBooks is kind of forcing people to the online version, but they have so many different softwares that are plugged into that desktop version.
It’s, it’s hard to change, but. For any new entrepreneur, uh, having, uh, having QuickBooks online is like the way to go. It can continue to scale with, with your organization. Now we’ve seen, um, different [00:18:00] businesses move to, uh, more complex softwares as they’ve continued to grow, but I, I think QuickBooks online is, uh, is, is a fantastic place to start.
And, and going back to the, the profit and loss statement for just a second, we. We like to break that up into a few different, um, reports. We, an annual profit and loss is okay, but it really doesn’t give me very clear information into my business. We like to look at it on a monthly basis. So, um, we’re running it month by month, and then we’re comparing it to last year, the same month, and going, okay, let’s, let’s take a look at a few, a few things and we, we like to know like.
Are we, are we trending in the right direction or in the wrong direction? And, and here’s how this, the p and l can help us with that. So if I look at my month over month and I’m trending in the wrong direction, uh, that, that’s going to, that’s a data point, right? If I’ve got less profit, is it because my business is seasonal [00:19:00] and this is just how it, it always goes.
And do I know this because I’ve run my p and l for. This way for a long time, and I know these sort of rhythms that my business takes and I plan for those. Or is this, uh, is this just a downturn in I am, I’ve got some problem organizationally, or there’s an economic problem out there that is causing us this, this scenario.
So month to month is the, the key piece. And then we also like to look at same month last year, you know, so if we’re, we’re recording this in January, if we look at. My January of last year, and I’m down month over month, December to January, and then January to January from, you know, 25 to 26, like, okay.
There, there might be more problems, right, that are, that are popping up that, uh, I need to be, be aware of. And so the p and l uh, can show us that information. And then the reason we like to see it month to month is, um. I can see some [00:20:00] outliers, right? I can see big income spikes or big expenses that show up and go, okay, what, what is the, the, the key issue here that, um, you know, I maybe need to go, go address.
And then we also like to acknowledge that, um, cash counting is good. You know, this is, if we think about our bank account, uh, that’s good cash accounting, right? The dollars in dollars out. Uh, the problem with cash accounting is. It can oftentimes skew how the business is actually performing. So if I pay a, an insurance premium, that’s an annual premium, I should accrue that, that, that over the, the entire year.
So there’s, there’s accrual accounting and there’s cash accounting. Most mature businesses move to accrual at some point. Now you can still file your tax return on a, a cash accounting method versus accrual. And there’s a whole discussion there. But, um, uh, when we talked to. Our m and a consultants, um, that, that work with [00:21:00] businesses that are exiting.
If you don’t have your accounting set up on accrual, um, that they’re, you’re gonna take a discount. Uh, most mature businesses are, are set up that way. And so, uh, again, it gives you a, just a clear picture into your business, especially with things like bonuses. Different compensation structures. You can see how those, those dollars spread out throughout the year versus like seeing these big spikes and dips in your, uh, your monthly cash flow.
So yes, that’s, that’s a key piece of the, the framework. Now there’s, there’s other financial reporting, uh, tools that are, that are out there that we think are great. Um, we can think about, uh, accounts receivable reports, like how many days outstanding are the, my accounts receivable and, uh. If that number’s long, we should start to, to put some, some pieces in place to, to address that.
Yeah. Solid financial reporting is, is so important and those are so many good ways to actually put it into practice and [00:22:00] take action on all of this. Um, but you know, we’ve, we’ve seen it firsthand. Um, people come in with messy. Messy reporting. And um, like you mentioned, some people have all their financials laid out on a Google sheet or a, a short little excel, uh, document and yeah.
I’m wondering if you can explain like how those messy reporting or delayed reporting can affect the decision making of those entrepreneurs? Yeah, yeah, that’s, that’s good. Um, when you have clear data, uh, an an example, I’ve got a friend that owns a coffee shop, uh, and. Uh, he actually, I live in Iowa, but right on the Mississippi River and on the other side of the river is Illinois, where we’re at.
And, uh, his, his coffee shops in Illinois, we’ve got two bridges that, um, connect us to, uh, the, the neighboring town. And one of the bridges was shut down and his coffee shop is close to that, that bridge. And so he was like, immediately we saw a 30% [00:23:00] drop in our, our margins. Um, you know, because when we think about margin, right, we’ve got.
