Our special guest in this episode is Leschen Smaller from Element Business and Accounting Solutions. How come so many businesses have collapsed? Where have they gone? Why didn’t they save for a rainy day? These are just some of the questions we have in mind and Leschen is here to enlighten us. She explains 13-week cash flow and talks more about getting projections for when your cash is coming in and when your cash is going out—something that is certainly important and that has been highlighted through this whole COVID crisis thing. Normally, businesses might save a little bit for a rainy day, but Leschen shares a better way to stay afloat in times of crisis: forecasting. Read more or listen to the podcast!
Josh: Good day everyone out there in Podcast Land. We’ve got Leschen here from Element Business and Accounting Solutions and she’s going to be going talking about some things that are on everyone’s mind, which is forecasting with your numbers. What are you doing in your business? How come so many businesses have collapsed? Where have they gone? Why didn’t they save for a rainy day?
Josh: So I guess, I want to ask you a quick question and that is, what would you say is the benchmark number? How do you work out how much is the right number? Or how do you work out your financial projections and budgeting? And I know I’ve asked you a mouth, which you can answer in an elevator pitch, but tell me a bit about the voodoo that you do and how you can help.
Leschen: Well thanks for that, firstly. We operate on a 13-week cash flow and getting those projections for when your cash is coming in and when your cash is going out, it’s certainly really important and it’s been highlighted through this whole COVID crisis thing. So normally businesses might save a little bit for a rainy day. I think we were talking about that before. You might have six months’ worth of working capital to see you through, but this crisis came out of nowhere and I think people have forgotten what it’s like and they have forgotten that cash is king. So they need to go back to the planning. And the easiest way to get your breakeven is just to average your monthly expenses for the year and that should give you your average balance that you should have per month. And you might have three months capital up your sleeve or six months. Six months is actually a luxury, most people can cope with three.
Josh: So, that would be a little bit industry-specific depending on what you’re doing. Our listeners can be anyone from doing yard maintenance stuff to hairdressers and people running a multimillion-dollar fortune 500 company. So what would you say is a benchmark if you don’t know what your expenses are? What should you save to start up a business to be able to make sure that you’re not going to collapse, I guess or what would you use as your safety net if you can’t have that safety net? So to speak.
Leschen: People say that expenses are unknown but they’re not. You know if you’re a gardener, you’re going to need fuel. You know how much it is going to be to repair your mower, your car, buy a trailer. And so, you need to have at least half that amount up your sleeve for if something goes wrong. But having said that, if you’ve got people that are just going into a business and they’re starting up a business tomorrow, they’re not going to have given that any thought whatsoever. Which is fine when they’re on their own but as soon as they get employees, whole different ball game.
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Leschen: And then I think you’ve just got to be a lot more conscious about the money you’re spending. And so using this 13-week cash flow, you know what customers you have, you project when they’re going to pay you. You know what expenses you have and you put those into your spreadsheet and what it enables you to do is, say you had to pay… Say you had a repair and maintenance that you needed to do but wasn’t essential. You can move that out a week on a week that you’re not going to get too much income because maybe it was a public holiday or there’s a public holiday in there and you couldn’t work or you were ill or something has happened that has not allowed you to work for a certain period. You just move your expenses out and you can… It’s a really robust tool to help you manage your cash flow.
Josh: Okay. And so with the 13-week cash flow, I guess you keep saying the 13 weeks, I’m going to ask you a few more questions about that, but is that something you should be considering personally as well as in business? Because obviously you’ve got your personal expenses, you got your business expenses and if you’re the owner, they very much overlap a lot of the time.
Leschen: I would prefer you to keep them separate but 100%. I mean, if you’re a sole trader maybe, keep them together, but if you’ve got a company or something, then definitely keep them separate.
Josh: Yeah. I was just thinking if there’s a person listening to that isn’t in business, this still really, really relevant for them because they could still be put out of a job, they could still be put out on the streets and they still have, depending on the stage of business, in baby formula or golf clubs to be buying.
Leschen: Both, yeah. Oh God! Yes.
Josh: I guess, you need to make sure that you’re forecasting and doing those things where you can and have that cash available to you. That’s from a personal sense. And then getting into a business, if you’re running a business where most of our listeners are, you want to make sure that you have 13 weeks. So how did you get to 13 weeks? Where did the magic number come from? Why not 12? Why not… I don’t know if you remember Something About Mary thing where he said, “Seven-minute abs.”
Leschen: No.
Josh: It’s like, “You can’t do your abs in seven minutes!”
