Setting Your Business Up for Financial Success (with Sarah Webb)

Angela Frank: 00:00:00

Welcome to The Growth Pod.

Today on the podcast we have Sarah Webb, who is a forward thinking fractional CFO dedicated to helping clients run profitable and efficient businesses.

She founded Web CFO to provide accounting assistance and long term financial planning guidance to licensed professional clients and their private practice small businesses.

Though Sarah and her team are happy to address the fundamental aspects of day to day accounting such as cash flow management and budgeting, they take client financials a step further by adopting a strategic approach by leveraging numerical data for forecasting and planning and offering a broader management oriented perspective. Sarah, welcome to the podcast.

Sarah Webb: 00:00:41

Yes, thank you so much for having me.

Angela Frank: 00:00:43

I am very excited. Today you're going to be sharing how we can set up our businesses for financial success.

And I think that this is going to be such a fun and important topic.

But before we begin, can you share a little bit about why it's important for business owners to pay attention to their financials and how paying attention to that could lead them to financial success?

Sarah Webb: 00:01:04

Yeah, a lot of small business owners and entrepreneurs, we, we get into the business to have freedom and flexibility or we're passionate about something specific and we know that we can, you know, help so many other people with our product or service. And if we don't have a strong financial foundation for ourselves, for our business, we're not able to continue to share that message with people.

And so not only is it important for your personal financial success and wealth building and all that that can entail, but you're not able to serve people if you don't have a financial foundation.

So we're wanting to help businesses really build that foundation, be financially successful so that they can continue on their mission, serving people through either a product or a service.

Angela Frank: 00:01:50

Amazing. So you mentioned building a financial foundation.

What are three key metrics that business owners should focus on to build this foundation in their own business?

Sarah Webb: 00:01:59

So profit is the number one metric that I always look at. And you know, a lot of times when you're reading blogs or information or maybe joining business groups, everyone's really focused on revenue.

And revenue is your top line sales. And it is critical and it's the lifeline of your business. But we don't always talk about profits.

So profits is what's left over after you've paid your contractors, your employees, you know, if you have a product, your cost of goods sold, and that is not what people talk about at cocktail parties, they're talking about their sales year over year or things like that. But you've really got to look at your profit. Are you Actually making money, serving your customer base in whatever capacity that is.

Another one that I like to look at is cash flow. So are you taking on debt? Are you not collecting fast enough? Are you paying your bills too early?

So making sure that you have enough cash in your business to run your business and looking that out over the next quarter, are you doing some big investments or, you know, do you potentially have to look at your ar? So AR is a really big one that I see.

You've provided the service and maybe you have, you've given terms, but you're scared to call and ask them, like, hey, you haven't made my invoice yet. A lot of people don't like to make those phone calls.

So I'm always targeting profit, cash flow and accounts receivable when I'm first looking at a business.

Angela Frank: 00:03:21

Amazing.

And so with that foundation, there's a lot of different moving parts and things that we need to keep in mind when dealing with profit, cash flow and accounts receivable. What is the biggest financial misstep that you see small business owners making?

Sarah Webb: 00:03:36

I think at the very beginning, they think that they have to invest everything back into the business, and so they don't pay themselves or they spend all of their leftover cash on something else.

And so they're not looking at the future, you know, even a few weeks out of when their bills are going to be due or if they're using a credit card, you know, that's paid once a month, potentially. So I think that just taking everything you have at the very beginning and putting it directly back into the business is a really big misstep.

I'm not saying that a majority of it can't go in there, but looking at kind of a cash flow plan for the next 60 days to. To make sure that you're not, I don't know, reinvesting too much and not able to meet your future obligations.

That's where I see people get really excited and they're like, oh, I'm going to have a big return on this. But they kind of forgot that they have to pay rent the next, you know, three weeks out and they've spent all the money.

Angela Frank: 00:04:29

Yeah.

So not only are you having to pay attention to cash flow in your own business, but being mindful about how you are using the business to support your lifestyle.

And like you said, even though most of it could maybe be reinvested in the business, building that muscle of taking money out of the business and paying yourself as the business owner, I think that's very Important. And speaking of paying ourselves, how should a small business owner figure out what to pay themselves?

Sarah Webb: 00:04:57

So a lot of times you need to back into this formula, right?

So if you are, if you've been a corporate employee and you're going out on your own, you need to know how much it takes to run your lifestyle on a monthly basis. And I'm not talking about an extravagant lifestyle. I'm talking about, you know, your rent or your mortgage, your utilities, groceries.

Like, what is the bare minimum that you can survive for on a single monthly basis? And then back into that. So let's just say that you have to survive. It takes $10,000 to make your household run.

And even if you have a partner, that's your contribution. That's what it's going to take. So how are you going to create, you know, $15,000 of revenue, $5,000 of expenses so that you can get that $10,000?

So I remember when I was first starting in my business, I had a target number that I looked at, and I divided that by how many hours I was going to have to work, and then I divided that by how many days I was going to work, and then I looked at it each week.

