5 Numbers to 5m with Gavin Smith the Profit Analyst

Greg Wilkes: [00:00:00] So today’s podcast is with Gavin Smith. Now Gavin Smith is known as the Profit Analyst, and he is an expert in understanding and deciphering your numbers. What can be really frustrating in construction is you often can receive big lump sum payments and And then the next week you’ve absolutely got nothing left because it’s all been spent out on cashflow is often one of the number one problems in a construction business, which can stifle your growth.

Well, in this podcast, we’re going to understand exactly how to overcome cashflow problems, how to forecast them and see them in the future. So you can take the appropriate steps to avoid them. And we’re also going to help you understand your profit and loss and your balance sheet. If you’ve ever received those from your accountant and you don’t know what you’re looking at, well, Gavin’s going to simplify all of it for you.

So we can focus on just five numbers that can take your business to five million. So you’re really going to enjoy this, especially if you don’t like your numbers. This is a great one to listen to. So let’s jump in.

Welcome to the podcast, everyone. [00:01:00] Really great to have you on today’s show. And I have a special guest today, a friend of mine, Gavin Smith. We call Gavin internally the numbers guy. He’s the profit analyst. And if you want to know anything about numbers, this is the guy to talk to. So I know this is going to be really useful for a lot of you here because in construction, we have to be numbers obsessed if we want to make money in our business and grow our business successfully.

So Gavin, really awesome to have you on the show. Welcome. Yeah, thanks, Greg. Really glad to be here. It’s great to have you here, mate. So Gavin, do you want to tell us a little bit about yourself and how you got into business and how you got into numbers?

Gavin Smith: Yeah, absolutely. So yeah, my my journey as a finance professional.

It’s about, I don’t know, 20 plus years long now, but it splits into three distinct areas. So I started out the typical accountant route. So I Did my university did

my charted accountancy qualification. I worked for KPMG across that period as an auditor. That was the first side of it, getting all the technical phase down.

Then the second component of it was very [00:02:00] commercial. So I moved to London, worked for a London stock exchange listed Global marketing agency ended up being with that group for about 10 years. And across that journey, I got a real mix of the M and a side of things. The running a global budget was on and off the plane all over the world, turning around offices.

So very, very commercial finance experience became a CFO for different regions, Middle East, Asia, all through that same group. And then the third part of my career has been my own entrepreneurial journey. So I moved back to Australia, started businesses and, you know, now six, seven years down the track and I have.

Spread across hospitality, Pilates studios, and of course, my, this business that my business of real passion, which is called the profit analyst, which is all about helping other business owners with their numbers. So yeah, it’s been quite a mixed journey and you can see how it sets me up as a bit of a unique person, the finance space, and that I’ve got the background and accounting side of it.

But I’m not professing to be an accountant anymore. I’m actually being a business owner and helping other business [00:03:00] owners with numbers.

Greg Wilkes: Yeah, that’s fantastic. And a real wealth of experience there and to work for such big companies like KPMG and things like that, that’s, that’s huge, isn’t it? To have that experience and grow your accountancy.

knowledge from that base. So that’s awesome. But I think what’s really appealing is that you’ve started your own businesses and that’s just a completely different beast, isn’t it? So how did, how was that transition going from, you know, working for a big corporate environment to then starting your own business?

Yeah,

Gavin Smith: yeah, absolutely. I mean, there’s the definitely adjustments from going from big teams and having people around you doing things to all of a sudden In the beginning, everything’s on you to be able to do, but from a finance perspective, it’s actually very interesting for me about how much of the, the learnings and the skills and the things I applied when I was dealing with billions of dollars and, you know, multiple entities, how much those same tools

and methodologies and stuff can actually just be boiled down and used in a solo operator or a single small business getting started right the way down the other end of the scale.

So [00:04:00] in particular, when it comes to being able to. Take all of that financial information and summarize it down into just the useful key couple of numbers. that’s what’s happening in the, in the biggest boardrooms in lumbers, they’re still sitting around talking about two or three KPIs that actually impact the whole business or impact the strategy that the business is focusing on.

and that’s exactly the same thing you should be doing as a small business as well, knowing two or three key KPIs and that’s all you’re focusing on. So the principles around the numbers and how to use them apply regardless of your size of business.

Greg Wilkes: Yeah, that’s really interesting. I know that’s something you’re passionate about, making it really simple and straightforward for everyone to use, because I think the problem is with numbers, is it just becomes so overwhelming for, for many, and you know, especially in construction and trades, you know, maybe they, you know, some are greater.

Maths and whatever else, especially when you put a pound or a dollar sign in front of it, they’ll be sharp as anything when they’re working things out. When we’re looking at spreadsheets and profit and loss and things like that, all of a sudden, the numbers [00:05:00] just all blur on a page. What am I looking at?

That’s the big

Gavin Smith: problem. Yeah. It’s, it’s a real, where the issue lies is, People get into business or start their business because they have a skill or a passion, or they found a great opportunity, something that they’re linked to. But all of a sudden, once they’re a business owner, financial information comes to them in the form of, you know, financial statements and things from accountants, and they’re expected to know all this stuff.

And they’ve never had any kind of training in it, or, you know, no one’s ever actually showed them, you know, What it means, how you use it. And so they’re kind of expected to be able to learn it on the fly as they’re going along, you know, they haven’t done an accounting degree before going and starting their construction business.

So it’s, it’s no wonder so many business owners feel confused and overwhelmed, and they’re a bit out of their depth with dealing with numbers. But yeah, like I was saying before, it’s. They are really quite simple if somebody shows you how to simplify them down and shows you what are the key couple of metrics you should be following.

