I Took My Eye Off the Numbers
Introduction:
This week, Jay Goltz tells Shawn Busse and Jaci Russo that, while he’s always been good with numbers, he’s never really enjoyed tracking his finances. It’s not what drove him to start a business, and over time, he stopped paying close attention. But now, after seeing his inventory levels and some big expenses get out of control, he’s diving back into the numbers and pretty much serving as his own chief financial officer, something he says he should have been doing all along. Plus: Shawn explains how one book and a specialized accounting firm and a monthly routine have gotten him comfortable with his numbers. And Jaci says it took years for her to learn to ignore the accountants who always gave her the same advice: Cut expenses. Instead, she tells us, “We’ve spent the past probably eight years really right-sizing what we charge. And now I feel like I can breathe.”
— Loren Feldman
Guests:
Jay Goltz is CEO of The Goltz Group.
Jaci Russo is CEO of BrandRusso.
Shawn Busse is CEO of Kinesis.
Producer:
Jess Thoubboron is founder of Blank Word.
Full Episode Transcript:
Loren Feldman:
Welcome Jay, Jaci, and Shawn. It’s great to have you all here. I want to talk today about how you guys go about tracking your numbers. And I want to do that, in part, because of conversations that Jay and I have been having about his business recently. As I understand it, Jay, you came to realize that you lost money last year, but you’re not entirely sure how you lost the money or where the money went, which has sparked a further realization on your part that you haven’t been paying enough attention to your numbers of late. Do I have that right?
Jay Goltz:
I know where it went. I had to spend a lot of time and energy on it. I mean, I’ve got four separate businesses that are in some ways connected, but very different in other ways: with the gross profit margin, one’s wholesale, one retail, the other one’s a furniture store. They’re all different. And I’ve had a CFO for over 20 years who took care of everything, and he retired, and I replaced him. And I should have been paying more attention along the way.
It just reminded me that I have an accounting degree. But the point is, I didn’t go into accounting for a reason: because it bores me. And there’s a reason my business got big. It’s because, you know, I like the marketing thing. I like figuring out businesses. I like looking for opportunities. And that’s not accounting.
So I’ve spent all of my energy on that over the years—not all, most of it, on that. And I’ve come to realize at this stage, I used to be 75 percent entrepreneur and 25 percent manager, and I need to be 100 percent manager now. Because I need to stop entrepreneuring, and I need to just spend time and energy fine-tuning the business. So it turns out to be, my greatest strength is my greatest Achilles heel. I’m good with numbers, but I haven’t paid any attention. I paid not enough attention to them for sure. There’s some great lessons in this for all parties, I would think.
Loren Feldman:
I would think so, too. I mean, if you could struggle with this, I imagine any owner—most of whom are not going to be as comfortable with numbers as you are—can struggle with it as well. I do want to hear how you’re solving this problem, what you’re thinking about doing to make sure it doesn’t happen again. But I want to make sure our listeners understand what the problem is. Why wasn’t it obvious to you where you were losing money? Why did you have to figure that out?
Jay Goltz:
It’s easy. I have a ton of inventory. It’s not bar-coded. It’s not like I’m selling stereo systems. Picture-frame molding comes in, and you know, you cut a frame, you have to guesstimate how much scrap there is. There are just a lot of moving parts. And what happened was, fundamentally, labor is way more expensive than it was three years ago. The interest rates are way more. Freight has been out of control. My real estate taxes went up. I didn’t realize this, but I’ve been paying more for Visa/MasterCard exchange rates. All these points they’re giving away, they charge the vendor. So that was half a point. And then insurance has skyrocketed.
And the problem is when you’re in a business like mine, most people base their prices upon: What do you pay for something? And then you mark it up. And when that product goes up in cost, you change your price. Well, when overhead costs go up, like your real estate taxes or your Visa/MasterCard exchange rates, or your insurance costs, that’s not part of the formula. So you have to go back and look at your business model and realize, “I’ve gotta cover that somehow.” And when all these things happen at once over a year or two, it’s not obvious. My business is way too big. It’s not like I can run it by the checkbook. I’ve got so much difference between the payables and receivables that you can’t just look in the checkbook, “Oh, we’re doing well. There’s money in the account.” It’s way more complicated.
And the lesson I’ve learned, which I should have known—I don’t care how big your company is: small, big. You can’t ever stop being the CFO, to some degree. You can’t hire someone and just go, “Okay, I got it covered. They’re taking care of it all.” I think small business owners—not think—I am confident that small business owners need to have their own key performance indicators and monitor them regularly and stay on top of it, which is basically what Lou Mosca keeps talking about. And he’s right. I mean, you can’t run your business out of a checkbook.
Loren Feldman:
Jaci, what do you do? How do you keep track of your numbers?
Jaci Russo:
That’s a great question. I actually learned from Jay, when we were all together in Fort Worth, that I might be overpaying myself. Because Laura Zander and I looked at each other with quite shock, when Jay said that the owner/CEO salary should be a certain percentage of the total sales. And I was like, “I’ve never thought about it from that perspective.” I did some quick math. I’m like, “Okay, well, then we just need to make more money, because I’m not giving myself a pay cut.” So, working on that right now.
Jay Goltz:
It’s very loose. You know, and I probably shouldn’t have said it. But there’s some truth to that. But if you’re smaller, but you’ve got great margins, it’s not going to work. But if you’re doing bigger volume, it gets more relevant, I think.
Jaci Russo:
I think it’s relevant, period. Listen, this is how I think about benchmarks: They’re a place to start. You may be a little higher, you may be a little lower, but at least you know what the benchmark is.