And so I was kind of tracking on, okay, am I putting forth the effort to produce that net number for some people, you know, you're selling a product and so it's not as predictable. It's not based on how many hours you're working.

And so tracking that on a daily basis, okay, I have to sell 100 widgets today to make my goal for the week, or, you know, getting it to really tactical level. But I think going back to how much is the minimum that you can live on, you know, especially at the very beginning of what is that minimum number?

And then backing into a financial plan to make sure you're meeting that goal.

Angela Frank: 00:06:33

Amazing. And when you're working with a business and they are now well past that minimum goal, their business is doing really well.

How do you advise them to determine the amount that they should pay themselves?

In that case, you're out of the woods, per se, but now you're not sure how much money you should actually be keeping in the business, taking out of the business, because you're in like this great, this great time, this great period in your business.

Sarah Webb: 00:07:00

Yeah, I think there's two different things, two different philosophies. One is, what are the financial goals for your business? Are you going to need some type of investment in the future? And what does that look like?

And so you know, you've got a healthy net profit you're looking at paying yourself. What are those goals that you're trying to tackle into the business? And is there a portion of money that you can set aside for that?

The other component is I'm a profit first professional. And so we follow a formulaitic, you know, based on how much sales. This is our recommendation.

And at the beginning, you know, I believe up to a million dollars, you know, you're in the 15 to 20% of your gross or your real revenue. And so that calculates into a percentage of your net income. And that just helps with a recommendation of, okay, it's going to be systematic.

This is how much you're going to make. Your putting yourself on a salary and also setting aside money for taxes.

So I'm always a big proponent of not being surprised at tax time, of having to come up with a very large amount of money because you've been successful, which is so fabulous. But are you planning, are you optimizing your taxes?

But even if you're optimizing your taxes with, you know, certain tax deductions and good planning, you still have to pay something. And so you need to kind of be tracking what that number is and setting that money aside.

So what we do with customers and clients is we do what's called a profit assessment.

When we first start working with people, and in the first 30 days, we're coming beside you in your business and looking at how you're operating your accounting system and how profitable you are.

And based on how profitable you are in your future goals, we set up a customized metric for you that tells you exactly how much to pay yourself, exactly how much to set aside in taxes, and how much you should be investing in the company, as well as, you know, what your base operations should cost. So for some clients, you know, they're paying themselves very little.

And so we're like, okay, you could actually ease up on, you know, you could pay yourself a little bit more and pull back a little bit from operations. And so we go through this profit assessment to give them a very personalized formula because business is personal.

Angela Frank: 00:09:11

Amazing.

So it sounds like really paying attention to where that money is going and then setting aside either a percentage or working with somebody like you, Sarah, to create that custom percent that's made specifically for your business.

And that way you're able to pay yourself more than your bare minimum, but also be able to plan for any future investments that you'll need in the business and, you know, support the goals that you have. Not Only for your business, but for your personal life.

Sarah Webb: 00:09:42

For a lot of entrepreneurs, you know, their business is their most valuable asset. And so, you know, caring for it and nurturing for it as part of their overall wealth plan is definitely critical.

Angela Frank: 00:09:54

I love that. And I want to back up now to something that you touched on, which is paying employees and making sure that you have enough set aside for that.

I'm curious on your perspective what the key differences are between hiring an employee that's a contractor and hiring a more traditional full time employee and how that may be relates to some of the topics we've already discussed.

Sarah Webb: 00:10:17

Yeah, well, generally employee team members, let's just call them team members, that could be contractors, a mix of contractors and employees. They're generally some of the largest expenses for your business. If you're in a service business, they're definitely the most expensive thing.

If you're selling a product, maybe your cost of goods is sold, but you still have to have team members to go out and deliver or sell the product. You know, they're generally the number one or number two, most expensive thing that you have in your business.

The critical difference between a contractor and an employee.

An employee is someone where you're directing their work, you're directing their hours, they can be remote, they can be in a different state, but you're directing their day to day activities. Whereas a contractor is someone potentially that is doing a project for you. So there's a final deliverable.

You're not telling them how to do the work, you're not telling them the time to do the work or how it's to be delivered. You're just looking for that final deliverable. And that's generally the IRS's stance on employees versus contractors.

I think there's a lot of scrutiny around this.

The IRS is aware that a lot of people are paying contractors, you know, 40 hours a week to do certain types of roles that you're directing and you're telling the person how to do it, and they're reclassifying them as employees. And so there's a lot of penalties and additional taxes that can be incurred if you're not classifying someone correctly.

Angela Frank: 00:11:45

So it's important for us to understand the difference and making sure that we're paying attention to how we're expecting the work to be done and when we're expecting it to be done. Otherwise we can be penalized by the IRS if we misclassify a contractor as an employee.

Sarah Webb: 00:12:03

Yes, absolutely.

Angela Frank: 00:12:05

Wow, that's amazing. Something definitely that I need to pay attention to. I work with a lot of contractors.

I want to bring it back to how that maybe plays into planning for the business. Are there any differences in taxes or when would it make sense to hire a contractor versus an employee?

