EP - 055

Profits, Profits, Profits

With Guest Melissa Houston

Increase your profitability by mastering your business finances.

The How to Sell More Podcast

February 21, 2024

If you’re like many entrepreneurs, focusing on your business numbers is not really your thing. You do what you can but ultimately, you’re too busy managing the day-to-day aspects of your business and focused on growth.

In this episode of “How to Sell More,” host Mark Drager discusses the importance of mastering business finances with Melissa Houston, a CPA, and the author of Cash Confident: An Entrepreneur’s Guide to Creating a Profitable Business. Melissa explores the different ways entrepreneurs can regain control of their finances so that they can focus on tasks that drive profits within their businesses.

Positive Money Mindset: Entrepreneurs need to develop a positive money mindset and overcome the fear of rejection and negative perceptions about wealth.

Effective Cash Management Strategies: Distinguishing between cash on hand and actual profit is crucial for financial clarity.

Understanding and Implementing Profitable Business Models: Strategic pricing and setting achievable sales targets are key to creating a profitable business model.

“A positive money mindset is truly one of the most important things for a business owner to have.” -- Melissa Houston

Links to This Episode

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Key Takeaways

Positive Mindset - A healthy attitude towards money contributes to making better business decisions and fosters growth and profitability.
Cash Management - Regularly analyzing cash management helps sustain and expand the business.
Profit First - Adopting and correctly implementing methods like Profit First ensures a focus on profitability, not just revenue generation.
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Top 3 Reasons to Listen

Don’t Sell Yourself Short: It's essential to value your skills and services, and avoid the trap of under-pricing.
Maintain a Healthy Cash Flow: Implementing smart budgeting practices and being cautious about incurring debt are key to maintaining a healthy cash flow.
Keep Tabs on Expenses: Controlling expenses is just as important as generating revenue for maintaining profitability.

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Follow Melissa Houston on Social

Book - Cash Confident Book - Melissa Houston CPA (An Entrepreneurs Guide To Creating A Profitable Business)

Instagram: https://www.instagram.com/melissahoustoncpa/?igshid=YmMyMTA2M2Y%3D

LinkedIn: https://www.linkedin.com/in/melissahoustoncpa/

Facebook: https://www.facebook.com/imelissahouston

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More About Today's Guest, Melissa Houston

Melissa Houston, with over 20 years of experience in financial management, has worked with hundreds of business owners, identifying a common fear of financial numbers and understanding among them. Observing that 82% of businesses fail due to financial mismanagement, she founded She Means Profit™. This initiative aims to educate business owners in financial literacy, enabling them to optimize their profits without the need to become accountants or bookkeepers. She has developed several courses and programs to empower business owners to achieve their financial goals through their businesses. For more details about her work and contributions, Melissa's website and social media profiles provide extensive information.

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A Transcription of The Talk

Mark Drager: Houston, you are a fellow Canadian. Do you know how I know that? I googled your name and a 613 phone number comes up, which tells me you're in the Ottawa area.

Melissa Houston: How did you have no idea you were Canadian? That's awesome. Yeah.

Mark Drager: I'm a 905 or so.

Melissa Houston: Okay, Toronto, right?

Mark Drager: Yeah, just in the GTA. But my brother-in-law lives up just outside of Ottawa in a little tiny French town called M Brum, B.

Melissa Houston: Okay, I have a couple of friends that live out there. What do they say, I...

Mark Drager: I don't know what they say. But I do know it's right near Calypso Waterpark. And so it's a great place to go. But I'm really excited to bring you on because the vast majority of the conversations we have are around marketing, sales, KPIs, and all these things. But you are a CPA, and you have written books and spoken at all the large organizations. You've really focused on, frankly, the stuff that I'm the weakest at. My CFO, my controller, will tell you he's been with me for 17 years now. And he's very, very patient. But I am not a numbers guy. I am a marketer; I like to sell, I like to have a vision, I like to have a team. My CEO, my integrator, he's pretty good at numbers, but he's not a numbers guy. Most of us get out there as marketers, as salespeople, as business leaders, and we just focus on more - more revenue, more expenses, more team, more... What's next? More, more, more, more, more. And I have watched too many people grow themselves out of business by focusing on more. So, if we shouldn't be focusing on that, what should we be focusing on?