And all of a sudden you can take all that overwhelm of information that’s coming at you and just boil it down to the couple [00:06:00] of key things you should be looking at. And that’s all you need to focus on. And it’s the same for every business. I look, it doesn’t matter if it’s construction or other industries, business owners really only need to know a couple of numbers and that’s all they need to track.

And that makes all the difference for them in terms of their. Not only their financials, but the strategies they’re pursuing or the decisions they’re making day in, day out. It’s all about how we can move or influence those couple of numbers that I’m following.

Greg Wilkes: Yeah, so that sounds awesome. We’ll dive into what those sort of KPIs that should be tracked as we go through the podcast.

What I’d love to know though, Gavin, is why did you choose this side of the business, a coaching company that’s coaching on numbers and making it easier? What was the big problem that you saw in all industries?

Gavin Smith: Yeah, so definitely it was in that, You know, third phase of my finance journey. Once I became a business owner myself and started getting into buying and starting up small businesses, I realized pretty quickly that all of my peers around me as other entrepreneurs and business owners really [00:07:00] didn’t have a clue when it came to the numbers.

And they definitely weren’t using their numbers, how they should be. And so while I was. Setting up Pilates studios or running bars, the conversations I was having with other business owners inevitably came back to what’s going on in your numbers, how are you using your numbers? And I soon discovered that, you know, what feels like to me about 90 percent of business owners out there really aren’t using their numbers at all, or really haven’t got a clue how powerful their numbers can be and how they can use them.

So. I pretty quickly started helping lots of people around me with their numbers. And essentially the profit analyst was just born out of that space. You know, I, I

obviously have a great skillset in a background in numbers, but I also have a real passion for how we can use numbers as a business owner.

And then through just wanting to help other people, inevitably I just started helping them with their numbers. And it was through that process that I created the profit analyst, my, my business. Coaching business and all I’m really doing in the profit analyst is teaching other people how I’m [00:08:00] utilizing numbers in my businesses.

So the tools I’m sharing, the coachings I’m giving, it’s just the, literally the things I’m using day in, day out in my businesses. And I’m just helping other business owners to be able to utilize their numbers through these simplified tools that I have.

Greg Wilkes: Great. So it’s not theory. It’s something that you’re practicing yourself and then you’re able to teach it to others and see the results there.

So that’s, that’s fantastic. In construction, I think one of the big problems with numbers is that you can often be receiving large sums of money at any one point. You know, if you’re a business that the people that are listening to this, they’re probably running, you know, one to 10 million size businesses.

And on some of these projects, you’re getting 50, 000, 100, 000 here and there, these payments coming through and you can feel absolutely rich when that payment comes in. And then literally a week later, you’re scratching around trying to pay a tax bill or, you know, whatever it’s going to be. And I guess we’ve also got a problem at the moment with COVID, haven’t we, after COVID, because there was a lot of free money blowing around.[00:09:00]

What sort of problems are you noticing with the businesses you’re working with, maybe even construction businesses, with the financial side of things at the moment? How are we seeing a bit of a change in the landscape financially with companies?

Gavin Smith: Sure. So yeah, there’s a couple of things to touch on there.

And we said, so first of all, definitely in a construction based business. Because of the way that business works, there’s a lot of money moving around. There’s a lot of, a lot of things to get right from a financial perspective. And I’ve definitely seen a lot of construction business owners get themselves into trouble, which they could have avoided if they knew how to read and use their numbers.

Definitely I’ve seen the rollercoaster ride of construction businesses thinking. Wow. I’m incredibly wealthy one week and I’m scratching around for cash the very next week. And if you’re managing your business purely just by looking at your cash as an indicator and looking at your bank balance, you’re really missing so much valuable information that you need to be across as a construction business owner, because.

You know, there’s a lot of cash changing hands and moving around the businesses. And we really need to understand [00:10:00] what’s going on, what’s moving where, and am I making the right decisions through this journey to make sure I’m coming out on top, you know, with my pile of cash at the end of it. So very important for construction business owners to embrace their numbers, to be really able to make a good success of their business in terms of COVID or how that influenced things.

I think if we look at the last three years, it’s been a very interesting time for a lot of business owners because we went through the initial shock of COVID of things grinding to a halt. And that was everybody learned pretty quickly about cash flow and how to manage cash flow across that period of time.

And then we came, we did, particularly in this country, came flying out the other side with all the incentives and grants and things. And all of a sudden. Everybody was flushed with cash and business was booming. And now we’re a couple of, oh, sorry, but that was also coupled with challenging supply chains, you know, things that we needed as part of the construction, all of a sudden wasn’t available because we were symptoms of countries which still weren’t fully operating in terms of manufacturing and stuff.

So and now we’re a couple of years down [00:11:00] the track and we’re over the other side of that amazing bubble that we’re on and. All of a sudden the, the great economy we were in a year or two ago, isn’t happening all of a sudden things are slowing down and there’s big layoffs happening from big construction businesses and stuff.

So, it’s been a very interesting ride for the last three years and it’s definitely one where knowing your numbers well. And being able to use it, you know, have the visibility and use your numbers and see what’s going on has definitely been a key asset for people across this period of time, because you can spot the early trends in terms of the price increases or the delays in construction or the delays in supply, which and how that’s going to impact you from a financial perspective.

So. Definitely been a time where knowing your numbers has, has helped for a business owner across this period of time. And if anything, I hope it’s really highlighted for people that if they’re not embracing the numbers yet, they really should be because navigating these issues while they’ve still been issues.

And they, they definitely do impact myself and my clients in terms of our business, [00:12:00] because we’re using our numbers, we’re able to navigate them. I think much easier than those who are. just being reactive to it, you know, and finding things out after the fact or not having cash to pay for something when they should have cash to pay for something, you know, that’s not the way you want to be operating through this period of time.

