Adam Lean | A CFO for Small Businesses

Posted in  Podcast   on  December 10, 2019 by  Joris Bryon

Adam Lean helps small businesses, especially eCommerce companies, sort out their financials, i.e. “their books,” to figure out what changes they can make to maximize their profits.

Turns out a lot of entrepreneurs are leaving plenty of money on the table without realizing it. Or, they’re wondering where all the money goes at the end of each month, even though their sales are great.

The key, says Adam, is to identify the metrics driving your business, figure out what they’re telling you about the health of your business, and then make appropriate changes. It’s all about being a good business owner, not just being good at you do.

Tune in to find out…

  • Two things you can do this month to improve cash flow – and why you must
  • The main reasons small businesses fail– including the one you might not expect
  • Why more traffic and more sales can’t save an eCommerce business
  • What an accountant or bookkeeper can and can’t do for you (most owners get this wrong)
  • And more

Listen now…

Mentioned in this episode:

Episode Transcript:

Joris Bryon: Hey, this is your eCommerce excellence podcast and today I’m really excited to talk to Adam Lean. Adam is a former accountant turned small business owner. He’s the founder of the CFOproject.com and also the host of the P is for Profit podcasts. He helps small business owners make their business more profitable by untangling their financials and showing them exactly which levers to pull to maximize their profit and their freedom.

He mainly works with a lot of eCommerce companies, so it’s going to be really relevant and interesting. His goal is pretty simple. He helps his clients to go from feeling overwhelmed and stressed out about cash to and wondering also, where did all the money go to feeling confident about her finance, financial situation, knowing how to run a business like like the should be running it like a CEO with the numbers at trade drive to decision making. Adam, welcome to the eCommerce excellence podcast. Really happy to have you here.

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

Joris: Cool. Yeah. Just to start off, can you tell us a bit about your background? Where’d you come from in your career? And how did you end up? Yeah, at this point?

Adam: Yeah. So like you mentioned, I used to be an accountant. And, you know, I got my accounting job right after I got graduated from college. And that was okay for a while, but then I ended up disliking, being an accountant, just because an accountant, their job is to record the past and I’m really wanted to work in the business and help businesses grow. So you know, during my day job as an accountant, I started my own eCommerce store. This was back in 2006. And I really enjoyed that I really enjoyed the marketing aspects and the operations and then just running the business and And, you know, sales grew, honestly, the sales grew a lot over the next, you know that from 2006 to about 2009. I was doing, you know, half a million dollars in sales. And, you know, and things were going well, from a sales standpoint, I was able to leave my day job and focus on my business. But then, around 2009 I think I was about 750,000 annual revenue. When I noticed that every single month my profit and cash flow started getting tighter and tighter and it just, you know, I, because of my accounting background, I was able to recognize this but it’s just the cash flow. There was it was just something about it. I’d I was making, I was doing a lot. I was making a lot of sales, but just wasn’t seeing it in the bank account. It was just frustrating.

But, you know, because I had an accounting background, I was able to sort of understand and dissect my business and figure out what the problems were And then, you know, shortly after that I was able to, to somewhat correct the majority of my problems. And I started working with other business owners and realize that they were experiencing the exact same things. They were working, you know, 90 miles an hour going 90 miles an hour working 75 hour work weeks, without a lot to show for it, meaning not a lot in the bank account. And really, that’s the whole point of business is to generate profit for you, the business owner. So you know, the difference, though, between those people and myself is that they didn’t have the benefit of having an accounting background. They weren’t they didn’t understand why their profit was leaking, or why they weren’t having enough cash in the bank, and so I was able to help them. And so fast forward almost 10 years, I started this business called the CFO project, where we make the financials very clear, we show you exactly what’s going right, and what’s going wrong in your business. And we say we tell you every single month, here are the two to three things that you need to do this month to improve their profitability and cash flow. That way the business owner can focus on what they enjoy what they do best, and let a financial person show them what they need to do to improve, which is what a CFO or Chief Financial Officer does for big businesses. We just wanted to provide this for smaller businesses.

