Adam Lean | Business Financials Simplified

Small business owners have a lot on their plate: marketing, product development, sales, hiring, expenses… that’s a recipe for overwhelm, says Adam Lean. And, all too often, what takes a backseat are the financials– the numbers that gauge the true health of your business.

Are you living with the attitude of “if I make more money, my finances will take care of themselves,” or “besides, that’s why I have an accountant/bookkeeper, anyways…”?

That’s the entirely wrong attitude to have. Adam says if you don’t monitor the right numbers, you’ll make bad decisions and potentially endanger your business. And, that’s something that someone who does your taxes can’t help you with.

Adam shares the three metrics you should focus on first, as well as…

  • When – and why – more sales doesn’t equal more profits
  • How to tell if you’re just “buying yourself a job” or truly running a business
  • Creating the customized financial “scoreboard” you need to make decisions
  • Overcoming the #1 thing all business owners struggle with
  • And more

Listen now…

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Transcript

Steve Gordon: Welcome to the Unstoppable CEO podcast. I’m your host, Steve Gordon. Today, we have a returning guest and I’m excited to bring him back and have him share some more of his wisdom with you. Today I’m talking with Adam Lean.

Adam helps small business owners make their business profitable by untangling their financials and showing them exactly what levers to pull to maximize profit and freedom that I I just I love what he’s doing because I think it we all have all of these numbers and we talked to never know what to do with them and he makes it really easy to understand. And his goal is just that it’s to make it simple to help his clients go from feeling overwhelmed and stressed about cash and wondering where all the money’s going to as it flows through the business to feeling very confident and knowing that they’re running their business. Like a CEO, and they’ve got the numbers that will help them with their decision making. So welcome back to the show Adam Lean.

Adam, great to have you back.

Adam Lean: Yeah, thanks. I’m excited to be here.

Steve: Yeah, it’s gonna be fun. So since we did the first interview, we’ve actually begun working together, you’ve become a client of ours. And it’s allowed me to really, really see into what you’re doing and how important it is. And, and that’s one of the reasons I wanted to have you back because you’ve just got this knack for simplifying. You know, what are otherwise pretty complex and sometimes very murky financial numbers in business. And so I’m excited to get into some of that today. Since we spoke last what has changed in your business? What’s, what’s new and interesting? I know you got a lot going on.

Adam: Yeah, so I mean, a lot has changed in the business. We’ve been definitely picking up more clients, working with all different types of clients. You know, we specialize And both eCommerce and service-based businesses but I get a chance to meet all kinds of different types of businesses, different types of business owners. If you think about it, regardless of the type of business you know, every business is in it for you know one thing to improve profit, which is a number and that’s what we specialize in and are hoping to help business owners understand the numbers in their business and what to do about it.

Steve: Yeah, well, and I love the way that you tie profit to freedom. Because without money, freedom, it’s pretty hard to have time freedom or relationship freedom. And so the two really I think, go hand in hand.

Adam: Yeah, I mean, most business owners, you know, and I’m definitely guilty of this are working too much in the business. And therefore you’re sort of a slave to your business, your work, you’re almost your own employee. And the, you know, the business should not be a job for you. You should own the business. The business should be working for you. You, you should be working on the business, not in the business. And that will allow you to have that freedom. Because if you’re still an employee of your own business, and if your business is just a very expensive job for you, then you don’t have the freedom because you’re always working in the business. And that’s, I mean, that’s not what many business owners get into business for.

Steve: Yeah, you’re absolutely right. I mean, we, we don’t get into it, just to go buy ourselves a job. But it’s funny, we, you know, we often get into a business because we love doing the thing that we’re doing. We think that by starting it, it’s going to give us that freedom that we don’t have in a job. But most of the time, what I think business owners find out really quickly is that it gives them all the risk and the exact same work that they were doing before probably for the exactly the exact same money if not less than, than what they had before. And so You know, but the work that you’re doing with your clients is is really, I think, an easy way to get at the solution to all of that. And it’s, it’s really to drive the business by the numbers. And so for folks who are listening, as they’re thinking about their own business, what are some of the things they should be paying attention to on the financial side?

