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 and context

everybody, Chris Bintliff back with you, again from Pro CFO partners create the next I have Byron Conneely back with us, again to talk about profitability. And to join us in in discussing some of the angles that we can explore around how we can become more profitable. What should we be thinking about as we develop insights about profitability, I think for a lot of companies, it's almost a surprise, or a, hey, look at that we managed to eke out a profit rather than something that maybe they plan for, or they think ahead on. So let's just talk about that, from your perspective about what you see or what your perspective is and how it is financial reporting. Help us be more proactive or help us manage profitability.

One of the things we talked about last time was being proactive and planning and being planful. About profitability, it's not something that just happens. And so when you when you take the next step of that, and you look at reporting that you're doing either actual or actual versus budget, is it telling you anything about how the business is doing? And the thing that we look for right off the bat, is, how are we? How do we have our chart of accounts organized, to be able to really identify what is Cost of Goods Sold direct variable costs, what are our sales and marketing costs, and what are overhead or more fixed in nature costs, and then is going to be one of the keys to determining profitability, because you'll have variable salaries that may be commission oriented, that are more so sales and marketing, you'll have direct costs of either of delivery or cost of goods sold. And then you have the overhead, you know, the the folks that regardless of whether sales go up or down, or there's a large effort in sales and marketing, you know, their their fixed cost set salary stays the same. And, and we find it is such an enlightening Aha, to our clients that have just recorded salaries as a lump sum and admin, because it's, that's the way they get it from their payroll service, they make a journal entry, they've accounted for all of the costs. But they don't see that that really their profitability is hidden in how they account for that, because payroll and people cost is such a huge part of Profitability and Cost related expenses.

That's interesting. So how we organize or categorize all the things in our reporting can shed light on our profitability. So what is that kind of the common mistake you see is with overhead, we lump it together in one kind of way, or what other errors or try to avoid this is do you bump into? And is there kind of a suggestion that you have a way to do this a formula that we can be following?

Um, yeah, and I would really start with the people. So when you're, when you're looking at people, and you're identifying, you know, you hire people to either do sales and marketing or to deliver or to provide overhead, you really need to be able to see what function do they serve. And one of the things that drives our thinking on this is that we look at breakeven point. But what is a breakeven point for a company and the formula is taking the the fixed costs that you have, and dividing that by a percentage of what your contribution margin is. So we're kind of driven by this formula, say, well, in order for this to work, you have to have the expenses and costs in the right bucket, in order to be able to say, here's my revenue, here are all my direct costs for delivering those services, direct variable cost for delivering the services that's going to gain my gross margin. And then what are the costs that that I incurred in getting the opportunity to sell something? Those are all my sales and marketing costs. Once you subtract those two pieces from revenue you have this has to cover overhead. And if it doesn't, then there's something in your in your mix that isn't working for you. So your profitability isn't going to be what you're expecting. Do you find that a lot of organizations

are missing this or doing this wrong? Is it kind of chronic and epidemic in your perspective, that there are some things that we keep seeing again and again and again?

Yes, and I'm I haven't cracked the code on whether it's, it is a function of Well, we've always accounted for it like this, and just, you know, kept everything together and you just become immune to it and you're, you're really you're looking at the top line, you're chasing revenue, you're looking at other variable costs, but you're missing out on this one huge piece of your cost equation. And that would be your your people costs and What people do is is different and it has a different part in the profit formula equation.

In small business, see if you agree with this. There's almost a sensibility. In my experience of, at the end of the year, look at that we've got some cash left over everybody, I guess we turned a profit. Like it's almost an accident or a surprise. And it's not planned for it's not calculated. It's there's not a course you know, that is set for it at the start. And it isn't even necessarily built into goals and strategies. This is when we'll be profitable. This is how are we profitable? That's I don't think the same for like a funded startup who has to, you know, talk to investors about that kind of thing. What should small businesses who don't necessarily have a wide breadth of reporting, be thinking about at the start of the journey so that they're better set for profitability even if they don't have a lot of overhead or a lot of people costs

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

Um, yeah, it's it's, that's the dangerous part of the of the profit equation is when you start up, because you're basically you've been funded, and you're trying to build build out your organization. So profitability, doesn't really enter into your thinking, it's how do I execute? How do I develop products? How do I hire people, I need to hire sales and marketing, I need to hire people in my administrative department. So you're trying to you're spending money to, to kind of create the organization. You have to as a disciplined financial person, or a disciplined owner, say, we can't lose sight of the fact that this is a temporary, you know, Monopoly money play, or we're spending, we have to be able to figure out what our profit formula is, how we're going to account for the business, and how are we supposed to be profitable, so that we can build our financial statements and our general ledger around where the accounts need to be to tell us how we're doing?