We’ve got revenue, then we’ve got some cost of goods that sit in there when you’re selling coffee, right? Like every, every cup of coffee I sell, you know, I gotta pay for the cup and the, the beans that go into that cup of coffee and the water and the, you know, labor to, to serve it. And then I’ve got overhead, you know, that, that just sits there with like my building rent and, you know, uh, utilities and some of those other things that, that are out there.
And so he found out really quickly that his margins were dropping. Uh, he was down 30% and so he was like, well. I’ve gotta go fix this. I’ve gotta figure out either how to creatively get my customers that live on the Iowa side that aren’t willing to make the, you know, what was now a three minute trip, uh, a 15 minute trip.
’cause they gotta go find another bridge to get across, to get there. Um, I gotta figure out how to get my product to them, or I’ve gotta change some things internally. And if you don’t have that data, if you can’t see that clearly, you’re just gonna look at your [00:24:00] bank account and go, man, what happened? I got, I got less money.
And you’re gonna look at your sales receipts and go, man, we got, we got less people coming in. Uh, what, what should I do about this? So I, I think there’s something too, when I, when I start to see that information, I can go, all right, what are we going to do to fix this and react quickly versus waiting until, um, you know, a month later and all of a sudden I’m, I’m hemorrhaging cash and I haven’t done anything to, to fix it.
So, yeah, I think that’s a, uh, a, a key thing. And then we can also look at. There’s just some key, I’ve been in some peer and mastermind groups around business value. You know, there the focus is like, we’re gonna, we’re gonna increase our enterprise value. And one of the ways to do that is looking at gross margin.
And here’s what gross margin is. It’s my, my revenue minus my cost of goods sold. Okay? So what does it take for me to actually deliver the product? Right? In this scenario, 30% gross [00:25:00] margin was like the healthy spot to be. And if businesses were, uh, less than that number, if they had 25, 20% gross margin, it was like, okay, we’ve gotta, we’ve gotta do some things.
We’ve gotta change our pricing. We’ve got to, uh, figure out our staffing models, our delivery models, uh, something we, we’ve gotta change something in there. And it’s just so interesting to see that, you know, when you start figuring out in your industry that these are the healthy spots to be. If you can be operating ahead of those, you know, if I can be at 35 or 40% gross margin, I know that my business is going to be more valuable to somebody that’s looking to acquire because, uh, I’m running a great, great operation.
Now again, we’ve seen people that have no clue. They have no clue what, uh, their, their margins are on by anything, and they have all of these things shoved into their p and l that shouldn’t be in there. Um, charitable giving for the organization is fantastic. But it should not be in there. Your tax payments that are going out [00:26:00] to, um, for the owner, right?
It should not be in there. Um, you know, your, your payroll tax should be in there. You know, that’s, that’s an expense for the business, but not, not the, like the income tax payments and state income tax payments. So, uh, I think having clear data just gives you clear picture into, uh, the opportunities that, that are in front of you.
Because business is dynamic, you know, it’s, it’s constantly changing. And if we don’t have our. Um, our financial information. Clearly displayed in front of us. It’s, it’s a problem.
If today’s episode is hitting home and you’re realizing that making more money doesn’t automatically create more clarity, I want to give you a simple next step, because the truth is, as your income grows, the decisions multi. Apply. Taxes get more complex. Cashflow gets tighter, and it becomes way too easy to build a business that looks successful on the outside, but feels heavy behind the scenes.
That’s exactly why we’ve built a quick assessment to help you [00:27:00] identify where your financial infrastructure is strong. And where it needs work. So you can stop reacting to your money and start directing it with purpose. You can access it right now at vital strategies.com/cashflow. Again, that’s vital strategies.com/cashflow.
Something that I’m thinking of that is just as important, if not more important than, um, solid financial reporting. And this, this, um. Can be done in the process of cleaning up your books and making sure you have accurate reporting, um, can be done si simultaneously or after. Um, I’d be curious to hear your take on where this belongs, but, uh, talking, thinking about cash management strategy mm-hmm.
Um, you know, we’ve seen it firsthand. Um, cash, uh, running outta cash in the bank is one of the number one reasons that mm-hmm. Um, small, that business owners go outta business and go bankrupt, so it mm-hmm. I’m wondering [00:28:00] why does cash still feel so tight for some entrepreneurs, even when the business is profitable?
Yeah. This is, this is a great question. Um, because we’ve seen it, we’ve seen clients that have had, uh, a million and a half, $2 million of of profit they’re gonna pay tax on, and then they, they start looking at the. Uh, the cash in the bank and the cash that they have access to when it comes time to pay the tax bill.
