The most important thing in business is to understand the money and the metrics from the very beginning because they matter most. While considered crucial to the success of any business, many people tend to mismanage their money and overlook their KPIs. And they wonder why business success has been quite elusive!
In this episode, REI Radio’s Chris Arnold talks to Larry White, his Chief Financial Officer. They not only tackle the basics of money and metrics and real estate fundamentals, but they also cover the importance of radio as a marketing channel.
Want to build a solid foundation for your wholesaling business from the get-go? Tune in! This is one episode you can’t afford to miss.
Money and Metrics – The Fundamentals of Building a Successful Real Estate Business
I got a little special treat for you. We are going to go down the path of money and metrics. This is what you are going to get. If you have been in the business for 1 or 2 years, you are newer to the game and trying to understand the ins and outs of what it means to run a business. I’ve got a guest who will come in and talk about a few things that he wants you to know about money and metrics in the 1 or 2 years of you running your business with some fundamentals.
Let me tell you this, the two things I see that hurt businesses are the fact that money is mismanaged and metrics or KPIs are overlooked. I see this all the time. For a lot of people, they want to kick this can down the road and go, “I’ll get to the KPIs a couple of years down the road when I have more time, where I start to understand the money side as I start to make it.”
What we want to challenge you on is that it is backward. Most things in your business are to understand the money and the metrics from the very beginning because they matter most. I have Larry White with us. I love this guy. He’s been a mentor to me and a confidant. He also is a Fractional Chief Financial Officer in my business. He consults my company. We’ll get into a little bit of what that means. Larry White, what’s up? Welcome to the show. I’m glad to have you.
Chris, thanks for having me. I appreciate it.
Before we dive into a few things they need to know, people hear the word Chief Financial Officer and might not understand what that means. Can you help people understand the difference between a CPA/bookkeeper, you might call those people controllers and someone who is a CFO or Chief Financial Officer? What is the difference between those two?
A CPA, controller or bookkeeper are the folks that put the numbers together for you. If you were to take a look at a number line and you look at a continuum, you would say, “What do they do?” They look at everything from today going into the past. They look at everything historically. They produce the information that needs to be accurate and timely. As I said, they look at everything from the past historical going to this date. What a CFO does is they take that information, they utilize it to forecast and predict what may happen going forward based upon what happened in the past. Also, they’ll take a look at profitability and things like that and how you take that and utilize it as a weapon going forward to make the most money you can.
You would say that the skillset between a CPA, bookkeeper and a CFO is entirely different. Those are two different skillsets.
It’s very different. I’ve come across quite a few people that would say to me, “Why would I want to engage a CFO when I already have a bookkeeper or controller?” A lot of those folks were business owners like the folks on the show. Let’s say I have that person. Why would I need somebody like you? The difference is if you try to ask them for strategy, “How do I do what I do? How do I take the business forward? How do I continue to make more money?” You’re not going to get that from a CPA. You give them information so they can prepare a tax return. The bookkeeper prepares the numbers for the CPA, who then prepares the tax return, but they’re not going to tell you what to do with your numbers, what they mean, and how to interpret them, so I make more money and more cashflow.
Years back, this was my thought process. I don’t have a CFO. I don’t know what one does, but I know that I need one. That’s all that I understood. Once I met Larry, we engaged and he started helping me out, then I understood the value of a CFO. That’s where I started. I was like, “I know I need one. I’m not sure why because I know that’s a bigger boy level to play there.” Let’s get to the meat. We’re going to hit on a few things about money and metrics that people newer to real estate, investors trying to build businesses, and what they need to know.
Let’s go with this first one. Cash is oxygen. I think there are a lot of questions around how much cash should I have in reserves? I need to spend the money on having to grow my business. I close the deal. I want to reinvest in my company to do bigger marketing, to make the snowball. At the same time, I know that I can’t spend all of it. I’m confused. I don’t know what cash reserves should look like. Help us understand why this is so important when it comes to cash being oxygen, then practically, how much should people be keeping in reserves?
What I have found and given what I do for a living, I’m pretty conservative by nature given what happened in 2020 because this has been the greatest anomaly in our lives. We’ve seen a lot of businesses struggle and we’ve seen a lot of businesses do well. What I have found is that those that have done well planned for the rainy day. They plan and they understand what we go through cyclically in business. It seems like every 8 to 10 years, there’s a downturn. There’s always something that we get concerned about that could drain all of our cash reserves.
