Why Profitable Businesses Go Broke and the Power of the 13-Week Cash Flow Forecast w/ Dylan Hendrickson (Part 2) - Ep. 19

SPEAKER_01 0:00

Yeah. Really?

SPEAKER_00 0:02

Yeah. No, and yeah, clearly service is a a big theme in your life. And so then okay, so then football ends, and then you go into a tax internship. Right? What what was that journey like as far and like what did you see as far as uh you know, with all everything that you'd learn about service, right? Which is a lot more than most people would coming out of college, understanding the concept of serving. Um and then you get into this environment, you know, you're uh it's a it's a new realm for you, obviously. Um what did what did you see as far as how service was uh was viewed, uh, and where did you differ from that and you know and all the lessons you've learned about service?

SPEAKER_01 1:02

Yeah, when I was doing my tax internship, it was definitely a season of learning um versus earning, right? And I wasn't super client-facing at the time. I was very blessed to do my tax internship at a local firm here, and we actually do a lot of business with them still. They some of the brightest tax people that I know. Um, I was more like right-hand man behind the scenes for the actually the founding partner, um Jamie Mitchell, who's you know the smartest tax person I've ever met. Um so I wasn't necessarily client-facing or anything, but um, I was really just, I guess, in a sense, trying to serve her and make her job easier, right, by doing a good job. And really, you know, in a way, it it helped spark my business journey and it helped it pushed me to continue going all in on the business side of things, right? Because a lot of what I was doing, it was mostly business tax returns. And it was for mostly smaller companies, right? Like sub a million dollars. And you know, they would come in. There was no accounting software, no nothing. Like a lot of what I did in that job was taking bank statements and getting them into Excel and creating makeshift PL imbalance sheets to be able to file the tax return with, right? So we're doing pivot tables and doing all this stuff, and I was just like, dude, like these people just like go all year not having any understanding of what they're making or spending or netting or cash flow or anything like that. And so I was doing that, and I had loosely started my bookkeeping accounting firm at the same time. It was just like I was doing a lot of the groundwork. Um, and I had one client that was one of my best friends, but I was in seventh grade, he's still a client, funny enough. Um, so I had like one or two clients, and I was going along and I was doing that. And what really flipped the switch for me is I had somebody pay me $600 to do their books for the year and to get their return filed. And it was the exact same thing I was doing at the tax firm. Like literally the exact same thing, right? Take your bank statements, put it in Excel, do the pivot table, whip it up, and file a return. And it took me a couple hours, right? Maybe it took me four hours, five hours, whatever it was. And I thought to myself, man, like how many hours would I have had to work at the firm to make that same amount of money? I was like, what the hell? Like, what am I doing? Like, I'm gonna just keep doing this, you know, and that really that really helped push me that way. But but I learned a lot. It was, you know, our firm doesn't focus as much on tax anymore. We were a little bit more like fractional CFO and accounting um type of firm versus tax, but I definitely feel like I have a competitive advantage understanding tax at the level that I do through the schooling and through that internship, getting to work with people that um know so much about it. Um and understanding kind of that segment of the market's needs. Obviously, we're a little bit further up market nowadays. Um, but but it was great. And it got I learned a lot. I got some initial clients from it because they were specifically taxed. So a couple of those people I was able to get for bookkeeping and just keep learning and keep snowballing. So yeah, the tax internship was great. They're a preferred tax partner of ours now. So like a lot of our clients we send to them and push to them because they do a great job on that side of things. So yeah, it was very fruitful.

SPEAKER_00 4:20

Yeah, no, that's that's all that's amazing. And it's funny how uh that you know, like today is you know, especially when you're talking about the uh having to turn the bank statements into financial statements, like uh it's uh there's you know, there's gonna be people out there that are stuck you know have recently started their uh you know careers in uh accounting or tax that uh have never had to do what you and I, you know, because you I've been there as well, and uh they've never had to do that because now with AI you can like that makes that process so much easier. And it's like um and so but it also like why do you think so many business owners accepted you know their reality, which was operating with z basically zero visibility from an accounting and finance perspective? Like, because I mean that's obviously like we're I'm sure we both have seen the same things. It's like it's way more common than not. For sure.