Jay Goltz:
Yeah, and I would say simply: market rates. If you’re paying yourself what you could go out in the world and get, okay. Can’t argue with that, if that’s the case.
Jaci Russo:
I’d like to think somebody would pay me more than what I pay myself. So I feel like I’m great.
Loren Feldman:
Jaci, how do you keep track of those benchmarks? What reports do you get? How often do you look at them?
Jaci Russo:
Well, we’ve talked about this a little bit in a previous episode that I never felt like I really mastered—even though we learned it in the Goldman Sachs 10,000 Small Businesses classes. We’ve discussed it in the different CEO roundtables that I’ve done. I still feel like when I look at a P&L or balance sheet, I see the numbers. I’m smart enough to understand the numbers. But I don’t really know the numbers. I don’t know: Is this good? Is this bad? How does one thing move to affect another thing? I didn’t take any finance or accounting classes, so I’m flying blind.
Back on day one, February 1, 2001, I started an Excel spreadsheet that is now a Google Sheet that I have, over the years, updated and altered. And it’s become quite, I think, comprehensive. And we track everything there, and it works for us. So if you ask me a number, I can tell you the answer. I can’t tell you off of QuickBooks, but I can tell you off this Excel document.
We started with an in-house CFO—and she was the third employee—and a CPA. Because in our very early years, we were a media-buying company, and handling millions of dollars of other people’s money. And that made me very nervous. I wanted to make sure we did everything right, and that I wasn’t going to put myself into a pickle. And so I was glad to have the support around.
Well, around about maybe year 10, the CPA decided that he thought the CFO was doing some things maybe not appropriately and launched a full forensic investigation. It turned out he was wrong, but there were burned bridges. And it was a whole thing, and it was awful. And so that CFO is gone, and that CPA is gone, and we do things differently now. And like Jay, though, I realized I kind of took my eye off the ball last year. And so I’ve stepped back in, because there were some opportunities that we were missing, and some costs that weren’t being controlled and some subscriptions that were being renewed for no reason. And so I’ve gotten back involved.
Jay Goltz:
Which gets to my whole point of—I use the phrase “model income statement,” which simply means you sit down and say to yourself, “All right, I think we can grow to this amount. And if we do, here’s how much money we should make.” And you start to fill in numbers and say, “All right, I think we can get the labor to this number.” That’s not something an in-house accountant has the ability—this is like strategic accounting. That’s not what the typical accountant does. That’s what the entrepreneur is supposed to be doing.
Loren Feldman:
Is that what you were not doing, Jay?
Jay Goltz:
I certainly had my own model income statement. What I didn’t recognize is—these aren’t little numbers when I throw these numbers out. When I tell you freight went up, I’m not talking about, it was $10,000. It was six figures. When I tell you my MasterCard/Visa exchange rate went up, it’s not $10,000. These are all tens of thousands. These are $50,000, $100,000, $150,000 numbers. So when these things start going up, and you think, “Oh my God, that’s terrible. Look how real estate taxes went up.” The question is: Did I turn around and go, “We better raise prices, too”? No, I didn’t. I took that hit. And then I took the next hit.
And then the labor thing, which I think has affected a lot of people—compared to four years ago, most people are paying everyone a lot more than they were paying them four years ago. And did you change your pricing structure because of that? I can’t tell you that I did enough. I didn’t. The minimum wage kept going up in Chicago—and I’m not complaining about that. I’m really not. I don’t think it’s unreasonable. But the labor thing is a major piece of the puzzle for most companies, and again, you’ve got to look at your pricing. It always comes down to margins, overhead, sales revenue, and sometimes you’ve got to tweak what you’re doing. And we all come up with what we’re charging. Where did that number come from? It really comes down to what you’re charging.
Loren Feldman:
Shawn, what’s your practice? How do you keep track of your numbers?
Shawn Busse:
Maybe I’m a little like you, Jaci, in that finance was never my strength. Starting the business, I came from a creative background. I’m really good at the humanities. So our company really got into trouble about 10 years in, in the Great Recession, and I realized I needed to approach it very differently. So I read a book called Simple Numbers, by the author Greg Crabtree. He has a really approachable philosophy about finance, especially for the owner-run business, and simplifying the numbers you’re looking at. And so I eventually hired his firm. They became a bit of an outsourced CFO-slash-controller.
And the process that they engage in is taking our QuickBooks on a monthly basis, reconciling everything, and then converting it into a spreadsheet that tracks a couple of key indicators that we’ve used for a very, very long time. Those are especially valuable, which are management LER [labor efficiency ratio] and direct labor LER. I think those are really critical numbers for an owner to understand. And that is, essentially, for every dollar of input into labor, how many dollars of output do you get? And that allows you to benchmark yourself and see how that’s changed over time. And it reduces a lot of the confusion, especially if you have a lot of pass-through costs. So our process is having a third party who is looking at and examining our finances on a monthly basis, and being a bit of a source of truth. And then they can also compare us to other like businesses, which helps me understand how we’re performing.
Jay Goltz:
Now, that is a specialty firm that does that. This is not just an accounting firm, correct?
Shawn Busse:
Correct.
