Steve Gordon:Welcome to The Unstoppable CEO podcast. I’m your host Steve Gordon, and we’ve got a great interview for you today. Really excited about this because, I’ve got to tell you, you’re in for some true business wisdom.
Today I am speaking with Prager. Jeff has been a CPA and a business owner and an entrepreneur for over 45 years. He is the former CEO or CFO and owner of several successful multimillion-dollar companies. He was one of three founders of Ashworth Golf clothing, which if you looked at my closet, you’d see a whole bunch of those. He was the CFO and founder of a large land development company and just has done all kinds of things throughout his career.
Jeff, I’m excited to have you here. I am looking forward to this conversation because you’ve done some things that a lot of our guests haven’t done and I think you’re going to be able to give us a unique insight. So welcome to The Unstoppable CEO.
Jeff Prager:I’m really excited to be here, Steve.
Steve Gordon:Yeah, this is going to be fun. So tell me a little bit more about your background. You’ve been doing this for a while and I’m sure there’s more beyond just that bio that I shared with everyone.
Jeff Prager: Well, it’s kind of funny what’s gotten me to this point right now, Steve. As you said, I’m a CPA and I started my career with one of the Big Eight firms. So that really dates me because now Touche Ross is a part of Deloitte and it’s the Big Four. But I specialized in pretty much real estate, construction and had a great career going and then went to become a controller of a big home builder and then a CFO of a real estate syndication firm.
And it was right at the dawn of the microcomputers. And I started doing a lot of projections and pro formas for people and they liked what I was doing and, boom, a few of them said, “Hey, if you break off on your own, we’ll set you up in your own business.” And that’s how my CPA firm started. So it was kind of good and I did very well.
And that’s where I got involved with Ashworth Golf clothing. In about 1992, I sold my practice, I sold my stock in Ashworth, and I was on top of the world. And then about 1994 one of my ex-clients came in and said, “Hey, Jeff, I’m starting in a home building company and I’d like you to be my partner.” And I said, “Well, God, I’m a hot shot CPA. I’ve done pretty well. You know what? I’m going to do this.” And that’s when my nightmare started. And I realized very quickly.
We sold five homes our first year, 15 our second, and by the middle of our third year we were $1 million upside down. And it was $1 million I no longer had. And it was kind of scary. And I don’t know how many other of your listeners have had this, but you wake up nights, you’re in a cold sweat, you don’t know how you’re going to make payroll, you start becoming short with your family. I was kind of afraid I was about ready to fail and I wanted to bury my head and just disappear. And those are the kinds of feelings you have when you run a business. And I had three kids about ready to enter college and I’m going, “What am I going to do?”
And luckily because I’m a CPA, I’ve been exposed to literally thousands of businesses and one day I just started saying, “I got to take inventory of the successful ones versus the non-successful ones.” And the common denominator, and this is where I had my a-ha moment, if you will, was that they all looked at their numbers but not just their financial numbers. And that was the key. They were able to manage their businesses in five minutes or less a day. It came down to seven key numbers that they were using to manage their business.
And so by using those numbers and then trying to say, “How do I make them better,” I realized, “Oh my God, we’re in the wrong niche.” And we were able to turn the company around. In fact, we became the second largest privately-owned home builder here in Colorado. All my businesses started going well and I kind of retired at 57 which was quite a few years ago. But the key was the numbers.
And then people would ask me about my success. And when you made it, everybody goes, “Well, it must’ve been easy.” And no one knows that you’re teetering on the verge of not being successful in a big way. You could lose everything. So people were asking me and as I shared my revelation, if you will, and these are things I did not learn as a CPA and did not know when I was running my CPA practice.
But as I shared these with other people, I found out these seven numbers are pretty much across the board. And even Mile High United Way asked me to do a program and said can I adapt my seven numbers to the nonprofit world? And I go, “Well, let me think about that.” And we did. And it was the same seven numbers, they just had different names in a different environment.
So that’s kind of how I started. And really for your listeners, what I’d like to say is that if you run your business based on generally accepted accounting principles, you’ll probably go broke. And they’re not helping. Your accountants, your trusted advisors are not focused on the right things.
Steve: Yeah, I’ve had some of those conversations in the past with accountants, particularly in a previous business. And we had a sharp accountant, but there is a disconnect between the rear-view mirror of your financial statements and sort of what’s happening and how you’re moving forward. So this is fascinating to me.
I mean, you say, “I wonder if any of our listeners have been in that position where they’re having those nights sweats and stressed and getting short with their family.” I know I’ve been in that position. I didn’t like it very much and I worked really hard to get out of it, as I know you did, too. But the more I’ve done these interviews, the more I realize that that’s an almost universal experience, that almost every entrepreneur goes through that.