Leschen: Because four’s too short, eights kind of in the middle. So 13 weeks kind of encapsulated… Who likes 12? I mean 12 beautiful number, I have to say as an accountant but then 13 is odd, so 13 just works.
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Josh: It makes sense, I guess. The average amount of wakes in three months I guess would be probably-
Leschen: I was going to say it’s probably about 13, yes.
Josh: Yeah.
Leschen: You would be surprised at what… We use it in our business.
Josh: Mm-hmm (affirmative).
Leschen: And we might shift around payments if we think, for some reason, that… So, for now, clients are paying slowly, right? But we still have wages to pay, we’ve still got rent. So if we have a discretionary spend we will move it from one week to the next.
Josh: Yep.
Leschen: Based on what we know, where our income is, or what week our income is going to land or cash our cash is going to land in our bank.
Josh: Okay. That’s actually brings up a very good point. So when you’re starting up a business, and obviously depending on the scale and the size of your business, some people, they’re net terms are nearly instant, they can sell a pizza and they’re being paid in 15 minutes, but then depending on the level of business you’re in, like for us, we have net terms that vary from anything from 15 to 45 day. Some people have, I think things are even higher than that. If you’re in business and you want to make sure you have that cash flow, what is everyone else doing out there? What are the net terms and how much does that affect the bottom line?
Leschen: It’s so important because there are some things that you can’t do much about because there’s legislation around it, but again, I’ll use us as an example, I’m quite transparent about what we do. So, we normally, for a client, we’ll do your compliance work and then we give you a big bill, not that big, but we give you a bill at the end of the day for having done it.
Josh: Acceptable bill.
Leschen: Yeah, correct. Of course.
Josh: Yeah.
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Leschen: But then we’re going, “Why are we doing that?” We would hate it if we went to you say, Josh, and went, “Can you provide us a service and then at the end of the year, give us a bill?” That would be a big bill. Right?
Josh: Yeah.
Leschen: But you might change it to monthly and that’s what we’re thinking about. So it’s smaller chunks. People can absorb the cost a little bit better. People know what’s coming up, they know when it’s coming up, and people can then plan their cash flow a lot better. So people can do the same in their business if they’ve got something that they can start billing over a year or three months or six months, they should think about that. Because also then, for you, you’ve got a regular cash flow coming in.
Josh: Oh, I think it’s a fantastic idea. That’s a big model that we’re a huge fan of. So about 10 years ago we changed from being a per hour model to a per month model. And we give unlimited support for everything that we do and we’re always available on the phone to talk to anyone and it’s so much easier because you remove that resistance. Before you’d go into a business, you’d tell them what you’re charging per hour and they’ll talk really, really quickly. And I know I’m guilty of it. I’ll go to my accountant and he’ll be like, “Oh, so how’s the family?” And I’m like, “Crap, am I on the time or not?” I don’t know-
Leschen: “Don’t ask me about my family now!”
Josh: Exactly. Ask me later when I know I’m not on the clock. And you start freaking out and we saw that that gave a lack of quality service because we’d go in and the receptionist would say, “I’ve got this problem.” And the business owner said, “Not important.” And I’m like, “Well that’s not very cool.” And so, charging a set price per month gave everyone that same thing, and I’m not going to say that this happens, but depending on your industry, when you have the likes of gyms that have popped up, these 24-hour gyms that are not doing much at the moment, but that you have this card sitting in your wallet. Isn’t it weird how you don’t lose weight with the card sitting in your wallet but the money still comes out?
Leschen: I have a gym that I donate to.
Josh: Yeah, exactly. You help fund their loans.
Leschen: It’s a great model that they have.
Josh: Yep and so that’s where I’m like, “Okay.” So I don’t know what you guys charge, but let’s say it’s $2,000 to do a returns for a Pty LTD something once a year or something like that.
Leschen: Yeah.
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Josh: I’m just saying a ballpark number, but if it was two grand, that gives people the opportunity to go, “Ooh, shit, two grand, that’s a lot of money. Maybe I should look around for next year.” Where if you divide that by 12, all of a sudden, even if it was $200 plus the overheads of the additional bookkeeping and administration, and you go, “Okay, $200 a month. $50 a week, it’s just coming out…” I know it’s there. I know I can call you anytime. I know this is going to be done. I don’t have this big expense and it’s a much easier model and it’s easier for everyone.