SPEAKER_01 5:34

Absolutely. Um, I think it's a couple of different things, you know, especially if we're talking like the sub-million dollar business owners. I mean, I it kind of applies to everybody really, but um, especially sub-million, sub 500,000, it's like you gotta get money in the door, right? They're hyper focused on the next deal and they're probably still doing a lot of the work, they're wearing a ton of hats in the business, and the finance and accounting is very stressful because they don't know how to do it, they don't understand it, right? So when they have all these different hats and all these different priorities in the business, and they know that this thing over here needs to be done, but that part of the business is stressful in itself and they don't know how to do it properly, right? It's just it's a really easy part of the business to run away from and stick your head in the sand and be ignorant to it until you can't anymore, right? Um, and that's where you know there's typically an inflection point that we've seen that happens kind of past a million a year where people start to realize that they need more support um than they thought they did on that side of things. Um yeah, it's just a really easy part of the business to run away from. Um, it is a great place to buy your time back and whatnot. But I mean, I I've started giving people the advice of like, dude, don't even try to do it yourself. Like, I would rather you not do it at all than try and do it yourself, um, most of the time, right? Especially if you're sub $500,000 a year, like just put it all in a business bank account, make sure all the income and expenses run through there. When you want to pay yourself or buy something personally, transfer it to your personal account. And that way, when you need to file your taxes, you know, a tax accountant can at least take your statements, and the statements will be clean from the business side, where then they can file your tax return. Um, and then when you have enough, you know, where you can pay a freelance person to set up your QuickBooks and manage that day to day, and then you'll soon realize that that's not enough support because um, you know, having a PL in front of you, but not understanding what any of it means isn't very helpful. And then you run into, you know, profit and cash are not the same thing, right? And most people are significantly confused about that, and that's where you know our firm typically starts to step in and help. That's kind of our main thing is you know, the forecasting and the CFO advisory and managing cash flow. Um, so yeah, that that's that's why I think people don't know how to do it and it's stressful, so it's easier to just run away from it.

SPEAKER_00 7:57

Yeah, no, it's uh I feel like uh part of this is the uh of our role and and with these businesses too, is I'm sure you find is like uh you're also an educator because it is that difference between cash flow and profit is used so interchangeably um among a lot of business owners and founders who like you know it's not their like it it makes sense why you know they're they're not completely aware of the differences because like they didn't go to school and get educated in accounting, like it's like it's not there is you know it's a completely different language, right? It's like if we went into a a business, uh you know you know we're not gonna know what an electrician knows because they had formal training on that. Like that's but that's why uh I would call an electrician, right? Yeah. But the uh that's something that you know we come across very frequently as as well. And so it um and I personally feel like there's too much of a uh this of a of an weighted importance on profitability for a business like where there's this you know pride and maybe partly ego kind of comes in where uh showing that you're profitable is like shows that you're successful, but then like you you know, like you're saying and like you've seen, like I see frequently, is a lot of these profitable businesses are super cash poor and don't cash flow and are one bad timing of something going wrong or slightly wrong away from a real bad situation. So why do you think why do you think a lot of profitable or or many profitable businesses are often so cash poor?