So when you were in that position, how did you move past it? How did you just sort of say to yourself, “I got to keep going?” Because I think for most people, the natural inclination, and I think you even said it, is just to sort of bury your head in the sand and kind of curl up in the corner and hope it all goes away.
Jeff: Well, you’re faced with the reality you’ve got to do something. Whether it’s closed it down or make it work, you’ve got to do something. And what I realized is that focusing on profit is absolutely the worst thing I could have done. And what I needed to do was focus on cash flow and my leading indicators.
The 7 Numbers to Watch in Your Business
And just so you know, the seven numbers are number of leads you generate, your conversion rate, your customer retention rate, your number of transactions per a customer, your pricing. By the way, pricing is usually the biggest problem in most organizations that I’ve come across that I’ve helped. And then those five numbers generate your revenue. Then you talk about controlling cost, which is your cost of producing your products or services, which, by the way, money is usually going out before it comes in and your fixed costs, your overhead, your rent, and stuff like that.
And so when you start thinking of it in those terms, not in accounting terms, but like fixed costs, it’s not just the interest which shows up on your profit and loss, but the principal and interest payment you’re making on debt. It’s your equipment that you’re buying, it’s inventory that you’re buying. Those things are not showing up in that profit number. And that profit number is extremely misleading.
And my best example, if you will, is you made a lot of sales but you haven’t collected on them. Now go to the grocery store and try to spend your accounts receivable or spend your inventory. You can’t do it. And so there’s a lot of real hard lessons I learned. But once I started focusing on my seven numbers and how that drove my cash flow and the cascade effect. Like if you want more leads, you got to spend more money on advertising. Are you getting a good ROI?
And that’s what cash flow engineering’s about is for every dollar you put in your business, are you getting a buck and a quarter back? And it’s a simple concept. Or part of the cash flow concept is, do I have more in the bank today than I did yesterday? And it’s so intuitive and it’s the way we think, but that’s not the way your financials are set up. And that leads to a lot of false starts.
Steve: You know, I got focused on this idea. It’s amazing. I’m glad you’re sharing this. We haven’t talked about this on the podcast ever in all the episodes we’ve done. This is so critical. When in 2006, seven, eight and nine as the economy sort of went into a funk, to put it mildly, I was in a different business and we were serving land developers. And a tough market to be in at that time.
And I was in a Vistage group. And the guy that owned the franchise here in Florida, his name’s Red Scott, he’s passed away since, but he had this quote and it just burned in my brain. And the quote’s stupid, but it’s brilliant. It’s “Cash ain’t cash unless it’s cash.” And his point was your receivables aren’t cash, your line of credit’s not cash, because at that time banks were going around and not letting people draw on them even. So there’d be people that thought they had that as an asset and then, poof, it was gone.
And so it really got me focused on the fact that the only thing I could count on was the actual cash in the bank that day. And I think that’s part of what you’re saying here is don’t delude yourself thinking that you’ve got money out there. If it’s not in the bank, it’s not your money yet.
Jeff: Exactly, and you just summarized everything I have to say. It’s kind of nice. You’re absolutely right. It’s not only cash in the bank, I’m going to take it one step further. But once you figure out that cash in the bank, what you should be looking at over the next week, month, 90 days, quarter, half year, annually is, “What am I going to spend and what’s coming in?” And, once again, “For every dollar I spend, is it an investment?”
Is Your Business an Investment? Are You Sure?
I mean, here’s the classic example. Would you put a dollar in the stock market if you thought you were going to get 87 cents back? And the answer is obviously “No. No, I wouldn’t do it.” But why would you do it in your own business? And you’re not thinking of your business as an investment that’s ultimately going to provide you with the ability to do what you love doing and do it with the people you love to be with the most. And that’s the best way I could summarize our objective in running a business is we want to do something we love. And are we doing it or has our dream become our nightmare?
And I know I’m being kind of a trite about this, but I’m always looking depending on what I call a time horizon. If you have three months of cash in the bank, you start applying some of the principles you would do for personal financial planning. If you have three months of operating capital in the bank, maybe you don’t have to look at it every hour, every two hours, what’s going on in your bank account. But if you don’t have that cushion, then you need to know how you’re going to spend that money and when you’re going to spend that money.
Because you’re going to have vendors who are relying on you to pay you. And it’s funny you’re talking about you “served the land developer.” I’ve been in the home building and land development business most of my career and I’ve seen a lot of builders and land developers bankrupt subcontractors because they’re not paying on time. And then you get into something where you’re usually using this job to pay the last job.
