Chris Hervochon | Understanding Your Cash Flow Statement

Adam LeanPodcast

On this week’s episode of P is for Profit, we speak with Chris Hervochon, a CPA and the owner of Better Way CPA, which provides outsourced accounting and tax preparation services. This episode is all about cash flow and how to improve the cash that your business generates.

“At the end of the day, your business has to generate cash because you can’t pay for your mortgage in anything but cash. You can’t pay for the grocery bill in anything but cash. You can’t pay your employees in anything but cash. It’s got to turn into cash, and understanding specific components of your cash flow statement and where you need to be focused is super important. You need to understand it, forecast it, and model it. That’s really the jumping-off point that I see a lot of small business owners struggle with,” says Chris.

We chat about common struggles faced by business owners when it comes to their cash flow, as well as:

  • Understanding your cash flow statement
  • What level of debt is healthy for your business
  • The importance of cash reserves
  • Bookkeeping best-practices
  • His book, Scaling the Data Driven Marketing Agency
  • And more

Listen now…

Mentioned in this episode:

Transcript

Adam Lean: In this episode, we’re going to talk about cash flow. We’re going to talk to a CPA on how to improve the cash that your business generates. This is P is for Profit. 

Adam: Welcome to P is for Profit. My name is Adam Lean and I along with the rest of the team at The CFO Project are passionate about helping business owners improve the profitability and cash flow of their business. My guest today is Chris Hervochon. He’s a CPA and owner of betterwaycpa.com. This provides outsourced accounting and tax preparation services. Chris, welcome to the show. 

Chris Hervochon: Hey, thanks for having me, Adam. I appreciate it.

Adam: Yeah, I’m really excited to dive in because, you know, unlike a lot of accountants, you tend to make things simple and clear for business owners. So I’m excited to talk to you and specifically in the area that is the most important, cash flow, generating positive cash flow. But before we dive into all that, tell us a little bit about yourself, how you got to be the owner of Better Way CPA?

How Chirs Came to be the Owner of Better Way CPA

Chris: Sure. I appreciate the kind words. Basically, so I started Better Way CPA about 10 years ago as CGH Financial and operated that as a side hustle for eight years, as I kind of migrated between public accounting on the forensic side and corporate accounting. And basically just had a moment about two and a half years ago now that, you know, why am I here? You know, I’ve got this side business, and I feel like I can drive value for, first of all, the business I was with at the time, I was in a mid-sized company, you know, doing, you know, heavy analytic work. I worked my way through the finance or the accounting department. I was in finance. 

And I figured that there was a lot of value that could be driven for a smaller size businesses that needed what I do. So basically, just decided one day, like, look, I’m gonna go and make this reality and go out on my own. So I did that. And now I’m a team of three. We’re based in Hilton Head, South Carolina. And it’s me and two other full-time employees. I’ve got one in Georgia, and then one here locally and we’ve got clients from Rhode Island to California to Florida and a couple internationally as well. So, you know, so far, so good. Haven’t missed a meal yet.

Adam: Okay, well, good. So, in your experience working with business owners, what is the number one thing that most business owners struggle with when it comes to their cash flow or just money and finance in general?

Chris: That’s such a loaded question. I think, and it is, from a cash flow perspective, I think it’s one of those things that just gets overlooked, right? I mean, everybody knows, you know, their p&l and a little bit less so, their balance sheet, it seems like. The cash flow statement seems like one of those things that just kind of gets overlooked, and specifically what’s on there and what it means. So we’ve got three different sections of a cash flow statement. 

We’ve got cash flow from operations, we’ve got cash flow from investing, we’ve got cash flow from financing. And the one to really pay attention to there is cash flow from operations because it’s really indicative of how the underlying business is generating cash. And that’s the whole entire point, right? At the end of the day, the business has to generate cash because you can’t pay for your mortgage and anything but cash, you can’t pay for, you know, the grocery bill in anything but cash, you can pay your employees and anything but cash. 

It’s got to turn into cash. And understanding that that specific component of the cash flow statement is where you need to be focused. And then also just understanding that your cash flow is super important. I need to understand it, I need to forecast it, I need to model it. That’s really the jumping-off point that I see a lot of smaller business owners struggle with.

