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Episode 22: Achieve Zero Profit Leakage at CFOs office

Ken Wentworth Ken Wentworth

Fractional CFO

Madhurima Gupta Madhurima Gupta

Senior Product Marketing Manager

HighRadius

Available on

Synopsis:

In this episode, join Ken Wentworth, Fractional CFO as he reveals how CFO offices can achieve zero profit leakage and strengthen business resilience. It is essential for down myths around Artificial Intelligence in CFO’s Office and why finance teams should invest in emerging technology.

Transcript:

Madhurima Gupta:
Welcome to the midmarket CFO circle podcast followed by HighRadius. I’m your host, Madhurima Gupta. We hear you midmarket CFOs, and we have got your back. Every Thursday. We bring you CFO circle podcast with your peers and we discuss the challenges you face and how you can leverage emerging technology to solve it. And to that end today, I have with me, Ken Wentworth more also known as Mr. BI. Hi, Mr. BIS, thank you for joining in today. How you

Ken Wentworth:
I’m great. I’m honored to be here. I’m been looking forward to this conversation for a while.

Madhurima Gupta:
So have I been so Ken today we wanna talk about how CFO offices can achieve zero profit leakage. Zero profit leakage is what I think every CFO strives for today, but it is far from reality. Often either the CFO office lacks control over processes that causes a leakage, or there are certainly unaware of the revenue loss that their business has been facing year on year for a growing mid-market organization. When you generate, let’s say 20 million in revenue, the leak amount would be thousands, but as a business scales, let’s say 200 million. You start to lose somewhere between 1 million to 5 million and winning. And as a CFO of your business is built on reckoning revenue, or if you expect revenue growth, a leakage like this could be a record challenge. So in today’s episode with Mr. Biz, we are gonna discuss how CFO offices can achieve zero profit leakage with cash flow probe. Right? So on that note a little bit about Ken before we get started commonly known as Mr. Biz, he’s a strategic business partner who helps businesses owner run their companies more profitably and efficiently after ascending to the top 3% at a fortune 15 company and breaking six world records, Mr. Biz now uses his experience and expertise to help others develop their skills to become more successful owners. He’s the owner of three bestselling books and, and award meaning post of Mr. Biz radio for his expertise. He has been featured on Forbes, Yahoo, finance, fast company, the New York finance and American express. So Ken, I wanna to understand the consequences that CFOs office face when profit leakage increases over time as company grows. So what would those consequences Be?

Ken Wentworth:
I mean, the consequences, as you mentioned a little bit in the, in the during the introduction of the episode when the company’s small, and I think this is what happens often, that I’ve seen when a company’s small, a lot of this leakage doesn’t get recognized because as you mentioned, it’s not as material, but as the company grows, that problem, that leakage grows and then it becomes a material problem. And it could be, you know, it could be a dire situation and you can end up in a, in a scenario that is really counterintuitive to a lot of non-business people in that you may be, be continuing to grow sales, but your profits are decreasing. And you look at that and you say, gosh, this doesn’t make any sense, right. We’re bringing in more money in the front door in sales and revenue, but why are we not making more? Is it, do we have an expense problem? And sometimes it’s that, but oftentimes leakage is the problem.

Madhurima Gupta:
And Ken, what do you think, or in your experience, what are certain signs that can help CFOs watch for these leakages? You know, that are often overload.

Ken Wentworth:
Yeah. I mean, really it’s gonna sound like a numbers nerd answer, which I am a self profess numbers nerd, I will say, but is really keeping an eye on numbers and looking at trends. If you had that scenario that I mentioned where your revenue’s increasing, but your net income is decreasing or staying flat, you probably have some leakage somewhere. In fact, I often call an element of this, the silent business killer, because as we both had mentioned, as the company grows, let’s say, for example, you have a product or service that you offer that is actually at best break even, but sometimes actually is a, is you’re actually losing money for every one of those products or services that you provide or sell. And that becomes a silent business killer because of course, you look at that and you say, well, I wouldn’t purposely price something, so I would lose money. Well, that’s the point of it. That’s where the leakage comes in is you don’t realize that you’re charging, you know, $10 for this widget that you’re selling. And it actually is costing. You let’s say $12. So the more you sell as you, as you mention, as you can imagine, those $10, $10, $10, $10, but you’re, it’s costing you 12. So again, your revenue is going up and here’s the bad part about it because it’s underpriced in this scenario, this leakage scenario, you’re probably selling a lot of it because you’re probably priced under market for that product or service. And so of course, any potential customer or client looks at it and says, oh my gosh, this is very inexpensive compared to competitors. And they buy more and more and more, and it just becomes like quicksand. You’re running in quicksand, you’re selling more, but you’re actually losing money because you haven’t accurately priced that product or service.