Jay Goltz:
This is where the problem lies for many people. First of all, let’s be realistic. How many people who become entrepreneurs would say, “Oh, my biggest strength is finance”? I don’t think many—unless you’re in that kind of business. So usually it’s: you’re into sales, you’re into whatever you’re doing. Okay, so this isn’t most entrepreneurs’ specialty. The problem is, they go to an accounting firm, and they think, “Oh, I’ve got a good accounting firm.” That is not what the typical accounting firm does. And even my accountant, who’s been my accountant for 23 years and makes a lot of money and works for a big firm, he said, “Well, your margins are fine. Your overhead’s too high.”
That is exactly what I’m talking about. I said, “How do you know that’s the case? Versus maybe my margins should be higher, because I’m giving a specialty product.” It isn’t that simple. It just isn’t that simple. You can’t look at the books like that. You have to be the entrepreneur and look at it and think, “Do I have too many people? Is the overhead too high? Or am I not charging enough?” It’s just not that simple. Okay, I’m just gonna say, in my experience, I’ve never met an accountant—and I’ve had four of them since I started—who ever came in and gave me great insight on running the business.
Shawn Busse:
I mean, it makes a lot of sense that it’s not working for you and doesn’t work for most people. Because if you think about the domain of accounting, it generally is a domain about risk avoidance and compliance, right? You have to follow the rules of the IRS. And so you have a persona that is much more about thinking within boxes versus being creative, and what you actually need as an owner is you need somebody who can bridge the gap between that very left brain activity and that very right brain activity. And in my experience, it has not been an accountant.
Jay Goltz:
No, it’s the entrepreneur, is my point. And that’s what we’re supposed to be doing. And like I said, in my case, you could either say, “Well, either my overhead is too high”—you have to look at who works for me and how much am I paying them—like, for instance, the biggest one on me was the freight costs: hundreds of thousands of dollars. We needed to build that into the cost, and we didn’t, and that’s not about overhead.
Shawn Busse:
I would add a nuance to that, Jay, in that, yes, it is the entrepreneur. But I think most entrepreneurs—trying to do it from nothing is really hard. And you have a background in finance. You are trained in it. And so I think your ability to cross that chasm is easier. Today, I can do it pretty easily. But I could not do it 14 years ago, and I needed somebody to hold my hand and really educate and train and get me to a place where now I can build my own spreadsheets like Jaci has done. But I couldn’t do it in the beginning.
Jay Goltz:
No, I totally accept that.
Loren Feldman:
Shawn, you said you get monthly reports from that firm?
Shawn Busse:
Correct.
Loren Feldman:
Do you review them carefully? I mean, if there’s a leap in an expense somewhere that you should be concerned about, do you spot it? Or do you rely on them to flag it for you?
Shawn Busse:
So we have a monthly meeting where we review the numbers together. And since we’ve been doing this for so long, we have baselines. And so if something gets out of the baseline, they’ll often say, “Hey, I see your marketing expense is twice what it was the month before. Can you tell me what that was for? Was that worth it? And your IT expense is up. What is that about?”
So having somebody who’s on the outside looking in with a dispassionate lens is really helpful. And it catches things too, because, to Jaci’s point, sometimes expenses creep in there. And as your business grows, you start to ignore stuff. You don’t see stuff. And so having somebody on the outside, say, “Hey, why are your subscription costs double what they were last year?” Just having that rhythm of somebody looking at it for you is so valuable.
Jay Goltz:
Which frequently turns into the question of: Is that going to continue happening? Because if you’re saying, “No, it’s the new world. I’ve got to keep spending.” Well, maybe you need to change your pricing. That’s really one of the critical pieces that most accountants—the ones I’ve dealt with—have never brought that up to me. I was growing like crazy for years, and nobody said to me, “Jay, raise your prices 5 percent. Your bottom line isn’t big enough, and you’re growing at 30.” That’s all someone would have had to tell me, and it would have been life-changing.
Shawn Busse:
Yeah, well, the incentives are all wrong, because the CPA is incentivized to complete a tax return. That’s it. I mean, cynically, that’s what they’re paid to do. And so whether that tax return says you owe money, or you get money back, they kind of don’t care, because they’re being paid to finish a tax return. And again, I’m generalizing. There are good CPAs who would raise the flag, but most of them don’t, in my experience.
Jay Goltz:
I can also tell you, having an accounting degree, if you think that they teach you this in accounting, they don’t. I’m telling you. I’m just good with numbers. I can tell you the training that I got, they didn’t talk about small business. They didn’t talk about anything like margins, and it’s just—now, this was 50 years ago, already. [Laughter] There weren’t computers. But my point is, I wouldn’t expect that people who are getting out of college now with an accounting degree could jump into a small business and say, “Oh, I can help.” That’s a stretch. I think it requires, like the firm you brought in. That’s what they do.
Loren Feldman:
There’s no question you’re right. That’s not what they’re trained to do. And they wouldn’t argue otherwise, I don’t think.
Shawn Busse:
I really think you have to look for a different type of animal than a CPA. You have to look for somebody who really understands small business finances. And they don’t have to have a CPA degree. They probably shouldn’t, in my experience.
Jay Goltz:
Absolutely not.
Loren Feldman:
Jay, I want to go back to a couple of things. One, when you were explaining how you figured out where the money went, the first thing you mentioned was inventory. And I can imagine some of our listeners wondering, in this day and age with all the technology that exists, why is it so hard for you to track your inventory? And I understand that you have moulding that gets cut. It may not be as precise as you’d like. But you’re sending out a frame of a certain size. Why is it hard for you to keep track of your inventory?
Jay Goltz:
The problem with the inventory: There’s millions of dollars worth of inventory. It’s not barcoded. And then you go, “Oh, you should barcode it.” Great idea. The problem is, when you’re moving fast and you got all this stuff going on, I need a new computer system. There’s no question that I need a new computer system.