Melissa Houston: Oh, it's such a good question. And first of all, like, you are not alone in not being strong with the numbers. Most business owners aren't. It is, you know, you go into business because you're passionate about what you do. And nobody really thinks, "Oh, yeah, I have to learn my business numbers," right? Focusing on your business numbers will help you increase the profit of your business. Because profit drives business growth. And I like the way that you touched on everybody looking for more revenue. And yes, revenue is absolutely imperative in your business. But if you're not making a profit with that revenue, your efforts are fruitless, really. Because you have to be making profits so that you can grow your business. So many business owners are operating from a loss standpoint, not looking at their numbers, not understanding that, and therefore not correcting it before it becomes such a problem that it puts their business at risk, and they have to close down.

Mark Drager: I've often wondered if Simon Sinek and you know, his "Start With Why," has watched and wondered if this whole purpose-driven leader, purpose-driven entrepreneur, "We're gonna save the world" type of organization has actually done a disservice to many leaders. Because the whole idea of "do what you love, and the money will come later," I mean, yeah, if you very carefully laser-focus on the money... Yeah. Or, you know, "Just do great work and drive value for people, the money will come later." Yeah, as long as you do all of that stuff, and then follow it up with structure, SOPs, focusing on expenses and profitability, and all the stuff that has to come later.

Melissa Houston: Exactly. I often say that you know, you can have all the money coming in that you want. But seven, eight-figure businesses, go bankrupt if they're not managing their money correctly. And I'm not trying to fearmonger here. But this tends to be a good thing, isn't it?

Mark Drager: I've never met with an accountant or lawyer who sat down and was like, "Let's be optimistic and not focus on all the things that can go wrong." Oh,

Melissa Houston: Yeah, you're absolutely right. Because, you know, there's nothing worse than having a client come to you for help, and it's like, you're on the borderline of being far too late for this. So we've got to get your attention early so that you can grow, stay in business, and keep doing what you love.

Mark Drager: Okay, so profits, of course, are important. I believe that most mature professionals understand, no matter if you're in a huge organization or a small one, whether you're the owner or just getting into it, that every organization needs to drive profit. Without profit, you can't do R&D, reinvest, market, go up my market channel, provide better services, better products, whatever it might be. We know that profits fuel everything. Now, I started my firm in 2006. I was 23, and didn't go to university, college, or business school – the perfect guy to start a business, right? But I was at a conference where someone said that in 2006, two years before the Great Recession, General Motors lost $30 billion in one year, but they had something like $45 billion of cash on hand. They said it's not great to lose that much money, but it's not the end of the world because a company can lose money as long as it has cash on hand, as long as it has access to cash, as long as it has cash flow. That stuck with me because I realized that profits will have great years and bad years, you may be over-investing or purposefully investing heavily in the next phase of growth. But cash is what it really comes down to, isn't it?

Melissa Houston: Absolutely. Cash is like, what I like to say, cash is queen. And you bring up an interesting point, right? You're saying as long as you have cash to keep the business operating, you're going to be okay. But the thing is, there are a lot of cash infusions that go into businesses when they're not being profitable, right? So cash infusion usually means bringing on debt. So you've got profit drivers that are going to drive your cash, and then you've got debt that's going to suck your cash away. You have to be careful not to take on too much debt because when your debt ratio becomes too high, you're basically still going to run out of cash, and your cash resources will run out. So you want to focus on profit. And yes, most business owners understand that, but they don't understand how to create that profit. There are really three simple tips when you're looking at profit drivers: you want to look at your price point to make sure you're pricing profitably, your sales volume to understand how much you need to sell each month to break even and create profit margins you're happy with, and your expenses because if they're too high, they're going to suck away your cash. So yes, cash is king in the business, but you have to manage that well. There has to be a balance between your profit and your debt utilization ratios.