Madhurima Gupta:
That’s a very good analogy, comparing it with the quicksand. You know, Ken talking about matrixes that you mentioned, what kind of impact will a profit leakage have on cash flow DSO? And let’s say DDO.

Ken Wentworth:
I mean, again, it can have a massive negative impact on all three of those, depending on the scale of it, right? Again, as you mentioned, as the business gets bigger and bigger, it becomes a bigger, bigger problem. And it just, it continues to grow. It’s this nasty monster in the corner that you keep feeding by not having oftentimes it’s man, too many manual processes. Human error. I just had this at one of my clients. About two months ago, we discovered that someone had, as we got inventory in, they had input it in the, the system. And usually we scan things in, well, this particular thing could not be scanned. I don’t know if the label for it was, was had been damaged. They couldn’t scan it in, so automate it right. And that’s key. Well, in this case, they had to manually input it. Well, they input the price incorrectly in the system. So then the, you know, the ad on the profit margin gets added to that incorrect price. It’s still underpriced. Well, one of our customers, our normal customers calls in to place an order for that product. And, you know, you would think they would be honest and say, geez, that sounds really, really low compared to what I usually, but they didn’t. And they ordered a whole bunch of ’em of course, cause they said, gosh, if I can get it at that price, let me buy a whole bunch of them. So we, we took a large write off on that because it wasn’t discovered until after the fact we sold it when, when, when the inventory was going out and we were matching it up, it’s like, holy crap, we really made a bit huge error here. So a lot of times what I find is the, the culprits for leakage are either too many manual processes. You know, which leads to human error, cetera. So you need to have automation at every step of the way you need to measure things. You need to have the metrics on all sorts of different things, profitability by customer revenue, by product margins by product and service, et cetera. And then the other thing is, you know, as I alluded to the pricing is unfortunately, almost every company that I’ve ever worked with has at least one product or service that is the silent business killer. That is something that is actually priced unprofitably. So literally every one of those widgets, every one of those that service that you sell, you’re actually losing money and you don’t even realize it until again, oftentimes the scale gets larger and larger and you start to really peel back the onion to see what’s going on here. It doesn’t make any sense. And then you find it, you know, like, oh my gosh, this has been, you know, hurting us. I had a client once that priced a very large project and it was with a large company. So he priced it very aggressively because he wanted to get his foot in the door with that company. He did the job and, and in the midst of me starting to work with them, they had already started bid the job, won the, won, the proposal, started the job we’ll get to the end of that year. Wow. And the job was a $220,000 job. It ended up costing us $260,000. So he was enamored. It it’s goes, leads to one of my other funny sayings is revenue is vanity. Profit is sanity. Don’t get too enamored with your top line. Don’t worry just about sales. Of course, that’s important. You have to, you know, you have to have sales to have a business, right. But you have to make sure that the profitable sales, that $220,000 job, but it pumped up the revenue line by $220,000 looks fantastic. But at the end of the day, we lost $40,000 for, for taking on that project. So having a, a pricing model and making it as easy as possible for your sales people to price jobs and make sure that they’re priced in, in the pricing model, your, your margins that you wanna, you wanna achieve are, are in there. And then the other thing that I found that leads to leakage oftentimes is when you give sales people a little bit too much leeway on discounts, they can offer and sales people. If they don’t understand the profitability of, of each product or service, you know, they want to get, they wanna get the business, they want sales. And so they may give a 20% discount, let’s say, on a product that you only have a margin of 15% on. So now all of a sudden you’re losing 5% on that product. Every one that you sell in that scenario. So very, very important to really keep an eye on things and automate as much as possible.

Madhurima Gupta:
So when we talk, when you talk automation, Mr. Biz, in your experience, what kind of automation has helped you curve profitably leakage?

