In this insightful episode of the MFGMonkey Podcast, we explore the art of driving value and evaluating expenses with financial expert Jason Kruger. As businesses strive to maximize efficiency and profitability, understanding how to effectively manage costs while enhancing value is crucial. Jason shares his expertise on strategic expense evaluation and value creation, offering practical tips and insights for business leaders and financial professionals. Whether you’re looking to optimize your budget or enhance your company’s value proposition, this conversation provides valuable guidance to achieve financial success.
How to Get in Touch with Jason Kruger
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- Website: SignatureAnalytics.com
- Contact Through Website: Fill out the contact form on the Signature Analytics site, and Jason or a member of his team will follow up.
- https://www.linkedin.com/in/jason-kruger-a0b159b/
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Driving Value and Evaluating Expenses with Jason Kruger
In this conversation, Dustin and Jason discuss various topics related to accounting and business management. They talk about their plans for the upcoming Memorial Day weekend, but quickly transition into discussing taxes and the importance of accounting in business. They touch on topics such as weatherproofing a business for a possible recession, what nonprofits need to know for annual audits, how to close the books quickly and accurately, and how to prevent and detect fraud. They also discuss the challenges of finding the right accounting software and the importance of understanding profitability and cash flow. In this conversation, Jason Kruger and Dustin McMillan discuss the importance of accurate and timely financial information for businesses. They emphasize the need for businesses to evaluate their expenses and ensure that each expense is driving value and contributing to the goals of the business. They also highlight the importance of closing the books, having good numbers that can be trusted, and having a forecast and budget to make better decisions for the future. They discuss the role of banks in providing funding and the importance of building a relationship with them based on credibility and trust. They also touch on the challenges faced by nonprofits in gaining trust and raising funds, and the value that financial credibility brings to these organizations. Finally, they discuss the role of a good bookkeeper and the need for a higher level of accounting expertise to ensure accurate financial reporting and decision-making.
Jason, welcome. How are you doing, buddy?
Thanks, Dustin. Good. How are you?
I’m doing really well. They’re getting ready gearing up for Memorial Day weekend and we’re excited about it. Spend some time on the water and probably drink a couple too many beers and have a good weekend.
I think I’ll be doing the same. Actually, we’re heading up to a lake in Northern California for the weekend. My wife’s friend and her family from college have a place up there. We’re driving up there. It’s a seven-hour drive, and we’ll be hopefully doing the same thing you’re doing.
Awesome. What lake is that?
It’s Lake Tughlaq. It’s just southeast of the Sacramento area.
Okay, cool. I haven’t heard of that. And where are you right now?
I’m in San Diego.
I forgot. San Diego. That’s right. Beautiful area.
San Diego. It’s going to be about a seven-hour drive for us. So, we’ll get up nice and early in the morning and head over there.
Very good. I spent a fair amount of time in California and San Clemente.
Yeah.
10 plus years ago and loved it out there.
Yeah.
San Clemente was really awesome. There were parts that I wasn’t too fond of.
Yeah.
But that’s another discussion for another day.
Yeah. I think Mays is great.
And the fun part of this is we’re talking taxes with somebody living in California. So that’s always an interesting topic that my buddies that run manufacturing facilities in California, it’s a sore subject.
Yep, exactly.
So maybe we can help some Californians out with tax discussions today.
Yeah, absolutely. And just for clarity, I do know enough to be dangerous on the tax side of things. Our focus and my background are more on the accounting side.
Right.
That is really on the CFO leadership, and the accounting leadership, to make sure the businesses have good numbers, and good reporting so they can drive decision-making for the business as well. But happy to go in any direction. Like I said, I know enough to be dangerous on the tax side too.
We will leave that alone. But the accounting piece has always been very, very interesting to me. Outside of manufacturing good products, the accounting piece is probably the number one most important thing any business can pay attention to and have full focus on and understand their numbers every day and I’m excited about our discussion today, quite honestly.
Yeah.
And I was even more excited reading your bio that you’re kind of tough. So, let’s touch base on that. That doesn’t make it in everyone’s bio.
I think you’ll notice me maybe and want to talk to me. But the reality is, I’ve had my background, I’ve had quite a bit of experience, obviously, in the finance world. I started my career in public accounting and spent most of that with Deloitte, which is one of the big four global accounting firms.
Yep.
So, I’ve had a lot of experience just seeing a lot of all types of companies. Different types of industries, all stages of life cycles, right?
Right.
And especially when you come into manufacturing. When you talk about numbers and accounting. Manufacturing when we see small, mid-sized manufacturing companies, inventory has always seemed a lot of times it’s a black hole, right? Understanding your true profitability, and your true margin is always a challenge. And so,
Yeah.
What we like to say is, that not only do you want to understand your margin, but you want to understand your margin by product line, and you don’t want to be guessing that. Maybe my margin is 50% or maybe it’s 40%. Well, is it 40 or 50? We wanted to know the percentage point because as you grow, that percentage point changes. That percentage point, 1 or 2%, can make a significant difference in your cash flow, your profitability, how much you pay yourself, those types of things.
Yeah.
I’m excited to talk about any value I can give to the listeners. We’ve seen a lot as a company. I’ve seen a lot personally and love to provide any value we can.
Yeah, I love it. It is very interesting to understand your profitability and not all systems are created equally there.
Right.
And it blows my mind that there are systems out there that won’t track labor rates and won’t track the actual cost of goods and things like that. And you know, we’re using a system right now that won’t allow us to track a labor rate.
Yap.
And it’s on our short list of things to invest in to move to a system that will allow us to track labor rates by work center.
Yeah.
And I don’t understand how somebody could create a system and not track labor rates.