I’m always of the opinion that we should always have 3 to 6 months’ worth of cash available. If we never did another transaction or we didn’t have any revenue in the door, we have enough to pay our bills like we would at home to cover six months’ worth of expenses even if we had no income coming in the door. The reason for that and what I find is when you don’t have those cash reserves, people tend to panic. They make bad decisions on pivoting the business, going in a different direction, trying to figure out strategically how do I navigate this difficult road?
I find that folks that have that cushion, that 3 to 6 months’ worth of cash, have the ability to spend the time to evolve other revenue streams or other directions to go in without making bad decisions because they know they can pay their bills. They wake up in the morning and they’re comfortable. They’re not happy with the situation, but they can make better decisions knowing that they’re not going to go out of business if something trips them up. They can make a change in terms of pivoting their business to make sure they stay in business for the long haul.
Here’s a question. I’m new to real estate, so I’m like, “3 to 6 months of expenses. What does that include? Is that for my salary or if I have another payroll in the company? Does that include marketing? Does that include software? Is this every expense I have and I take that number and I multiply that by 3 or 6? How do I mathematically come up with 3 to 6 months of expenses?”
The four different buckets of expenses in the real estate business: commissions, marketing, payroll, and operating expenses.
The way I look at the real estate business is there are four different buckets of expenses. You’ve got the commissions that you pay to your real estate folks. That’s more commission-based. If you’re not making a sale, you do not have to pay that out, so that goes out. Automatically, you’re going to be saving. If you didn’t have a transaction, you wouldn’t have to be paying those commissions because you didn’t have a specific transaction, so you wouldn’t have to pay those folks. You’re looking at marketing, payroll and other operating expenses, which would be everything else.
When you say 3 to 6 months expenses, it’s enough to cover your marketing, payroll, and everything that you’re spending money on the operational side, and you multiply by that by 3 or 6. Why 3 months versus 6 months? That’s a span there and I’m going, “Should I be at 3, 4 or 5 months?” How does someone dictate whether they should be between 3 to 6 months? How do I decide that for myself?
That’s a judgment decision, to be honest with you. I know myself and the more cash I have in hand to make a better decision, I can sleep at night and know that I can pay my bills. I like to have a lot of push in personally. That’s more of a personal decision. Others are going to have a completely different thought process. They’re like, “I’m not worried about it. I can bring in money in three months.” They have that ability and don’t get concerned about that stuff. I always worry about, “Can I sleep at night?” That’s a personal decision. I would say a minimum of three months. Anything over that, I think you have the ability to make decisions to pivot the business, to continue to stay in business for the long haul.
What we’re saying is it depends on how risk-averse you are. I like to say it depends on how well you’re sleeping at night. If you got three months’ reserve and you’re still not sleeping well, then maybe you need to kick it up to 4, 5 or 6. That’s what I think is the best way to dictate how well you’re sleeping at night. Let’s move on to the second piece, the percentages matter. We’ve already opened this up, which is great.
I love this because a lot of new people I know when I was newer struggled with this. If you look at your business based on those four categories, this is a very simple way to create silos of expenses in your company. It’s the commissions that you pay out to your acquisition managers if you have any. You have your marketing silo, payroll silo, and you are in that payroll, so that should be a part of that as well, and then, of course, you have your operation silo. Here’s the question that I think is important.
We define revenue as the total amount of profit that you’re bringing in every month. We’ll utilize some simple numbers. Let’s say that I bring in $10,000 of revenue each month. What percentage should that $10,000 make up of those four buckets, and what percentage should my profit margin be? I don’t think most people know what a baseline is for this. Let’s start to break this down.
What I like to do is I always like to work from the bottom up because that’s what I think is important. Most people in real estate say, “How much money can I make and how many transactions and what’s my revenue?” It doesn’t matter if you’re not putting any excess cashflow or profit on your bottom line. I like to look at everything in percentages and say, “How much profit on the transactions or the revenue that I’m making will flow through to my bottom line?”
My rule of thumb is I always like to see 25% in profit, especially in this business, based on my experience, and then I work backward and I say, “How much then should I be spending on the payroll? How much should I be spending on marketing? How much should I be spending on operating expenses and all others, and how much should I be spending on commission?”
For purposes of the folks on the show, what I always like to talk about is I get 25%. Out of that 100% of the total picture, what we do is we say we’re going to probably spend about 15% in commissions, spend about 20% of my total revenue on payroll, 25% on marketing and 15% on everything else on your operating expenses, your software, all that stuff. If you were to do the math and say, “My revenue was 100%,” deduct to all of those things and you should come down to about 25% profit.
Let’s break this down. First of all, if you’re a solopreneur and you don’t have the overhead, this isn’t going to be in the sense of you being in 25%. You’re going to be weighing all of that. You have no expenses and no acquisition managers and that’s fine. Know that you’re running a very mean-lean healthy battle. What we’re going to say is, you might want to stay there.