Ken Wentworth:
The biggest things I can mention are, again, with inventory control, I try to take as much of the manual piece of it out of it, as you can meaning that you scanning barcodes, for example, as opposed to someone saying, oh, we got 20 widgets in, let me put it in a spreadsheet because they might put in have a MIS key and they put 200 instead of 20, or they put two instead of 20 or whatever. So using a scanning system for inventory is very important. Measuring and monitoring anything you can in regards to any sales revenue, etc and looking for trends. And depending on the business is difficult to give a very, really specific example because every business of course is different and offers different things. But just monitoring that running reports at a minimum on a monthly basis to ensure you don’t have that problem, having something that can run through in the scenario that I mentioned, what we did was we, when we had the inventory problem that had been input incorrectly in the system the cost of it is now we run a process at the end of every night. There’s an there’s AI that BA basically goes through and matches up the prior price of that inventory item to the current price. And if it’s off by more than, you know, when we put it, set it at 3%, if it’s different, by more than 3% up or down, we get a report in the morning that says, Hey, these are the items that got flagged. So we can quickly find those things, prevent that leakage and that we had. But yeah, the automation piece, making pricing model again, making it as easy as possible for your sales people. So they don’t, they’re not, you know, trying just guessing in the dark on pricing and they’re not giving away too big of discounts unknowingly, right. You know, leaking away revenue and profit in that scenario. So really the overall message I could say is just automate every possible of the process, but especially the biggest levers that will drive that revenue and or profitability up or down.

Madhurima Gupta:
Since you’re talking about inventory maintenance. I also want to talk a little bit about accounts receivable here. So when your inventory is in place with inflation coming into picture, and eventually you make a sale, and then your accounts receivable are still, you let’s say for another 60 days, because that’s your terms and conditions of payments now in a scenario like this with inflation coming in and maybe not so stringent credit policies, what would you say CFOs should do to avoid any profit leakage?

Ken Wentworth:
Yeah. Accounts receivable, especially during a recession and, or, you know, inflationary period. I mean, it’s important all the time and it should always, you should have someone dedicated on your team that is working accounts receivable every single day. What I’ve found is that’s most important with accounts receivable is you have to be diligent about it, whether you’re in good times or economic downturn, because what I’ve found is what I like to say is the most important thing is to make sure that for your customers, that you get to the top of what I call their PayPal, not PAL, PILE right. Their pile. And what I mean by that is, especially as you mentioned, in, in a recession or inflationary period, when things start to get tight for your customers, they may get to the end of the year, or I’m sorry, at end of the month. And they’re paying bills for example. And they say, I have $5,000 of bills to pay. I only have $3,000. So let me go through and prioritize which invoices are getting paid. The invoices that don’t have a late penalty, the companies that are not on top of their accounts receivable, they’re not diligent. They’re not gonna pay those. They’re gonna go to the bottom of the PayPal, the ones that might have a penalty, or I know that if I don’t pay ABC company, Susie’s gonna call me on Tuesday the, the first day that it’s late, I’m gonna a phone call from Susie, and it’s gonna be awkward. I wanna avoid that. So let’s pay that one. So you wanna make sure that you’re being diligent about that, and you have someone, I mean, honestly, if you stay on top of it, can be, you know you know, a minimal tasks in the morning, do it every morning. Look at the things that have tricked on and are, are over the limit or whatever. And again, one of the things I use in my own businesses is I automate ’em all. So the invoices I sent out, you know, it’ll automatically, if it’s not been paid and it’s within two days of the due date, they’ll get another email. Let’s say, Hey, by the way, this hasn’t been paid yet. And again, automate the process, make, take as much manual out of as possible, but really the net message whether manual or automated is you gotta make, you have to show your customers that you’re diligent about it. And I don’t mean you’re being mean to them or you’re being aggressive. I just mean they know that you’re on top of it. They know that, you know, when they’re late because a lot of people don’t do that. And again, and that example I gave with the PayPal like, oh, I’m, I’m not gonna pay the, this one because I, I know these guys won’t, they won’t bother me. I don’t have to have that awkward conversation that I haven’t paid an invoice. So I think that’s a very critical piece of accounts receivable management, especially in inflationary situation and recession,

Madhurima Gupta:
Mr. Biz, as for a recent study, 49% of CFOs founded difficult to execute data that is not, not only timely, but also accurate for driving Quicken informed decisions. Do you think inaccurate data is one of the root causes of profit leakage? Is that something you experienced personally?