What To Pay Attention To When Starting A Business

Adam: Yeah. So then the whole goal of a business is to improve profit and cash flow and that’s the point of the business is to give you cash, to reinvest back in the business or to save for retirement or to pay off debt or whatever. But the best way to get there is to make more profit, and profits and numbers, and one of the reasons why business owners struggle so much are because they don’t know how to improve that number. I mean, what they typically do is just work more on and trying to get more customers or more clients and then just, you know, run 90 miles an hour, trying to do that, but and the other problem is that when they run an income statement report or a balance sheet all these, you know, financial reports from QuickBooks or your accounting software, it’s easy to get lost in understanding really what’s going on in your business. I mean, it’s really difficult for somebody who is working in the business and, you know, working 60 hours a week to sit down and really dissect and a financial statement.

And that’s because they’re just confusing, I mean, they just are I had the benefit of being an accountant before I started my business so I could understand it, but most people just don’t understand it. But at the end of the day, you still got to understand the financials and what’s going on in your business because that helps you know, what you should do to improve the profit. So I’m a big fan of making the financials clear. So in, you know, for our clients, at least Instead of giving them an income statement or balance sheet to look at, we actually create a custom scoreboard for the client. I mean, that scoreboard tells you the score, and it should be easy and clear. And that’s what we create.

So we like to put no more than, you know, 10 to 12 numbers, if you will, on this scoreboard and each scoreboard. Each number on the scoreboard should tell you what to do to improve your business. So if you think about it like this, if your entire business is a puzzle, each, the puzzle is broken down into many different pieces. You need to know which piece which puzzle piece is is going right and which is going wrong. And so we put all those puzzle pieces, the most important ones on the scoreboard, so every single month you should know what’s working and what’s not. So you know, some of the basic numbers that you should be paying attention to that should be on your scoreboard are essentially broken down into sort of three sections.

The first is marketing and sales. How do you get customers? The second is profitability? How do you make a profit from those customers? And the third is cash flow. How do you turn all that business into true cash that you get to keep? So those are the three sort of buckets that I put on, you know, that should be on your scoreboard. So I’ll Break That down if you want into some of the specific numbers that I think you should be paying into. Is that okay,

Steve: Yeah, I think that’s great. Because I think, you know, this is is often a very confusing area for folks. And you know, so much of what we get from our accountants who they do great work, and it serves a certain purpose, but they always give you the view from the rearview mirror or through the rearview mirror. Totally. It’s hard to run a business that way, though.

Adam: Yeah. I mean, accountants and bookkeepers record what happened in the past. I mean, that’s what they get. Pay to do. And so when you get these reports, they tell you what happened in the past? Well, you need to know what to do now to impact the future. Yeah, so some of the numbers and I’ll sort of tie the past and the future together as I explained these numbers, but let’s say that you own a heating and air company.

And so some of the numbers that you should be paying attention to, and this can apply whether you own a retail store, restaurant, whatnot, but, but I’ll just sort of use a heating and air company as an example. So some of the numbers that you should be paying attention to. Starting off with number one is the number of leads that you get, you know, the number of leads that you attract to your business is very important. And of course, all the marketing efforts that you use and you pay for should be giving you leads, well, that’s number one. But then number two, you need to track your lead to customer conversion rate. How many you know what percent of those leads that you get, can you turn into customers?

Now if you if we stop right there, just those two things, if you improve each one of those two numbers individually gets more leads and then get a higher conversion rate, then your business will, will dramatically increase. And that’s just a small example of taking your entire business and breaking it up into pieces. We’re just looking at a number of leads and just looking at the conversion rates. And that way you know, do you have a lead problem? Are you not getting enough leads or you’re not able to convert them?

You know, just those two things alone will help. So, the number of leads, conversion rate number, three is the customer retention rate. You know, that’s something that you can improve how do you take all that once you get a lead once you convert into a client, you need to retain the client especially in the heating and air business. But let’s say you own an eCommerce store, you know, instead of customer retention, right, it would just be purchased frequency how many you know how many customers existing customers that you’ve won in the past can buy again are going to buy again. And that’s a number that you need to be paying attention to, to improve that. So number leads conversion rate, customer retention rate, then number four, average order value, you want to increase the average order value. And as you can see each of these things, you need to know of all these things, which ones are working and which ones are not, you may not have a lead problem, you may be getting tons of lead leads, but you’re may not be charging enough and that’s, you know, if you’re tracking average order value, then you will know that the fifth is, of course, the number of orders that you get or number of invoices, however, you define a transaction, and then all of those things one through five, add up to revenue, total revenue. So if you put if you run your income statement, it’ll show you total revenue, but how do you get there and you may you know, your account records what you know what happened in the past, and they give you this report and has a history of your business?