And there’s not enough money to pay the tax, you know, and, and they may have a half 1,000,006, $700,000 tax bill, uh, depending on their, their quarterly payments. Um, and especially if it’s a, a really good year and they were making safe harbor payments and now they’re, uh, they’ve got two x the tax bill that they had last year and they’re just not prepared for that.
And so, um. The way people get into that situation is, uh, twofold. Um, a your accounting method can, can impact you. So when we, [00:29:00] we, we talked about cash and accrual. Uh, if I’m on an accrual, accrual tax filing basis, um, and I’ve invoiced somebody, but I haven’t collected the income, I’m gonna pay tax on that.
And so, um, that’s, that’s. That can work out in our favor. It can also be, uh, you know, something we have to be mindful of. Again, we, we like accrual accounting methods, uh, but I think there’s always a discussion with your CPA if we should be filing our taxes that way or not. But, um, uh, so that, that can be the first thing.
You know, if I, if I’ve got, uh, let’s say a half million dollars of invoices out there that I haven’t collected the cash on yet, I’m still gonna owe the tax now. Uh, the goal is to hopefully collect the cash as soon as possible so I can pay the tax. But, um, that’s, that’s something that can get us in trouble.
Another thing we’ve seen is, um, we’ve had clients that were, uh, growing a, a healthy business and, uh, we’re seeing just year over year, like 50 [00:30:00] 75, a hundred percent growth, and it created a tax problem that they were unaware of. They were also a little bit of debt averse, and so they had about. 70 800,000 in cash and they went and bought a building for cash.
Well, the problem was they still made a million and a half dollars of profit, uh, you know, spent some on lifestyle, invested some dollars, and then, uh, moved 700 K into, uh, you know, this building. Well, the tax bill came due and it was like, wow, we, we owe about $500,000 between state and federal and we don’t have the money to pay it.
What are we going to do about this? Uh, created some unique. Tax planning opportunities, um, we were able to resolve that problem. But that’s something to be mindful of, like cash management strategy is, is so important for, um, a successful business. And, and we’ve seen very, very complex businesses just continue to refine this, this process.
We, we helped a, a client recently, um, put in a 13 week cash flow, um, [00:31:00] like process and they just start forecasting out. The next 13 weeks, how is our cash looking week by week? And it’s looking at both accounts receivable, um, and accounts payable. So they’re, they’re going, okay, how much money do I got coming in?
And how much money do I have going out? And they were a manufacturing organization buying lots of raw materials. And so, you know, they could have million dollar invoices that they needed to pay and they could have, you know, million and a half dollar receivables that they needed to collect on. And so. Uh, they were finding, they were having these dramatic swings.
You know, in that example I just gave, you know, you could have two and a half million dollars, you know, if you pay the, the invoice of a million bucks and you haven’t collected your million and a half. Like that’s a dramatic, uh, difference. And we’re tapping lines of credit. We’re we’re doing things that maybe aren’t as quite as efficient, where if we, if we start to create some structure around our cash management with that.
13 week cash flow. Uh, the thing we like about 13 weeks is it, it [00:32:00] projects us through the end of the quarter and we can start to see, um, how those each of those weeks are gonna turn out and how I’m gonna end up in the quarter. But, um, the 13 weeks, and that’s a rolling 13. Um, so every week I’m looking at, okay, what, what money am I receiving?
Am I expecting to receive what money? Then based on that, should I be paying out in my accounts payable? And so I’m, I’m sort of managing the money flow both in and out. And I, I, it’s so amazing with, with accounts receivable, um, that’s the money that people owe to you. Like once you start putting a little bit of infrastructure in place where you’re following up with phone calls, emails, what have you, like, people like to pay their bills on time.
Uh, but life gets in the way and, uh, the squeaky wheel gets the grease. So it’s like. I’m, I’m gonna stay on top of, uh, that bill. So we, we found organizations that just have somebody that’s committed to that. Um, it, uh, it just helps their cash management tremendously by, uh, [00:33:00] being able to have all the money to do everything from pay payroll, to pay their invoices, and to, uh, not have that stress of like, geez, we’ve got these two and a half, three, $4 million swings in our cashflow.
Uh, that that can keep people up at night. That’s, that’s, uh, super interesting stuff. So when I think of, um, kind of what I’ll call the pillars that we’ve talked about, having a profitable business, having solid financial reporting and having a, a, um, sound cash management strategy, how do these three kind of tie together and it almost reinforce each other.