SPEAKER_01 10:09

Yeah, we see it all the time. I I I know you do too. It it's way more common than people think. And it's especially I mean, it can it can happen in any business model, but it especially is common um in any type of business where you're not getting prepaid, right? Or paid before you deliver the services and you're working on any sort of terms or like uh pay as it's done type of thing, right? So if you're collecting on net 30, or if you're getting half up front and half upon delivery, business models like that, man, it's understanding cash flow is mission critical. It's necessary, right? And this is what happens, this is what I think happens and what I've seen is business owners don't understand the economics of the business model that they're in. They don't understand their cash conversion cycle, right? They don't understand how quickly they can collect cash and how quickly they're spending cash, right? And again, a PL showing your profit doesn't really show you that, right? And this is really what the whole philosophy our business is built off of and how we serve as clients. It's like, dude, who cares about the PL? Like, that is not the right tool to be managing a company day to day. All we care about is cash. Um, but basically what happens is they don't understand their unit economics, they don't understand their cash conversion cycle, but they want to scale, right? Like everyone has wants to have a multi-million dollar business, uh eight-figure business. So they scale, and what they do is they scale a business that has a math equation that isn't as favorable to them as they thought it was. Right. And now what happens is you know, there's some sort of event where you know something that was net 30 went to net 45, but you still got to make payroll every week, right? There's still business, there's still expenses that come out. So some event like that happens where they're short, right? And there's a gap, and they probably because as I mean you know, most companies don't have a great accounting function. So because they don't have clean financials, they're not able to secure favorable, favorable rates on a loan or a line of credit. So now they take on predatory debt, they're taking on MCA loans, or they start factoring, or whatever it might be, and now they're buried in debt. So even if they fix the cash conversion cycle, and even if they are profitable, most of that profit is now going towards servicing the debt they just took on. So I mean you wouldn't believe it. I mean, you would believe it, but someone listening to this would not believe how many people I talk to that are doing, you know, three, five, seven million a year and cash poor and buried in debt happening all the time.

SPEAKER_00 12:33

And I mean, especially you raise a very, very accurate point as well on the terms of any financing and having to having to go that route um because of a lack of cash. Uh where like, you know, it's the amount of those those, you know, those loans, and you know, they're always the loans uh and financing that you can get approved in 24 hours for usually, right? It's cause um that, you know, like you know, the amount of amount of rates that I've seen that are, you know, 25% plus, and they also because then there's you know hiding inside of you know the loan agreement. There's you know the there's other terms that there's hidden fees in packed in there, and it's like, man, like you that's expensive cash that you could have uh really been your own bank if you had of uh thought about cash flow a little earlier on. And like, yeah, like fixing you know fixing your cash flow problem is one thing, you know, like uh I did a solo uh episode I think last week about that because uh you know because now you know like uh it was uh a uh local landscaping company that winterizes and de-winterizes our sprinklers. So you know I get an invoice from them twice a year. Um I de-winterized uh at the beginning of 2025, uh, you know, in March. I didn't get my invoice in the mail, right? In the mail is one thing, uh as well, until July, I believe. And then it's net 30 on that on receipt. And to pay, you either have to mail a check or you have to call. And you know, like obviously, you know, as an entrepreneur, like uh just not doing that. Like, yeah, like that sat like that sat on my desk for the full net 30 because I'm not like the options I had were write a check, drive to the post office, or yeah, like calling, you know, in hindsight is a very easy thing to do, but way easier to be able to pay online. Or when I called, I asked them if can you just auto-charge me next time? Uh right, and and but it was and it was a no, like they they don't have that system in place, you know, because a lot of this you know is a you know a lot of systems issues. But I'm like, man, they might what?

SPEAKER_01 15:12

So it sounds to me like they hate money.

SPEAKER_00 15:14

R that's that's what it sounds like to me as well. Um and I even because you know, and uh because like I hate seeing these this uh you know happen and like you know, like we help we help companies just like you do, like fix these problems. I got because the owner lives like down the street from me, uh uh, I didn't I don't know him personally, but um uh our neighbors knew him. I asked if for his phone number, so and I texted him and I told him about that. He never responded, but this year when we de-winterized, um they uh they did have a way to pay online. So I don't know if it was from the text or not.

SPEAKER_01 15:59

It was because of you. Yeah.

SPEAKER_00 16:01

No, but no, I'm just like I'm glad because when when that happened, um I'm like thinking, like, man, this should have been paid. First of all, like I would suggest you have some way of, you know, the ideal is like once you've de-winterized that, you have payment method on file and you charge that immediately. So the day off. Um even net 30 from that, okay, cool. But you need to get the invoice to me. Like, let's do it digitally, let's not wait till your office manager mails those out every Friday, and then this paper invoice got lost somewhere um and wasn't caught until July. Like, I'm like, am I the only one? I can't be the only one. And then I'm like, how many? Like, because like that is something so easy to fix, but also clearly with these, like, there's a lack of systems here, and it's like that could that can if that's happening to a big amount of people, like that's that could be a that could be that could kill, you know, that could kill a business. Uh if it's insane.