Mark Drager: And you mentioned your breakeven. I've never been great at this, but I've often been recommended to focus not on a breakeven but a profit breakeven. So that way, you would actually bake the amount of returns. Yeah, you know,

Melissa Houston: Even…and then to hit your profit target. Yeah.

Mark Drager: But is that something that everyone should be doing?

Melissa Houston: Absolutely, you need to know your sales target each and every month. What I do with my clients is we look at what you need to absolutely break even, especially if you're a startup. At the very least, do one breakeven. And then, when you get your profit margin target in place, you know, I'm just going to use 30% as an example, because that's generally across the board. But depending on your industry, is it 30% net profit? If you're a product-based business, now, if you're a professional service, you're going to be a lot higher.

Mark Drager: So here, when we talk about net profit, are we talking about gross profit?

Melissa Houston: We're talking about net profit, net profit.

Mark Drager: I've never been able to really maintain more than, I mean, I pay myself a salary, and then I look for profit. But I've always maintained like 15 to 20%. I've always found it hard to push more than that. Is that right? Yeah. No, not curious. Like, what am I doing wrong?

Melissa Houston: I'd like to know, too, because I think you're mostly service-based, aren't you?

Mark Drager: 100% service-based. Yeah, a lot of payroll. But maybe I'm just investing in a lot of stuff that doesn't work, I guess, or something. But yeah, I've always thought that a 15 to 20% net profit on our professional services firm, after having paid everything, even my own salary, was...

Melissa Houston: Yeah, I mean, I don't know how much you're paying yourself as your own boss, right? Because there could be some number of things going on there. But take out what your salary is. If you're looking at how much profit margin is coming in, it goes right back to the three profit drivers: Are you pricing competitively? Are you hitting your sales targets? And are your expenses too high? This is why I always say, know your numbers. When I say know your numbers, we always look at your marketing numbers, your sales conversion numbers, and then your financial KPIs.

Mark Drager: Fantastic. So, when you sit down, and you look at a balance sheet, or you look at a P&L, I'm curious, actually, if those are the things that you're looking at. So when you're taking an assessment of an organization, what are you asking for? What are you looking at? And then what are the items or the classes on the balance sheet or the P&L that you're really looking at to tell the story?

Melissa Houston: Yeah, so we start off looking at the P&L because that's really where your profit drivers are. And we focus on it as we look at where your business is currently.

Mark Drager: One year, fiscal year to date, like what kind of P&L?

Melissa Houston: It's a P&L plan that we do, right? So we're just looking at the template of a P&L, and we look at where you are currently in your business. So we list all the revenues that you have coming in, all the expenses going out, and then we analyze it. We're going to look at all the KPIs, most importantly, your net profit margin. If your net profit margin is in your service-based business, I'm looking at you to be at least 50%, at least. And most of the professional service-based businesses I work with, provided they're not selling any products, are usually coming in between 60 to 80% net profit. But it depends on how your business is structured. So you have to look at what you're investing in. Say you're investing a lot in marketing, but there's no return on it. You've got to figure out where the problem is and how to fix it. So we look at all the numbers, like everything. The leads coming in, how they're converting, where they're converting? Are they converting on your landing page, or is it more at your offers? What are your sales conversion numbers? Are they comparable to your industry? Look at the problem, look at the sales volume, look at your expenses, and say, okay, what am I paying for that's way too high? What's the industry average? And where can I start cutting that?

Mark Drager: I love the way that you're approaching this because you're approaching this the way that an entrepreneur would. Which is, let's look at our acquisition sources, our cost of acquisition, our cost of delivery, let's look at this from end to end, as opposed to, frankly, most of the accounts I've worked with in the past want to focus on accounts receivable aging. They want to make sure we close the month out or the quarter out or the year out properly, and let's pay our taxes. But you're coming at this from a much more holistic, almost CEO-CFO view, like, "Hey, let's look at the entire health of the business."