Greg Wilkes: 100%. Yeah. And I think, you know, in good times, it’s easy to get away with, you know, spending too much and you know, you think things are great and they’re never going to end. And then all of a sudden as things start tightening up, you think, well, yeah, now actually I need to pay attention to this, but you know, a little bit late then, isn’t it?

But if you’ve, but at the same time, you know, you can look at those warning signs now. So if people are listening to this and they are noticing a slowdown, which we are in the UK and Australia, then, you know, now’s the time to really get on top of things and don’t bury your head in the sand. It’s time to get an understanding of your numbers right now.

Gavin Smith: So to that point how I said earlier, there’s only really a couple of numbers that you should be across as a business owner. If we go a level sort of higher than that, [00:13:00] It’s about what type of numbers there are. So when we’re, when we’re looking at financials and know your numbers is obviously a phase used quite a lot.

When it comes to looking at financials, we need to understand that there’s three distinct sets of numbers. They fall into three different groups. And I have a little model about it. You can find it somewhere. I’m sure on my Instagram and social media and stuff. But if you imagine there’s three different overlapping circles.

They’re the three different areas of numbers we need to be across. And so the first set is our profitability. So this is the information we find on our profit and loss statement. This set of numbers tells us, are we making money? Is this whole business worthwhile? Are the things that we’re doing, the jobs we’re pricing and actually going and building at the end of the day, are we making a money out of them?

So key set of numbers there to be across is our P& L. I would almost say our most important set of numbers, because if you’re not making a profit. There’s not much point being in your business. The second set of numbers, the second circle, this is our net worth. So this is our, the information we find in our balance sheet.

So this is all the numbers about what do I own, our assets, and what do I [00:14:00] owe other people, our liabilities. Really important to be across those as well, because, you know, as your particular construction business, if you’re just focusing on the cash and you’re seeing that influx and then outgoing of all the cash.

Just appreciate that cash is only one element that makes up your net worth. You need to consider the invoices that people owe you, the invoices you owe other people, how much you owe the tax department, and all of those numbers are listed there. And we can again, collapse them all down and just understand what is our net worth position?

What’s our financial position during this journey? And even though you’ve got the big fluctuations in cash, It’s probably not fluctuating like that in terms of what’s yours and what do you own from a net position through that journey. And then the third circle, the bottom circle out of those three is our cashflow.

And that’s all about getting a clear understanding of what cash is actually coming in and out of my bank account. And so in particular, really important as a business owner to have a cashflow forecast here set up for your business. So the reason cashflow is different from The profitability side of it is largely because of [00:15:00] timing differences, you know, it can be a long time between when you send an invoice to a client or they actually pay you or when you register the expense or when you actually pay that.

So significant timing differences, but then you also have the money movements in your net worth. Like for example, you’re paying a big tax bill or something like that. And that doesn’t show up in your P and L at all, but it definitely shows up in your cashflow. It’s money going out the door. So, so stepping back.

Just appreciate the three different sets of numbers, our P and L, profitability, our balance sheet, what’s my financial position, my net worth, and then what’s my cashflow, what’s actually going in and out of the bank account and when is that happening. And it’s really important to be across all of those three areas to have the complete picture.

But if that sounds overwhelming, just appreciate you only need to know two or three numbers from each of those three circles, from each of those three areas. And that’s all you need to be across to have a really great handle on the financial activities of your business.

Greg Wilkes: Perfect. So that’s really useful for everyone listening.

From the businesses you’ve analysed, Gavin, out of those [00:16:00] three, P& L, Cashflow and Balance Sheet, what are the one that business owners generally seem to focus on the most out of those three? Where do you think they mostly sit and what one do they ignore the most?

Gavin Smith: I think most business owners, if they haven’t been taught how to use their financial statements, focus purely just on the cashflow there.

And even then they’re not necessarily looking at the cashflow forecast. They’re focusing on the bank balance and looking at that number go up and down. And if you’re a business owner, who’s met primarily managing your business by your bank account, it’s an absolute rollercoaster ride, because first of all, there’s certain things that come out of your bank account and they’re all on different patterns.

There’s things that come out. Every single week, things that come out on a fortnightly basis, things that come out on a monthly basis, things that come out on a quarterly basis. And you have these periods where a week of a fortnight, a monthly, a quarterly, all lined up in one week. And all of a sudden you had heaps of cash last week and you have no cash this week.

And so to the business owner, who’s just [00:17:00] watching their bank account and seeing it drift up and down like a, you know, the tide coming in or out, that feels very stressful. And they don’t necessarily understand what’s going on, but. And honestly, it doesn’t really even reflect the success or the health of the business.

It’s just the purely the timings of the in and out of the bank account. And so to deal with that, we just want to put a cashflow forecast in place, which is just a matter of looking at all the ins and outs from the historical and then just project those forwards. So every single one of my businesses or my clients businesses or any business I’ve worked in the past has a cashflow forecast where you can see what the bank balance is going to be on a weekly basis.

12 months in advance. And the beauty of that is you’re not living on the ups and downs, the rollercoaster ride anymore. You’re really confident about what the low points are for your cash over the coming months. And the beauty of that, you can make really quick decisions. You know, if you need to buy something, buy something, something that’s out of, out of scope or something quick comes up, you know exactly what your low point is for cash off into the future.

And so you can make really quick decisions, [00:18:00] but just appreciate that cashflow and mastering your cashflow is not making a success of your business. It’s, it’s like keeping the pulse going in a body. You can have a body that’s really unhealthy, but as long as you keep the pulse going you can keep that body alive for a period of time.

So the blood pulse in the body is kind of what cashflow is like for a business. If it runs out, the business is dead. So just like the body’s dead with no pulse, but it doesn’t really reflect. Or it doesn’t help you dial in the health of the body or the health of the business to do that sort of stuff. We need to focus on our P& L and our profitability and really get that working for us because when we are making a success of our profit, ultimately it’s going to flow on to our cash flow and it’s going to flow on to our net worth and our financial position.