Ken Wentworth:
Absolutely. A hundred percent. And I would venture to guess that, you know, it’s probably at 75% of the battle is inaccurate data. And again, that example I gave earlier when the inventory came in and was entered incorrectly, you know, now again, we have that process to where we look and look for changes and it’s an automated process to make sure we catch any of those, but the inaccurate data. You know, I say, especially with the CFO, I have to make sure that the bookkeeper controller, etc in that company is accurate. And the system is accurate because you have inaccurate data. You’re gonna make poor decisions because you’re making decisions based on data. That’s not, you know, that’s not accurate. So, you know, you know, you have a hundred different examples of where that could really cause significant problems, but yeah, inaccurate data. And again, it goes back to what we were talking about earlier. Oftentimes that inaccurate data is because it’s a manual process. There are too many businesses too often, especially as they’re growing that are tracking things in an Excel spreadsheet, nothing wrong with Excel. I love Excel. Right. but that’s where problems can happen, right? Again, you have miskeyed things things don’t get entered at all, or they get double input, you know, things like that, that manual process. So systematizing and automating as much as you can prevents a lot of the inaccurate data that I think that a lot of companies and CFOs deal with. So really, you know, a lot of times I’ll find when I suggest to a company or recommend to a company that they need to, you know, buy new software package to automate something. And, you know, especially, especially in inflationary time recession, when, when money might be a little tighter, it’s like, gosh, we don’t wanna make that investment. But then, you know, you show them the benefit that that has. So yeah, this software may cost us $5,000 upfront, but if it prevents 10% of the errors that we’ve had over the last two years, it’ll save us $50,000. So it’ll pay for itself tenfold over. And so I think people need to think about it more like that, of an opportunity to prevent some of this leakage, because unless you companies already have a lot of this automated and they have very little manual have leakage, unfortunately, you know, I’m sure you’ve seen. I think you may even mentioned logistic show that typically about the normal company between one in 5% of annual revenue is leakage and that’s across all companies. And, you know, as you had mentioned, considering the scale, if you’re on a 10 million business and you’re losing 5%, I mean, think of the impact that has on your margin. You know, if you’re in a, a really competitive industry that you have razor thin margins, and then you’re already on top of that have leakage of 5%, which is completely preventable. Gosh, it’s a huge competitive disadvantage for you because now you have to price differently and price higher, and you may end up losing business, losing sales, et cetera. So the downstream impacts of having that inaccurate data are just absolutely critical. And as the company scales could end up being the end of the company

Madhurima Gupta:
I can’t agree more. Mr. Biz. Yeah. Other thing that I wanna talk about since you already mentioned how important it’s to get the data, right. Is to understand what role can modern day analytics play to fulfill this expectation that ideally should be met in a CFO’s office.

Ken Wentworth:
Yeah. Again, automation, AI is just amazing now a days it’s getting better and better every single day. I will also mention though that depending on different people’s roles in the company, it is possible, especially with automation and all the wonderful tools that are available now that you could inundate someone with too much information. And what I find what happens with that is if you give people, you know, four pages of KPIs to look at, they’re not gonna focus on ’em enough. And it’s gonna be too much information. So really skinnying down. What are the most important analytics to track for that particular person in their area of the company. You know, as a CFO, again, as I mentioned, I’m a numbers nerd. I love to see numbers and all kind of numbers. So but you know, if you, for example and with one of my clients, we have our sales, our executive sales director, he gets a completely different set of KPIs of course, than I do, but it’s a subset of the ones that I have. And it’s the key things that I need for him to make sure that he’s monitoring and he can talk to his team directly on. And we have different things for the production side, the production manager of the production, the warehouse, he gets a different set of KPIs. Of course, I get all of them again, but they get a subset of what, what I see, and then we can have that conversation back and forth, but the analytics are super important and it’s getting, so it’s getting much less expensive and it’s getting much better with AI. So it, there’s a powerful opportunities out there with all sorts of different capabilities and, and software packages, etc, to be able to take advantage of that, have accurate data, use the analytics, make it super simple and completely automate the process.

Madhurima Gupta:
One of the reasons why people or CFO offices often refrain from using AI based systems is the biases that it may have based on the available data sets. What do you think about it? And if that exists, how do you solve it?