Melissa Houston: I'm kind of a different CPA, right? Like, there are different types of CPAs. You've got CPAs that are tax-focused, specialists in tax. And then you've got other CPAs that are more like growth strategists like me. That's kind of like the CFO role. There all different types of roles. I personally find taxes nice, but what I love is looking at the business and seeing how we can make it more profitable. So that kind of falls more under a fractional CFO. That is who you want to work with, right? Because if you're using your tax accountant, their job is to look at your books, make sure everything's categorized correctly, and do your taxes. They may give you a couple of tips on how to improve, but they're not invested in your day-to-day operations like a fractional CFO or full-time CFO would be. The goal of a CFO is to increase profitability in the business.

Mark Drager: And so, if you're listening to this and thinking, "Well, I'm in business development, I'm in marketing, I already have my organization, it's running really well, and I have a CFO down the hall from me who takes care of all this stuff." Because you may not be in a startup, you may not be in a small business, you may not be the entrepreneur who's leading the business. What do you recommend for the employees of organizations? For the people who are not the owners, what should they be focusing on? To ensure that the company or the organization or their department, where the returns are helping leadership approach it the way that you're suggesting?

Melissa Houston: Yeah, and you know, I wouldn't put all the onus on the employees, right? The leaders have to provide targets for their employees to meet. So, let's use sales as an example. The owner understands their sales targets and passes down the sales targets to each salesperson, right? This is your quota. This is what you need to make each and every month. So, that person understands how they contribute to the profitability of the business. Other people, like admin, or management, have targets they have to meet. It's all about KPIs and meeting your KPIs, right? There are hundreds of KPIs out there, so you can't follow every KPI for the business. An owner would assign certain KPIs or key performance indicators, and most corporate people understand that jargon. So, they're going to understand what their targets are for their unit, and they're going to meet them or exceed them.

Mark Drager: Okay, so it's got to come from leadership. You have to have the strategy, and the plan, and be able to turn it into something you can actually measure. You have to make sure that everyone's running those structures and then report back.

Melissa Houston: Yeah, you have to be accountable to those, and review them, whether they're meeting them or not, right? At least on a monthly basis, so that you can catch problems earlier. And I'm not talking about employees doing that review. It's like middle managers or whatever level of management, but review your numbers every month to make sure that you're either hitting or exceeding your targets. And if you're not, then you know there's a problem that needs attention, you need to figure out what's going on within the business that's keeping you from meeting your targets.

Mark Drager: That was something that, because I started so young and grew a company, I've worked through a few recessions and other challenges. I've grown a company, contracted it, and regrown it. But one thing that always surprised me, as a bit more of a startup entrepreneur hustler kind of person, was how much time, energy, investment, and bureaucracy, once a business hits a certain size, you have to start to put into place. It stops being about just the work, the productivity, the efficiency, sending the invoices out, getting the checks in, and it starts to become a lot of time and resources going into the systems of the organization. There's a great book that I quite like, and I know that you've written a book as well. So sometimes people are like, "Why are you referencing a different book instead of mine?" Playing the Game by Dan Nicholson talks about when businesses hit a certain size, the vast majority of in-house accounting teams, in-house reporting, or financial statements are written by accountants for accountants. Much of the training that goes out there is created by accountants for accountants, and much of the forecasting is by accountants for accountants. And there's this huge divide. Looking back, I wish I had spent way more time, energy, focus, and resources on building up all the bureaucracy and the systems because I've learned some hard lessons. But at the time, no one could convince me to do so, because they were all like accountants creating accountant things for accountants, and I looked at it and went, "This doesn't help me, this doesn't help me manage, grow, make smart investments, or have to cut back." So, how do we get over that divide of, oh, most of the stuff out there is actually created for people who love it, and it doesn't work for people like me?

Melissa Houston: Yeah. And I get it because even when I listen to an accountant, I get bored. And I check out, right? Because it's too much. So, this is my approach, right? This is why I decided to take the approach I do. Like, I write for Forbes, I have my blog, She Means Profit, and I wrote my book. What I'm trying to do is talk

to the average person who doesn't have this financial knowledge, and teach them about it. Try to help you understand why it's important to learn about it, and then start learning about it. We don't need to use high-level accounting jargon that confuses people, or that monotonous tone of voice that's going to put people to sleep. You care about your money, you want to know how much money you can make, and you want to make the most money you can possibly make. So, let's get to it. Let's talk about what's going to get your attention, and then all the other things are going to follow.