So profit is definitely an important thing or the most important thing we need to get right in a business. I know many people think, no, no cashflow is most important and absolutely it is, but if you’re not making profits, your cashflow is going to run out at some [00:19:00] point in time.

Greg Wilkes: Just coming back to the cashflow and I love that illustration by the way of yeah, it’s like blood pumping through the body because they talk about cashflow being like the lifeblood of a business, don’t they?

Gavin Smith: Yeah.

Greg Wilkes: So thinking about the cashflow, because in construction, sometimes That may feel a little complex for people having to track the cash. So a lot of people are just doing it on the bank account but they think, oh I’ve got to buy these materials and I’ve got multiple projects running. What do you recommend for people?

Are they to use software or is it just a projection? Like how would, you know, a complex company manage their cash flow going forward? And how far in advance would they be projecting this cash flow?

an expense side to only about 10 lines. So we’re not going down the page.

So we don’t want loads of information. We can find all that information. So we don’t use our cashflow to manage the profitability of our business. That’s what our financial statements are. So we don’t need to complicate our cashflow. Our cashflow can be [00:20:00] really simple. So for each column, I do it on a weekly basis.

And the reason I do it weekly rather than monthly is because if you’re just looking at cashflow monthly, you really miss the highs and lows that take place. So we want to follow that on a weekly basis, each column, I’m sort of describing a spreadsheet out loud, but if you can imagine each column starts with, what’s the opening cash for the week.

And then we have what cash came in, what’s going out and divide that up over sort of the 10 key areas of cash going out of the business. So in a construction business, definitely, it’s going to be the cost of goods sold the main, you know, the, the supplies and things that you’re buying and paying for, but then you’ll also have things like a team and office Rent, the, any other major sort of costs that occur on a regular pattern coming out of business.

And so we’ve got the opening, what’s coming in, what’s going out and what’s the closing at the end of that week. And then that closing the end of that week becomes the opening for the very next week. And so it becomes that same pattern of what’s in, what’s out, closing becomes the opening. If you do [00:21:00] that and look over the last, Couple of months worth of your business.

You’ll get a really clear understanding of what cash comes in and out of your bank account and what cycles and patterns that works on, which then makes it really easy to project that off into the future. And in terms of forecasting cash off into the future, You want to go for at least three months.

And the reason three months is because that’s the typical cycle in Australia and the UK in terms of when you’re paying BAT or GST, like doing your, your tax returns and those key amounts, you want to have it going far enough in advance so that you’re seeing where that low point is that happens every quarter, because it happens in every business, every quarter, you know, when you’ve got the big tax bill.

Personally, I like to do a 12 months in advance, but I’m really focusing on that coming quarter as to. Understand the highs and the lows within that quarter.

And now a couple of things that we should just specific to construction businesses here though. So one, when you’re forecasting the cost of sales across that period of time, [00:22:00] I appreciate people will be saying that it’d be very complicated because some weeks it’d be huge.

Some weeks. It will be, you know, much lower, you can do it a couple of different ways. One, you can either just look at what you’re consistently spending in the past for your cost of sales. And you might find that it’s typically 50 percent of income or 80 percent of income or wherever it might be in your business.

And therefore you can just predict that number forward as a percentage sort of ratio of the income. So whatever every week’s income is, we’ll just make it 50 percent of, or 80 percent of, and that’s, that makes life easy for the future forecasting side of it to run it that way. But I always like to have the, the, the coming couple of weeks to be his best, my best guess, much more accurate.

And you can do those by understanding what’s actually live or what’s coming up right now in your financials. You know, in particular, the suppliers or the creditors payment report that you have, you can get out of your accounting system, get a look at that and look at what you’re actually going to pay over the coming weeks and put that into your forecast.

You know, I know this week’s, you know, [00:23:00] Not so big, but the following week, I have a huge amount of payments. So, so put it in the forecast and you can see what’s going to happen to your bank balance. And likewise for the income, if you’re in a construction business where it’s actually quite lumpy in terms of the cash incomings, because you know, let’s say you’re, you’re building.

A big project and it’s split into five stage payments and you know, you’ll get a huge amount of cash one week and then you’ll have to build, go two or three weeks before you get another amount of cash in. Again, forecasted like that. If you, if you know what work you’ve got on and what’s coming in, you know, show the huge amount coming this week and nothing for two or three weeks and then another big amount.

And when it goes off into the future, once you sort of hit that point where it’s like, well, I’ve got no idea, make it the average, look at what the last 12 week averages and just make it that every single week. And off it goes. So that’s how we’re not over complicating it, talking about it, but it’s actually quite a simple

process when you sit down and just populate the spreadsheet for yourself to make a forecast.

And then. In terms of keeping it live, I just like to update it every week with the actuals and it makes the forecasting get easier [00:24:00] and easier because you’re just constantly tweaking or dialing in the same forecast that you’ve already made.

Greg Wilkes: Perfect. So you’re not really using any software to do that? No, sorry.

Gavin Smith: No. Google sheets is I’m all about, but Google sheets or Excel, the same thing. There’s definitely software can do it. I’m aware people do it in zero zero has a feature now where you can forecast your cash flows in this way. Personally, I love a spreadsheet for it because it’s only 10 rows lying at 10 rows down.

It doesn’t need to be complicated. Spreadsheets are super versatile. You can chop and change things and add columns and rows in as and when you need to, you’re not bound by the restrictions of the software system that it has for you. And once you’ve set it up that first time, it’s really easy to keep it updated.