What are some key performance indicators that I should be keeping my eyes on to increase or create more profitability?

Probably the key area for KPIs key performance indicators is really in the revenue side. Because I remember having this discussion with some sales and marketing people back in my youth versus financial, okay, nothing happens, the less we sell something, yeah. That tends to get all the oxygen and all the sunlight, which is valid. The KPIs on the revenue side, aren't just how much do we sell it? What do we sell it for? It's how many calls do we make? What is our what is our production run? What? How efficient? Are we? Those are elements that allow for us to be able to anticipate in advance of any financial statement creation, how are we doing? Are we staying on track with the elements that are going to lead to profitable, profitable revenue, rather than, we're just selling stuff, and we're losing on every transaction, but we'll make it up in volume? That's the you know, that's the fallacy of trying to stay away from so KPIs on the revenue side. And then KPIs on the cost side. What can be, you know, what percentage efficiency are we achieving, and how we deliver on a product or service. And the KPIs on the marketing and sales side can be how many calls do we make? How many proposals are outstanding? How many, you know, contracts that we generate, those are objectives that you put in place and you track against them. So that isn't just, oh, well, we sold or we didn't sell, there's an awful lot that goes in prior to that, that we need to keep our eye on.

There isn't as a marketing professional, I see that a lot when I'll go into organizations and the discussion will, will be around thinking of marketing as a cost center. And and sales you know, as you say, gets gets a lot of the oxygen. And when I can help them see that there are big and small levers that when we pull them, they impact the next lever and the next and the next and then you can start to see this holistic picture. It's you usually an eye opener. And what I hear you saying is from this position of looking at all different aspects of the organization, you're going to find lots of those small and large levers, which for me gets into the heart of the value of the really capable Chief Financial Officer helped me understand that what should I be looking for my CFO to be doing more of to help us be on this path towards profitability?

I kind of come back to the financial reporting piece, because it's not just here's a balance sheet here, because here's an income statement. Here's that cash flow, check their management reports, how do you have a good CFO is going to figure out how do you make the business communicate to the non financial people? What's going on? What's important? And what do we what's the next? What do we need to do to improve our profitability, improve our ability to grow profitably, rather than just chasing volume, and then being disappointed because we disconnected our actions from what was going to make us profitable? We either we either overbought inventory, or we over hired people. And we didn't have a good yardstick KPIs and management reports that tell us how do you keep these things in balance? And it's a it's a difficult thing to do. But the CFO is really charged with how do I communicate this to the CEOs and the non financial people? So everybody's on the same page as to what it is we're accomplishing? And are we doing things that are going to lead to profitability?

Do you think that I should have a goal of profitability? breakeven is kind of our starting point. But then should I be aspiring to some percentage, or you know, some metric that I should be chasing or keeping an eye on or looking towards or putting into my annual planning? Or is it more organic and sort of evolving as the business grows? How should I be thinking about that?

always set a target. Always be aggressive in your in your profitability, it needs to be needs to be reasonable, it needs to be attainable, there can be a stretch to it. But if you if you don't feel that it's something you're really trying to achieve them, you're not going to achieve it. We had spoken last time that the the biggest economic challenge you'd have in running a business is that expenses rise to meet income. And if you don't keep your eye on the ball as to how you can manage profitability, that's what's going to happen. You're going to spend and expense dollars that are going to eat up your profitability and you're going to be disappointed and the result. It's tough. It's a tough equation that needs constant vigilance. And that's why these KPIs and financial reporting are so integral in achieving those goals.

Byron Keneally from Pro CFO partners thanks again for being with us. Always a great time to have a conversation with you learn so much from you about profitability. I can't wait for the next part. I'm really interested in maybe digging into some of those KPIs and some of those goals and planning that we should be strategizing around for profitability. Maybe in part three, we can dig into that. Thanks again for being with us today.

Okay, great. Thank you.

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.