This is create the next from Pro CFO partners, where every week we explore strategies and ideas for financial management and growth to help today's businesses but their financial picture in contact Chris

Bintliff here with Byron Conneely from Pro CFO partners environment, we're talking today about what makes a company profitable, and how a company can better approach the idea of profitability. I think sometimes we think of it as just another, another line on the reports, and in that profitability is somehow inevitable. Or if we do these four or five things, business planning or whatever, profitability will be inevitable, but I don't think it's that simple. What do you think is the best way for a company to achieve profitability?

Why and thanks for the question. The one thing that I've come to over the years and looking at businesses and their struggle with profitability is it's hard work. It really is hard work. And it's not something that just happens and needs to be planned for. I need to look at all of the different components because there's a lot of moving parts to a profitable business. And many of them are controllable. So them or not, I think, the year 2020 has proven that. But this is where planning comes in planning to be profitable, I find to be the key to profitability.

So planning is the key. But tell me what you mean by that? What are what how would you define business planning? My sense of it might be very different. I might think it's okay, what's my next six months or a year or two quarters? What do you mean when we're talking about business planning.

So from a profitability standpoint, the profit formula that kind of works its way through financial statement is the relationship between revenue costs and expenses. So planning your revenue, planning the costs, ultimately getting your gross margin percentage out of that, and then managing your expenses, primarily people cost being the largest chunk of that the relationship of those that revenue, and those costs and expenses will yield profitability, if it's properly managed and properly planned. If you just wing it, and you say, okay, we're going to just sell x, and we'll worry about everything else later. Chances are, you're not going to see profitability, because there's just too many control items that will yield expenses that you didn't anticipate, or will yield costs that you didn't anticipate, or will yield revenue that it didn't hit. You know, I think that the one, the one caution that I give most business owners when I work with them is it's hard work, because every day, you are fighting an economic reality of expenses rise to meet income, and that needs to be paid attention to every day.

So that's fascinating. And as you're talking about some of the stuff. I think sometimes business leaders don't appreciate that, that incredibly astute point that our expenses rise to meet income, I think we often think that profitability is an inevitability if we just kind of pay our dues, so we sometimes think less, I'm worried about profitability right now. We'll worry about that next year as though it will just sort of emerge itself to become a concern at some point or two years from now. Should I be starting from the ground floor? I'm a startup, I'm brand new. How do I start planning for profitability? How do I start creating a profitability, a model even for profitability immediately? Or is that even something I should do? And the same question, I guess, if I'm a more mature company, and I'm trying to manage profitable growth? Do I have similar concerns there? Or do I have it? Am I completely in different spaces, once I reach a certain point of maturity in my company?

Well, going back to the theme of profitability is hard. When you start a business, you're you generally have, you might have investors, you might have a good revenue model, you get some production and go to market. But you're making things up as you go along how many people I need, how much is it going to cost? Where should we have our offices, and if you get a good investment chunk, or a good loan from a financial institution, you're flush with cash and you start spending the same dollar over and over again, okay, I need this person that I need that person I need, you know, this resource, and I'm going to travel and I'm going to hire consultants, and the money is there to enable you to do all of these things in your vision that allows you to start your business, but it doesn't yield profitability. There needs to be a culture of budgeting and planning that says this isn't going to come easy. So therefore, yes, we need to spend this money. Yes, we need to build this infrastructure and hire these people, but how are we going to actually make money where revenues will exceed costs and expenses over a period of time. And you know, I do find that entrepreneurs always feel that there's another avenue of investment waiting on the sidelines, because they've got this great idea. And I think one of the realities are that I like to say is, if you're not profitable, you're going to run out of cash. I'll just repeat that if you're not profitable, you will run out of cash, there's only so much that a lender will lend or an investor will invest in a business that's not profitable, because the cash is just going to keep getting spent. And you're not going to show any kind of return on that investment. And then you're, then you're, you're stuck. So starting from the get go, knowing that you need to get to profitability, you need to be able to manage your expenses, and that it is complicated, and it is hard to do. You build that culture. You build a culture of budgeting and build a culture of planning. And you build a culture of profitability. We're in it for a return on investment. So we can hire these people, they have livelihoods. Our customers or stakeholders, they rely on the goods and services we sell. We can't be flippant and how we go to market and how we run our business because being cash strapped all the time does not allow for good decision to

create. The next is brought to you by pro CFO partners who believe every business deserves to work with an expert CFO to guide its success. Pro CFO partners, our expert financial officers network across industries, verticals, specializations and situations, fulfilling the role of a part time CFO with all time commitment, pro CFO partners utilizes the innovative and exclusive FGC financial flywheel as a framework that creates momentum to drive your financial functions for sustainable success. Visit pro CFO partners comm to explore how we can implement a systematic and scalable financial system to help you achieve your goal. Pro CFO partners.com It's a

great point. And you're right, it stifles imagination, it stifles creativity, it makes us reactive instead of responsive. When we're finding ourselves under the gun like that with cash, you mentioned an interesting word, which is culture, and a culture of profitability. And that, in my opinion, is going to be an interesting perspective to a lot of our listeners, because I don't know that we consider culture in the same context as profitability. And it brings for me to mind, something that pro CFO partners uses which is called the FTC financial flywheel, which has all these interesting financial functions, but even business components all in relationship to each other, and culture is one of them. What other things are impacting profitability, whether other things are driving profitability, or are giving context to its performance that I might not be thinking of culture is one of them. That's really interesting. But are there other dynamics that maybe three steps removed, but if that one's haywire, you can expect profitability to not be where it needs to be?