And keep it rolling. So my, my businesses, which are the oldest ones I have are five years old. I’ve got five years worth of weekly cashflow. They’re just going back in history, which I never look at or use, but because I’ve done it every single week, which also means the forecasting is really well dialed in because it’s got all this history to.

To use to [00:25:00] predict the future of them.

Greg Wilkes: Yeah, that’s fantastic. That’s really useful and powerful to make decisions. So if someone’s looking at their cash flow now, let’s imagine they do what you said, and they’ve forecast the next month or two out. And then all of a sudden they’re seeing huge dips. How, how does that data then help them make decisions?

What advice would you be giving people if, you know, this?

Gavin Smith: First of all, that’s fantastic, because if they hadn’t done that, They wouldn’t know about it until they hit that point. And, you know, now through doing this, this cashflow forecasting, you can see that the low point is coming, but it’s 10 weeks away or eight weeks away.

In your example, rather than getting one week out from it and being like, Oh no, how am I going to pay the tax bill next week or whatever it might be? So. Now that, okay, so let’s imagine a scenario where we’ve, we’re looking at weeks in advance and there’s a crunch point in eight weeks from now, the beauty of this is, is you’ve got eight weeks to do something about it instead of two weeks, but now you also have all the variables on the page between now [00:26:00] and then that are within your control and not within your control.

And so you’re basically looking at all the cash income at the top. What can you do to make sure those jobs happen, get those invoices sent on time, you collect cash as fast as you can, any work that could be pulled forward, do you need to make more sales? You know, it’s sharpening your mind on what you need to do to improve your income side.

And then on the expense side, cash outgoing, it’s just the inverse of that. What can I delay? What can I spread out? Can I talk to those people I might have to pay between now and then and see if I can spread the payments or delay them across? Isn’t it discretionary spend that I’ve forecast for between now and then that I can put a stop on and stop Paying for those items, you basically now have all the numbers on the page between your starting position today and that crunch point in 10 weeks from now.

And you either want to maximize what’s coming in and minimize what’s going out and do your best to play with those variables to make that happen. If you’ve still done all of those things and you’re [00:27:00] still facing a crunch point, okay, now we’ve got a bigger question we need to start solving, you know, and this is, do we need to raise finance?

Do we need to Whatever it might be. Restructure, look at all your different bigger picture options at that point in time.

Greg Wilkes: Yeah, that’s really useful. Hey, can I just ask a quick favour? We’re constantly trying to bring on the best guests on this podcast so we can deliver as much value as possible. But the only way we can do that is if we get more subscribers, more likes, more comments and more reviews.

So, subscribe to this channel and click notifications so you know each Every time we’ve got a new video coming up, give us a review if you’re getting any value from it and give us a thumbs up. We’d really appreciate that. I think when you’re in control of your numbers like that, it just, it clears your mind, doesn’t it?

To think straight and think clearly. There’s nothing worse than, you know, having that big tax bill to pay in a week and you think, oh, you know, you’re stressed.

Gavin Smith: This, this spreadsheeting concept I’m talking to here of cashflow forecasting, pretty much all business owners do this. The problem is they do it in their [00:28:00] head.

They’re constantly walking around thinking, well, I’ve got this job and this job on the go, this money will come in, but I’ve got to pay this, this, and this, and I’ve got to make the wages next week. And they’re doing the mental arithmetic of it. So just put it onto a page. Have a look at it all on a page.

That way you can’t miss anything. You can see it all there. But it also frees your mind now because you’re not focusing on doing the mental arithmetic. You can free your mind up to actually be creative and look for other options and see the different angles or what you need to focus on or improve within your cashflow rather than just trying to do the basic calculations and plugging your mind up with that.

So everybody’s doing it, just put it on a piece of paper. It’ll make your life much easier. And it often gives people that peace of mind around their cashflow that they’re, they’re really looking for. That’s

Greg Wilkes: great advice. So let’s just shift gears and talk now about the second one that you mentioned. So we said cash flow, we then spoke about your actual profit and loss.

So what should people be looking at when they get their profit and loss statement through from their accountant or whether they go and download it from Xero or QuickBooks? [00:29:00] What are the key things they want to be looking at there?

Gavin Smith: Yeah, so the first thing is when you’re getting sent a P& L or from your bookkeeper or accountants team, don’t accept it in that format that it comes to you.

There’s way too many numbers on a page. You can’t see the wood for the trees when you’re looking at your P& L like that. Things are in alphabetical order so they’re not grouped together. There’ll be line items on there like stationary or printing or just Pointless small stuff and it gets the same amount of real estate on the report as like sales does a massive important number for you.

So first thing I always do, it’s what I refer to as P& L simplification, is you want to summarize that P& L down just into five key numbers. Five key categories for all of the expenses. So I’ll list what they are right now and then they’ll make sense why. So the first category is our cost of goods sold. So, huge number in construction, very important number.

Collapse all that stuff down and look at it as just one figure, cost of goods sold.

Greg Wilkes: Let me just [00:30:00] stop there for a second. Just if people are struggling to know what that is. That’s basically the cost of your labour and your materials is going to lead to the balance of cost of goods sold.

Gavin Smith: Yeah, exactly. And then the next four categories are team costs.

So any team costs, which aren’t the direct related to direct sales. So the rest of your office, those kinds of things. Number three is marketing or business growth type costs. So what are you investing into growing the business? Number four is property costs. So if you have rent or an office location that you’re running in your business, I’ll put that into its own separate category.

And the final one, number five is overheads. And that’s essentially everything that doesn’t fit into one to four above. So the beauty of that overheads account is it’s the one which takes all of those lines on the P& L, which are kind of small and meaningless and just collapses them all into one number and just calls them overheads.