It’s hundreds of thousands of dollars. It’s going to require a lot of time and energy. We’re working on it. But if I was a big company, I’d already have it. But I can tell you, from what I’ve [seen] there are a lot of companies in my situation that have legacy computer systems that we’re used to that are working or are kind of working. But I need a new computer system. There’s no question that that’s part of the problem.
Shawn Busse:
I can’t imagine a more complex business than your business, Jay, from a finance perspective.
Jay Goltz:
Right, I’ve got manufacturing. I’ve got wholesale. I’ve got distribution. I’ve got the internet. I’ve got direct sales. And every one of them is a different combination. So I’m fixing it. I’ve got it under control. But there’s no question that I should have paid more attention along the way. And things like our financial reports, splitting out, how do you take the salaries of the HR person? Who pays for that? How much do you put on each business? Even that stuff, just the separating of the numbers, was something I should have been involved with, and I wasn’t. And I take full responsibility. I’m not gonna let it happen again. I’m gonna get it all straightened out. But if you don’t keep track of the numbers, the numbers will track you down and beat you to a bloody pulp. [Laughter] That’s what’s gonna happen.
Loren Feldman:
Jay, when you say you took your eye off the numbers, what has been your practice?
Jay Goltz:
I’m embarrassed to say, I should have had monthly meetings and sat down for an hour and a half and gone line by line. And I haven’t.
Shawn Busse:
Was that because your old CFO was—
Jay Goltz:
Well, he was taking care of it for 20-some years. And this is where I bring up the Achilles heel thing. I’m ADD. I’m sure I’m ADD. I have a short attention span. I like figuring out ads. I like figuring out new opportunities. I like figuring out, “Oh, we found some new stuff to sell, new trade shows.” I’m totally a business junkie and all that stuff. I don’t get enjoyment out of going through—and I realize, this is part of the problem. I don’t use Excel. I don’t use any of that stuff. You have to remember, when I got out of college, there were no computers. I certainly use a computer now. I certainly do stuff there. But I’m not doing Excel spreadsheets there. So I’m kind of old for this.
I will absolutely, going forward, oversee things, be the CFO. I’ve been sitting down with my accounting manager for a couple hours a day. It’s been extremely eye-opening for her and me. So we’re fixing it really well. I will continue. I will fix this now. My suggestion to everyone who’s in business is: Yes, you could go hire somebody. First of all, you have to be big enough to afford this person because, like, how does a $4 million business, $3 million, $2 million business afford to go pay someone? This isn’t a $60,000 job, right? This is going to cost them money. First of all, how do they afford that? They probably should have a part-time person.
Loren Feldman:
Jaci said she had a CFO pretty early. How did you do that, Jaci?
Jaci Russo:
How did I afford it?
Loren Feldman:
Yeah.
Jaci Russo:
Well, we were making money from day one. You know, I went and picked up clients. And I know I’ve mentioned here before: I was eight months pregnant, waddling in, getting media clients. And so before I quit my full-time job, I had four or five clients. And then they came on as a fractional CFO. And then by month six, I had 10 clients, and they were managing. Now, do I think we should have had someone of that level? No. Do I think that we were probably overpaying based on the need? Yes. But I felt secure knowing somebody was making sure I wasn’t spending clients’ money on something it wasn’t supposed to be spent on.
Jay Goltz:
In my case, I have to make up the pricing. In your business, isn’t there some kind of standard fee or something? How does the pricing work in your business?
Jaci Russo:
Well, at that time, with our media work, yes, straight 15-percent commission. So that was easy. As we’ve evolved from that, because I mean, we’ll do some sometimes for clients, but they have to be on retainer. So then you start talking about either an hourly model or retainer model. That’s where it gets interesting.
Jay Goltz:
Yeah, and that’s tricky to figure out.
Jaci Russo:
Yes.
Shawn Busse:
Well, and the other thing too—I think this is really common in smaller businesses—the numbers are not accurate. Like, they’re not true, meaning the owner is doing all kinds of hijinx with their business that make it really hard to get a clear picture of what’s going on. And what I mean by that is, like, “Oh, I bought a car through the business,” even though the business doesn’t really need a car. Or, “I pay myself $40,000 a year,” even though the CEO position in, say, a $5 million company would probably pay $200,000 to $300,000 a year. And so they can’t make good decisions from their numbers because they’re full of holes. And that’s really common.
Jay Goltz:
Listen, I’ve been in four or five business groups over the years. So I’ve seen everyone’s numbers. I always say, “Wait, wait. Stop telling us how much money you made. What did you pull out last year?” Because in some cases, they’re paying themselves a quarter of what that job should pay. Or in other cases, they’re paying themselves twice. So the bottom line is meaningless unless you peg the salaries at what the appropriate salary is at. So you’re absolutely right that people are getting numbers, but they’re skewed for some reason.
Shawn Busse:
That’s right. Somebody can claim, “Oh, we have incredible profitability.” But it turns out, they’re not actually paying themselves even close to market rate. But they can also extend that into their company. I’ve seen this happen, where really young businesses are good at hiring ambitious, well-meaning people and paying them very little money. And then, as the business matures, you need to hire more expensive, more talented people, and they’ve built a financial model based off of that really inexpensive, ambitious hire, and then things start to break. So I’ve seen that too. I’ve seen that problem as well, or paying their kids, or all kinds of crazy stuff.