Well, you need to know how to impact revenue in the future. And those five things that should be on your school board are exactly how to impact revenue in the future. There’s a terminology, not to get to accounting lingo, but there’s a term called lagging and leading indicators. Lagging indicator just means it’s a number indicator that tells you what happened in the past. That’s it. revenue is a great example of a lagging indicator that tells you we made $100,000 last month in revenue. Well, that’s great, but you need to know what to do to impact revenue next month and the month after that, and therefore you need to be paying attention to what’s called leading indicators and all five of those numbers I mentioned earlier, there are five metrics are leading indicators, number of leads conversion rate client retention,right average order value if you improve each of those four things individually, then you will improve revenue and next month and the month after that. So that’s really the revenue piece, the marketing and sales piece of the scoreboard. The second main section of the scoreboard is profitability. Once you make a sale, you need to keep as much of that sale as possible.

You know, Robert Kiyosaki, he wrote Rich Dad, Poor Dad, he, one of my favorite quotes is that he put in the book was, you know, it’s not how much you make that matters. It’s how much you keep will sales is the making part. You can make a million dollars in sales. But if you’re only keeping $10 a head, what’s the point? Mate keeping it is the most important part and that’s profit. So once you make a sale, you need to track how much you’re spending after the sale. And so there are two metrics I like to put on the scoreboard one’s gross profit, which is simply your sales Minus all the direct cost to make the sale. So if you’re a heating and air company if you sell a customer thousand dollar air conditioning unit then the direct costs would be things like the actual cost of the air conditioning unit and the labor involved in installing it. Let’s say it you know all that was $600. So really, you’ve only made $400 which is your gross profit. So we want to increase improve the gross profit, which is another leading indicator on your scoreboard.

So if you take your sales minus your gross profit, then the only other thing you really have to pay attention to from a profitability standpoint is overhead expenses. How can you reduce the amount of overhead involved so that that example you sell $1,000 air conditioning unit, your gross profit $600 after paying the direct costs, then you’re left with $600 to pay the overhead Head for the business and Abby, subtract the overhead, that’s your net profit. So your goal is net profit. How can you increase sales? How can you increase gross profit? And how can you reduce expenses?

So all those things need to be on your school board. And the very last piece is the cash flow. Cash is, is the lifeblood, literally of the business. I mean, there’s a lot of profitable businesses that go out of business because they don’t turn that profit into cash and keep the cash and use that cash to pay off debt or to invest in other things that will help grow profit in the future. So you’ve got to track cash flow and, and there’s really three main metrics that should be on your scoreboard that is tracked for cash flow.

The first is days sales outstanding, this is the number of days it takes for the average client to pay. So if that customer that owes you $1,000 for that Heating and Air install. If it takes them 90 days to pay you, that means your day sales outstanding would be 90. Well, you’ve got to get that number as low as possible because if you think about it, you’ve had to pay your air conditioning supplier for the cost of equipment, you’ve had to pay your employees to install that equipment. And so you’re out of money until your customer pays you. So you need to get that 90 days down as low as possible. The second is, and this is mainly, for retail type businesses or restaurants that have inventory, they’re selling inventory and there’s a metric called days in inventory, the number of days, the average item is in your inventory. And again, you need to get that number as low as possible.

If it takes, you know, 100 days on average to sell one, you know product one unit, that’s 100 days that cash is tied up on a shelf. Your business, you need to get that number as low as possible. So you can turn that item into profit and buy more items. And then the last thing that should be on your school board in terms of cash flow is what I call working capital ratio. Now, this is a little bit more accounting lingo. But it’s super, it’s once you understand that, it can be very easy to understand and, and all it is is your working capital is the amount of cash or capital that you have to pay all the expenses and to keep the lights on. So you want to make sure you have enough capital or cash to do that for the next month and for every month going after that. So the working capital ratio is simply a gauge is simply an indicator number that tells you how well you have the funds to keep the lights on Want to keep the business operating.