And now. The beauty of looking at your P& L when it only has five expenses on it and they’re grouped into these [00:31:00] categories. So much easier again for your brain to understand what’s going on within your business. I refer to these five categories as the business drivers or even commercial drivers because they’re distinct categories that You as a business owner make different decisions about, you know, am I focusing on my cost of sales?

That’s got a lot to do with how I’m quoting work and delivering work. My team is always about, do we have enough team? Do we have the capacity? Do we need to bring more people in, you know, and your team decisions to help you scale your business up. Marketing. Often a very underutilized investment for many businesses, but when you highlight it on its own, you realize how important that number is and what you’re investing in marketing to actually drive sales in your business, which is why I really want to highlight it on its own.

And I like to actually refer to it as marketing investment a lot of time to get people different frame of mind, thinking about what they’re spending in that category to drive. Well, create leads and generate sales for a business property costs, probably not quite such a big deal in construction based businesses, but [00:32:00] very much is a big deal in a lot of bricks and mortar type businesses.

You know, are we making the most out of our location and then overheads? The beauty of looking at all your overheads is just one number is instead of being blinded by all these small amounts, you know, the telephone bills and whatever, if you just look at it as overheads, typically you realize all of those accounts don’t actually represent a big deal in your business.

And, you know, it might only be 10 percent of where your expenses are going. And when it’s all collapsed down, it’s easier for you to think, okay, I spend 10 K on overheads every month. So we really need to think about it. And if all of a sudden next month, it’s 20 K. Okay. What’s happened in the overheads?

And then you go back and find it. But if it’s just 10 K every month, just leave it at that. Spend your efforts on the numbers that actually make a difference. I cost of it’s old as, as a real key driver in a construction business. So yeah. What do we look at when it comes to P and L first of all, Simplify it down because All of a sudden, when you’re looking at your numbers with any of these five categories, so much easier if you just understand what’s going on and be [00:33:00] able to comprehend your numbers.

From here, a couple of things. If you’re looking at a couple of P& Ls side by side, this is where you start to see the trends of what’s going on within your business. You definitely want to look at ratios here. This is where you take those numbers and divide them by the income so that we understand what our ratios are.

And in particular, cost of goods sold ratio, really significantly important number for a construction business. Because that number basically tells us how well are we doing in terms of the work we’re, we’re producing, you know, are we making good profits on it? Are we actually even delivering work at the cost that we quoted that we were going to deliver the work on?

You know, that’s often a key area in construction businesses to get right. And just having a numbers in a summarized format enables you to see what actually drives your profitability. From here, we can start to get into the next step of how do we use our numbers. And that’s starting to think about, well, if this is how my P& L looks right now, and those are my five key [00:34:00] numbers, and I’m not happy about that, what would I want to see for my business?

And now if we now want to see, you know, maybe a higher income or lower costs of sales, so we’re making better gross profits and ultimately making better profit. When you’re looking at your numbers, summarize this, it becomes a lot easier for you to see what you actually need to focus on. What business strategies you need to pursue to get the results you want to see out of your business.

So

Greg Wilkes: yeah,

Gavin Smith: yeah,

Greg Wilkes: just wanted to come back to the ratios briefly, Gavin, because it’s such an important point. And we just touched on that. I think in construction, one of the things we see all the time is sometimes people gauge their ratios based on huge, Multimillion pound or billion pound companies and now they’ll look and think, Oh, on this project, I’m going to do 10 percent or 15 percent overheads and profit on this.

And what they don’t realize is that actually, if they looked at what their overheads actually are and simplifying it down for you, looking at what the rest is, they might be spending 10 to 15 percent [00:35:00] anyway on their overheads and everything else. So I think without having a clear understanding of what those ratios are and what they should be, you’re flying blind, aren’t you?

You’re not going to make any money.

Gavin Smith: The ratios really help you to, as your business ebbs and flows in its journey of scaling your business. So when you’re scaling a business, it’s not a straight line from where you start to where you want to get to, you know, if you’re a million dollar business and you want to be a 10 million business, it’s not going to be a straight line.

You’re definitely going to be climbing it, but it’s like climbing a mountain with a lot of peaks and valleys on the way up as you sort of reach a new peak and then you dip through a new valley. And there’s a really great reason for that. And Because every time you’re on a peak, you’re pretty much maxing out at something.

You’re maxing out the capacity of your team, maxing out the capacity of your leads, wherever it might be. And then you have to go through those little phases of investment where, okay, we need to bring somebody else into it. And, you know, in a construction business, it might be, okay, we need to bring on a new team that’s going to do the estimating or another supervisor or whatever it is that enables you to [00:36:00] grow to the next peak.

And, but when you bring that team member on, they don’t come on and hit the ground running with full work, you know, everything happening for them. Or it might be investments in marketing activities or new locations or new equipment, new tools, new machinery, whatever it might be. And so there’s a lot of peaks and troughs as we’re climbing a mountain, sorry, scaling a business.

But knowing your numbers well helps you make that journey really easily because you can see what you’re aiming for. You can see what the key numbers are along that way. And so. Coming back to ratios, why they’re so important ratios help you to understand your business and how much you’re spending in these different five categories, regardless of your size.

It enables you to compare your 1, 000, 000 version of yourself to your 10, 000, 000 version of yourself and see, wow, I really got a lot of fat happening in the team cost or in my overheads, or, you know, I did get more efficient in my cost of sales across this journey. It takes away the size of the business aspect and enables you to, Comparing benchmark [00:37:00] at different points in time, just in terms of comparing yourself to bigger businesses and other businesses, it’s great to know your industry averages or your benchmarks or guidelines for different things.

It’s more important to compare yourself to the previous version of yourself. And keep dialing that in as you’re scaling up. So the benchmarks, industry benchmarks give you a good guideline of what you should be aiming for, but don’t necessarily think of them as what you have to be doing because each different business or different niche or different perspective that you offer is going to change that.