Joris: Yeah, and I think a lot of people will recognize what you just sold as you’re growing, but your bank account is not like, I mean, cash flow is is not really not really good and and you know, you’re putting in a lot of hours, a lot of effort, you get a lot of revenue, but at the end of the day, it’s it’s it’s the profit that matters and and that, that’s really hard and it’s hard to I mean, I’m a small business owner myself and and it’s not something the finance, it’s not something I enjoy, so it’s something you tend to postpone and maybe you’ll do it the other day and you don’t really know what to do exactly and you focus on other stuff that you really good at so that’s what I find cool about what you do is you get the expertise of our CFO even if you’re not at the level yet of having an in house CFO so that’s really cool because at the end of the day is here for really looks towards the future as well as as you mentioned before the countdown looks records the past but it’s here for looks at it. And yeah, except a future. Maybe the general question, Why do you think so many small businesses fail because I don’t remember the statistics but it’s in the huge number of, of businesses that don’t make it past a five-year mark.

Adam: Yeah, there’s a there’s an organization here in the United States called the Small Business Administration that according to them, Half of all small businesses 50% never see their fifth birthday. They don’t make it five years. And that’s a crazy statistic. I mean, literally one out of two people will go out of business. And that’s very unfortunate because their livelihood is tied up in this business and a lot of capital, you know, capital, a lot of investment. their personal funds have been invested in this business, and it’s just gone. But the reason why they fail is simply that I ran out of cash. I mean, most businesses, problems can be solved with making more profit and, and having adequate cash flow, meaning that there’s money in the bank when they need it, to keep the operations going and to invest in other things or buy inventory or hire employees.

But so the question is, why do those businesses run out of cash and it’s, you know, I believe is because most business owners get into business because they are an expert at the craft of their business, not necessarily an expert at numbers or, or financial things. So for example, an eCommerce business owner, you know, who sells leather wallets and leather purses and key chains and things like that, they are probably an expert at that type of product. They enjoy the craft of making these leather goods and, and they want to sell them and they enjoy the operational side of things. But at the end of the day, the only thing that matters in business is, is making a profit, which turns into cash, which gives you cash flow. Those two things profit and cash flow are numbers.

And so somebody in the organization has to understand what to do to improve those two numbers. And those businesses that go out of business, they just simply don’t have somebody to do that or that I don’t know it themselves, they are focused so much on working in the business instead of on the business and they just go out of business because you know, despite the hundred-hour work weeks they put into their business, they’re not able to improve they don’t know how to improve the profit and cash flow which are the only two things that really matter in business.

Joris: Yeah, and I think it’s recognizable again, small business owner you always think like Oh, if I can just sign up that next client then situation is gonna be different or eCommerce, if I can just get more traffic and sell more wooden situation, is going to be different, but that’s not the case. Is it?

Adam: No, I mean, in many cases, you know, sales may not a sale solves a lot of problems, but sales may not be the problem. I was working with a client. A couple of years ago, he came to me and he was doing the one 1.2 million in sales but had a loss of about $200,000. And I’m quickly you know, I, after working with them for a few months, you know, I, we was able to dig much, you know, dig deep in the numbers. And I realized that their problem, they were selling some products at very, very thin margins. And they didn’t have a sales problem, they had a gross profit problem. And so we were able to work with some of their, their suppliers and, and do some re-engineer some things to improve their gross profit and they were able to improve their profit from a loss to a net profit of about $200,000 that a huge swing in profitability without growing sales

Joris: That changes your organization completely.

Adam: Totally is about working smarter, not necessarily harder. Yeah, right.

Joris: So what do you think are the biggest challenges for eCommerce owners when it comes to their finances, 

Adam: Not understanding them, and how and it’s like most businesses have a bookkeeper or an accountant or somebody that does that keeps up with the books or the business owner doesn’t themselves. And you have to have a bookkeeper or an accountant or you have to do the books yourself. I mean, bookkeeping is just in this necessary you know, thing because you need to, to be able to keep accurate books for tax purposes. But you also have to keep track of the books for yourself so you can make decisions. Well, here’s the problem. When a bookkeeper the accountant does the books, they’ll give the business owner the reports like the income statement, or the balance sheet or whatever.

And most business owners don’t really understand those reports and therefore they don’t use them to make managerial decisions to grow their business, you know, on the surface, the p&l or that the profit loss statement or the also known as the income statement, you know, it tells you what you’ve salesman tells you your profit. Well, just looking just being able to recognize how much you made in sales or profit that month, does it? You know, that’s just this very surface level of what that report can tell you. There are so many other things that can be looked at to help you improve your business. But most business owners and this is the answer to your question. most business owners just don’t know what to look at, because they’re not financial people.