You know, I think that the, you know, one of the largest costs that you do have within a business are people costs. So it's how you how you manage your people, how you treat your people, how you incent your people. And I think that that's an important component of having that HR. People focus. So that you've got, you've got smart people, you want to enable them to help you enable, implement a plan that will yield profitability if we implemented properly. So regardless of whether it's an engineer, or customer service, or accounting or sales, everybody needs to understand their part in this whole grand scheme of things as to how we're going to move this business forward. They take ownership of it, and they become part of that solution. If they're not made aware of how difficult it is and what their role is, and how everyone else depends on what they do. Then you end up with, you know, the robot where people are all rowing in a different direction.

How do you feel like the CFO fits into that? Because as you talk about profitability, I think again, there's this sort of outdated notion that the CFO would come in waving papers saying, profitability, is it whatever percent this year and the reports prove it, but you're clearly there's so many more dynamics involved here. What role does the CFO have in the center of that or maybe even on the peripheral of that sometimes to help a core an organization, manage culture, manage people manage sales, performance, manage all these inventory and revenue and all these things that can impact profitability?

Well, I read a great book once called the Great game of business. And the topic of this whole book was how you provide financial information that some people may feel as sensitive and no one should know about this. Versus everybody needs to know where we're at. Where are the yardsticks? Where are the metrics? How are we doing as a business? I lose track of it sometimes, in that, I'm so close to it. I know the numbers inside and out, I know the revenue targets, I generate all the financial analysis. But if I'm an engineer, or I'm in customer service, or I'm on, you know, some, I'm removed from that, because my job is not numbers. I don't know what's going on. I'm just doing my job. So not trying to make them accountants or overwhelm them with financial information, but making sure that they understand what they're doing contributes to the overall success of the business. You know, I think profitability is more about the culture and all of the different pieces that go on then. Okay, you need to be mechanical about,

you know, what every conversation I'm having with, with folks helps me realize just how true that is and how what, how mischaracterize so many things about financial functions are that there's such a misperception that it is about mechanics, and it is about gears turning, and it's really about so many other, you know, overlapping things, and so many other more esoteric things that maybe you wouldn't have even thought of like culture that really drive things or, you know, deciding as you said, we're going to be a profitable organization. And here's how, and here's why. And rather than just letting it hopefully happen, which is why I think a lot of companies

do, right, yeah, and I, you know, as a financial person, I love the entrepreneurial environment, I love startups, I love being able to provide that guidance. But I also find from a consulting standpoint, they need they need constant fresh blood, because my voice gets old. I'm viewed as standing in the way of progress. And where I find from my perspective, I see that the visionary is getting too far away from reality, as to what profitability can be achieved. And, you know, there's so much at risk, I just have seen, you know, people lose their jobs or livelihoods, you know, all the downsizing all the right sizing all of these, these, you know, pivots that need to be made when you start running low on cash. It's because you haven't built profitability high enough on your food chain. It says we need to be profitable, we can't just keep borrowing money.

Yeah, fascinating stuff. And really, I think, taps into so many of the things you talked about, it's easy to point out, look, we don't have a cultural profitability here. And here's the evidence of that, here's how I can tell that that's true. Here are some things we need to do differently, or here's my guidance to make some of these other things happen.

Right. You know, and I do find that the, the enthusiasm that goes through a business that has a as a success, and around in raises money. And now we've got some money, now we can do this, this and this, well, they do this, this and this, and then they do the system this again, and they do it again. And there's keep spending the same dollar. And every dollar spent on a raise needs to be it needs to yield, maybe not a return dollar return on an investment, but a step towards that profitability goal. And that's a measurement tool that is, is really fun to try and analyze, because you have to keep the the CEO who's the visionary, the business owner, the founders, the visionary, who's really say, Well, I need I need to accomplish all of these goals. And then we're going to be profitable. And you know, I like the notion of let's grow the business profitably, let's not just grow the business, and then try and be profitable, because then you've lost the culture, you're in a spending mode, and you're, yeah, we'll just get another raise, and then we'll, we'll be able to hire more people. And I have found that based on the evidence of my experience, that does not work.

incredibly valuable perspectives. Byron, thank you so much for sharing some of these insights. I mean, I've got some notes I've been taken down, you know, and I really appreciate all of this guidance and advice for our listeners. Thanks so much. I can't wait to have another conversation. I feel like we just scratched the surface, we can dive into some of these deeper things together.

Great. Nice talking with you.

Thanks, Byron. Take care.

Thanks for listening, and a special thanks to our subscribers. Consider becoming one today. Visit pro CFO partners calm and learn how we can help you build a framework for financial management and growth.