Jay Goltz:
Or you can double it. The husband-and-wife teams—which we have on this podcast—the two of them can be underpaid by 100 grand. I mean, this could be serious money between two people.
Jaci Russo:
But then you also have to balance what they’re paying themselves in salary, what they’re paying in shareholder distribution, and what expenses the business is covering. So you have to really look at how much you’re being paid.
Shawn Busse:
Yes, you have to normalize. I don’t do that stuff,but if you’re gonna do that stuff, you’ve got to then build your own system for a P&L that gives you a true picture of the business.
Jay Goltz:
They have a word for that. There actually is a word for that—it’s called “recasting” the financial statements. You know, it used to be in the olden days, you could join a country club and write it off. Right? Okay. Well, they stopped that. You can’t do that any longer.
So I was saying to a guy, he was telling me, “Oh, yeah, you got a strip that out.” I go, “Whoa, that’s illegal. You can’t.” He goes, “Trust me, they bury it.” That’s what he told me, that people still do it. They just bury it somewhere. So I don’t do that stuff. But there are some companies that do bury it. They take a vacation, and they write it off as a business trip. In some cases, it’s not that much money. But in some cases, it is a lot. I don’t do any of that stuff. I don’t need to worry about it. I just don’t do that.
Loren Feldman:
Jaci, like Shawn, you have a professional services firm. Do you know which of your services are profitable, and which ones maybe aren’t profitable?
Jaci Russo:
Yes, but because we’ve changed our business model a little bit, we’ve kind of limited what services we provide. And we’ve expanded some because they now fit under the retainer. So people come to us through really one of two avenues. Either we’re doing a rebranding project for them—so it’s a brand identity created from scratch—or they’ve grown and evolved over the years, and now we need to make sure all their pieces fit together properly so their logo system works, etc. So that’s a way in the door for us. Or they come in because we’re going to do a strategic branding plan for them using our Razor Branding process. And so we’re going to map out target audience and messaging and annual plan and budget and campaign and all the things that they need.
Either one of those is the way in the door. And so I can tell you exactly profitability around both of those, because there’s very, very little outside expense. And then they move into the retainer model. So now we’re handling their marketing, advertising, social media, email campaigns, etc. under that. That gets a little bit vaguer, because we don’t do hourly billing. So I have to do a little more work to keep an eye on which clients are in line, taking advantage, or super profitable, because they’re not using nearly enough of our time, which we’re fine with.
Jay Goltz:
So I’m going to call this strategic accounting, and my point is: That’s your job. That’s my job. That’s everyone’s job. Don’t think you hired an accountant to work for you, and they’re gonna come to you and go, “Hey, I don’t think you’re charging enough.” That’s just not what they do.
Jaci Russo:
Correct. In all those years, whether it’s our in-house CFO, or CPAs, or whatever, no one ever said, “You should charge more.” They always talked about cutting expenses. Always. And I felt, “Wait a minute!” We are running a pretty bare—not bare-bones operation—but I think we’re efficient with our time. I think we’re efficient with our work. I’m not going to ask my people to work after five. I’m not going to ask them to work on the weekends. So, I’m not cutting expenses. I’m not driving a $200,000 car. I’m not living in a million-dollar house.
Jay Goltz:
Not that there’s anything wrong with living in a million-dollar house. I mean it, really.
Jaci Russo:
No, there’s not. That’s not my lifestyle. Now, I did have four kids in private school, sSo that was my big splurge. And it paid off, because they all got through college without any debt. But my point is that we realized, like you did, Jay: Early on, we should have been charging more. And so we’ve spent the past probably eight years really right-sizing what we charge. And now I feel like I can breathe.
Shawn Busse:
You know, you put your finger on one of the worst problems that I see with the financial consulting industry, which is their kind of one-trick-pony nature. They come into a business, and they start looking for things to cut, without actually having a good understanding of the ramifications of those things. You know, if you start asking your team to work 10 more hours a week, you’re gonna churn through people, and then you’re going to have to pay costs in other hidden ways, like training and onboarding and loss of customers.
The expression I like here is: There’s just not enough one-ply toilet paper in the world. Meaning if you go from two-ply to one-ply, it’s not going to frickin’ save your business. So, most of the time, moving the needle is not about cutting costs, especially in small businesses. Most of the time, it’s about getting the right customer who’s willing to pay you what you need to make in order to have a sustainable business.
Jay Goltz:
Or, at least, from the accounting standpoint, it would be nice if they understood that and said, “Okay, maybe your overhead is too high, but let’s also look at what you’re charging, your margin.” I was in an accountant’s office one day. He had a bumper sticker on the wall that said, “Overhead kills.” What a ridiculous—seriously? They think the secret to success is: Don’t spend money. And that is simply not the case. That doesn’t mean they’re not right sometimes, but you know.
Loren Feldman:
Shawn, does your specialized firm help you figure out which of your services are more profitable than others?
Shawn Busse:
This is where I would say, they took me from kindergarten to high school to help me understand my numbers. And then, to go to college and grad school, I started to have to do things myself. So, for example, like Jaci, you’re talking about your clients. I had to build a spreadsheet that helped me understand client-level profitability. So I could know: Oh, this client is actually a really great customer. They kind of stay within the bounds of what we’ve expected. This client is becoming difficult, or they’re really asking a lot of us. We’re going to have to adjust our pricing over time. This client, maybe we’re actually charging them too much, and we need to find ways to deliver more services.
Jaci Russo:
Shhhh. Shhhh.