SPEAKER_01 17:13

That's totally insane. I mean, my business partner, um, he's very good at you know all the stuff we're talking about, right? Payments and collections and putting all the possible safeguards you could possibly put in place to make sure that we're getting paid what is contractually due at the right time and we are able to pull it, all that sort of stuff. And we get paid, you know, before the work is delivered, right? If we're doing June's accounting and CFO work, we're getting paid on it June 1st, not on the 30th. We do we do all of the best practices, and we are still looking at our cash flow all the time. I'll still looking at it weekly because crap happens, right? Payments bounce, like people churn, whatever it might be. And so we, you know, in a in a in a business that cash flows and is profitable, and we do get paid in advance and all that stuff, and we have all the best practices, we're still looking at cash flow all the time because it is that important, right? When you're so I mean, really in any business, it's so important, but especially you know, sub-20 million, like cash is all that matters. Like, I don't care about your hebda and all that other stuff. Like, how much cash do you have 30 days from now, 60 days from now, 90 days from now? And yeah, make our decisions based off of that. Um, and so then so that's where it really blows my mind when there's people that are working on net terms that just aren't even looking at this, they're not they have they have no understanding of what they expect to have six weeks from now or four weeks from now or whatever it might be. Like it's it's crazy. It's crazy to me. But I mean you have businesses, we come in and help people with that kind of stuff.

SPEAKER_00 18:40

Yeah, no, exactly. Um and you know, so when it comes to forecasting, uh what is your what's what's your perspective on forecasting on uh you know how how big of a role that any projections or forecasting can or can or should be used? Because I have my own opinions too, because uh, you know, like I tell anyone uh that we're gonna forecast or project give projections and build projections out for um that like I start by defining really in essence what projections are. They're as they're at their foundation an educated guess of what your future financials are gonna look like, your future cash flow is gonna look like. You said I was gonna have this much cash in the bank uh three months from now. And especially my view is the further out you go, the more of a guess it is, right? Like you the degree of accuracy that you can predict 30 days from now for a business or one week from now is a lot more accurate than you can predict 13 weeks out or 12 months out, you know. It's so what's your what's your position on on projections and and forecasting?