Josh: But people… I’m going to use one of those terms like they do on the news when you say, “They said this is going to come.” When they don’t actually have any references. I mean I’m going to do one of those. I’m going to just say people freak out when they get their rates notice or their insurances too or whatever their case is in business and you go, “Oh crap. Here’s an eight grand invoice that I wasn’t anticipating at all.” But if you’re able to amortise that into smaller chunks, you’re able to see the outgoings more easily, predict for that and forecast for that, for a lot of people that don’t really use many forecasting applications and things like that.
Leschen: It’s simple.
Josh: Yeah, exactly. What do you suggest if you are new to the game and you’re wanting to get a bit of an idea of, “What are I expenses next month?” Did you have any tools that you could suggest that you could do that in a live way?
Leschen: Well, we use Zero a lot, but accountants love Excel, and I’m going to sound like such an accountant now, but Excel works wonders. Why make it complicated? You should know when your next bill is coming in. You should know when your rates bills are coming in. When you’d go into business, that does need to be a little bit of ownership about what you’re doing. So yeah, if you’re new in business, you’re going to sign up for insurance. So you will know what that bill is and so you just put it into your little Excel worksheet and in the week that it’s due and just have your weeks across the top and you just work it out like that.
Josh: Yeah and that’s easy enough. And most people don’t, and I’m going to say the thing that all accounts hate, I love Excel, but if you don’t have Excel, anyone out there listening in Podcast Land, use Google Sheets. It’s the poo version of Excel. It’s free. It’s not as good.
Leschen: I was going to say the same thing. Isn’t it?
Josh: Yeah, oh, it’s okay when it gets down to.. For most uses it’s going to be the same. Just when it gets down to some of the more complicated things that you’re doing between them.
Leschen: It’s not complicated at all.
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Josh: Exactly, somebody can sit down there with a beer, hypothetically, and then go through and do that so that’s really good advice. And when, I guess, looking to find out all your numbers and going through all your numbers, we’ve got a bookkeeper, we’ve got an account, and then I’m the business owner and a lot of people have that same sort of Three Stooges or Three Musketeers depending on how you feel about it. Where do you say is the best way to understand the cut-over between accountant, bookkeeper and business owner when it comes to responsibilities to create these documents, to know when things are happening? I’m not going to pick on any industry in particular, but some businesses sort of go, “Oh, no mate. I just do what I do and put everything in the Share Box and it just bloody gets sorted out from there. It doesn’t, hey?” And then there’s other people that have their finger on the pulse and I would be more closely aligned with that, myself. But I don’t know if I’m… I don’t want to think that I’m stepping on my bookkeeper’s toes and they go, “What are you doing?” Or if the book is just meant to be there for reconciliation. So where do you say the cut-over really sits nicely to just know where your responsibilities lay as a business owner when it comes to things like this?
Leschen: So if we start with a book, it’s like a… What’s the analogy with the cookie? Or making a sausage. The bookkeeper starts at the beginning, they input the data into your software package, say it’s Zero or MYOB or QuickBooks, whatever it is, and then your accountant reads it and checks, is how I would probably put it because if I had to input anything into Zero, I would probably break it, but I could probably get my way around it, sort off, but I would not be anywhere near as efficient as a bookkeeper.
Josh: Cool. So from an accountant’s perspective, you’re into the P and L’s.
Leschen: Yeah. I want to tell you how you’re going, why is your marketing so high this month when you only budgeted X or why is your rent percentage of income so high? Those are the conversations that I want to have with you. I want help you interpret your numbers so that you can go away and go, “Right, okay, this is what I need to do.” We’re going on our plan traject trajectory or we need to change.
Josh: Obviously, in the analogy of making the sausage, if the meat is rancid or the bookkeeper’s not doing the job that you thought they were meant to be doing or something’s wrong, let’s say I just walked off the street and I was decided, “Let’s start a business.” Can you tell that the bookkeeper’s been doing something a bit wrong? They’ve been claiming GST free expenses instead of other things where they shouldn’t have been. They haven’t got the appropriate tracking codes and things like that. Or can you go, “Maybe I should tell the business owner, this doesn’t look a hundred per cent kosher.”? Or how deep do you get into it?
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Leschen: Yes, it depends how much you want us involved in your business. So we prepare a lot for clients. So it’s at that time we review all the data and we go, “Well, this has got GST on and it shouldn’t.” Or, “Hang on a second, this insurance has GST on the full amount but it shouldn’t. So can you give us the invoice?” That sort of thing. So we can certainly run a preliminary eye over what’s in your books but it’s not going to pick up everything but it will certainly pick up the majority of things. So we can definitely help from that perspective.