Shawn Busse:
No, actually, there is a thing. I really believe this. If you start making an extreme amount of money on a client, it can be an indicator that there’s probably a problem there. It’s a long-term risk, meaning that you’re probably not delivering enough value. They’re not engaged with you enough. That’s my belief.
Jaci Russo:
Agreed. Agreed.
Shawn Busse:
So I’m really thankful for our firm that has helped us, and I still engage them. But I don’t expect them to take me into graduate-school-level finance. I’ve had to learn how to do that myself. But without their training, without their help, I could never have gotten there. I couldn’t have gotten there on my own.
Jay Goltz:
My whole thing is, look, there are three parts of business. There’s marketing, there’s management, and there’s finance. I’m going to suggest that most people that are successful are really good at one—like gifted, like really, really, really good at one. They’re good at the second one, and they’re okay at the third one. And that’s where the Achilles heel could come in. I don’t think any of us can afford to be just okay. Pretty good or good would be better. And I certainly could have kept my eye on this better. And I am now and I’m fixing it. But that’s not where my attention was.
And I think there are a lot of people who just want to bring in sales. And they think it’ll take care of everything, and for a while that will probably work. But not when you get bigger, and you start layering in salary after salary. I’ve got 130 people. And the new thing, to add to the complication, now all of a sudden some people morphed into working from home. Well, that’s a little harder to keep track of. And now, when they’re at work, when they have nothing to do, they can sit on their phones and talk to their friends. It’s not what it was 20 years—it’s different. And you’ve got to manage differently.
Loren Feldman:
Jay, in describing what happened to you last year, you talked about not being aware at the time of all these price increases that you had to deal with, from freight to taxes to everything else.
Jay Goltz:
Well, I was aware of them. I just didn’t take action.
Loren Feldman:
And the action that you would have taken, you suggested, was you should have raised prices. You’ve also acknowledged here many times that a lot of people think framing is already very pricey.
Jay Goltz:
No question, yeah.
Loren Feldman:
If you had raised prices, are you confident that would have solved the problem?
Jay Goltz:
So the question is, first of all, you’ve got two options—three. There are three different outcomes. One is, you could do nothing. Well, that doesn’t work, because I didn’t make any money. So you’ve gotta raise prices. Chances are, I’m sure you will lose some business. But I doubt that you’re gonna lose—the definition of an elastic product is that if you raise it 10 percent, if you lose more than 10 percent in sales, that’s called elastic. If it’s not, it’s inelastic.
So if you’re a brain surgeon, and you raise your prices 10 percent, you’re probably not going to lose much business. And it’s not elastic. So I should have raised prices, because it is what it is. And I just came back from the frame show: “They’re complaining about high prices.” Trust me. They’re going to complain whether it’s the price you’re charging now, or it’s 7 percent more. The difference is you’ll be making a living. I mean, it is what it is.
The problem with the freight thing was—and you’ve just read about it, maybe it was even in the 21 Hats report—companies are reevaluating this free shipping thing. It’s costing everyone a fortune. And then this whole ridiculous thing with Zappos. They would order, “Oh, I like that shoe. I think I’ll order it in all 12 colors and see which one I like.” And then they get them, and they return them. That stuff’s drying up very quickly. This isn’t just me. Everyone who’s selling stuff on the internet is dealing with high shipping costs. So just the fact that you’re giving free shipping—maybe it should be not free shipping at $100. Maybe it needs to be $150. So I was subsidizing a lot of free shipping, which was also a problem.
Shawn Busse:
If you think about it, that’s all a legacy of the free money era. It’s Amazon doing it, because they have tons of free money, and they can lose money in order to get customers. And it’s unfortunate, because then it forces small businesses to fall into line too. And it kills their business.
Jay Goltz:
There’s no question. Look at Wayfair. You all hear about Wayfair? They don’t make any money. They lose hundreds of millions of dollars every year. I mean, this is the environment that many of us are living in. I’m competing with companies that are losing money regularly, except it is what it is out in the marketplace. It’s a problem.
Shawn Busse:
Do you think they’re gonna last, though, in this new environment? I feel like the chickens are coming home to roost here.
Jay Goltz:
Well, it happened in 2000, if you recall. Everybody was giving stuff away. And I’m not saying they’re not going to figure it out. I don’t know. I can just tell you this: Shipping furniture is a pain, and it’s very expensive. So I don’t know about that one. There are other businesses where it’s easy to ship, and they’ll probably be okay.
I ordered some shirts from a company, and I couldn’t figure out whether I was a large or an extra large. So I ordered a couple of each. I got them, and I really didn’t like the fabric. So it was 175 bucks. I contact the company. I want to return them. They said, “You know what? Just give them to a homeless shelter.” Really? 175 dollars worth of shirts?
Now, it doesn’t cost that much to ship back. Which makes you wonder: Why didn’t they take them back? What is it, 12 bucks UPS to get them back? Is their margin that big on this stuff? I don’t know what the answer to it is, but anyone who’s doing anything shipping stuff is dealing with this.
In my wholesale business, selling to frame shops, every single order is shipped UPS or FedEx. So we’re talking hundreds and hundreds of thousands of dollars worth of freight bills. I have it from Jayson Home, shipping out furniture. I have it from the wholesale business. And then in my retail framing business, I don’t have either of those. But then I’ve got the real estate taxes went up a lot, and insurance went up a lot. So every one of them had some weights thrown on it, and I didn’t react quick enough to fixing it. And like I said, I’m doing that now.
Loren Feldman:
Have you gone ahead and raised your prices, Jay?