And so when you hit something like 2007 and 2008… And there’s always an economic cycle, always. Can’t predict when it’s going to happen, but there always is. Will you be ready for it? Will you be able to survive that economic cycle? And if you’re not following your cash, if you’re not following your numbers to get those early indicators that, “Hey, things are not as good as you think,” you could be in a lot of trouble with your business.
Steve: Absolutely. I want to take a quick break. When we come back, I want to talk in more depth about these seven numbers and talk a little bit about cash flow. And I know you’ve got a lot more to say on all of that. So we’re going to be right back with from Jeff.
Welcome back, everyone. This is Gordon and today I’m talking with Prager. And, Jeff, let’s dive a little deeper on these seven numbers.
Steve: And everybody that’s listening has probably heard that, “Oh, I need to focus on leading indicators.” And they’ve heard of the ones that you’ve talked about in the first part of the interview. But I will tell you in my experience that, I don’t know, what do you think maybe 5% of businesses or 10%, if we’re being generous, actually are looking at these on a consistent basis.
Jeff: I don’t even think it’s that high. I mean, it’s really amazing how we came up with these. But, yeah, you’re right. People are afraid of numbers. And this is kind of cool because when I started looking into the fear of numbers, there’s actually a real phobia called arithmophobia. And it’s a fear of numbers. And the reason people are afraid of numbers is they’ve been punitive in their past. Like an 89 on an exam as a B+, where a 90 is an A-. And it’s very punitive.
Do You Suffer From a Fear of Numbers?
And most people have never ever been learned how to look at numbers, what to look at, how to interpret them and what to do about them if they’re not the right numbers. And so they’ve never been able to make numbers their friends. And yet the language of business is numbers. And, again, I’m going to repeat myself, it’s cash in versus cash out. That’s all a business does. Cash is either coming in or it’s going out.
So if you start looking at these numbers, maybe you don’t know how to interpret them in the beginning, but if you consistently start following them, you’ll find that you’re going to start making decisions based on where you want to be instead of where you are right this minute. And that’s the key. Start with the end in mind. Where do you want to end up? And then what are you going to do to get there? And you can map it with the seven numbers. And I use it for exit planning, I use it for cash flow planning, I use it for strategic planning. You name the planning and my seven numbers are always there when I’m working with my clients and when I’m trying to help people improve their businesses.
Steve: So let’s go through the seven numbers again and kind of, if you can help us understand as you’re working with a business, how you would define each one. I think they’re pretty straightforward, but some people will say, “Well, what does it mean in terms of like a lead, let’s say? At what stage do I count them?” Or things like that and how you would address that.
Jeff: Right. And so, to me, a lead is nothing more than a qualified lead. It’s not just everybody who’s listening to your commercials, reading your ads, or whatever. It’s qualified leads. And so are you driving people that are really your ideal clients? Or the new term is “avatar.” And what I’m finding as I get older is that we’re using different language and we’re using newer technology, but it all boils down to what people have been doing for thousands of years. And that’s an incredible thing to realize is that there really is nothing new. So, yeah, are you getting qualified leads? And I’ve worked with a lot of businesses where they weren’t qualifying the leads, wasting a lot of salespeople’s time, and their conversion rates were low.
Well, if you have qualified leads, obviously the next number is your conversion rate. Do you have the right sales script? Do you have the right sales force? Are you selling it through the right distributors or whatever? And so then you get into all the strategies related to your conversion rate.
By the way, this is like peeling an onion. You realize that. Like number of leads, do you have the right message? Do you have the right marketing budget? Do you have the right marketing calendar? Do you have the right marketing materials? Then your sales conversion rate, are you reinforcing the message? Are you really showing your product benefits and features? And are you really meeting a market need? Do you understand your product, your target market, your competition, your industry? See how this kind of unfolds? So that’s the next one and that gets you that customer.
Now the next step is customer retention. If you keep those customers, how do you retain them? Do you have a customer journey, if you will, that takes them from that initial sale through a whole progression of steps? A friend of mine, Eric Lofholm, who’s a sales trainer, once said, “The only purpose of your first sale is to generate your second sale. And the purpose of the second sale is to generate the third.”
So then you get to the fourth number which is number of transactions per customer. And that gets to, in my mind, your referral program, your customer retention program, your customer satisfaction. But like when I had my home building business, everybody goes, “Well, you sell one house, you’re done.” But we found out with a certain demographic that if we went there after three years with a bouquet of flowers to that homeowner and say, “Hey, we’d like to thank you for living in a Strauss home and living in one of our communities for three years. And, by the way, when you bought this home, you had one child and this is your career path. Tell me about that. How’s it going?”