The reality is if you’re using the least expensive systems and software is great for most businesses. For manufacturing, they’re tough. QuickBooks, we highly recommend QuickBooks for a lot of our clients. But when you’re in manufacturing, QuickBooks is not really made to track inventory. To track labor rates and cost in any level of complexity. And there’s a number of systems where there’s a number of bolt-on software out there that will do that. And then now you have two systems. And then the challenge comes if you have to learn how to use the new system. Not only do you have to use it effectively, but you also have to be able to integrate it effectively within a QuickBooks platform so that ultimately you’re getting the good numbers, right? And so that adds complexity that for businesses that are growing, they’re smaller, they’re growing, they want to grow, once you get beyond 10 million, that adds a lot of complexity and it’s challenging and what I see a lot of times is even though they may set it up and it may be tracking inventory and cost of goods, it’s not necessarily tracking it accurately. So, you end up with numbers that don’t really reflect reality and you may not even know it because inventory can be a black hole and the byproduct of inventory, what comes out of inventory, ends up being your cost of goods sold. So, if your inventory is not accurate, your cost of goods sold is not accurate, your profitability is not accurate, your margins, nothing, so how do you really run your business without that clarity? And that’s a big challenge for manufacturing companies as they’re smaller and scaling and want to grow.
Yeah, and it is. Good tools are extremely expensive.
Right.
The one that we’re using, we’ve used for several years, and it’s certainly not the best. And we want to get away from it. And we won’t talk about who they are because I just don’t want to bash them.
Yeah. As I said, I mentioned QuickBooks because we highly recommend it, but it’s just not built for more complexity, especially from a manufacturing perspective.
Yeah.
And they actually have partners that they recommend for that piece, for inventory management that will integrate within their system.
Yeah. And we use QuickBooks and I do think QuickBooks is great for what it is. And we use another system that integrates or is supposed to integrate with QuickBooks.
Yep.
But it doesn’t.
Right.
And there are rounding errors for invoicing and things like that, it messes QuickBooks up. So, we ended up turning it off. Then we’re double-entering everything. What system outside of QuickBooks would you recommend to folks that are small to medium size, or would you?
Yeah, there are several systems, as companies grow, I actually like NetSuite. That’s a fully functioning ERP system. Now that starts to get more expensive, right?
Yeah. We’ve looked at them and they are crazy expensive.
So, you have to be above 10 million annual revenues to want to entertain that.
Mm-hmm.
Sage Intacct, I’ve seen is a pretty good system. What else? So, Sage has all different types of products and all different types of industries. They’re a business because they’ve acquired several different software. They do have a pretty solid system. That’s I think the challenge is the next phase beyond QuickBooks is very expensive, right?
Yeah.
So, the best bet like what you were saying, is to leverage something like QuickBooks with a tool that can track inventory. And there are several of them out there. After this call, I can probably send you and your listeners probably what I would consider maybe the top five.
Okay. Yeah, we’ll do that.
We’ve seen, so maybe we’ll do something like that.
Yeah, for sure. Well and to make sure that we do stay on track because I have tendency to score out of control and we’ll go down a black hole. You did send me some topics that you want to make sure that we talk about. So, let’s talk about those real quick. How to weatherproof your business for a possible recession. Great topic.
Yeah.
What do nonprofits need to know to breeze through annual audits? We talked about that, you know, nonprofits briefly. I think that it’s a great topic, even though we’re a manufacturing Podcast or so many manufacturers or warehousing distributors that have interest in giving back as well. So, I think that’s absolutely a great topic. How to get your month-end close quickly. That’s a good one. Accurately and with insights you can use that’s you know, we’ve struggled with that and in years past, I think, feel like we have our arms around that one, but what a great subject. What makes an efficient accounting process and how to tell if yours is working?
Yep.
Is your business really profitable? Great. You know, you think it is, right?
Yeah.
You bid on a piece of work, you win it. Your spreadsheet tells you, or whatever quoting tool that you’re using tells you that you should be profitable, but are you really?
Yeah.
And then fraud, how to see it, how to prevent it, and what to do if you find it.
Yeah.
We get, I don’t even know how many phishing emails a day that if you click on the wrong email, you’re hosed.
Yep.
Years ago, I worked for a company where somebody clicked on something and they had ransomware and it cost a tremendous amount of money. So hopefully get all their data back.
Yep.
And I don’t even know if they got it all back.
Yeah.
Insurance is great for that, but if you lose it, you lose it. I mean, what’s insurance going to do?
Right, yeah, I mean the insurance is, it gives you some sort of a bridge. But I mean, you also can lose credibility with your clients.
Yeah.
Cash flow is critical, you know, you’re not going to get your insurance, it is not going to fund you the next day.
Yeah.
I mean, we’ve seen that as well. We haven’t had that issue with any of our clients that we work with, but we’ve been in situations where it happened before we got there, right?
Mm-hmm.
And that’s part of why we got brought in is because they realized, we don’t have the controls in place to ensure that this isn’t going to happen again.
Right.
And why is it happening? So, they get locked down in some cases. They get into the IT infrastructure and the training of your team.
Yeah.
We’ve seen others where it’s fraudulent, phishing from a third party that will go directly to the head of finance or the CFO or the controller. And it appears to be an email from the CEO, and they say, hey, I want to transfer 50 grand. We needed to pay off this vendor. Can you transfer the funds to this bank account? And it’s fraudulent, it’s fake, right? And so, they transfer the funds, and then the funds are gone. So, we’ve come in after that fact and that’s a control issue where there weren’t the right communications to ensure that, an approval process to ensure that something like that doesn’t happen.
Yeah.
We’ve seen that before. And then other fraud issues happen internally. You have any company that has one person doing the accounting and has total control, I mean, that’s ripe for that individual to be stealing from the company. I mean, it’s just so easy if they have total control. And the business owner, the executive team is just thinking, this person handles accounting, I don’t have to worry about that, I’m going to do all this stuff over here. No oversight, no control over what that person does. We’ve seen situations where the person has control of payroll too, so they gave themselves a raise, right?
Mm-hmm.
Or they create a dummy vendor account, and they can pay themselves through that. So those things are very easy to do and probably happen more often than we want to believe. Probably happening to some listeners here.
Yep.
And those are also fairly easy to prevent if you have the right structure in place to prevent that.
Yeah. I remember probably four years ago, one of our sales folks clicked on an email and whatever he clicked on gave all of our customer lists to whoever was overseas and they sent our entire AR database, a change of remit form.
Wow.