SPEAKER_01 20:43

Yeah, yeah, I largely agree with everything you said there. Our norm is 13 weeks, that's what kind of our main deliverable on the CFO side is, honestly, it's what we obsess about. And that's really our hypothesis, and you know, where I think we're a little bit different than a lot of folks in the market in in this realm, you know, because getting a really good 13-week forecast um takes a lot of effort and it takes a lot of collaboration, it takes a lot of time, it's significantly harder than you know, just producing a P ⁇ L and a balance sheet, right? But it's that much more impactful. That's why it's so much harder. But um, again, it just comes back to us wanting to be obsessive over cash. Um, I mean, what we see in our clients when you have a great cash flow forecast and we have, and and again, right? It's not 100%, but even if we're getting to 70, 80, 90% confidence, especially in like the first four to six weeks, you just see a complete behavior change in the business owner and an emotional change where, you know, because I talk to a lot of people, again, most of our clients are kind of in that like one to 30 million realm. So a lot of times they have an in house accountant. They have a tax CPA, they've gone and hired the people they thought they were supposed to hire, and then they come to us and they're like, Why am I still so confused? Why am I still so stressed? Why does this still feel so broken? And it's because in Intuitively, they understand that profit and cash isn't the same thing, but they can't articulate it. They don't know why or like what's broken. Um, and that's where the forecast is really impactful because now if they have an understanding of their cash position four weeks, six weeks, eight weeks with some level of confidence, now they can sleep at night. They understand it's gonna be okay. There's enough cash that any problem that comes up, we can solve it, right? And and what it also does is it now gives you a different system in terms of decision making, right? And so we're kind of changing almost the behavior of the business owner, right? And you see this, right? People are coming through, they've brute forced their way to this point in time, just being a cowboy or gunslinging, shooting from the hip, right? And you know, that becomes more risky the larger you get because you're dealing with larger numbers, right? The timing of cash in and cash out becomes more important as you get bigger, not less important, right? So now when somebody comes to us and says, hey, I really know that I need to hire this key a player, I need to hire this type of person, but I'm not sure how much I should pay them, I'm not sure when I should hire them, right? So now with a forecast, we can now use that as our decision-making tool. Like, okay, well, let's throw the salary into the forecast and see how it affects your cash position, right? And part of something we like to say too is you know, the right decision at the wrong time is still the wrong decision. Right. So in a 13-week view, you know, paying that vendor seven days later and delaying that hire seven, fifteen days later, that can be a significant difference in your cash position. Right? Um, finding a way to you know incentivize that person that always pays five days late to pay you on time or pay you early, coupled with that, those other things I mentioned, can be a very significant swing in your cash position, um, especially the larger up you get. So, yeah, our our perspective is too many people are managing their company day to day, week to week, using the wrong financial tools. Like the PL and balance sheet is just not the right tool to be doing that. And and to be clear, like they are useful tools, they are necessary. They're necessary from a compliance standpoint. You know, I'm a big fan of gross margin. Everybody we talk to and see their gross margins overstated, right? Like I want to see what your true cost of goods and cost of service is, right? So it's a good tool for pricing and historical performance and seeing a gross margin, things like that, but it's not the right tool for managing a company day to day because there's so many cash activities that happen that are not reflected in a PL, right? Paying like loan payments, paying down your credit cards, paying yourself, right? None of that stuff shows up on a PL. But on a cash flow forecast, all of that is taken into account, where we can have a degree of um confidence in what the cash position is going to be over the handful of weeks. P NL does not tell you how much cash you expect to have three weeks from now, six weeks from now, eight weeks from now. Right. Um, so that's really our whole hypothesis is let's obsess over cash. Because really, if cash is dialed in, you got a ton of cash and reserves, and your cash cycle is all dialed in, PNL and balance sheets take care of themselves.

SPEAKER_00 25:09

100%.

SPEAKER_01 25:11

Yeah, that's our whole philosophy there. And that comes from, so to be clear, right? Like, I'm not the genius that thought of that, honestly, right? We have we're very blessed to have very talented people in our company, right? Between our director of CFO services and our strategic advisor on the CFO side, our strategic advisor literally started his own private equity fund. He was actually born in New Zealand and grew up in Australia. Um, it'd be fun for you guys to meet. Um, but he started as he's a lawyer, he's a CPA, he has an MBA from Duke. He started his own private equity fund in London, buying distressed businesses, turning them around, and then sold that whole portfolio and retired at 40. And then somehow I talked him into coming and working for us. I still don't know how. But like that's the like everything that we just talked about on the cash flow forecasting, that's exactly what he did in those companies to turn them around. He was obsessing over cash, he was obsessing over a forecast, and that's what he used to drive those businesses back into profitability was focusing on cash. Our director of CFO services, he had started it, he started his own company and exited it after a couple of years. And then he was a very early stage employee where he was eventually the full-time in-house CFO and CO of a SaaS company that exited for $350 million. Um, again, same type of systems, same frameworks, same obsession over cash and forecasting. So it's really those two um it's really those two people's experiences actually doing this and actually growing companies and actually doing what everybody's trying to do. And we basically just brought those systems into stacks. And really, a lot of the time, at least at a really high level, it's kind of reserved for larger companies or private equity-backed companies, right? A private equity firm is gonna require a 13-week cash flow forecast, right? But the small business owner doesn't typically give that as often because typical bookkeeper, like they're not qualified to do that. Typical accounting firm, they just want to do the P ⁇ L imbalance sheets because doing a great forecast is challenging. It takes time and effort. Um, but it's so fruitful. So, really, what we're trying to do at Stacks is take those same systems that you know PE backed companies have the benefit of having in those environments and really just bring it to Stacks so that we can bring it to the small business owner is really what we're doing. And it's again hyper focused on the CFO advisory, but really coupled with the 13-week cash flow forecast. That's what we're focusing on with our clients.