You know, if you’re focusing more on a certain niche that involves more, I don’t know, more professionals involved in it, you’re going to have a different team cost than them. Or if you’re a lower priced person, you’re going to have lower cogs compared to someone who’s a higher base business. So, important to know the industry benchmarks, but more important to know your own, your own internal ratios and your own internal benchmarks and compare yourself to those each time and better those.[00:38:00]

Greg Wilkes: That’s a great way of putting it. I love just coming back to what you said about the peaks and troughs to thinking of it like that, because sometimes when we look at a business and we see it. Going through the troughs. We think I’ve done something wrong. I’ve made a mistake or

Gavin Smith: yeah, this

Greg Wilkes: is this has happened.

But actually when you describe it like that, it may not necessarily be that I think it’s great to think actually we probably just hit a peak and now we’ve just been investing in getting ready to hit the next peak. So I think that’s quite comforting to think of it in that way.

Gavin Smith: Yeah, so how I like to use a P& O once I’ve boiled it down to these five numbers.

What I do is I always create a, what I refer to as a profit formula for every business. And what this is, is we need to appreciate that. So, so profit is a really basic formula. It’s income minus expenses equals your profit. So if you want more profit, you’ve got two levers. You can have more income or lower expenses.

Either one of those options is going to create more profit. If we go one layer deeper, we can, we can take those PNL or that summarized [00:39:00] version of your PNL and put it into a formula and understand how your business works. And so the layer deeper than just Income minus expenses. The next layer down is income breaks down into price and volume.

So all of a sudden we’ve got more levers or opportunities here. So if we want more income, well, you need to charge more or we need to get more work happening. Those are the two levers there. And then from the expense side of it, instead of just having expenses, think you have those five categories. That we’ve talked about before, and it’s those five categories.

They’re either represented as a percentage of income. Maybe your cost of sales is like that, or they’re represented as a dollar value. Like your overheads, 10 K per month. Once we’ve got that sort of base level formula for your business. You can then see, okay, well, this is where I am today, but using a table, you can map those numbers out down the page and see where you want to be in the future.

And now you’ve got really tangible numbers that you can look at to see exactly what you need to be hitting within your business to generate the results and profitability you want to see. For example, you know, you want to go from 10 million, sorry, 1 [00:40:00] million to 10 million. Let’s say you’re not going to change the price at all.

So it’s just the volume. We purely have to go from one client to 10 clients or what, you know, 10X our volume. And so when we’re looking at that, going down a page, if I’m going to 10X my volume over time, you can then ask the question, well, what’s going to happen to those five categories of costs? Well, costs of sales should stay exactly the same because I build and quote work exactly the same.

So it’s probably going to just grow at whatever percentage it is that I priced my jobs at. So it’s going to stay the same as a percentage job, even though the dollar value will build down the page. Whereas some of my other costs, like my overheads on my team, those are numbers that will definitely stay the same for a period of time until we hit those capacity points.

Then we need to bring our new team. Stay the same, hit a new capacity point, build on a new team. And that enables you to see, a really mapped out version of how you’re going to scale your business through your numbers. And this then gives you all the confidence. So instead of hitting those periods where you’re like, [00:41:00] why am I busier, but going backwards or, you know, if you’ve got the plan mapped out, you’ve got complete confidence as a business owner.

You know, exactly what’s happening and why it’s happening and you know, what you’re aiming for. And it just makes life so much easier with the decisions you need to make to scale your business.

Greg Wilkes: It just gives you so much more confidence, doesn’t it? To have that projected out like that. And how far would you be projected into the future with that sort of thing, Gavin?

Is it, you know, a year, two years, three years? What do you normally do? So,

Gavin Smith: I personally have, for myself and all my clients, we have a five year forecast for every business. Because it helps us see the big picture, what we’re aiming for. We use my tools of having a profit formula and a profit calculator, which is just the calculator is just the formula mapped out for your business over a page.

So we use that tool to enable us to see what we need to, what is our next right step? The numbers always tell you what is the next right step we need to take right now. So if we want to get one step bigger. What’s the current constraint we’re facing how much [00:42:00] profit will we be making on the other side of solving that constraint?

Therefore we can see how much money is available for us to solve that problem so the the formula calculator enable us to see the decisions we need to make each time through our numbers and You know if we have a five year Future or five year plan for our business. We can see the big picture thing that we’re aiming for But then in terms of, you know, I don’t really look at that five year forecast often, like that’s a once a quarter sort of check in when it comes back to actually reviewing our numbers all the time, we’re always looking at the numbers monthly, you know, balance sheet.

We look at those monthly, but we look at the monthly in the context of 12 months of the year. So that enables us to see how we’re tracking this year, what’s going on over the coming six months as we’re ending towards the end of the financial year. So, yeah, I like to, I like to project the numbers. Big picture, long term, because it gives you those, you know, confidence in terms of the decisions you’re making now in terms of how you’re setting yourself up for a five year play, but then in terms [00:43:00] of regularly looking at the financials, I’m looking at the monthly and thinking about them in the context of this year.

Greg Wilkes: Yeah, love that. That’s fantastic, Gavin. And just to let everyone know on the podcast, I have actually seen Gavin’s spreadsheets and tools that he uses. He was kind enough to share them with me before, and they’re absolutely incredible. The insights that they give you, The forecast in that, that, you know, and the stress that it takes away because you now know, actually, if I just spend maybe this much in marketing, or if I spend this much, this is what it’s going to do to my business, that those, those insights are invaluable, aren’t they?

To, to help you grow.

Gavin Smith: But that also might, that may sound complicated to somebody, but if you remember, I only look at them in the context of five numbers. So we’re not looking at pages and pages of information. We’re looking at five numbers projected out. So it’s, it’s really not complicated for you to understand.