To go to a different account and you know, a lot of our customers pay us ACH now and luckily, one of our customers called us and they’re like, do you really want us to change your account to whatever? And I forget where it was Bangladesh or so.
Yeah. Hahaha.
I mean, it was so obvious that the customers were like, do you really want us to do this?
Yeah.
And obviously, we got our arms around it very quickly and we were able to call all of our customers and say, hey, this is a fake email.
Yeah.
Don’t send our money to Bangladesh.
Right?
But it was scary. I mean, my heart rate was probably 200 because it would, you know, something like that would sink,
Right? Yeah.
you know, sink a company, all of your AR is going offshore somewhere.
Right, and then it comes back to, okay, well, whose fault is that? You could say, well, the customer still owes you money. I don’t care if they paid someone else, they still owe you money, right?
Right.
And then the customer’s going to say, well, we got something that looked like it came from you that said that we need to pay this. So, then you get into arguments with your customers over, do they still owe you those funds or not, even though they lost, who loses on that? And that’s a tough situation.
Yeah. And luckily it really didn’t affect us. It took a lot of our time, but that was about it.
Yeah.
But then we immediately implemented different things through our I.T. that those types of emails would be sent out to people. And if they clicked on it, they got sent to detention and they had to do like seven hours of training.
Hahaha.
And just to make everyone aware. And we still do it today. I got them. And luckily, I haven’t been sent to detention yet.
Yeah, that’s good. Hahaha.
But I mean, some of them are, they really look, look real.
Right.
And we’ve had fake purchase orders come in. You know, you bid a certain piece of whatever business and they send you a purchase order and there could be a dash in the email instead of where it should be a dot or whatever. And we end up looking the company up or getting on the LinkedIn and looking that person up. And it’s like, and we had one come in and we were all excited to win this business.
Yeah.
And my office manager comes to me and she’s like, Dustin, I looked this guy up on LinkedIn. He’s the CEO of this company and came that he was the purchasing agent.
Okay.
And well, the CEO of this company is definitely not sending us, you know, as a multi-billion-dollar company.
Right.
Definitely not sending purchase orders out.
Yeah.
So, just paying attention to those tiny little details in the URL or email address.
Yep. Exactly.
It’s imperative for you to buy something or make something for a company and send $100,000 of product off and you never see it again.
Yep.
You’re never going to get paid.
Absolutely.
Two years ago, we had somebody intercept a shipment of tape. It was like an entire, what was it? It was an entire semi-truck full of tape. It was a tape manufacturer. I don’t know who it was. I can’t remember, but somehow they intercepted the truck, sent it to our facility and they were trying to set up an account for us to warehouse this stuff and send it somewhere else. So, we get all this tape in. And again, Ashley does some digging because she feels weird about it.
Yeah.
Just has a bad feeling and digs into it. And it was somebody offshore that somehow intercepted this truck and stole an entire truckload of tape.
Wow, and end up in your warehouse.
And ended up in our warehouse and we ended up reaching out to the company and they’re like, no, we definitely didn’t do that. So, they sent a new truck in and picked it up and we sent it back to them.
Yeah, like, do you want your tape back? Yeah. Hahaha.
But I mean it had to be hundreds of thousands of dollars of tape.
Oh my gosh. Yeah, that’s crazy.
It’s amazing to me the people that spend the energy to do things fraudulently. If they actually spent that energy in a legitimate way, they would crush it.
I know.
I mean, I think it’s so much harder to make a living fraudulently, I guess.
Yeah, I don’t even know. Obviously, I don’t personally know anyone that does that. So, it’s like, you don’t even know what they’re,
Right.
what type of individuals you’re dealing with. They’re just kind of in the dark, you know.
Yeah. We just set up an Amazon seller account for one of our customers, and probably 15 years ago, I had a company, and we sold some products on Amazon and that company is no longer around. But the hoops that we had to jump through to set up an Amazon account were crazy just because there’s got to be so much fraud on Amazon.
Oh, I’m sure. Yeah.
It was just interesting to me. It took like a week to set up a seller’s account.
Yeah.
They wanted, you know, it was wild.
Yeah, I mean, their margins have got to be so thin because, I always look at things from a financial mind, right?
Mm-hmm.
Okay, well, we just ordered one thing and it wasn’t very expensive and it came in this massive like cardboard box, you know? So, how much does this buy this whole huge box for this one thing that’s not expensive?
Right.
And then they shipped it here and the item probably costs 10 bucks or less. And it’s like, how do they even make money?
Yeah.
They do so much volume that they can make money. But the seller of that product, I don’t know, their margins are pretty thin too. We have clients that sell on Amazon, and you know, Amazon definitely gets their share.
Oh, yeah.
It really impacts your margin as a seller on Amazon. It’s a whole new beast to do that.
Yeah. And I mean, Jeff Bezos isn’t building another multimillion-dollar mega yacht because he’s not making money.
Right.
So definitely the volume. And that story is incredible to me, whether you like Amazon or hate Amazon.
Right.
That guy, what he created is just unbelievable.
Yeah, it was an online bookstore, right? That’s where it started.
Yeah. Online bookstore and his desk was an old door. I don’t know, it’s just a cool story.
Yeah.
I mean, it’s the all-American dream to create a business like that.
Yeah. Really first real Internet business and the question at the time was, can Internet-based businesses be profitable? And they didn’t have profitability for a while.
Right.
And the amazing thing is that he actually has led that from the beginning. You know, a lot of companies that get to where they are, or that really grow that the leader, the founder has the sophistication and the insight to get to a certain point. And then you bring in the hired guns, right?
Mm-hmm.
To expand and grow it even further. But you look at things like Microsoft with Bill Gates, Tesla with Elon Musk, and I think he was with PayPal before that. These guys are, they’re one of a kind, obviously, and the ability to take it and then not want to even exit, right? I mean, they want to continue working 60, 70, 80 hours a week, even though they’re billionaires that’s their passion.
Mm-hmm.
That’s what they want to do. Whereas a lot of us normal people would be like, hey, you know what, I’m good with a couple hundred million. I think I’m just going to resell it and retire and move on. These guys if that’s their passion, they want to keep doing that and that’s what they do.