That’s why it’s called working capital and you need working capital. And there’s really just three ways to get working capital mean, you know, cash for that to keep the business running that the first way is through debt, you could, you know, take a loan out from the bank, that’s one way to get working capital. Number two, you can get investors or you can invest your own money into your business. That’s the second way to get cash. The third which is my favorite, which is more realistic for most small businesses, it’s just to make a profit. And so as you can see, everything else we’ve had on the scoreboard will help if you improve each of those things will help self feed each other. So your working capital will go up if your net profit goes up, and your net profit goes up, if your sales go up and, and leads go up and etc. So, all of this is there’s a very long answer to your question, Steve, but that’s those are the things that I would put in the scoreboard.

Steve: Well, I know that’s really helpful, I think for everybody listening and just to clarify the working capital ratio so that’s working capital or the amount of cash you have over some other number to get the ratio.

Working Capital Ratio

Adam: Yeah, so working capital is simply your current assets are the money that you own minus the amount that you owe somebody else. So current assets minus current liabilities current just means you owe it within a year. So let’s say that you have $50,000 in the bank and $50,000 worth of stuff in inventory. That means you own $100,000 it can be turned into cash within a reasonable amount of time. And let’s say you owe your vendors $90,000. So you simply take your working capital is the amount that you own 100,000 minus what you owe 90,000. So you’re working capital is $10,000. And you’re working capital ratio is simply your current assets divided by your current liabilities. So in this case, $100,000 divided by $90,000 is about 1.1. So a good working capital is is anything above one, that means you have you own more than you owe. And so if you have a less than one working capital ratio, then something’s you know, you’ve got to get cash from somewhere, you got to get capital or cash from somewhere. You know, and the best way to get it is to improve your net profit.

Steve: I love that. So basically, when we put all of that together, we now have, as you call it, a scorecard. We’ve got something that’s really easy to read. And I’ve seen your scorecards and they’re incredibly simple to just look at and understand. And I know you build all that out for your clients, but we’ve got something that’s really easy to To understand and now that enables us to make quicker decisions and better, hopefully, better decisions as we try and grow the business, right?

Adam: Yeah, totally. I mean, think about if you’re if you are trying to coach an NBA team, if you’re the general manager of the team, you know, how do you know our favorite sorry, if you’re the coach of the team, how do you know how you know how well your team is doing? If there’s no score, if the scoreboard is, is blank, like how do you know who’s winning, who’s losing what plays you need to make who need to bring in what your assistant coaches need to be doing? And I mean, in the key to a scoreboard is simplicity, like you said, it’s got to be simple and easy to read. That’s the problem with the financial statements that you get from your accounting software is they’re not simple and they’re not easy to read, and they won’t tell you what to do. So you’ve got to have something that’s simple and easy to read in order for you to take action to improve your business

Steve: Yeah, and and I know that you know, as, as you’re working with, with business owners, you’re then using this and you’re working with them on a regular basis to kind of plan out than looking at the numbers, what needs to happen and you work with them to set kind of the key projects for, I guess, quarter by quarter or month by month that is going to make an impact on these numbers.

Adam: Yeah, totally. And that and that’s the, you know, you’ve got to understand the, the what’s going on in your business, you understand you have to understand your scoreboard. But then you have to know what to do about it. And that’s one of the things that we do for our clients. Well as we build the scoreboard for them. every single month, we analyze, you know, ourselves because we’re financial people, we analyze what the scoreboard and what’s going on in the business. And we come to the table. We come to this meeting, you know, our monthly meetings with the clients and say, all right, based on everything going on and based on the goals that we have set together for your business.

Here are the two things that need to happen this month. And that is what a CFO or Chief Financial Officer does for big businesses, they advise the seat of the CEO on what needs to happen. they propose corrective actions on what needs to happen. Well, every business needs something like that. So we put that that’s essentially how you know I came up with this business because I wanted to provide that type of thing to small businesses. I wanted to give small businesses the sort of the resources of what a CFO would provide for large businesses, but in a way, that’s affordable to small businesses. So, every single month our CFO is analyzing your business and your scoreboard.