And inevitably we got to the point where we were selling, I think our top year was 137 homes a year and then we started seeing market weakness and pulled back. But we would get three to five sales a year for the cost of a bouquet of flowers. Now you don’t think about that, but we didn’t have to sell the customer on our product because we were very much quality oriented and low warranty work. We did it right the first time most of the time. But the second thing is we, we didn’t have to pay a realtor a commission. Well, there’s $15-20,000 right into our pocket. That buys a nice dinner. And you start thinking about that and how do you make sure that you fulfill the promise? Okay?
So number five is your pricing. And we’ve got the formulas and that equals revenue. When you take those five numbers, revenue could be broken down by those five numbers. Pricing, like I said earlier, is the number one problem I see in a lot of businesses. They’re pricing to the competition, they’re trying to be low priced, which gets back to lead generation. The value proposition isn’t being communicated properly. Like when people come to me as a CPA when I had my practice, they go, “How much do you charge for a tax return? Oh, how much do you charge for a car?” Are you buying a Lexus or are you buying a Volkswagen? And I learned to say one of my jobs is you want…
I was in a corporate meeting, it was my first corporate meeting as a controller of a very large home builder. And they were talking to this guy Mike, who is still a friend of mine to this day, and they said, “Mike, we looked at the statistics and we found out we are the second highest priced home builder per square foot in the region.” And he goes, “I’ll have that corrected by tomorrow.” And I’m sitting there as an accountant going, “What? What’s going on here?” So I cornered Mike after the meeting and I go, “Look, I’m new to the organization, but what is our goal here?” And he goes, “We’re supposed to be the highest priced.” I said, “What?” And he went into a whole philosophy of customer service, quality, and stuff like that. And it was a real eyeopener for me.
And I’m an economist by training, so we all know that as price goes down, quantity goes up, but you actually can lose gross profit that way. So you don’t want to price low. But the other thing is there’s a branch of economics I actually taught at the University of Colorado and it deals with a certain part where all the formulas break down, where you raise prices and you increase your volume. So that’s number five.
And I’ll go through the last two very quickly. Variable costs is the cost of producing your product like equipment and facilities. That goes on the balance sheet and people are totally unaware of the consequences of that. But your cash is going in and out and so what are your variable costs? And you see it in restaurants all the time. They cut costs by cutting the quantity and quality. Like where I go for breakfast, the bagel when I started going there was about five inches wide, now it’s about two and a half inches wide. And you see that all the time and that has an impact on your customers.
Finally, fixed costs. And fixed costs are your costs of running your operation. Now here’s the biggest mistake I see in even small to medium size businesses, the owners take what’s left after they’ve paid everybody. No. The first thing under salary should be your salary. And, by the way, you also should plan on getting a return on your investment when you set your revenue goals.
The Spreadsheet That Can Run Your Business
So they all work together and they all have a cascade effect. If you change one, it changes all the others or it can impact any of the others, let’s rephrase that. And so I’ve got a spreadsheet that if your listeners would like they could get from me. We could talk about that.
Steve: Yeah. No, I’m sure they’d love that.
Jeff: And it’s a very simple spreadsheet. It’s so simple. I mean everything I do can be done on one sheet of paper. And that’s been my philosophy is keep it simple. It’s the old Mark Twain thing, “Hey, I’d write you a short letter but I didn’t have the time.”
Steve: Right. Well, it’s powerful when you get these things in place. So in my first business we had a lot of moving parts, probably not as many as you had in the home building business, but we had a simple dashboard that tracked, I think we had a few more things than seven but not many more. And on one page I could look at it and in an instant see how we were trending in all sorts of different important areas.
At the time, it took us a little while to build all of that because I was trying to learn and figure all that out myself and didn’t have anybody like you to walk us through the seven simple numbers that we need and share the spreadsheet with us. But once I got it, it saved so much time. It eliminated all of the questioning like, “Do I have the right information? Am I looking at the right things?”
It just immediately simplified decision making and it’s hard to explain that to someone until they actually go through it in their business, but you’re wasting a ton of time if you don’t have this.
Jeff: I call it my thumbs up, thumbs down management theory. You look at your numbers and they better be thumbs up if your management team is doing what they’re supposed to. And so if you’re doing better or equal to your expectations, and that’s the other key is developing these expectations, then your thumbs are up. And if they’re not, then your thumbs are down and you have to do something about it.
And, again, at my peak, I was an owner in over 156 companies and I was managing them in less than 10 hours a week and teaching at the University of Colorado and working less than 40 hours a week. Now when we have real problems, yeah, you have to dig in. But I have a little saying you may like, “A problem’s a problem until you reduce it to a procedure.” Once you reduce it to a procedure, you can delegate it.