Yeah, I mean, that’s my jam, I want to hire myself out of a position, right?
Right. Yeah.
That’s my dream is to build something and hire a team that can go on without me. And it doesn’t need me.
Right.
And that’s my goal. We talk about that all the time. People work 60, 70 hours a week. And it’s an addiction, I think.
Yeah.
And at one point in my life, I definitely worked like that. But the older I get my goal is to work as little as possible and I share that with everyone and to be on our team, if you’re not okay with that, then probably it is not the place for you.
Yeah.
And I would invite anyone who works for me so that if I can help them do the same thing, I’ll absolutely help them do the same thing. And that should be everyone’s goal, I think is to build something that you can enjoy your life and not work your life away.
Yeah. I think for us, we have about 75 full-time employees. And what’s important is that they’re able to get the experience to grow their career with us, right?
Mm-hmm.
But at the same time, we also know that everybody has a life. And so, there’s always that balancing act between, we want people that are hardworking, passionate about what they do. They want to grow their career. They’re not satisfied just doing the same thing all the time.
Yeah.
And they work hard. And sometimes they put in some extra hours. But at the same time, giving them flexibility, and building that culture within an organization is critical, for the long-term success of the company and also for the individuals who are involved, right?
Yeah.
Because everybody has different passions, everybody has different interests. It’s interesting
and very challenging to build a strong culture within an organization with so many different people from different places and different personalities and types of people.
Absolutely. I have something going on with my microphone. I don’t know if you can hear it on your end, but like every once in a while, it gives a screech or something.
Okay, I can’t hear anything on my end.
Okay, well, good. Maybe it’s just on my end and Luke our guy who edits everything can edit that out. I’ve never had that before, but I don’t know what’s going on. But as long as you can’t hear it, then I’ll try to ignore it.
Yep, I’m all good.
Okay, sweet. It’s always funny. It’s like the exact same setup I use every time. And it’s like something weird is going on. I don’t get it, but whatever. I kind of squirreled out there again. Let’s go back to weatherproofing for possible recession.
Yeah.
I mean so many companies went out of business during COVID. And before that, it was 2008. Massive recession. And the companies that make it through those are truly sustainable I feel. But you never really like we didn’t prepare for it. I didn’t even think about preparing for anything like COVID.
Yeah.
It’s definitely an interesting conversation. And in this environment, who knows? We could be headed towards another recession. I don’t want to be negative, but I mean, it’s going to happen at some point, right?
Yeah. And that’s the interesting thing, a year ago, everyone said, okay, we’re definitely going to be having a recession in the second or third quarter of 2023.
Right.
And then even before that, it was going to be the first quarter of 2023, then it got pushed and it got pushed. And it’s like, are we going to have a recession? So, there’s a lot of uncertainty in the market.
Mm-hmm.
And there still is this year with interest rates, now’s the big thing of the day is. Interest rates, everyone says interest rates are going to go down five times this year, four, five, six times. And now we’re in May and it doesn’t look like at the earliest it’ll be September or October, right, for it to go down at all. So, you never really know. There’s a lot of uncertainty. Nobody can really predict for sure what’s going to happen. When it comes to protecting yourself in a recession, there are two things. One is obviously, know your numbers. Because how do you make decisions if you don’t really know what’s happening with your numbers and your business?
Right.
And that goes to not only profitability, your expenses, your expense structure, but then ultimately cash flow. And cash is king, right? So, cash flow is different than net income, than profitability. And especially in a manufacturing business, more so than others, because in manufacturing, you got to buy your product, so you got to cash out the door, and then you got to manufacture the product, and then you got to sell the product, and then you finally get paid for the product, right?
Right.
In some cases, depending on your customers, maybe you’re getting paid upfront to cover the cost of the product costs, and in others, you aren’t. And so, the reality is your inventory is cash on the shelf. So, managing your inventory levels is critical. I still remember this. I had a great conversation with a potential client. This was several years ago. And he pulls out his P&L. I think there are QuickBooks. And he says, hey, look at this. Look how profitable we are. But we have no cash. I can’t even pay my bills.
Right.
But if I look at that, you’re so profitable. And I said, there’s one of a few things. One, your numbers aren’t accurate. You really aren’t that profitable. And that was a high likelihood because I don’t think they were tracking inventory very well and all that kind of stuff. The other is that your cash is hung up in your AR and inventory. So, you may be profitable, but if you’re not collecting your AR, then you don’t have cash, right?
Right.
And if you have too much inventory, that inventory is cash on the shelf. So, managing inventory levels is critical. And it was very difficult during the COVID time period when the supply chain was disrupted.
Right.
So being lean on your inventory is critical. Not too lean because you obviously want to be able to take advantage of opportunities, but managing inventory and really understanding that is critical. So that’s number one. Number two is always have a strong relationship with your bank. If we ask you who your banker is and you say, well, it’s so -and -so at the branch when I go make deposits or when I go to the branch for some reason, that’s not a true banker.
Right.
Especially when you talk about manufacturing, lines of credit, and any other types of financing. You may not need financing now, but the best time to build that relationship and get some level of financing in place like a line of credit or an extension on maximizing the amount of the line that you have availability for, is when your business is doing well. If you wait until there is a recession and your business declines, it’s going to be very difficult to get financing, to get a line of credit. So, get that line of credit in place now. If you have a $2 million line, see if you can make it three or four right now.
Right.
You know, there’s not much additional cost to do that, but it gives you that flexibility if things go south a little bit, you have more cash flexibility.
Sure.
Again, you’re not going to get that. If things go south and then you go to the bank, they’re not going to give it to you. So, let’s work on it now.
Yeah.
And then the other piece is really understanding your expense structure. We talked about accounting systems. We talked about ERP software. Software expenses are a black hole. Everyone invests in software, and they realize I’m paying all these software costs and technology costs that I’m not even using or getting value out of. So, evaluating, hey, am I really using this?
Right.