Jay Goltz:
On some stuff, sure. I have to. I used to tell people in the framing industry, “There are two big questions that are Number One in America. Two questions: Who killed Kennedy? And why is framing so expensive?” [Laughter] So I’ve changed it now. The question is no longer, “Why is framing so expensive?” The question is, “Why do so many people still do it?” And they still do it because it’s fabulous. Because when you get your thing framed and hanging on your wall, it is life-changing and it puts you on a whole new trajectory. So the fact is, framing is important. Framing is beautiful. Framing makes people happy. They’re just going to have to pay what it costs to do it.
I have to regularly [answer], “Why is framing so expensive?” I said, “Tell me something else you buy that’s custom, where you stand at a counter with someone for 45 minutes, and then they take an hour or two.” “Nothing” is the answer. Most people don’t buy anything that’s custom. Has anyone been surprised when they call out the person to put blinds or shades in their house? That’s also, like, $10,000 or $15,000. So anything that’s custom costs a lot. You’ve got to charge what you’ve got to charge. It’s the same thing that the two of you do. You need to charge enough money to make money. And if the customer thinks it’s too much money, they shouldn’t be hiring you. What are you gonna do? Am I wrong?
Loren Feldman:
Are you going through the same process with your home store, Jay?
Jay Goltz:
Absolutely, I have no choice.
Loren Feldman:
There, it’s trickier, right? Because at least with framing, it’s not like there’s a price on the wall that’s suddenly going to be higher when somebody walks in. But the price of a sofa, people may be familiar with.
Jay Goltz:
Well, there’s only so much I can do with, in particular, sofas, because it’s a brand name and they’re out there. But I literally—using the word literally properly—I literally send people all around the world to find cool, interesting, crafty, artisan-made stuff. So we have a very unique selection, which is why people love the store. And we have cool, interesting stuff. So it’s not like they can take my lamp that’s made out of a piece of wood with a blah, blah, blah. I sell unique, interesting stuff, and that costs more. And prices are appropriate for what’s out there, because I’m not selling just plain old vanilla stuff.
Shawn Busse:
We talked about this a little bit, Loren, in the piece we did the other week about marketing, which is: The more commoditized the thing is that you do, the harder it is for you to have control over pricing.
Jay Goltz:
No question.
Shawn Busse:
And so Jay’s way of escaping that trap is to find things that are really hard to get, you know, that there is no comparison. If you sell something that I can go on Amazon and find too, that’s tough. I mean, you’re in a race to the bottom.
Jay Goltz:
Especially if there’s a name to it. You know, Coleman stoves, boom. I mean, you’ve got 40 vendors. The key is, there’s a reason why people—and when I tell you, they love my store. They don’t like it. Like, regularly, “Oh my God, I love your store.” I mean, it really, really, really makes people happy. We find artisans that can’t sell the big stores. They can’t make enough of the product. So we carry cool, interesting stuff that people love. And that’s why the store is popular. And that’s why we do well. I have to cover the freight costs.
Loren Feldman:
Well, Jay, that does raise another interesting question, though. In the past, when you’ve talked about the inventory problem that you have, I’ve asked you—you know, it was unforeseeable. It was a result of the pandemic and the supply chain issues. But was there anything you could have done differently? And your answer was: No, there really wasn’t. Because it was exactly what you just said: Your store, Jayson Home, relies on you finding cool, interesting stuff around the world. And you couldn’t stop buying that, even though you had inventory backing up. Do you still feel that way?
Jay Goltz:
No, that was a good answer at the end of ‘22. What I should have figured out is: This can’t keep going on. There’s the artisan part to this. And I always laugh about the fact that—you know, Shawn, you’re an artist. I’m an artist in my own way. I don’t make pottery, but I’m a business artist. I like finding cool, interesting stuff and making people happy. So I’m like a junkie, and so, “Oh, I want to keep buying stuff.” At some point, you have to stop and say, “Okay, if you’re making pies and you’ve got 30 pies, at some point, you have to stop making the 50th pie out of whatever.” I mean, there’s some point where you just need to stop. And I should have told the buyers: Start being more selective about what you’re buying. We’ve got too much inventory.
I kept thinking the solution was: We just need to sell through more and get rid of more. Well, it’s two parts. It’s sell through more, and slow down the buying. I should have absolutely slowed the buying down in ‘23. In ‘22, there was nothing I could have done about it. It was all pandemic-related when shipments got tied up, and they finally came in.
But here’s the joke. I had a guy come by here. He owned a chain of paint stores in Chicago, very well known in the ‘70s and ‘80s. And he came in for framing. I was friendly with him. “Hey, give me a tour.” So I walked him upstairs. At the time, I did the production upstairs. And he looked at the racks and racks I had of moulding, and he just turned to me—I mean, I was all of probably 30 at the time—and he says, “Keep an eye on your inventory.” Yeah, oops.
I think most retailers would tell you: Keep an eye on your inventory. It’s easy, easy, easy for it to get out of control. So I never had something that all big businesses use. They have something called the “open to buy.” That’s the phrase they use. I never had an open to buy. Now I tell my buyers, “Here’s the open to buy. We can’t buy more than this this year. Figure out how to make that happen.” I never worked anywhere else. That’s another one of my problems. I never worked anywhere. If I would have worked at a bigger store, I would have known that. I didn’t know that.
Shawn Busse:
Well, I mean, I think this is such a good example of how most problems are never caused by any one thing. It’s like, we’d love to talk about, “Oh, the Space Shuttle exploded because of the O-ring.” There’s all kinds of other things that led to that problem. And I think there’s that really bad movie a while back called The Perfect Storm, where it’s like all about these—
Jaci Russo:
It was awful.