And that’s the key to doing… An owner, if they’re in the weeds all the time, it’s not a good sign. An owner is usually a visionary and they should have the time to be a visionary, but if they’re always putting out fires, then they’re not an investor in their own company, they’re another employee. And you can’t make it, you can’t get to the point where you’re doing what you love to do if you’re always putting out fires and if you don’t have the management systems in place.
And as soon as I say that, everybody’s eyes glaze over. But management systems are just having a dashboard. It’s like driving your car. I was explaining to my eight year old granddaughter all the dials on my car. And as I’m explaining those to her, she’s like amazed that I could do so much at once. But we all know driving a car is fairly simple once you learn how to look at the dials. And that’s the key to running a business. Just what dials are you going to look at?
Steve: Yeah, and I couldn’t agree more. And I’m so glad you’ve shared this today. As I’ve said, we’ve not covered these particular topics before and I’m glad we’re getting to them and I’m thankful that you’ve made it as simple as you’ve made it. So if somebody’s listening to this and they want to find out more about what you’re doing, I know you’ve got a wealth of information on your site, what’s the best way for them to connect with you?
Jeff: A couple of ways. Connect with me at CashflowEngineering.com. That’s all one word. CashflowEngineering.com. And/or you could email me at email@example.com. If you really want to get me, you hit firstname.lastname@example.org. So those are four ways to get in touch with us.
Steve: Perfect. And if they want to find that spreadsheet that you mentioned earlier, what’s the best way for them to find that?
Jeff: I’m finding out that navigating through my website isn’t as easy as I’d like it to be. So if you shoot me an email directly, I’ll get it in their hands.
Steve: Okay, perfect.
Jeff: And, again, that’s email@example.com.
Steve: Perfect. And we’ll put links and instructions for all of that in the show notes so folks that may be driving while they listen to this, they can go and find it real easily. It’ll be referenced there. So, Jeff, any final thoughts you want to share with folks? Any wisdom you want to impart on us?
Jeff: Yeah. When you start a business, you usually have a skill or a dream that you’ve done very well and it took you years to learn. When you run a business, running a business is a different skillset than the skills you’re selling or the products or services you’re selling and reinventing the wheel and trying to learn this skillset overnight is just virtually impossible. So if you’re going to do this, if you’re running a business and you’re not going where you want, find that trusted advisor.
And I got to be honest with you, if you don’t find somebody who’s actually been in the weeds like you have, you’ve got the wrong advisor. They’re working on theory, they’re not working on practical advice. So find somebody to hold your hand and show you step-by-step how to get through some of these tough things.
But what I’ve found is the more complicated you make it, the worse it is for you. And that’s why I always try to get everything… I look at my father who was a peddler. That’s a door to door salesman. And he would write his business plan on the back of a napkin. And I remember him having breakfast with the other peddlers in New Haven, Connecticut, and they’d all pull out napkins and start writing down their numbers and everything like that. And that stayed with me to this day.
Is Your Business Overcomplicated?
And, yes, I could write very, very detailed dissertations, if you will, on how to do this stuff, but all my tools come down to one page, maybe two pages at the most. I mean, when you’re doing the dog and pony show for like a bank, yeah, you write a business plan and you do that, but your business plan should be on one page. Your dashboard should be on one page. You should be able to describe your business on the back of a napkin.
And that’s been a key component. That’s how you make it easy is running this as though you’re having a conversation over your dinner table or your breakfast table. And that’s really what it takes to run a business. Because of all this technology, we’ve overcomplicated everything. And it’s amazing to me how complicated life is. If I were to talk to you as a CPA today, I could snow you with vocabulary and you wouldn’t have a clue what I’m saying. Okay? My whole goal is to keep it simple.
And, again, my best advice to you is find somebody who’s been in your shoes if you want real advice on how to do it. I will say that as a CPA, I thought I knew how to run a business. I did not. I had to learn that skill from scratch. And my whole goal at this point is I’ve done it, I’d like to help other people do it, and show them the shortcuts to doing it. That’s kind of it.
Steve: I love it. I love it. Well, thank you for being here and for investing a little bit of time with me today and sharing all your wisdom with the audience. And again, folks, go check out Jeff’s site CashflowEngineering.com. And if you’d like a copy of that spreadsheet, email him directly at firstname.lastname@example.org. We’ll link all that up in the show notes. Jeff, thanks again. This has been a lot of fun.
Jeff: It’s been great for me, too. Thanks, Steve, for having me on your show.