And we have a meeting with you. You know, you’re the CEO of your business. We have a meeting with you and say, all right, based on everything, here are the two to three things that need to happen. And then we’ll strategize on how to make it happen on the phone. On the video call, and that way the clients are crystal clear on two things. One, they know exactly what’s going right and what’s going wrong based on their scoreboard. And number two, they know what steps to take based on this action plan that we give them every single month.

Steve: Yeah, so I mean, to me, that’s really powerful. I mean, that’s the one thing that takes this so far beyond what most of us get from our accountants and I don’t want any of the accountants to think that I don’t love you, I love you all my dad is was a CPA for all of my life, you know, and, and so they do great and important work that you’re actually then coming in and building upon the work that they do look backward and kind of projecting that that forwards and then helping with the strategy piece too. And I think that’s so important because sometimes we get caught up in our businesses, you know, and we’re caught up in the day to day grind and it’s it’s hard to to remember Sometimes to step back and think kind of strategically and, and, and be able to see, okay, well, they’re my numbers. And if I move this one in that one this month, let’s come up with some, some strategy, some product, some projects to do that, you know, you get you kind of get into a rhythm where the business is always improving, I would think month after month after month.

Growing & Profiting

Adam: Yeah. And that’s the goal. I mean, that’s the ultimate goal is to have a growing and more profitable business.

Steve: Yeah, well, and the compounding of that is got to be huge. That’s amazing.

That’s amazing. So I want to, I want to change topics on you for a moment if we may. Okay. Because the last time we spoke, we were recording an interview just like this a few months ago. And at the end of that conversation we got talking about, about marketing and some different things and, and you you kind of got intrigued by by podcasting and, and how we were doing some things and ultimately, you became a client of ours and I’d love to hear a little bit about your journey with your podcast and, and how that has impacted your thinking about your business and, and frankly how it’s, it’s, hopefully, improve things on your scoreboard when it comes to leads and customers.

Adam: Yeah, absolutely. I mean in my business, and like many others, you know, professional service-based businesses, it’s just, it’s hard to attract, it’s hard to get awareness to potential clients once I have a client potential client aware of me, then it’s, you know, fairly easy to convert because you know, most clients need something like this. But the awareness factor is hard. Most you know, nobody’s googling what I do. And you know, any other professional service-based business, not many people are googling it. You know, you can’t really put up a Facebook ad so awareness is hard.

So, you know, one of the things that I liked about the podcast is that it’s a chance to, to build relationships with people who can get you, you know, put you in front of people who are and build that awareness. And, you know, the podcast is a great medium for getting that to happen. Because you can not only educate the, you know, the audience of the podcast, you build a relationship with the person that you’re speaking with your guest. So yeah, that’s what I loved about the podcast and through the relationships that I’ve built through the podcast and the people listening to the podcast. I mean, I’ve, you know, I’ve definitely been able to, to attract several clients, because they trust me, they’ve heard me speak, and, you know, in order to get somebody to trust you, they have to know and like you, and and by hearing you talk, you seem more trust. Then if you got a random, you know, had on Facebook or, or whatnot. So yeah, it’s been great so far.

Steve: Yeah, and you’ve really been a student, of our process. So you kind of dove right in and knew that you had some people, you know that were in your network, or at least on the periphery of that, that you identified that you wanted to interview. And these were, these were influencers who had the ability to refer you and so tell us, talk us through how that went, where you invited them on the podcast, and then you were able to extend that into opportunities to present to their audiences.

Adam: You know, I had several relationships with people who had audiences of clients that that would be a good fit for my business. So I just, you know, reached out to them and and invited them as a guest on podcast because it’s a great way for them to promote their business and for me to learn more about what they do, I’m a big believer in, you know, if you want to receive you got to give first and I think giving you know learning more about their business and giving them an opportunity to promote their business. And then you know, being able to refer you know, some of my clients or other people I know in my network to their businesses that that’s actually happened I think one of the first or second podcast guests I had on once I learned more about their business I was able to refer one of my clients to them and they’re actually doing business to this day through those things that make the podcast guest want to help me out and promote my business.