Mark Drager: And so, your book "Cash Confident: An Entrepreneur’s Guide to Creating a Profitable Business," and all of the speaking, consulting, and everything that you've done. By the time it gets baked into a book, it's not the first draft. This is years. But when the book goes out, there's always this like, "Oh, that surprised me. I didn't realize people would jump on this thing, or that would be the chapter that would pop, or that me saying this would lead to this question over and over again." So I'm curious, within the book "Cash Confident," what are the two or three things that are constant themes that continually come up, and you spend all day every day addressing?

Melissa Houston: That's such a good question. Money mindset, business financial plans, and cash management. A money mindset is truly one of the most important things for a business owner to have a positive money mindset. People have no idea how their relationship with their money affects the success of their business. And then for cash management, everybody wants to know about cash management because most people are struggling with cash and not understanding that your cash balance is not equal to the profit of your business. Your cash balance is something completely different from profit. Another thing that I find really interesting too, and it comes up a lot, is that there's a lot of talk about profit first, especially in the online world. And I don't know if you're familiar with Profit First, but it confuses people. The concept is to pay yourself with the profit you make, except they're not making a profit. So when we do the business financial plan stuff, we always ensure that you are including a budget to pay yourself, because you don't pay yourself with what's left over. You have to pay yourself first. This is definitely a struggle for a lot of business owners.

Mark Drager: So, money mindset, cash management, the third?

Melissa Houston: Well, I was going to say the business financial plan, but I would go with the Profit First method because that is one that constantly comes up, and I am constantly referring to it.

Mark Drager: So, the money mindset, I want to circle back around on that. I've heard many different things. Are we talking about abundance mentality, or are we literally talking about like, "Hey, guys, money is a resource that exchanges for this"? Like, I like woo-woo stuff, so I don't want to say let's not get too woo-woo. But what is a money mindset?

Melissa Houston: Yeah, I mean, I'm a woo-woo person to a certain degree, right? This manifestation, like, just envision it and the money is gonna land in your hands. Like, that does not work for me. So, the money mindset, when I talk about it, is basically looking at your relationship with money. And it all boils down to self-worth. A lot of business owners, especially women, struggle with their money mindset in the sense of, "If I make a lot of money, people are going to think I'm greedy, people won't like me," stuff like that. These things are holding you back in your business. Or money mindset in terms of making sales. A lot of people hold themselves back from making sales because they're so afraid of rejection. It boils down to how you feel in your relationship about money. And a lot of people don't realize how that affects their business.

Mark Drager: That's so interesting. You know, when I started, I remember some people referring me to some business, and the business just wasn't good enough for me. It wasn't quality work. It wasn't a quality client, and they didn't have the budget they needed. So it was like, to me, it was very clear. But I had no business, so I rejected and said no to the business because it wasn't good enough for my expectations. But meanwhile, I had nothing else to do. Yeah, and the person who referred me to the business got pretty offended. You know, they were like, "Oh, it must be nice to be so I don't know, egotistical or something like that." And to me, it was just like, well, I don't get it. Like, if they want to move forward, it costs x, they don't have x. This is not an emotional thing to me. Like, we can change the scope. But I didn't get it. I was maybe too robotic. I did not understand it. But you're saying that more people are really, they tend to undersell or devalue themselves. So they don't kind of have that same reverse approach that I might have.

Melissa Houston: Yeah, I think the point you're making in your story is that you knew your worth, and you weren't going to work for less. And that's totally acceptable, right? It's like, you know, you look at your time invested versus what you're going to get in return. If it doesn't pay off, then don't do it. Even if...

Mark Drager: The thing was I had no other work to do, so...

Melissa Houston: Well, like, that could have been a money mindset issue in the sense that, you know, you needed that money, and it could have helped you. But on the other hand, were you just keeping open space for what was really suitable for you? Right.