Ken Wentworth:
Yeah, so that’s a great question because that I have seen that as well. People’s being hesitant. And so what I, in one company, when we brought on an AI tool, what I did was at the same thing, the owner was very hesitant. He’s very old school had done things manually. And I was trying to show him the benefits of it. So what we did was we ran, we ran parallel with some AI and did a manual, some manual calculations, you know, based on the AI to show him what it does. And then every month we review what, you know, what it spits out. And sometimes we have to tweak it, do manual tweaks to it, to say, you know what? We wanna make sure we wait this a little bit differently because it’s spitting out some things that may not may skew the picture for us. So really just looking at that on a regular basis, whether that be monthly, quarterly, depending on how frequent the statistic or the analytic you’re looking at. But you know, kind of, especially in the beginning monitoring, because it may take a little bit to kind of refine what AI is pulling for you to make sure it’s what you need and against not skewing the picture one way up or down too positively or two negatively. But, you know, in the beginning, like I said, we just ran parallel the, the old manual process we had with the AI and showing that, you know, of course, I’m sure you could imagine what we saw was the AI side was much better, was much more accurate, showed us more deeper analytics than the manual side. The manual side was terribly laborious to complete as well. And the AI was almost a click of a mouse, right. It spits out information. Whereas we had someone who was manually going through and doing all that stuff. So yeah, I think looking at it, at least, if you have to prove that is almost like a proof of concept to kind of run through what the old process was and compare it to what the AI, the new tool the AI is spitting out just to give someone some peace of mind, like, Hey, this is accurate. It’s not pulling inaccurate things. It’s not some crazy robot off. Someone are trying to, you know, Dom your business.

Madhurima Gupta:
Great. Thank you for sharing you know, your insights on on, you know, not just how companies can ensure a zero profit, but also discussing nuances that are open the preconceptions that keep CFO offices from accepting new emerging technology. And before we wrap up this session there’ll be already, we discuss this. If I have to ask three top tips from you for achieving zero profit leakage at CFO office, what would those three tips be?

Ken Wentworth:
Ooh, three tips, I guess, honestly it kind of would play into, so I have, I, I call ’em my three pillars of financial success. So when I begin working with a business, regardless of the business, regardless of the industry, I start with three things that I consider to be the foundation of the financial health of the company. And those three things are cash flow. And looking at how we can improve that. Oftentimes you’ll see leakage from cash flow. Some of it may be what we talked about a little bit earlier with accounts receivable management. Is it being done correctly? What is the DSO is it way too high? How do we refine that? How do we pull that back and shrink that down? That’s, that’s a form of leakage that can come out. The second one, it budgeting is so critical and can help with leakage in that you create a budget and now you’re monitoring against it every single month. And it can show you data that, that it, you know, you expected this to be at a hundred thousand and it’s at 90. Is that because there were less sales? Is that because we had more sales, but we have leakage, right? So that’ll help identify some of that as, as well. Budgeting is so important. I think budgeting gets such a bad wrap especially from non-financial people that they think budgeting that they, I think they think of it akin to, like, when you say the word diet to someone, right. Someone says, oh my gosh, I have to go on a diet. I have to eat salads and drink water. Well, it’s not always the case. Right. you’re talking about being healthy. It’s a plan just like budgeting is your financial plan. So that’s the second one. And the third one is pricing. You know, really important to have that pricing model in place for the sales people take as much of the, again, the manual process out of it as possible. Look for those silent business killer products or services you have, which are again, can be massive purveyors of leakage. So I, those three things, I mean, those would be the three tips I would say is really take a deep dive into your cash flow. Again, looking at a lot of those things, with the accounts receivable management, et cetera shrinking that payable receivable cycle, as much as you can. There’s a bunch of different ways to do that. Of course, budgeting again, monitoring against it every single month will help show shine a light on audities and then pricing and looking at pricing on a regular basis with every product you have and making sure if you, as we’ve had this inflationary period, you know, I’ve been revisiting that with all my clients for price increases because you know, our inputing costs, right, are, are going up. And so our, we have to make sure we’re passing it at least a portion of that on to our customers. Otherwise we end up having silent business killers because our, our incoming costs are going up and we’re not, you know, passing it along. And so we end up being unprofitable potentially. So those are the three things I would say is, you know, really taking a deep dive into those three will be go a long way and identifying and allow you to fix leakage.

Madhurima Gupta:
Absolutely. Thank you so much for sharing those insights. I think the listeners are gonna benefit a lot from it. So thank you for your time once again, and I hope you enjoy talking to me as much as I did. And our listeners out there. Thank you for joining in and please stay tuned. We’ll be back with more.

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