Evaluating each of the expenses of your business. Is this expense driving value to my business and driving me towards the goals that I have for my business? We may have hired somebody or you may have hired somebody two years ago to drive something forward within your business to achieve a certain initiative that you had. And maybe that initiative fizzled out and didn’t come to fruition and that person is still there, well, do they really need to be a part of the team? Some of those are difficult questions. You know, you don’t want to just be letting people go left and right.
Sure.
But make sure that every individual within the team really is driving value to the organization and driving you towards achieving the goals that you have in the future.
Yeah.
So, taking a hard look at that and you know, the reality is, it’s hard to understand any of that if you don’t have good solid numbers that you can trust. And so that goes back to see some of these other things is make sure you can close your books. Let’s get good numbers you can trust. And then ultimately, do you have some level of a forecast? Can you forecast your business over the next six to 12 months? Do you have a budget? All of those things will help you in being able to make better decisions as you look forward in the business versus just saying, here are my numbers, great. We did good, we did bad, okay, let’s keep moving forward.
Sure.
If that’s the mindset, if something does happen in the economy, I mean, you’re at the whim of, who knows, right? And that’s a scary, scary point to be.
Right. Those are all good points. And there probably are quite a few people out there that end up needing a line of credit and they go try and get it and then they get shut down.
Right. The other thing with the line, I’ll go back to that is the bank looks for the first thing they’re going to observe is how credible this company is. How credible is the owner, the executive team I’m lending to? And they see that through when you give them the numbers. So, if the bank is asking for financials and you just hit print on QuickBooks and send it off, you’re at the whim of them evaluating your whole business through what you gave them and you may be providing them with too much information. You’re providing them in a manner that is not credible or doesn’t look very sophisticated. Well, they start to make those judgments and then ultimately that determines the risk they put on you as a potential customer. The more packaged you are, the better, the more sophisticated you can present yourself, the lower risk the bank will see you as, and you have a better opportunity to get funding.
Yeah.
Banks have their own metrics, but banks can make decisions. They can take on more risk if they want to and they will do that with companies that they see are credible. Have a higher level of sophistication and have a true understanding of what their numbers are and their business.
And that’s just such a wonderful point. And we were fortunate enough that I had a colleague that I was talking through these things with and said, Dustin, you got to tell your story.
Exactly.
You can’t just send your P and L on your balance sheet to the banker and expect to get finance. You have to tell your story. We were very fortunate to have that conversation before I ever went to the bank. We had a binder, invited our banker into our facility, and walked home. They met our employees.
Yeah.
It was a two-inch binder of everything that we felt that would put us in the best position with the bank.
Absolutely.
And the banker sat down. He says I’ve never seen anything like this. Is that good or bad? And he’s like, this is wonderful. Now I get to take this to the CEO of the bank and to the underwriter. And he goes, I just walk right through everything.
Yeah.
And I think they asked us for, I don’t even know if they asked us for another document.
Yeah.
We had some conditions to clear or whatever with things that some releases and things like that, but it was an awesome feeling that they just walked right through everything. And the better you tell your story. And like you said, that you have that relationship with your banker, the better position that you’re in.
Right.
And it gives you a lot of confidence when you are going for a new piece of business and it’s a big piece of business and you’re looking at your projections and you’re like, our cash flow is going to be negative for three months until we have cash coming in.
Yeah.
And you can go to your bank and say, okay, here’s this new piece of business. And this is what we need to do to land it.
Yeah.
And the bank wants to be a part of that.
Right.
That’s how they’re making money. And the better you can tell that story, the better you are.
That’s everything. I hear a lot of individuals say, the banks won’t lend anyone. They only lend to people who already have the money or don’t need the money. Or a lot of people take the entitled approach that the banks should just give them. The banks should just give them money for them to run their business. The reality is banks lend their relationships. They want to know you. They want to trust you. They are a business too and they need to be turned a profit. If they have to understand the risks that they’re getting into.
Mm-hmm.
And if you build that relationship with them and they trust your numbers and you can provide them that story and with confidence, you can get a long way. Even though your business, the financial side, maybe you’re not the most profitable business in the world. But if they can trust you, trust your numbers and you have that relationship, they’ll go to bat for you.
Absolutely.
If you treat a bank as a transaction and transactional, they’re not motivated to want to work with you.
I totally agree. And you do want to tell your story in a way that they feel like their risk is low.
Yeah.
The bank is a risk-free zone.
Right.
They’re not entrepreneurs that are out there taking risk and they want zero risk. They’re risk-averse, they do not want the risk and if they feel like they’re taking a risky position at all, they’re just going to turn it down and move on.
Right.
So, very, very good points. Let’s talk about the nonprofit a bit. Ashley is very involved with a nonprofit in West Liberty, I believe it’s called Blessing Bags. And I forget how many kids that this nonprofit feeds. And it’s just a wonderful thing, I believe she started it. If she didn’t start it, she was definitely part of the beginning of it. And I do think that there’s so many people that work for companies or companies are involved in it and they don’t talk about it. And quite honestly, we never talk about it. But I think that it is important and there is a need out there for nonprofits. And I’m glad that you brought that subject up.
Yeah, we’re very involved. We have a vertical team actually specifically dedicated to nonprofits and our nonprofit clients. Obviously, we have a passion for that. The team has a passion for that. They have deep experience in that space.
Mm-hmm.
And the value that we bring to those nonprofits is, and I heard this last week at a conference I was actually at. So, this is one of the first times in society that people actually trust nonprofits less than they do a for-profit business.
Interesting.
Where everyone thinks, for-profit businesses, they don’t treat their people well and all they care about is making money and all that kind of stuff. The reason behind that lack of trust is because a lot of individuals say, I don’t trust nonprofits because I don’t know where the money’s going. They almost equated to government in some ways, right?
Right.
They’re just going to waste the money. Right. That’s why the financial credibility is so important. And if you have that financial framework in place where you can show your donors, if you’re getting grants, or in the fundraising team can go out and provide them with clarity on where the funds are going and confidence in that what you know in the numbers and in the information that brings up the trust level of the organization as a whole and creates more success overall in the ability to raise funds to achieve the mission that they have. And so that’s a big part of what we do is give the confidence internally and then externally on behalf of the nonprofit so that they can go to market, go out into the community and show that we got our act together. We’re doing really good things here and ultimately increasing the level of contributions, of donations, and of grants that they can get.