Shawn Busse:
It was so bad.
Jay Goltz:
But it was a great title. It really was a great title.
Shawn Busse:
But you know, essentially, it was like: Oh, these three storms are all colliding at the same time on this one ship. And what I hear, when we’re talking about Jay is, you had a couple of things, right? One was, yeah, you didn’t keep your eye on the ball on inventory. That’s kind of a function of now you’re running the Queen Mary and not a speedboat anymore. You, like many people, did not expect the acceleration of inflation. The rate of inflation that has hit us across all industries is just bonkers. And it’s really hard to kind of see that, because we’ve never seen it before. I mean, what has it been? Since, like, the ‘80s that we had this kind of inflation?
Jay Goltz:
Well, here’s the other one that’s interesting: interest rates. Think about this. This is my own theory. I didn’t read it in a publication. I’m gonna argue that 40 percent of furniture that’s bought in America is bought because somebody moved. Interest rates are where they’re at. I think the statistics would back up the fact: Probably half as many people are moving now. Well, half of 40 is 20. I’m told that the furniture industry—I talked to a rep, he goes: Everyone he knows is down 20 percent. That explains it.
So you’re right. Part of it was inflation. Part of it was high interest rates that drove people not moving. Part of it was insurance rates going up. In my case, it really wasn’t two things. I’m telling you, it was all 16, all at once. And I’m not cutting myself any slack. I should have paid attention to it. Here’s the good news. Here’s the entrepreneurial news. I’m really good at fixing things when I screw them up. Really, really good.
Jaci Russo:
Lot of practice. [Laughter]
Jay Goltz:
Yeah, right. Absolutely. I just want everyone to know, if you’re torturing yourself about whatever, stop torturing yourself. Take charge, fix it, it’ll be okay. And that’s what I’m doing. And I’m hoping this is my last piece of the learning curve that I have to go through. I think I figured the rest of it out. I think.
Loren Feldman:
Do any of you have a specific metric that you watch? To the extent that you’re keeping track of your numbers, what are you looking at first to let you know if you’re heading in the right direction and things are okay? Or what’s a warning sign that things are moving the wrong way?
Shawn Busse:
For me, the big one is the number of new inquiries, because that’s a forward-looking metric. It’s not backwards. A lot of people have backwards-looking financial metrics, which are important—you know, net operating income, management LER, direct labor, etc. But the forward-looking ones are the really important ones, because that helps you understand if you’re going to hit an iceberg.
For us, for a long time, we knew if we got about four inquiries per month, that would sustain about 10-percent growth per year, like clockwork. And then with the pandemic, that number went way down. And that’s when things got really hard. So I would really encourage folks to develop some forward-looking metrics, and not just backwards-looking metrics.
Loren Feldman:
How do you define an inquiry, Shawn?
Shawn Busse:
Somebody raises their hand, calls you, sends an email, a contact form, meets you at a conference, and says, “Hey, I’m kind of interested in what you guys are doing.” So it’s that early stage of the funnel: “I’m interested.” It’s almost even pre-qualification. And then there are separate metrics for that. Like, okay, so if we get four, that’ll turn into two that are qualified to buy. And of those two, that’ll turn into one that’s a customer. I’m just kind of picking numbers here, but we have all of that data to know what the typical conversion rates are. And if you can do that for your company, if you can figure out what those forward-looking metrics are, it really helps you plan. It really helps you know, “Oh, we need to hire because in six months, we’re going to be overwhelmed with work.” Do you have anything like that Jaci?
Jaci Russo:
We do. We have a forecasting document, and we track every lead that comes in. Did it come from the website? Was it a speaking engagement that I did? Was it somebody who emailed out of the blue? Did they respond to some thought leadership we put out there? You know, whatever the source might be. And then I’m able to track the percentage that turns into discovery meetings that turn into proposals that turn into yesses.
Shawn Busse:
A lot of owners don’t have that.
Jaci Russo:
Really?
Shawn Busse:
They don’t.
Jay Goltz:
Well, it makes sense in your kind of business, but it depends what kind of business you’re in. My retail thing? You open a store, people come in on its own. You don’t have to really do a whole lot. If you’re in a wholesale business, it’s a matter of: Do you have sales reps calling on customers, finding business? It depends what kind of business you’re in as to what’s going to be turning the machine, what is the driving force? Is it sales reps? Is it advertising?
What about the internet? Whatever you thought three years ago, I know people who made a fortune on the internet, because they bought a word, and they got all these leads. Well, it went from $1 a word to $10 a word, and the business model didn’t work anymore.
Shawn Busse:
That’s really common. Yeah, I think you bring up a good point. You know, I’m talking about what metrics matter for my business. Jaci has done a great job of building a lead-to-customer flow for her business. But at least the small businesses I talk to often do not have that forward-looking metric, whatever that is. You know, it’s the number of calls made by a sales rep, or a number of folks who ask for a sample of something. There are going to be some key numbers in your business that are going to help you understand what the future looks like. Those are harder to figure out for most businesses. It’s easy to look backward, hard to look forward.
Loren Feldman:
All right, my thanks to Jaci Russo, Shawn Busse, and especially Jay Goltz. Jay, I appreciate nobody likes to talk about losing money. I also want to thank our sponsor, the Great Game of Business, which helps businesses use an open-book management system to build healthier companies. You can learn more at greatgame.com. Thank you all.