So, and this is why my, my methodology, what I teach people or how I coach people, their [00:44:00] numbers is a three step process. And the first, first step

is simplify. The second step is no. And then the third step is use. So more about simplifying numbers, know your numbers, using numbers, really important. We’re doing that simplifying for the start because it enables you to do the other potentially more complex kind of a more creative type thinking, but it’s just so much easier to do when you’re just dealing with a handful of numbers.

It’s it’s not complicated. Any of us can do it.

Greg Wilkes: I love that. I just want to say something a little bit controversial now, Gavin, because we spoke before about Profit First and I’ve had some Profit First guests on here. Or I had a Profit First guest on here, but I love hearing different viewpoints on how we should do certain things.

So this is completely different to Profit First. And some people are frustrated with Profit First because they find it a little bit complex. Why do you think this is a better system that you’re promoting here over Profit First?

Gavin Smith: Sure. So a couple of, a couple of points. So the, the Profit [00:45:00] First methodology is around, saying, looking at what my income for my business is, saying how much profit I want to make, and then what’s left over is what I need to make my expenses.

So what I don’t like about that is it puts the focus on, I need to dial my expenses in to make more profit. And oftentimes, You’re missing a whole piece of the puzzle here. You’re missing the revenue side of it. And many times to grow and scale a business, it’s actually about building revenue and to build revenue.

We often need to make investments. They’re not expensive. They’re investments in certain areas, team, people, marketing, those kinds of things, which are going to help us scale out our business. So first of all, I don’t necessarily like just to focus on expenses. I really like to. Look at the formula version and really appreciate that both revenue and expenses are my variables to play with to make my profitability.

Then the other part of it, I don’t like is. It’s basically giving business owners a bit of a pass on having to learn their numbers. It’s saying, don’t worry about learning your numbers. Instead, [00:46:00] just put money in these different buckets and you’ll be right. And my challenge with that is we’re not empowering business owners through their numbers.

Numbers are so powerful for you as a business owner to know and understand what’s going on. I appreciate they might seem complicated because So far

you’ve been having conversations with accountants who don’t know how to communicate with regular people and it’s full of jargon and it doesn’t make sense.

But really numbers are quite simple. When, when they’re simplified down, anybody can understand your financial statements, but there’s so much power in knowing how to pick up your financial statements and read what’s going on and know what’s happening. And then what decisions you should be taking accordingly.

Whereas when you’re doing profit first, You’re sort of abdicating any responsibility of having to think about numbers. You’re just putting money into buckets. And often what’s happened is people, they find out, you know, Oh, it’s now time to pay the bills. I don’t have enough money in the expense account.

So now we’ll have to take some money out of the profit account and put it back there and be able to pay my bills. If that person could have been reading their financials right from the start, they would have [00:47:00] seen what’s happening. Okay. Cost of sales are blowing out or prices are going up. I can now be far more reactive.

And so I’m more proactive on changing my results and getting the profitability that I want out of my business, rather than just trying to hope I’m getting it right. And, you know, putting money into buckets. And then many people then still have to go back to the accountant to say, am I putting the right money into these buckets?

Am I getting this right? And the accountant will look at the figures and say, Oh, no, just make adjustments to how much you put in each one of those buckets. And there you go. Again, we now have a business owner who’s reliant on their accountant to understand what’s going on and make decisions. And the problem is when you’re relying on an accountant or an external person to advise you, you’re not talking to that person day to day.

You’re talking to them once a month or once a quarter. Whereas if you’re a business owner, you need to know what’s going on in your business day to day. You’re making decisions day to day about things. Do you accept this price? Do you accept this quote? Do you focus on this area? Do you make that higher?

Unless you want to be ringing your accountant every day. It’s [00:48:00] really important you learn how to read your numbers so that you can actually use your numbers day in day out and the decisions that you’re making. So yeah, I really

like, and my analogy for profit first is I think it’s great for business owners who are first starting out, gives them a bit of a safety net that they can put some money in different buckets and not get caught out with tax bills and stuff.

But If you’re a business owner who really wants to scale your business up, you know, do the one to 10 million journey, you’ve got to learn how to read your numbers. They’re not that hard. And once you’ve been taught how to read them, then you know how to use them. Life becomes so much easier. So it’s like going to the slopes, going to the ski slopes, learning how to ski for the first time.

My analogy is if you’re doing profit first, you’re staying on the, on the bunny slope at the bottom, holding the hands. With the guide the whole time, but if you want to actually ski the mountain, you need to learn how to ski for yourself so that you can go off and, you know, have the peaks and the troughs, but navigate them with confidence because you’ve learned how to ski.

So that’s my

Greg Wilkes: [00:49:00] perspective. Great illustration. Thanks, Kevin. That’s really useful. Everything you’ve told us today has been so valuable. And I think if people just apply just a few little tips here that you’ve mentioned, but I think that three step framework That you talked about was so valuable and going to be really useful for everyone.

If anyone wants to know a little bit more about what you teach, Gavin, and they want to follow you online, what’s the best way they can do that?

Gavin Smith: Yeah. So my business is just the profit analyst. So you can find us at theprofitanalyst. com. I’m at, sorry, I’m on Instagram and Facebook as at the profit analyst.

If anybody wants to look us up on there in terms of what we do, I run a short nine week coaching program that takes people through the framework of how to simplify, know, and use your numbers. I think it’s really quite, simple information that every business owner should be across. And so I’ve created a program, which is exactly for that.

Teaching people how to. actually utilize their numbers so that, you know, they can go forth and be a confident business owner [00:50:00] who’s really empowered by their numbers and not scared of them. And that’s what my program is about.