SPEAKER_00 27:36

Yeah, no, it's um, I mean, those uh I feel like both both of our companies like definitely look at this world through the like a very similar lens, but then it's uh which is why I love uh talking about this like with people like you and you know, the kind of seemingly far and few between that kind of look at it like this, but then you know you're saying about those experiences uh for each of those people that uh on why they see things the way they see things and then to bring it into stacks. Um and it just reminded me of uh the company I worked at before starting Arrowhead was um was a startup, um and the majority of our clients were startups. Um, you know, and these are all companies that were wanting to, you know, that were going through different uh seed rounds, you know, with the VC money, wanting to, you know, and with the ultimate goal of having some large exit event. And I think 95% of clients that I worked on at my time there were all startups that you know were in hyper-growth mode. Um, you know, they they cared enough about accounting and finance to pay you know good money to have our team and our company service them, but 95% of them were burning through hundreds of thousands of dollars a month. They like they had negative cash flow. Um and it was just and like that stressed me out, and I didn't even own these companies because I'm looking, I'm like, how as a founder, how like genuinely, how do you sleep okay? Knowing that like you have like there is like a clock on the wall tick taking down the days of how much cash you have until you can find another investor to pump some more cash in to kind of reset the timer, and I'm like, man, like that's like that's not how I would want to run a company, and you know, and each do their own, right? It's but like it's all about you know I comes down to what kind of company you want to run, and I'm just thinking, and I'm putting myself in the shoes, and I'm like, I would that would give me like I'd be sick. Like I'd wake up sick every morning, I feel like. And so that's what I I focused on. Uh, you know, the two in the two things, because the other part of what you mentioned, which is like apart from cash flow, is also uh similarly the way that I like one of the other most important things is you know, gross margin. Um, you know, is and not like I focused on cash flow and gross margin. Uh, because especially with you know a company like mine, and then you know, a lot of the clients that we work with, there's you know, they're found they're founder-led. Uh there's not a you know, there's not many of our clients that do have institutional investors or boards they have to report to. So you know, there's there's some personal stuff going through the business, right? And like that clouds what your profitability uh overall shows. But uh, you know, a clean number to look at if you do want to look at a PL is like I think like the PL is uh is useful for what is your gross margin, because you know that that does help in pricing and knowing like are you profitable from the standpoint of delivering what you do or sell? Um and yeah, you know, similarly, like there's clients that come and first go into their QuickBooks and they have no they have no cogs, they have no cost assessment.

SPEAKER_01 31:49

Their gross profit is the same as their revenue.

SPEAKER_00 31:51

Yeah, they have a hundred percent gross profit, and it's like, wow, that's amazing, but it's so so far from the truth.

SPEAKER_01 31:57

Um yeah, I want to buy that business if I ever find that business.

SPEAKER_00 32:01

Yeah, if you ever find one, let me know, and we can go in on it together because uh that's attractive right there, but I'm not sure that exactly exists. Um and so that's yeah, so that's always been a focus. Uh and because and I never talk about net profit. Uh I don't think I've ever uh talked to a client and and made you know any comments on net profit, because I'm like, that number is like actually like, in my opinion, unless you're preparing for an exit, is the only time that that, in my opinion, comes into the equation of importance, because then that's going to affect your EBITDA, which is gonna affect your valuation, which is gonna affect how much money you get at your exit, which so like that's where when clients come in, and you know, first thing I want to figure out is like, okay, are you in growth mode or exit mode? Uh, because if you're not in exit mode and preparing for that in, you know, a 12 to 24 month period, then let's just get on the same page to take the net profit and just throw it out the window, place zero importance on it, um, at least before we get a grasp on cash flow and all the other important things. And there's a long list that come before that. Um, because really net profit is uh I think for a company in growth mode is only important um when it comes to f getting ready to file your taxes, in which case you want it to be lower. Right? And so it's um, you know, it's really like no, you we don't want we don't we don't necessarily want you to be showing a huge net profit, um, because you're just you're gonna be it's just all that all that gives you your your trophy at the end of the day for high net profit is a bigger tax bill. And if you're cash poor, how are you gonna pay for that? You know, so um so you started your company and then you met your you you met your business partner online and merged within how how many months within meeting him online did you merge?