And that’s, you know, that you need somebody that can help you interpret the financials to create a strategy for the future. And unfortunately, bookkeepers and accountants are only record what happened in the past because that’s where they’re getting paid to do. That’s it. They’re getting paid to record what happened. They’re not, they’re not getting paid to help you interpret those numbers and strategize, strategize for the future. That’s what a CFO does for big businesses. You know, a CFO of you know, Apple will tell the CEO, you know, here’s what I’ve analyzed, you know, here’s the summary of your financial situation this month. And here’s the three things that we need to change. And they make it clear to the CEO. What needs to happen? Well, small business owners need something like that. So that’s, you know, that’s, that’s what they struggle is not understanding their financials in order to grow their business.

Joris: Yeah, absolutely. I think this is this will resonate with a lot of small business owners. What are some of the key numbers that eCommerce owners should be looking at? What should they be tracking?

Adam: Well, there are several numbers. You know what, for all of my clients, I create what I call a scoreboard, which is basically a one-page report that has some key numbers on the business. And of course, every business is different but for eCommerce stores, there are some basics that you just need to be tracking like the number of visits to your site of course, and then the let me back up actually, you need to be tracking the entire business model or lifecycle of a client starting with leads, alright. So, so getting leads or getting business to the site and then converting them so the conversion rate of the size of those visits, and then the number of I think you call it actually the purchase free frequency, basically the number of orders that one customer places over a period of time you want to measure that and all these things were measuring the goal is to see which of these things are are not performing as well as I should. And the key is identifying them and improving each one.

So if you improve the number of visits to the site, and the conversion rate and the purchase speak frequency, all three if you improve each three of those things individually, then your revenues just going to go up and just it has to and then of course there’s you know that’s getting the sales you want to improve the new Number of the average order value, and then all those things add up to revenue, then you want to improve your and track and prove your gross profit, you know, your sales minus all the direct costs to, you know, if you sell a widget for $100, and they cost you $60 from the manufacturer for that widget, you know, then your gross profit is $40 or 40%, you will improve that as much as possible and track that. The next thing is that the basic things that you want to track, of course, are overhead expenses, which include marketing, payroll, and just what I call general and administrative expenses. So if you take your revenue minus your cost of goods, that gives you your gross profit, you subtract out expenses that gives you your net profit.

So, of course, that needs to be on your scoreboard of the things that you’re tracking. And then all of that is profit from sales, minus all the costs of sales and expenses that gives you Your net profit that’s super important to track and improve, you need those, those eight metrics that we just talked about, you need to improve each one of those individually. But profit is only one half of the equation. Many profitable businesses go out of business because they don’t have the cash flow. So you also need to be tracking cash flow as well. And there are two key metrics that you know, and I don’t want to get too much in the weeds here. But there are two really key metrics that I like to track for eCommerce stores and one is days in inventory. And the number of days that you have inventory sitting on the shelf, you want to get that number as low as possible.

You know, so for example, if you have if your average number of you take all the products that you have in inventory, and on average, each one is sitting on your shelf for 75 days. That means that that cash is tied up on that product that’s sitting on the shelf, you want to turn that cash, you want to turn that product into cash. So you want to get that the each product turns to more quickly. So get that 75 days, down to maybe 60 days or 50 days. And they’re able to turn that cash, turn that product into cash very quickly so that you could buy more inventory. And you know, and turn that into cash. And then the last thing or one of the other major things I like to track for cash flows, what is working capital ratio. So you’re working capital is basically another word for how much cash you have to keep the business going. And we want to make sure you have enough cash over the next you know, between now and the next 90 days at least. And you want to look at this on a regular basis to make sure that you have your well funded that you have enough cash to keep the business going.

Well, you know, there are really three ways to get cash. One is to take on debt, credit cards, bank loans, things like that. That’s how that’s a way for you to get cash. Another way is to get investors This is really not a viable option for many businesses for most small businesses, but You can get investors or you can invest your own personal money into the business. That’s another way. The third way, of course, is make a profit, right and take that profit and key and turn it into cash. So you want to make sure you have a good working capital but you want to make sure that most of that working capital is coming from profit. So all of those things you need to measure and track and measure on a regular basis to know what’s going right and what’s going wrong in the business. Yeah,

Joris: I mean, I’m not a financial guy and just hearing all this makes me think like oh man, that’s a lot of work but I assume you guys could take all you take it over right?