Yeah. Yeah. Uh, they’re so important in, in relationship to, to growth and scaling. Um, when I have profit now I can, I can make intelligent business decisions on how I’m investing in the business. And when I, when I think about that profit piece in my p and l, um, I can start to [00:34:00] see and forecast and plan for these, um, maybe seasonal dips.
Um, I can plan for. Uh, making sure that I’ve got the liquidity. You brought up a really important point about the, the number one reason businesses go outta business is they run outta cash. And, uh, so it’s like, you know, we talk so much about having minimum thresholds of cash on hand and we just do not go below that threshold.
And so, um, you know, when I, when I start to see these things like, okay. I can marry together my, my profitability along with my p and l, along with my cash management strategy. It can allow me to make investments in my organization, um, that will allow to grow farther faster. You know, and I think there’s two schools of thought here that are worth considering.
It’s like, what do I really want? Do I wanna build my business valuation or do I wanna build equity outside of my business? Do I wanna build my personal balance sheet? Um. Do I [00:35:00] wanna take dollars off the, out of the, the business and sort of redeploy them in, you know, real estate stock and bond markets, some other investment that, uh, I’ll say take some risk out of the equation.
You know, the, the reality is being a business owner with all of my chips in my business, if it goes sideways, um, you know, I’m, I’m losing a lot of my, my value versus like, there might be some less upside by, by diversifying into, we’ll call it the stock and bond markets, but, uh. There might be more safety there.
So, um, I think those are, those are key things. And when we start having good systems and processes around all of that, it allows us to make those strategic decisions. Do I want to build my, my enterprise value or do I want to build my balance sheet outside of the business? And, uh, I can do that in a way that protects both, both scenarios.
So I think that’s, that’s how these things tie together nicely. Yeah, that’s that’s great. And, and one thing I’m thinking of is you mentioned. And utilizing [00:36:00] these and thinking about these things intentionally to grow further faster. So I’m wondering what, what is the cost of ignoring one of these for too long and what kind of effect could that have on the entrepreneur?
Yeah. I’ve got a friend how a really good friend, um, and he’s not a client and it’s, uh, he’s got super messy financial situation. Like, it just, it’s, uh. Uh, Rob Peter to pay Paul on a regular basis. And, uh, it is, I’m concerned that there’s a house of cards that are, that are coming and it’s gonna fall down at some point.
Uh, because there’s always this like, you know, stress around paying vendors, paying. You know, payroll, tax, you know, like really important things. Uh, and, and I’m concerned that at some point, you know, and the stress has gotta be massive, you know, [00:37:00] doing that and, and operating from a, a reactionary standpoint versus a proactive standpoint.
And, uh, so I, I think the, the cost in that scenario is like the concern that someday the house will fall down, you know, the, the cards will all collapse and there is no, there is no money to like. Uh, pay the, the tax man, you know, ’cause the, the IRS, um, state taxing authorities, they don’t mess around. They’ll, they’ll come seize your assets, they’ll lock up your bank account.
And, uh, now I can’t transact anymore. Now that means bankruptcy. And it’s like, I, I think about the, uh, the work that goes into building a business and it is a lot of work, um, to compound that with. Not having the right infrastructure in place just creates another level of stress that is just not worth it.
And, uh, it, it can be, it can be embarrassing to be like, man, yeah, I’m, I’m running millions of dollars of revenue, but my financials are a mess to bring somebody into that situation and try [00:38:00] to clean it up. But at the end of the day, it’s like, it’s okay. Um, we’ve all got things in our businesses that, uh.
We’re, we’re a little bit embarrassed by, you know, oftentimes it looks like the duck is swimming smoothly across the top of the water, but underneath you see the, the chaos and the, the paddling that’s taking place. So, uh, I think that’s, that’s something that, you know, if we ignore these things for too long, it’s, it’s just an added stress.
And ultimately it know we’re, we’re missing out on business valuation. We’re missing out on cashflow, we’re missing out on. Opportunities to, to make proactive decisions versus reactive decisions.
Yeah. Patrick, this is, this is good. Um, um, that about wraps things up. Is there anything else, um, you want to say that, um, that is important or would be helpful for the, the listener? Yeah, I, I think there’s, there’s some key pieces here. Like if, if this has got your attention, you know, we, we see entrepreneurs all over the place, uh, and almost [00:39:00] everybody, whether you’re a.