Mark Drager: I was just offended. I was like, "I have so much more than this. I'm not doing that. No."

Melissa Houston: Well, I mean, to be honest with you, referrals sometimes are hit and miss, right?

Mark Drager: We're going to do a whole thing on referrals. That was a lesson that actually took me a very long time to learn, and part of this podcast has helped train that in me. So, I'm 17 years in the business. But realizing that I don't have to help every person that comes my way. And that I can choose the business that I want to take on because I knew I could choose who I targeted. But once people came to me for help, I always felt really bad about being like, "You're not really quite who I could work with for whatever reason." And so, that takes a lot of confidence to be able to jump into that stuff.

Melissa Houston: Absolutely. And you know, that's part of the money mindset thing is you understand, you make those choices because you want to build the most profitable business that you can build. So if you have a good positive money mindset, you're going to make those choices like you did, where it's like "I'm gonna focus more on the profit side." And whether that's consciously or subconsciously, you're noticing what's better for your business.

Mark Drager: So, I'm speaking with Melissa Houston, she's a CPA and CGA author of the book "Cash Confident," and fellow Canadian, which I love. And I have known about you for a few years now because, for whatever reason, I would go on these podcasts, I'd be invited to these podcasts. And when you jump onto a podcast, I always like to listen to a whole lot of episodes. So I understand the audience and the tone. And there were like, I think two or three occasions where you were literally on the previous podcast that I was listening to. So I've heard you a whole bunch of times, I really appreciate what you're doing in your message because it's something that we all have to deal with. No matter what level of business you can't get away from the numbers, you can't get away from finance, you can't get away from cash flow and managing it. As painful as it might be, you can't just hope someone else will take care of it. And now you can hire a fractional CFO, you can hire a great bookkeeper, you can hire an accountant, you can hire these people into your team. At the end of the day, the responsibility is still on...

Melissa Houston: Absolutely. You don't need to be an accountant, but you need to understand the finances of your business. That's like saying you're running your household without having a clue of what comes in and out of your household. Same for your business.

Mark Drager: You know, most people do that. Right? Like, when my wife and I were broke, we had a budget, but we did not have a budget.

Melissa Houston: Throw me a bone here.

Mark Drager: This is why your message is so important. So, I do have one final question for you. It's the question I love to ask everyone towards the end of the conversation. What would be your number one strategy or tip to help those of us who are listening sell more?

Melissa Houston: I mean, sales is definitely not my forte, but the first thing that comes to mind is to have confidence. Confidence sells. Just be confident in what you're doing, and don't think of it as selling. Think of it as helping.

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Resources & Go Deeper

"Financial Management Explained: Scope, Objectives & Importance"

This article discusses the critical role of financial management in businesses, highlighting its necessity for success and compliance with regulations. It outlines the objectives of financial management, including maximizing profits, tracking liquidity and cash flow, ensuring compliance, and developing financial scenarios. The piece also delves into the scope of financial management, covering planning, budgeting, managing and assessing risk, and setting procedures for financial operations.

Financial Management Explained: Scope, Objectives & Importance | NetSuite

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"Why is Financial Management Important for Businesses?"

This comprehensive guide by Great Learning emphasizes the significance of financial management in achieving business goals and objectives. It provides a detailed overview of what financial management entails, its importance, objectives, elements, and functions. The article explains how financial management helps in financial planning, acquiring and managing funds, funds allocation, and making critical financial decisions to cut down financial costs and improve the profitability and value of the organization.

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Why is Financial Management Important for Businesses? | Great Learning (mygreatlearning.com)

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"The Importance of Financial Management for Businesses"

The World Financial Review article outlines how effective financial management can lead to improved financial performance, increased competitiveness, enhanced credibility among stakeholders, and an increased ability to identify and mitigate financial risks. It stresses that practices such as budgeting, cash flow management, and forecasting are essential for optimizing financial resources, which in turn, helps businesses to plan, control expenses, and invest in growth opportunities.

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The Importance of Financial Management for Businesses - The World Financial Review

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