Adam: We have it’s basically a done for you service will do it all for you will create will analyze your business will prepare the scoreboard create a scoreboard for you and then every month will show you what’s going right and what’s going wrong and give you an action plan. But it it is a lot of work, but it’s necessity in order to improve the profitability and cash flow of your business, and that’s how you stay in business and grow your business.

Joris: Yeah, sure, like some typical profit leaks you see for eCommerce?

Adam: Yeah, that’s a good question. There’s, there’s several things that I mean that profit leaks can come from almost anywhere. But, you know, I boil it down to just efficiency. There’s an eCommerce, there’s really two big buckets that you can improve efficiency, and that’s on the margin side and on the, the operation side. So let’s start with margins. If you sell a widget for $100, but it costs you $99, from the supplier, then it doesn’t matter. You can sell million widgets, you’re not really making all that much. You want to improve the efficiency or the amount of money that you make on every single product. And a lot of businesses get into trouble, especially eCommerce businesses because they try to compete with Amazon. Amazon’s own game. Amazon’s goal is to have low prices. Well, if you’re the only thing you’re competing on is low prices, then you’re in a race to the bottom.

And you can only make it up in volume, meaning you have to sell a million to literally a million widgets in order to have you know, sustainable profit. That’s very unsustainable for small businesses. And that’s, you know, Amazon as come out and said that their business model only works if they would volume, and I have to have it so you can’t beat Amazon hear their own game. You’re not going to have as much volume as they can. So you have to do something different to do one thing, which is to improve the margins of your products. And there are many different ways I’m sure you know, I know you you do that for your clients. You help them make more money from their existing visits visitors to the website. But there’s many different things that can be done to improve that but you’ve got to focus on margin says profit leak number one, they’re just you know, many many businesses are just simply not making enough profit to cover from their product sales to cover their overhead and in their Yeah, their overhead and profit goals.

The second is operational efficiency. Many businesses are have way too many expenses for their level of sales or volume. And they’re just not efficient with the employees or with the services they buy on a regular basis, whether that’s software, equipment or whatever. They’re just not efficient with those things. They’re not utilizing them to the best of their ability like a good example was if you if you have to employ ease that is making this super simple if you have two employees who are doing order processing, you know, if you were able to streamline some of the processes, could you could you have one employee doing all the order processing?

I mean, that’s just a very, super simple way, you know, example, but there’s just a lot of overhead for these businesses. And that’s just leaking profit. I mean, employees are a huge chunk of most businesses profit. I mean, you know, at the end of the day, if you can pay, you know, if you’re going to employ multiple people, then you need to have the sales to support that, you know because otherwise you’re just not going to make any money. You’re going to be what I call playing business, you’re going to be coming in working 75 hours a week. You’re in and paying all the bills and doing everything it but the at the end of the month, you have nothing to show for it. What’s the point?

Joris: Yeah, yeah, that makes a lot of sense. And I think it’s it’s a mistake a lot of businesses Megan and to be honest, I, we made a mistake as well in the past, like hiring for future growth and that’s that was stupid. Yeah. So because then you’re all of a sudden you have salaries to be I mean, that’s what you’re good doesn’t come then you’re kind of screwed too.

Adam: Right, and don’t get me wrong every you know, every business struggles with things like that I mean every single business struggles in it, you know, a lot are experiencing what I call growing pains. You know so it’s, it’s normal to experience those things, but in there you have to know what to do to get out of it to improve it.

Joris: Yeah, absolutely. In a video on your site. Yeah, by the way, I recommend everyone to check, check out that video. You talk about profit systems. Can you expand on that?

Profit Systems

Adam: Yeah, on the profit systems for the business. So it’s essentially a Your entire business we sort of touched on earlier your entire business, if you think of it as one giant system, so you have an air conditioning system in your house that is made up of many different parts. And each part if one part breaks then your whole system sort of fails or struggles. And so you have to make you have to be able to look at the entire system of your business on a regular basis to see which parts are not doing so well so that you can fix them before they fail. And so I’m a big fan of breaking your entire business down your entire system into smaller systems, you know to here, you can also think of it as maybe a puzzle, you take your business is a puzzle, but the puzzle has a million different pieces and are a lot of pieces and you want to look at each piece individually and improve that one piece. So that as a whole your business just gets better.