Adam: So let’s back up for a moment. Can you define exactly what cash flow is? Because there’s a big difference between positive cash flow and just, and of course, negative cash flow, Can you explain what cash flow is?

Chris: Sure. So very, very simply, cash in minus cash out. We’re not talking about profit. We’re talking specifically about cash. The money that’s literally in the bank in some way, shape, or form.

Adam: Right. And so essentially, the three ways you mentioned earlier, those are the three ways to get cash, from operations through making a profit, through financing, which is through debt, and investing, which is through investors. So how do you know of the three ways, obviously, you know, you said that operations trumps them both, how do you know what level of debt or what level of investment is healthy for a business?

What is a Healthy Debt/Investment Level for a Business?

Chris: Good question. It depends on the business really. And the way that we generally look at that is we’ll do some benchmarking. We’ve got a bunch of different sources where we’ll look at data, we’ll look at like debt to equity ratios, we’ll look at, you know, interest expense, how much of that’s, you know, making up the p&l. And just try to figure out, you know, what’s best practice, where are we currently, and then how does that fit into the overall financial performance of the business? 

And then make some decisions from there. It’s not a one size fits all, for sure. And, you know, it’s going to be dependent on what industry you’re in, what your business life cycle, you know, what stage of the life cycle, you’re in, a bunch of different things. So that’s why we start with the industry benchmarking.

Adam: Got it. So for a heating and air business that has, you know, a couple technicians, couple trucks in a specific area, like, what do you use to, or how should a business owner listening know how much debt they should take on?

Chris: Right. And like, like I said, we start with the benchmarking and then we get into how much debt can the business sustain. So when we’re talking about a capital intensive business, like, you know, an HVAC company versus a capital non-intensive business, like a marketing agency, marketing agencies, I mean, they’re gonna have computers, basically. They’re expensive computers, for the most part, you know, you’re, like expensive IMAX, but those are expensive. 

But that’s pretty much it. When we’re talking about, you know, the trades, HVAC, for example, we’re talking about trucks, we’re talking about equipment, that is very capital-intensive. So what we’re going to, we’re going to see different things between those two types of organizations on their cash flow statement. We’re going to see a lot of cash out probably, especially when you’re just starting up on the HVAC side in the cash flow from investing section of that, the cash flow statement, and then, you know, conversely for a marketing agency, not so much there. We’re gonna see a couple computers, it’s probably going to be about it. 

And then you’re kind of getting into, Alright, well, how much startup capital that we have? Where are we starting from? How much do we need that dips in the cash reserves? So make sure that you have a high enough cash reserve and then that can kind of feed into how much debt you can take on. And then from there, it’s like, Okay, well, how much debt we’re going to have? What’s the interest going to be on that? Is that going to be a headwind, a significant headwind as far as earnings and cash flow? You really just have to model it out to figure out what you can sustain at that particular point in your business’s life cycle.

Adam: How much cash reserves do you recommend somebody have in their bank account?

Chris: Great question. Between two and six months. And we’ve got a survey of fixed expenses. 

Adam: Fixed expenses. Okay. 

Chris: So, two to six months of fixed expenses. We’ve got any question survey that we go through to quantify where you should be between those two in those six months. So if your business running on all cylinders, if, you know, you’re really positive about the revenue growth, if you’re really positive about what the revenue pipeline looks like, if your personal liquidity is good, so you don’t necessarily need to take cash out of the business on a regular basis if you had some sort of a downturn, then you’re going to be less cash. 

You’re going to be, you know, somewhere around that two-month window there. Now, if you’re going to be making heavy investments in the business, you’re going to be hiring people, if your cash flow is lumpy, meaning it’s project-based, you don’t really know where your next meal is coming from, that’s another way to put that, then you’re going to be closer to six months because, you know, some sort of downtime like what we’re seeing now is going to hit you, you know, potentially a little bit harder than somebody who’s got that steady stream of cash. Clients who are with you month after month that you’re providing some, you know, consistent services to.