A, a new starting business or one that’s, that’s sitting at, um, millions of dollars of revenue and millions of dollars of profit. Uh, there’s still work to be done on, on these, we’ll call ’em financial infrastructure pieces. And so we’ve, we’ve created some, uh, just a, a free assessment, uh, to get an idea of where you’re at.
If you go to vital strategies.com/cashflow, uh, we’ll walk through that. Assessment with you, and you can look at and go, okay, I see the areas that I need to go shore up. And, uh, I would say if you, you want to take that conversation to the next level, you can visit, visit us@vitalwealth.com and just schedule a time to talk and we can, we can help you with that.
Uh, again, this goes back to when we think about the most important use of time and energy is staying focused on your unique ability, not, not getting sucked into accounting work. And so, uh, we think bringing sharp people into the equation to. Help you manage those pieces is, is, is an important piece. So, [00:40:00] um, it’s just know this is a, a low friction action oriented assessment that just, uh, will, will help you, uh, take action in the, the, uh, the right direction.
And when we think about what success results from taking action, it’s like financial health is designed intentionally. You know, everything changes when we’re, we’re healthy. Uh, decisions become clearer. Stress lowers. Cash starts moving on purpose. Instead of reacting to your money, you begin directing it.
And that is when wealth starts to accelerate. Um, instead of just sort of exist as it sort of comes in and out of your, your bank accounts. And when we think about what happens if we don’t do anything, you know, nothing changes. The complexity keeps compounding. You know, as your organization continues to grow, uh, it doesn’t get any easier.
More income brings more pressure. You know, the financial decisions stay reactive and opportunities are, are missed, and the business becomes heavier instead of freer, uh, just becomes this burden on you. So the longer clarity is [00:41:00] delayed, the more expensive it becomes. So when we think about this, it just allows us to shift from being, you know, a higher earning entrepreneur who you know is, is operating on a hope and a prayer that it all works out to becoming a disciplined wealth builder who designs outcomes on purpose.
Not somebody just chasing strategies, trying to find a new tactic, but someone that’s building something that’s, that’s ultimately designed to last. So the cool thing about all of this is, is wealth. That last doesn’t happen accidentally. It is, it is designed. And, uh, I think that’s what we’re trying to accomplish with this, this series here with designed to last.
And, uh, we’ve got three other episodes that we’re, uh, looking forward to, to putting out into the world to help you as the entrepreneur, just to develop these, these frameworks to. Build something that not only grows and scales, but also gives you just the, the freedom, the peace of mind to, uh, have a successful business and ultimately at the end of the day, uh, live and optimize life.
So Michael, I’ve really appreciated this, this conversation. This has been a lot of fun. Thank you [00:42:00] so much. When Yeah, thanks. Thank you so much for inviting me on. Uh, I had a lot of fun and I’m looking forward to the rest of the series. Wonderful. Thank you. Awesome. Alright, that wraps up today’s episode.
Thank you so much for tuning into the Vital Wealth Strategies Podcast. I hope this conversation gave you clarity, sparked a few ideas, and helped you start thinking about your financial foundation in a more intentional way. Because the truth is, the more your business grows, the more important it becomes to build systems that keep you profitable, organized, and in control.
If you found value in today’s episode, I’d encourage you to share it with someone you know who could use this. Another business owner, an entrepreneur or friend, or someone who’s growing fast and starting to feel that financial complexity pile up. And if you haven’t already, I’d really appreciate it. If you take a quick second, leave your review.
It helps more entrepreneurs find the show, and it helps us keep bringing you high value episodes like this every single week. And if you want the next step from today’s conversation, I want you to visit vital strategies.com/cashflow. That’s where you can take [00:43:00] a quick assessment. To see where your financial health is at and identify the gaps that may be costing you time, money, or peace of mind.
Again, that’s vital strategies.com/cashflow. It’s a simple, low friction way to get clarity and start taking action. And remember, you’re a vital entrepreneur. You’re vital because you’re the backbone of our economy, creating opportunities, driving growth, and making an impact. You’re vital to your family, creating abundance in every aspect of life, and you’re vital to me because you’re committed to growing your wealth, leading with purpose, and creating something truly great.
Thank you for being a part of this incredible community of vital entrepreneurs. I appreciate you and I look forward to having you back here next time on the Vital Wealth Strategies Podcast, where we help entrepreneurs minimize their taxes, master wealth, and optimize their lives.