Yeah.
And so that’s the value and that’s what we’re really passionate about.
That’s great. And there is some diminished trust in nonprofits. I remember several years ago we were contributing to a nonprofit and I sent an email to one of my buddies and he responded to me and sent me their financials.
Mm-hmm.
And he’s like, Dustin, I would absolutely support you in this. But just take a look at the page or whatever, four hundred sixty-two and I pulled up and I’m like, my God, I don’t even want to be involved in this now.
Yeah.
And it was pretty wild. The amount of money that was going to the actual nonprofit to help whatever that nonprofit was helping was a very small percentage and a majority of the money was going in like four individuals, you know, pocket.
Yeah.
And that’s got to be where that comes from because the Internet’s powerful and you can look anything up these days.
That’s the thing, you can look up the nonprofit’s file. They don’t actually pay taxes, but they file an informational tax return called a 990. And all that information is public, right? So, you can see in a number of states. It’s a two-million-dollar threshold. You’re required to have audited financial statements. A lot of that is public knowledge, too.
Right.
So, anyone can look this stuff up. And if the 990 isn’t filed timely or if the audit’s not done timely, that just creates concern among anyone who wants to know. Hey guys, if you can’t manage your own financial situation, why do I want to give you more money when I don’t even know what you’re doing with it?
Right.
And that’s why we actually have a lot of clients because we have come in many cases where they’re two years behind on their audit. And now they’re having challenges with fundraising.
Yeah.
Because they can’t even provide current financials to people who want to give them money.
And there’s got to be more of those companies or those nonprofits that are doing good that are not good at the accounting piece.
Yeah.
Because they’re so they’re so focused on doing good, that those are the ones that are probably getting hurt the most because they don’t have you helping them create that financial stability and in that picture where people can look them up and the nonprofits that are probably more fraudulent are probably on top of it and they’re figuring out how to hide things anyway. So, I don’t know, very interesting. And that’s a big piece of your company.
Yeah, we were probably about 15 to 20 % of our clients are nonprofit-focused. As we’ve been talking about manufacturing, manufacturing distribution is a big vertical for us. We have a very strong vertical in the construction industry as well. So, we have a lot of general contractors and subcontractors. That’s a unique niche when managing construction and accounting for projects. For ongoing projects that they have. We have a number of different verticals that we really focus on.
And construction got to be I mean, that cash flow has got to be crazy tough, especially, working big commercial jobs or government jobs where you’re getting stretched out 90-120 days before you’re getting paid. Different vendors going out of business. That’s got to be very, very hard to manage cash flow. Right?
Yeah, and the margins are so thin, right? $100 million, you do $100 million. If you’re a $100 million general contractor, your bottom line might only be a couple million, a few million. That’s $100 million of activity you have to manage to turn a 2 % to 3 % bottom line. And that’s a lot of paperwork you’re pushing. As a general contractor, you’re now in charge of bringing on the subs and pulling together the managing and driving the overall expense of the overall project. So, there’s a lot of work there that’s to be had. And with such thin margins, it’s, OK, how do we identify? How can we drive an extra percentage point? How can we drive an extra two percentage points on the overall business and ultimately maximize that profitability?
There’s a thousand things going through my head with the construction industry of all the challenges and it’s so necessary for our economy. And you can drive down 71 here in Ohio and Honda’s putting in a mega factory. It’s millions of square feet and I can’t even imagine how many different contractors and subcontractors are on that job. Same thing with Intel. Intel is investing a hundred billion dollars in a mega facility here in central Ohio. And you look at all those vendors, it’s wild to think of all that.
Yeah, and they’re also hit the hardest and they are the most cyclical as it relates to the economy too, right? So, when one of the first things that slows down is the construction, right? When the economy starts to slow down. So, they start to see that now, sometimes though, they’re at the tail a little bit because they have a backlog. And so, the economy might slow down and then six months later, the bottom falls out for them.
Sure.
But in the same way, they might be at the forefront of when the economy is doing well, right? So, you can always see when construction is picking up or slowing down it usually is directly correlated to the economy.
In colder states, I know you guys don’t deal with it in Southern California or the middle parts of Northern California. The weather could affect you massively. And we see that in Ohio, certainly up in Michigan, and then a lot of the northern states could just be completely shut down because of the weather. I work for a concrete contractor right out of school and there were years that the ground froze so damn hard we couldn’t dig. We’re out there trying to use ice rippers and all that. We did a lot of residential basements and commercial basements. But a basement that would take half a day for us to dig. It might take a week because you’re just trying to chisel through the ice. It was almost like, why are we doing this? Why don’t we just shut down, save the money on the diesel that we’re burning 10 times more, and go back at it when the ground falls out? And then you’re laying people off and things like that that nobody ever wants to do. But that’s an interesting one.
Right.
What next? Closing month end out. You’re going to tell us all this, but I would think that the really important part of just being on top of your books and getting everything entered, live, and not doing everything the last two days of the month.
Yeah, so there are a couple of parts when you talk about accounting. You have the day-to-day transactions. Got to pay bills. You got an invoice, right?
Yep.