And so, you know, once we’ve continued building that relationship, you know, the goal is to help get the podcast guests to help promote my business and most of our I haven’t had one person say they didn’t want to help in some capacity. And so I’m able then to leverage that relationship and that trust and get in front of their audience to promote my business. And these are people that I never would have gotten in front of if it wasn’t for the relationship that I’ve built with the podcast guest.

Steve: So you, you talked about them having the opportunity or the willingness to want to promote you and what you’re doing. What does that look like? What I mean, if we dive into the specifics, how have they helped bring people to you?

Adam: So one of the best ways is, is offering to do a webinar about in my case, it’s with making the financials clear, and, you know, help understand a webinar on helping you understand why your business may not be profitable, and what to do about it. And so I approached, these podcast guests and asked them if they would like to, for me to present a webinar on how to improve the profitability of your business, to their audience.

And most of them have embraced the idea because, you know, that’s something that they don’t provide to their audience and, and it’s a great value for their audience. And so, you know, I put together this webinar and we do it as a joint webinar between me and the podcast guest. And it’s been it’s worked out really well so far.

Steve: Yeah, I know you’ve I’ve talked with you a few times shortly after you’ve done with those webinars and it’s always I think you’ve done this to me two or three times now are you like, Oh, yeah, we got another lead put that it’s booked a call. You know, which that certainly that’s, that’s what I love to hear that gets me fired up. But, but, you know, I know that that at the end of the day, that’s what you were looking for was a way to, to, you know, get people coming to you and, and booking appointments already kind of having an understanding of what you do.

So they’d heard like all this stuff that we talked about the beginning of this episode. That’s so important. The work that you do for businesses, they got to hear that kind of, you know, in advance of them being ready to talk with you. And so it sounds like you’ve really been able to, to create those opportunities to educate folks. And then, you know, and you got a message that resonates, which is, it’s, it’s awesome. It’s so much fun to see, to see you have the success that you’ve had with it.

So before we wrap up here, if you know, you went through a number of different forms of marketing and business development, everything from that local networking, and you’ve lamented to me about, about the amount of time that that’s taken in the past, I’ve been there myself, a lot of people, you know, can relate. You’ve tried a lot of different things. What has been different about this process that stood out to you?

Adam: That it’s that its relationship building that scalable, local now Networking is all about relationship. If you do it right, it’s all about relationship building, you can’t go to the Chamber of Commerce is pass out business cards, that’s not relationship building, you got to truthfully build relationships. But that’s, that’s hard. It’s not scalable. I think the thing that I like about this the most is that I’m able to build true relationships because nobody’s gonna, nobody’s going to act if they don’t know and like and trust you. So you’ve got to build a relationship. Well, it’s hard to build relationships across the country, with people you don’t know unless you have a system or something that’s scalable, and that’s what I like about this.

Steve: Awesome well, you’re knocking it out of the park for sure. And it’s been fun to watch. And you haven’t really been you haven’t been added for very long but you’re getting really great results and that always gets us fired up every time you know, you share a little wind with us. I share it with the team and you know, they love that as well.

So we’re really excited about your success. So can I put you on the spot?

Adam: Sure.

Steve: All right, so I know that you have created a really great presentation that goes deeper into all of the numbers that we talked about at the beginning of the show. Would it be okay, if we shared that with everybody that’s listening?

Adam: Of course that would be great.

Steve: So where should they go to watch that presentation? Because you’ve got to set up on-demand, I think on your website.

Adam: Yep. It’s on-demand. Just go to the CFOproject.com/video. So that’s T-H-E-C-F-O-P-R-O-J-E-C-T dot com slash video.

Steve: Then, folks, I’ve watched it, it’s it takes all of the concepts that that Adam shared with you at the beginning and gives a little more detail because he’s got a little bit more time to do it in the video, and I think you’re going to get a ton out of it. So go take a look at that. It’s at the CFOproject.com/video will link that up in the show notes.

Adam, thanks for coming back on the show. Can graduations on all your success. And again, thanks for helping straighten this out on profitability. It’s been great today.

Adam: Yeah, no, thank you so much for having me again.