Leschen: And then from a bookkeeper’s perspective, it depends. We would always go back to the owner going, “Oh my God we had to reconcile your bank account. Why is it not reconciled? The bookkeeper should do that every time they come to your place.” Or we would go, “Well no, we had to do 50,000 adjustments to your file.” But it’s just a two-way communication because we do like to work with the bookkeepers as well. And the good bookkeepers, we have a really open dialogue with so that they can ask us questions. Because the last thing you want is the bookkeeper and the accountant at odds with one another.
Josh: Butting heads, yeah.
Leschen: All three of us… Yeah. Because they get very protective of their work or the accountant gets very protective and it’s not a good relationship. So you need the owner, the accountant, and the bookkeeper all to be on the same page, it just works so much better that way.
Josh: I can say, comfortably, you’re 100% correct. When I started the business in 2007 I read four or five books on bookkeeping and accounting and thought, “I can do this.”
Leschen: Oh my God. Were you having-
Josh: Easy.
Leschen: …trouble sleeping?
Josh: Ah, so 2007, start of the business, 2009 I went, “I am freaking out. What have I done? This is terrible!” And I got a bookkeeper and I’m like, “I need you to help me. I don’t know what I’m doing. I don’t want the government to come and hurt me. I haven’t submitted anything two years.” And they said, “Look, don’t freak out. It’s all right. You’re not the only person that’s ever done this.” I’m like, “Yeah but I don’t even want to be any of the people that have done this.” I don’t want to be in the naughty chair. What am I doing? Anyway…
Leschen: Just fix it!
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Josh: Exactly. So she went through it all, got it all sorted and at that stage we were using QuickBooks, got it all sorted and, oh my goodness, the weight off my chest, that was fantastic. That’s something that I said, I went, “Okay, I shouldn’t have been freaking out about this.” The good news is though I read enough into it to understand enough about the numbers and so I definitely think everyone should… As you said, the business owner needs to take some responsibility when it comes to knowing what expenses are coming up and being aware of that. And I 100% agree because being able to do this, I was able to more easily diagnose and understand things when I was going in for an expense or going in for a loan or something like that. I understood where and how that would work and how you could better map out the chart of accounts or general ledgers. And that was great.
Josh: And that, for me, definitely made the line of a bookkeeper versus a business owner a bit fuzzy because I’m like, “I don’t want to step on their toes. How much am I meant to know and do?” But at the same time I think more knowledge can only be a good thing, but just know that there’s other people that do what they do professionally and better, so I don’t necessarily jump in. I wouldn’t be expecting business owners to go and do security assessments on their companies.
Leschen: Well, I was just going to say, my philosophy is you go and do what you’re good at.
Josh: Yeah.
Leschen: I will help you interpret your numbers until you understand them, because I do like to get to a stage where you do understand them but I’ll help you interpret them. I’ll help you along the way, but you go and build your business and build what you’re good at or do what you’re good at because I wouldn’t have a clue about IT. So it’s just having those people… I think we’re in a world where no one is an… You can’t be a generalist. You can’t build your business and be good at IT, your accounts, your… What else do you need? Legal. You can’t be good at all of that and you don’t have time to do that.
Josh: It already bothers many business owners, including myself. You’re kind of still expect it to be the salesperson, the marketer, and whatever the thing is that you’re good at and it’s still like, “Aw man, I had to learn to become…” It sounds like I’m extroverted at the moment, I assure you, I love a quality month alone with a book.
Leschen: Sure.
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Josh: I realised in business, if you’re not the person able to talk, your messaged doesn’t go anywhere. You can have the cure to cancer but if it’s sitting on your shelf and you don’t have a voice to tell anyone about it, you shouldn’t even have it.
Leschen: No. If it’s sitting on your shelf and you’re at home trying to do your bookkeeping, instead of getting the word out there, or you’re struggling with your bookkeeping and it’s taking you a week to do instead of two hours, like a good bookkeeper or something like that. What a waste of time. What a waste of opportunity.
Josh: Absolutely. And we’ve only got time once, don’t we? So you don’t want to be-
Leschen: That’s right.
Josh: Spending your time doing crap.
Leschen: It’s the one thing you can’t get back.
Josh: Exactly right. So there are books out there that I have read and I’m sure other people who’ve read like The Barefoot Investor and stuff.
Leschen: Oh yeah, I haven’t read that one, but yeah.
Josh: What would you say, if people are looking towards forecasting or people are looking towards some sort of material to not necessarily tell them, “This is how to do something.” But just tell them how to make sure they’re doing the right thing? Forecasting’s awesome, the split of expenses can sometimes… My family are either teachers, business owners or engineers, all of them, my grandparents, everyone. That’s the trifecta that we’ve got there. And dad was an engineer. So doing all of their operations and bits and pieces.