The mistake a lot of business owners make is, are they just look at the income statement that they’re they get from their QuickBooks or their bookkeeper. And they just look at the profit number at the bottom, or they look at the bank balance on a daily basis and think that’s how and use that number to make decisions. And that’s, you’re essentially looking at past number on your profit for last month or the bank account for yesterday to come up with how to improve your business. And that’s just not possible, you need to be able to break down the systems in your business so that you can improve each one to impact next month revenue into impact next month’s bank balance.

Joris: Yeah, right. Yeah, that makes a lot of sense. In the same video, by the way, you talk about a four-step process for some process that you guys use. Can you explain to us.

Adam: Yeah, so it’s very simple. We we have a four-step process for all of our content. And the first step is called the Prophet hot it, where will once we start working together will understand your business from a financial perspective, and we will, you know, gather a lot of data on our own because we’re financial people. So we’ll take all the will understand your business as best we can, you know, will essentially audit the business and understand where it’s currently at. Then we’re going to do step the second step, which is to is which we call the profit target, where we’re going to set a target for profit for December 31 of this year. And our entire mission going forward will be to help you meet that profit target number.

And then the third step is what we call the scoreboard. So we’re going to create a custom scoreboard for you which I talked about a few minutes ago. every single month, we’re going to prepare the scoreboard and show it to you and it’s a it’s I call it a scoreboard because it’s a graphical, one-page report that’s in the things that that we’re measuring are either red, green or yellow. So you can clearly see of all the systems that your businesses is running, which ones are working and which is not. And then we’re so we’ll show you the scoreboard is basically like all your financial reports in one. But it’s actually easy to read.

Joris: Yeah, that’s the thing, because otherwise it’s overwhelming. Anyway, I know.

Adam: There are tons of things I can I mean, I know you, you, you work with eCommerce, business owners as well. There are tons of metrics out there. They’re just vanity numbers, they don’t really matter. You know, you need to be looking at numbers that matter.

Joris: Yeah, I often say like, you don’t need more data, you need more insights. Absolutely. 

You Don’t Need More Data, You Need More Insights

Adam: I totally agree with that. And so we show you the school board. Then we do the fourth step, which is honestly the most important step. We call it the action plan every month, really will analyze your scoreboard and all the financials. And we’re going to come to the come to you at a meeting every month and say, All right, here’s the two to three things that based on everything we’ve looked at, we think you need to focus on this month. So we’re taking your entire business and everything going on. And we’re showing you just the most important things that could change that needs to change this month in order for you to meet that profit target number and to have better cash flow.

Joris: Yeah, and I really liked it because again, there’s so much information out there and especially finances if you’re not a financial person, it’s very overwhelming and it’s hard to already find what you should be doing and then adding the priority as you guys do, say like, Okay, this one, this is the absolute priority. You should be working on this that breaks it down and makes it easy to digest. And, and very clear, I think. Yeah, to move forward and really start working on this because, to be honest, again, I’m a small business owner, and I Been not so good. And my finances to be honest. I mean, we’re doing good, but we could probably doing be doing better. But whatever reason I’m sure I want to talk to other business owners, it’s especially small business owners. It’s so overwhelming. It’s not clear. What should I be doing now that the end of the day, you don’t do anything, and you just keep going the way you’ve been going so far. But you guys break it down and make it really clear this month, this is the kind of things that you should be doing.

Adam: Yeah, absolutely. Because if you keep going at your current pace, you’re going to basically have owned a job for yourself instead of owning a business.

Joris: Yeah. Yeah, I think that’s a great thought to end this interview in. But hey, Adam, this has been absolutely great. We could probably go on for a long time. But yeah, we’re running out of time. I just want to make sure that people know how they can Find out more about you. What’s the best place for people to find you and to connect with you?

Adam: Yeah, so my website is the CFOproject.com. And that’s the best way And honestly, a there’s a green button at the top right-hand corner that says book a call. So if anybody wants to just get on a call with me, you’ll be able to see my calendar and just schedule a call. But if you go to the CFOproject.com/video, you can watch that video that you were referencing earlier.

Joris: All right, absolutely. Do that. Because it’s, it’s definitely very interesting. I thank you so much for being here. Adam. It’s been absolutely great.

Adam: Oh, thank you so much. I really enjoyed it.

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