Sarah Webb: 00:12:27

So I mean, hiring a contractor versus an employee is all about how you're delivering your product or service. So if you only need someone to do something that's like, I'm a contractor, right? I'm a contractor to my clients. I am delivering a final product.

They're not telling me how to do it, they're not directing the work that I'm doing. They're not giving me. I'm not punching in on a time clock of what to do. So I am delivering a finalized product.

If you're having someone do customer service calls and you're telling them that they need to be on the phone from eight to five every day, they need to take a lunch break, you have to turn in certain types of deliverables and then maybe on top of that you're giving them coaching of how to do a better job or you're giving them a script to follow that is an employee, you're directing their work and you're telling them how to do it. For a lot of businesses, you experiment at the very beginning with a contractor. Maybe you're looking for help for just a temporary portion of time.

Maybe you don't really know if this is a full time role of an employee or you don't even know how to do the role yourself. So you decide to hire a contractor versus an employee.

It's really when you get to the directing of the work is when someone kind of converts to an employee. Employees are also subject. You're also required to file quarterly 941s and W2s at the end of the year.

So there's a lot more compliance around employees. And so that's why people want to hire contractors. It's a little less burdensome on the compliance of having to keep up with that.

So I definitely understand that, you know, contractors can be a great path, especially as you're starting or if you're doing some type of project type work.

But if you're hiring a contractor, let's say to be a virtual assistant for 40 hours a week and they have to, you're very prescriptive, you're going to follow this script, you're going to do this email, you have to be available these hours. It might be considered an employee.

Angela Frank: 00:14:21

Okay. That's very important. So thank you for going into detail on that.

For the people who are listening and they're realizing that maybe their finances are a little bit more messier than they'd like. Based on our conversation today, what's that next step that you recommend that they take to get things more in line for their business?

Sarah Webb: 00:14:42

their tax Preparer. Does your: 2023

Your tax preparer is a wealth of information and they see lots of businesses, especially in your industry and maybe in your area, and they can point out like, hey, have you thought about this? Or we might need to consider a different legal structure.

So I think if you have a great rapport with your tax preparer, that would definitely be one great resource that I would go to. I mean, bookkeepers, accountants, fractional CFOs, you know, we're, we're here to help you.

Again, our company starts with a profit assessment and that kind of tells you where you are today. And we incorporate your goals and where you want to be. And from there we can work with clients on a monthly basis or a project basis.

But I would go back to your tax return first and see what your tax, what guidance does your tax team have and what are they recommending to you?

Angela Frank: 00:15:37

Great. That's something that everyone should have available to them. So I really love that tip.

But Sarah, you are a fractional cfo, which means that you work with all sorts of clients on the day to day and I'm sure that keeps you really busy. But I'm interested in learning what's next for you.

Sarah Webb: 00:15:53

Yeah. So our team, we serve clients across the United States. We have a team of seven amazing employees. They're all employees.

I refer to them as team members because they're so critical to our team. But you know, we're helping individuals and entrepreneurs and small businesses with their day to day accounting.

So we jump in and help them with their QuickBooks. We'll help them with their accounts payable and accounts receivable. And so we have great team members who can do that.

And then, you know, not everyone needs a CFO right away. That's not, that's not needed for everyone.

If a company is going through a big growth phase or they're wanting to talk about financial strategy, you know, that's where I can provide more value with like, where do they want to go? And that's really, to me, the difference between accounting and finance. And that's where you match up the cfo. Accounting is very historical looking.

It's very backwards looking. It's telling you how you did. And working with a fractional CFO or a CFO qualified person, we're more focused on the future.

So we take all your financial data and say, that's great. You did a good job on this. We need to do a better job on this. Here's where we're going for the future and what that future plan looks like.

Angela Frank: 00:17:09

So you're able to essentially take that historical, but then project it into the future and create some more financial strategy around businesses.

Sarah Webb: 00:17:18

Yes. Absolutely.

Angela Frank: 00:17:20

Amazing.

And if anybody's listening and they're interested in learning more about your company or just keeping up with you online, what's the best place for them to do that?

Sarah Webb: 00:17:30

Yep. Our website is web CFO W E B B cfo and all of our social media follows the same.

So we'd love to learn more about your business and learn what you're doing and starting with that profit assessment.

And, you know, if, if it's not the right time for a cfo, but you need a bookkeeper or even just a recommendation for a tax preparer, we don't do that type of work, but there's so many great professionals that we work with, we can give you a great recommendation.

Angela Frank: 00:17:57

Amazing. And everything that you just mentioned will be linked in the show notes.

So if you're listening and you're not by a computer, it's there for you as soon as you finish up what you're doing. But Sarah, thank you so much for joining us today. I appreciated all the insights that you shared and I know our audience did as well.

Sarah Webb: 00:18:12

Thanks for having me.

Angela Frank: 00:18:14

If you enjoyed this episode of the Growth Pod, please leave us a review. Thank you so much for listening and I look forward to seeing you in the next one.