Leschen: Oh, bite your tongue!
Josh: This isn’t just for that business it’s for other businesses that he’s worked with previously, but how much people generally spend on marketing, generally spend on the people in the trenches to get the work done. And I’ve always had a lot of trouble with that because I’ve sort of thought, “Well, if you want to get your message out there, your brand out there, you need to be spending money on marketing. “As much as when I first started my business, I thought like a lot of people, people will come. Rome wasn’t built in a day but you build it and they will come and it wasn’t the case. And that’s when I learned to start talking more. Do you like review if you see some weird patterns, if you went, “Oh, that’s weird that they’re spending 60% of their revenue on marketing and 20% on business meetings and only 20% on staffing. That’s a bit of an odd mix.”
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Leschen: We’d certainly be having a conversation at that point in time. But it also depends on where a business’s at. And so, part of our job is to, I guess, listen and we might have these set things in our head and go, “Yeah, wow, 60% on marketing. That’s really high.” But there might be a very valid explanation for that. So we’ll play devil’s advocate and make sure that strategy, I guess, is robust and that the business owner has thought through all the pros and cons. And if it’s good, it’s good. And if they go, “Ah, yeah, I could probably get an employee that would do…” It’s all those types of conversations. So all in all, we just strike up a conversation around it. Everyone’s got a filter through which they make decisions, whether there’s $0 in the bank account or a million dollars in the bank account will affect how you make your decisions. So we’re just trying to make sure that all decisions are made at an even keel.
Josh: What was it that I saw? It was a presentation that I saw in the past and they said, “The decisions and the ways that your mind works when you’re backed into a corner will be incredibly different to the ways that would work when you’re thinking clearly.”
Leschen: Never a truer word has been said.
Josh: Yeah.
Leschen: I agree.
Josh: So I would say every business has gone through some hairy bits. And if you haven’t, you’re going to, it’s just inevitable. You’re not taking enough risks. Yeah, that’s cool. So if you are looking to make sure that you’re keeping your cash flow in the right spot, what are some of the things, I guess, you can do in regards to say commercial property you might be leasing and things like that?
Leschen: So right now,in this specific time, if you’re starting to worry about cash, you should be speaking to your landlord.
Josh: Just for everyone listening it’s at the COVID time we’re talking. People listen in five years time, it’s the COVID time we’re talking right now.
Leschen: 2020 it’ll go down in history.
Josh: Yep.
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Leschen: Yeah. In this COVID time, because there’s specific legislation now for it, you should be speaking to your landlords and see if you can get some relief around your rent. You should be speaking to your banks, see if you can defer payment. And at the moment they’re not obviously I’m saying you can go payment free, but they’re just tacking it onto the end of your loan. But it gives you a little bit more financial certainty now, just do it because your stress levels are going to sky rocket and you’re not going to be able to think clearly unless you relieve some of your cash issues. And if you can, go for Jobkeeper if you haven’t already.
Josh: Yeah, jump into it. They’ve extended that haven’t they? Just recently.
Leschen: So they’ve extended applications until the end of May and you don’t actually have to have paid that $1,500 per eligible employee until the 8th of May. The major banks are funding those so if you’re a customer of Westpac, ANZ, NAB or CBA, you can actually go to them and they will do a short term over-draught sort of thing.
Josh: Bridging loan type thing.
Leschen: Yeah, correct. And at very reasonable rates and that will help you fund a lot of that. So I would be getting on the phone ASAP if you want to do that sort of thing.
Josh: That’s awesome advice. So Leschen, is there anything else that you’d like to go through that you think I haven’t covered off on, that you think would be… Questions or information that we should be given to our listeners?
Leschen: Look, if anyone has any questions, happy for you to get some notes and I’ll shoot something through, but stress is a big things so look after yourselves and have a clear mind as much as possible. Yeah.
Josh: Cool. It’s been lovely having you on the show here. I’m going to chuck some links in the description here for Element Business and Accounting Solutions for anyone that’s interested in jumping across there and hearing a bit of the voodoo that they do and how they can help you out if you are a bit or you’re not sure that you’re getting the right advice or if you want anything to do with forecasting and want a bit more information there, make sure to jump across and talk to a wonderful team. And everyone else out there, stay healthy and in Podcast Land, if you have enjoyed this, jump across to iTunes, leave us a review, give us some love and everyone stay good.
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