You have got to collect cash. Hopefully, if you’re staying on top of that’s a big part of it. Hopefully, you’re not just paying bills and then entering it in the system later. And when you receive the cash, hopefully, it will be applied against the invoice you have. You really want timeliness. You want real-time information on AP and AR at a minimum, right? Because that’s how you’re making decisions on cash flow in a lot of cases. That’s how you’re making decisions on who you’re paying. Want to make sure you’re up to date on your invoicing because that impacts cash flow. So, you want to be invoicing ASAP right at whenever that invoice period is. Because every day that it gets delayed is the delay in the cash. So, if you really want to improve your cash flows if you’re late on invoicing speed that up by a week, and all of a sudden your cash flow is going to improve drastically. So that’s one. Make sure that the day-to-day activities are being entered, as you just mentioned. Then on a monthly basis, there’s a process, the monthly closed process. Usually, hopefully, you have some sort of a checklist and there’s consistency on how it’s done. And there should be expectations with your accounting team on when you should get monthly financial statements. If you’re not getting financials within 30 days, that’s the bare minimum latest you ever want to see it. If you’ve gone into the second month, so if we’re in May and you haven’t gotten financials by the end of June, that’s a problem. Because now if you are getting them, it’s late. You’re getting old data. You can’t manage your business that way and you can’t trust it. The best I would say, I would consider to be kind of the standard would be a minimum of 15 days after my end, you’re getting financial statements. At a minimum, you’re getting at least draft financials so you can see what’s happening, but you should be getting closed financial statements. And again, it’s not necessarily a printout from QuickBooks either. Ideally, you’re getting a financial reporting package so you can dig into different aspects of your business. You can see what cash flows look like as you move forward, what are your cash flow projections. You can see your profitability by product line and by the different products that you’re selling. So, you can dig into that a little bit deeper. And that allows you to make decisions on how do we become more profitable in these areas. This product is more profitable. So how do we incentivize selling this product more over this other product that’s less profitable? Being able to evaluate your expense structure is important. That process to close the books really does take the sophistication of somebody probably above a bookkeeper, in most cases, especially with manufacturing, above a bookkeeper level. It is actually a more robust process to ensure that things are reconciled, and you have supporting documentation for everything. Every account on a monthly basis. If you have financing and the bank requires reviewed financials or audited financials. If you are properly closing the books every single month, by the time you close out the year and then ultimately get to the point where you have to work with the auditors for the audit or review, 90 % of the work is done because the schedules and the supporting schedules that they’re asking, those are standard schedules that should be done every single month to close the books. So, you have them, you’re done, boom, here you go. The remaining 10 or 15 % is just the standard audit related stuff that they do and questions and all of the poll support and all that kind of stuff. But the challenges, we see a lot of times is that’s not done at all during the year. Then they have to have reviewed financials or audited financials. And now they’re scrambling and they’re trying to put stuff together. It’s not accurate because it’s never been accurate. And the audit extends out and the bank gets upset and all these things happen. So, if that’s happening, you probably aren’t getting good financials timely and accurately. They’re not relevant to you as well. And you probably don’t have a team that is sophisticated enough to be able to do that. The real value of financials is to be able to use it, make decisions to achieve the goals that you have moving forward. And if you don’t have that as you grow, you’re just going to end up getting stuck in that hamster wheel of just not having good information.
So, is this where your team steps in or where you’re adding value to your customers as you do that heavy lifting?
Absolutely. A lot of times, the client will have a bookkeeper do the day-to-day stuff we come in, we support the bookkeeper and make sure that what they’re doing is sufficient and there’s the right oversight on them. So, there’s one, the fraud we talked about the bookkeeper stealing right? Now we’re there they can’t steal because we’re we understand what they’re doing and we have our eyes on things. And then the other is we bring that product, we will support and drive that closed process. And a lot of what we’ll do is we will define roles and responsibilities. The bookkeeper, the internal resource they have can probably do a lot of things. They can reconcile the bank accounts, they can reconcile the credit cards. But when it comes to more sophisticated things like really finalizing and closing the books, and booking any accruals, making sure the revenue is recognized appropriately. Making sure that we understand the margins and by product line and that all those things are recorded effectively. That’s more sophistication than a bookkeeper will provide. And so we have a team that will do that. We’ll make sure that we work and position the financials in a way and the reporting so that the business owner and the executive team are getting good data and good information. And then we’ll walk through it with them and say, hey, this is what we’re seeing. Here’s the trends of what’s happening. Have you considered this? What’s happening here? What are you trying to accomplish? Let’s talk about that and let’s talk about what that means moving forward as well.
That’s great. I would think that a lot of small companies are relying on their tax accountant to do those things or to close their books out on a monthly basis if they don’t have a controller or an accountant on staff.
And the reality is that’s not what the tax CPA wants to be doing. They want to be doing the tax work, right?
Right.
They don’t want to be doing cleaning up the books like that’s not really what they want to be doing. And they’re not in there every day. They’re not there. They do it once a quarter and they do it at the end of the year. You’re not getting value out of that. You’re not getting good information. And where we come in, we’re part of your team. We just don’t happen to be there every day. But we’re there, we’re working with you on a fluid relationship daily, weekly, and monthly. Making sure that you have that oversight and that leadership to take your business to the next level.
Right. It is so important. And even we found that having a good bookkeeper is very difficult to find. We found that if somebody thinks that they know how to do bookkeeping and whether they really do or not are two drastically different things. And even companies out there that are bookkeeping companies still aren’t doing bookkeeping correctly.
Right.
We have found and there’s some monster companies out there that do the same thing and you have the same issues with it. And it’s been one of the bigger thorns over the years of building my company is the bookkeeping and understanding it. And it’s definitely not something I’m strong at. I don’t even want to be strong at it.
Yeah. And I honestly use bookkeeping, bookkeeper, bookkeeping is almost a bad word, right? Like that’s your lowest level of sophistication. That’s somebody who can enter, do the data entry and do basic bank recs and stuff like that. But beyond that, you’re probably not getting, especially manufacturing, a bookkeeper will not have the sophistication or the skill to be able to really give you good insight and good information on your business. And that’s where you need somebody higher up.
Yeah. And we’ve found it’s even tough to get somebody to categorize something properly.
Yeah, and that’s the basics.
There’s been years that I’ll go through our P and L each month. And I’m like, why is this in there and why is that here? I’m going through and then I’m digging in, it just blows my mind that I don’t know if it’s laziness or it’s ignorance or, what.
It’s a lack of process. It’s both. It’s a lack of process by whoever’s doing it or the firm that has that person out there. And it’s a lack of experience and sophistication, right? I’ll just put it where I think it goes and I’ll move on, right? They don’t truly understand that. That’s not appropriate for you to run your business and to have good data. You can’t have that, right? It’s just a lack of sophistication.