Adam: let’s talk a little bit about organization. Organizing your money, when it comes to bookkeeping. In my experience, a lot of businesses don’t have the best bookkeeping. So, or the best systems or the best accounting. What makes a great and effective accounting system or bookkeeping system? Is there any tips or anything in general that you look for, for a business to be organized when it comes to their bookkeeping?

Chris: Sure. I would say two things. Number one is making sure that there’s a consistent accounting cycle. At the very, very least, you should be maintaining your books on a quarterly basis, at the very least, which means 

Adam: Accounting cycle meaning when you 

Reconciliations are Key

Chris: When you close the book. When you’ve reconciled all of your transactions, when all of the transactions are entered and you consider that month to be totally complete, or that quarter, whatever your period is gonna be. That’s the first thing. Make sure that you’re consistent. I see that problem all the time with, you know, with clients who come to us originally or initially, you know, we reconciled six months ago and then we reconciled three months before that, and we think that we’re good but we’re not sure, you know, that sort of thing. 

Reconciliations are key because it makes sure that everything that’s in the books should be in the books and everything that’s not in the book shouldn’t be in the books. So we want to make sure that we’ve got, you know, complete accounting records and that it’s happening on some consistent cycle. After that, you want to be on the cloud. 

That’s the biggest thing that I see as well. You want to have a good cloud-based ecosystem from, you know, cloud-based general that surrounds a cloud-based general ledger. What do I mean by cloud-based general ledger? That’s, the way to think about that would be like a QuickBooks Online or a Zero or a Fresh Books. Those are like your nuts and bolts accounting systems. 

Adam: Do you have a preference? 

Chris: I do, we are actually a QuickBooks Online only shop. Reason being is we just think at this point, it’s just got the best ecosystem because what we’re looking at is the apps that surround the accounting system, like a bill.com for bill payments, or, you know, like an Expensify for expense reports or, you know, a BI tool, business intelligence type tool. How easy is it to get the data out and to move it into other places where you’re going to need to do analysis or remove money, basically, what we’re looking at? So, we’re looking at the full ecosystem and that’s why cloud-based is so important.

Adam: Yeah, I agree. I recommend QuickBooks Online as well. It’s easier to understand, the user experience is so much easier, especially over QuickBooks Desktop, the desktop version that a lot of people have experience with.

Chris: For sure. It’s much easier to get help with QuickBooks online these days. I mean, there’s millions of customers using QuickBooks Online, there’s several hundred thousand using QuickBooks Desktop. So even if you just need to go get help, I mean, you’re more likely to be able to find it, you know, with QuickBooks Online than you are with desktop at this point. And at some point, it’s going to go away altogether, I suppose. But, you know, down the line.

Adam: Yeah. So in your experience, working with business owners, what separates successful business owners from those that always seem to struggle?

Create and Adhere to Your Business Plan

Chris: Two things. One is to have a business plan and to pay attention to it. And what I mean by that is, have it, have your business plan so that it clearly documents what you do, how you do it, why you do it. You’re going to do it for the various tactics that you’re gonna use in your business marketing, for operations, for accounting, all of those things and then revisit that plan on some sort of a cadence, at least every year, just to see where you are, what’s changed. 

You know, it’s kind of like that old Mike Tyson quote, everybody’s got a plan until they get punched in the mouth. Well, I mean, things change, right? So make sure that you’ve got a plan and make sure you’re sticking to it. And if you’re not sticking to it, you got to have a really good reason why. The business centers that we see that struggle, it’s because they get distracted. And, you know, it’s like the flavor of the month, like, oh, we’re gonna offer this service this month. 

And then oh, this sounds like a good idea, we’re gonna offer this service next month and there’s no consistency to it and it’s a total killer. And then the other thing that really separates the good business owners from the bad ones is just understanding cash flow, I think. If you can understand cash flow, if you can have a good clear, consistent business model and you can stick to it and basically, if you’ve got a plan, more likely than not, you’re probably going to be successful. When you get off-kilter on one or both of those things, that’s when things go sideways or go south.

Adam: Yeah, no, that makes sense. And I suppose the hardest part is actually coming up with a business plan because you don’t know what you don’t know until you get into it because it is a lot of trial by error. But you’re absolutely right.

It Doesn’t Always Have to be Perfect

Chris: Absolutely. It’s one of those things, it doesn’t have to be perfect. You know, when, especially when you’re first getting started, like, I was working with a client last week, and she is right at that stage where she’s got a job, she’s getting ready to go out on her own. And I asked her, I said, do you have a business plan? She said, Yeah, and it’s a Google Doc and it’s kind of disjointed and it’s missing a lot of key parts. 

So that’s a good opportunity to go get yourself a business advisor, somebody who’s done a business plan before, take whatever your thoughts are, they’re on that piece of paper electronically, or wherever they are, and then mold that into something that’s a coherent plan on how you can get started. And like just giving you feedback. Like what’s realistic, what’s not realistic? What are the things that you miss? What, you know, what do the things that are really good in the plan? 

Why is it going to work? You know, what are the benchmarks look like for that particular industry that you’re trying to get into? Like, all those sorts of things, you can wrap it in. You can make a business plan as complex or as simple as you want. The more detail, the better, obviously, but just start somewhere and then iterate that, you know, as you get through your business’s lifecycle.

Adam: Yeah, that makes sense. So you mentioned that you have an e-book coming out? Or is it already out? So tell us about that.

Chris: It’ll be out shortly. So it is Scaling the Data Driven Agency and it’s basically a roadmap of how to scale an agency starting from a financial perspective. So getting good data, good financial data that you can make decisions off of. How to implement that, how to look at your cash reserves, what you need to be doing in your business after you’ve kind of gotten past that point, you know, documenting processes and going in and look at your business plan. 

It details, all of that and the exact steps that you need to take to get there. And, you know, I’m hoping that, you know, there’s plenty of good content in there that the small business owners and agencies are going to find helpful. But it’s, you know, a lot of our thoughts on just how to scale.

Adam: Excellent. So where can people get this book? 

Chris: Sure. It’ll be out at betterwaycpa.com/datadrivenagency. And so that’s on our website and then just /datadrivenagency.

Adam: Excellent. All right, and we’ll make sure we put that in the show notes. So, yeah, let me ask you one last question, Chris. So if you could go back in time to when you first started your business, what’s one piece of advice you’d give younger you?

Chris: Man, such a great question. I think that I’ve spent probably a lot of time in the business, focusing on perfect as opposed to done, you know what I mean? 

Adam: That’s a good point. 

Chris: Yeah, like trying to get things exactly perfect before, especially before I went full time. So I was like, Well, you know, I’ve got to totally have, I totally have to have my app ecosystem nailed down. And I have to have, you know, fully-baked business intelligence model. And I’ve got to have, you know, all this technology that’s fully-baked. You don’t. You just need a minimum viable product when you’re first getting started and then you can iterate. It’s all about iteration and just being flexible. 

The best example is we’re what, six months into a pandemic as we’re recording this? And no, I guarantee you, nobody planned for it. Things have changed. And, you know, one of the first pieces of advice that we gave to people back in March was, you know, you need to iterate. You need to be thinking creatively about how you can drive value for your clients that maybe was a little bit different than what you were offering before and just being helpful. 

It’s a great example. I mean, it’s certainly one of those things that happens once hopefully, in a lifetime. But, you know, it underscores the point, you just need to be flexible and you just need to realize that everything’s not always going to be perfect and you just need to iterate and iterate in a smart way and in a way that your finances are going to allow for it, which is why cash flow is so important. And cash reserves, for that matter.

Adam: That’s true. That way it’ll give you a longer runway so you can make things, you know, improve things and grow. Well, Chris, this was excellent. Thank you so much for being here.

Chris: I appreciate it. This has been great. A lot of fun chatting with you.

Adam: Yeah. If you would like to see if Chris and his team can help you with your business, feel free to reach out. I’ll put his website, betterwaycpa.com in our show notes. And again, thank you so much for listening. And remember, the goal of your business should be to make more profit than last year and turn that profit into cash that you get to keep. Thanks for listening.