Yeah. And it can affect you, maybe not hugely, but just the difference in how meals are entered and the tax implications of how much you can write off a meal. And if you’re buying it for your team and they’re working versus, taking a customer out and if it’s all lumped into one bucket. It’s maybe not the biggest problem you have, but it’s definitely one of maybe 50. And it can definitely affect just tax returns. And that certainly affects cash flow if you’re paying more in taxes than what you should be in and things like that.
Yeah. The best case I see us live with manufacturing companies is significantly overpaying taxes because they don’t have a handle and we talked about inventory before being a black hole. If your inventory is not accurate, if your inventory is overstated, meaning your books show you have more inventory than you actually have on the shelf.
Right.
That means that your cost of goods sold is understated. Meaning you’re showing less expense than you should be showing on your books. That means you’re showing more profitability than you actually had. And therefore, you’re now paying taxes on that profitability you never really had, right? So, if you don’t have your hands around inventory, it directly impacts the profitability of your business one way or the other. In a lot of cases, we see businesses paying taxes on phantom profits because they haven’t done their accounting correctly. And that is significant, that’s cash you don’t want to be paying.
I don’t want to pay taxes period let alone taxes that I don’t know. And it almost makes me all jittery. Even thinking about a phantom tax. That’s going to haunt me. Phantom taxes.
Right.
So, I would say at a minimum, do an inventory count at the end of the year, and true up your inventory to what it should be and the difference. From an accounting perspective, that difference hits inventory and it would cost a good sold, right? And that will at least give you some peace of mind. If nothing else, just do an inventory count at the end of each year.
Fortunately, I think Ashley’s on it, and I bet our inventory is spot on. If it’s out of control by a percent, I would be surprised.
Yeah, that’s good.
And maybe I’m too confident in that, but I really do think that she does a great job with that. And kudos to her. That gives me a better feeling, and if I’m wrong and we’re paying phantom taxes, then we have a problem. So maybe you’ll do an audit on us, and you’ll find some big issues. I don’t know. That really rolls right into the efficient accounting process. And are you really profitable? And if your inventory is out of control and you think you’re profitable and you’re not or you’re not collecting your AR like you think you might be. Very challenging things.
Yeah, I mean, you can’t honestly know if you’re profitable without good numbers, right? You can kind of say, I think it cost me this to buy the product and then it cost me X, X to buy it, product cost me Y to sell the product, here’s how profitable I am. To your point, a lot of times labor rates are not taken into consideration there, and overhead is not taken into consideration. So, how do you really know how profitable you are? Unless you’re getting your numbers consistently every month. And if you’re not, you can’t make good decisions to improve that profitability or even be prepared for anything that may or may not come up. So, to me, obviously, I’m a finance guy. It would be very, very scary if I had no understanding of what my numbers look like. I wouldn’t be able to sleep at night.
Yeah.
Because it’s just that critical. Now, how do you produce good numbers? How do you know your numbers are accurate, is you have to have a process. You have to have a process to close the books and you have to have that, we talked about that higher skill set individual as part of that process to do that. To close your books effectively, every single account on the balance sheet needs to be reconciled. What is also a misunderstanding is, I hear some people say, I just look at the P and L or I just look at the income statement. I don’t really look at the balance sheet or I don’t understand the balance sheet. But the reality is if the balance sheet is not accurate, there’s a hundred percent chance that the income statement or the P and L is not accurate because they relate to each other. When one thing hits the balance sheet, when something happens on the balance sheet, it impacts the P and L in a certain way as well. So, if you have balance sheet accounts have not been reconciled for, in some cases, months or years, there’s inaccuracies on the income statement and the P &L as well as a result of that. Now, some of those inaccuracies may have resulted from years ago and need to be cleared out. But those balance sheet accounts need to be reconciled every single month.
Yeah.
When you balance from an accounting perspective, I don’t want to get too granular here. When you reconcile the balance sheet accounts, you then ultimately have confidence. Everything flows through into the P&L, and you have confidence you have accuracy there. Then it becomes a classification thing as we talked about before. So, are your expenses classified effectively? Are they being recorded in the proper accounts? Cost of goods sold and ultimately your sales and G&A (General Administrative Costs and Expenses). So that process, you have to have consistency in that to really truly understand. So, you can compare month over month as well. How profitable am I? Am I consistent? Knowing your margins and your margins on your product should be pretty consistent by product line if you’re doing it the right way.
I think we could talk all day about this. Again, it’s something that I’m passionate about and I nerd out over it. It’s a constant learning and I’ve gotten a ton out of it just listening and talking to you and hopefully everyone else does. If somebody wants to get a hold of you, we’ll put this in the description. It’ll be on our website, on our blog, and things like that. But how does somebody get a hold of you if they want to chat?
Sure, I mean our website’s pretty easy, SignatureAnalytics.com. I can also be reached directly over email, the letter J, Kruger, that’s J, and that’s K -R -U -G -E -R, at SignatureAnalytics.com(jkruger@signatureanalytics.com). Probably the two easiest that I would recommend, LinkedIn, you can find me on LinkedIn, reach out that way. I always love talking to business owners. We’d be happy to help or point you in the direction or introduce you to someone who can help.
Yeah, awesome. I really appreciate you reaching out to us and coming to the show. It’s been fun. Not many people are going to say accounting is fun but I do. I think it has been fun. And it’s such an important piece of your business. And you could have a lot of a company and it could fall apart because you don’t understand this stuff.
Right.
Definitely, very, very important. We’re going to buy time for people to hear this, we’re going to share everything on LinkedIn, like we always do. And we’ll certainly tag you in those things. So should be pretty easy to find. Thanks for coming on. And maybe if somebody wants to hear a very specific subject that might be fun to talk about, certainly email us at info@ MFGmonkey.com and then ask us to talk about it. Maybe we can get you back on and talk about another subject that you know somebody’s like, hey, I’d really like to hear about this or whatnot. I think that’d be fun as well.
Sure. Yeah, absolutely.
Cool, Jason. Well, thank you. And I’m sure we’ll be in touch soon.
Yeah, thanks so much.
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