There is nothing wrong with looking at what you’re doing and going, “I want to stay nimble. I don’t care about building a large team. I want to stay small, lean and mean. I’m going to run up 50% plus profit margin.” It’s fine. Others are going, “I want to build this thing into a business. If I build it into a business, get out of me having to run all of the day-to-day and be responsible for me, then I’m going to have to scale, and that’s going to cost money.”
Larry’s percentages are based on the fact that you’re looking at building a team structure, and this would be roughly a healthy model for a team structure. That also says this is basic guidance. You might have shifts and percentages based on how you run your operation, your payroll or different things like this, but this lease gives you a baseline to look at. Let’s break this down a little bit more. I want to repeat it really quickly. They got roughly 25% profit margin, 15% for acquisition to the manager, roughly 15% for operating costs, all those types of things, about 20% for payroll and 25% for margin. Readers, you got this. What do you want to elaborate on this with these percentages here?
I guess the most important thing is when you talked about scaling. If you talked about what’s important here, this would give you the ability to scale your business. Some folks may be sole practitioners and they’re saying, “I’m bringing in 75% of my revenue. I’m able to keep that.” What you’re limited from is you’re going to be limited for growth. That’s the thing. You’ve got to spend money to make money as we all know.
If you can bring in a team, maybe you can take that from $250,000 or $500,000 a year that you’re bringing in to $10 million a year. If you’re bringing in 25%, I would much rather have 25% of $10 million as opposed to 75% of $500,000, where you’re limited by your own ability to scale because you can’t scale yourself. That’s what I think is important. Every investment that you make, whether that be in people or marketing, the purpose of that is to increase your top line and also increase the amount of cashflow that you’re getting out of the business that you don’t have to work for.
Revenue doesn’t matter if you’re not putting any type of excess cash flow or profit on your bottom line.
The big thing we want you to understand is to begin to look at your business in percentages. If you’re looking to grow and you’re looking to scale, you’ll make the most sense by taking the 4 or 5 areas that we talked about and if you include net profit in that, and understand them as silos and percentages of revenue. If you look at your metrics and your money that way, your business will start to make sense to you a lot faster. Let’s go on to this last thing. KPIs. I drill this home all the time. I don’t think there’s anyone reading that hadn’t heard of track your numbers and know them.
I want to know from a CFO’s perspective why you think this is important. If I’m reading and I’m going, “I know it’s important, but you’re going to have to deliver to me a series of why for me to open this up because it drains me. It is a mountain to think about tackling, but I know that I need to do it.” Larry, let’s talk about the numbers, the KPIs. What are the reasons why I need KPIs and tracking?
The numbers are a weapon. They’re a roadmap and important. What we always say is it’s an easy anomaly, but failing to plan is planning to fail. It’s very simple. If you want to go from New York to Boston or New York to Philadelphia, you need to have a roadmap. You can’t get in the car and put your finger in the air and say, “I’m going to get there from here.” That’s the benefit of having numbers being your weapon.
You need to have a roadmap and a plan. Where do I want to be in six months? Where do I want to be in a year? Where do I want to be in a year and a half? How quickly do I want to grow my business? All these are is their checklists. They’re roadmaps along the way that tell you that I’m getting this business to where I want it to be so I can have the lifestyle that I ultimately want. If you don’t do that and put goals and a roadmap in place, you don’t know what you’re shooting for and you don’t know if you’re going to get there from here.
I like that phrase that the numbers are a weapon. It’s this idea of taking the math that exists in your company and shaping that into a sword or a machete chopping through the business jungle. That’s the way you’ve taught me you understand numbers. Numbers are a weapon if you understand them, and to have that weapon, it’s such a powerful tool to move forward with what you want to accomplish in your life.
The next one on why KPIs are important is forecast. I know when I came to you, you started talking about forecasting and I’m like, “I can forecast in real estate?” I struggle with this and we wrestled through this, and you’re like, “Chris, you’ve got to learn to be able to forecast what’s going to potentially happen 3 to 6 months.” You take us out an entire year. Let’s talk about the value of forecasting if you have your KPIs and your metrics.
What all this comes back to is the ability to plan and give you a guideline of where you expect to be. We all know that things come up, anomalies come up, things change in the market. It is what it is but you have to put a stake in the ground and you’ve got to give yourself the opportunity to say, “This is where I’m going to be.” If you don’t reach those goals, then what it does is it gives you enough time to say, “If I need to pull back on expenses or I want to invest more in the business because it’s doing well, what do I need to do? How much cash do I need to put into the business to achieve those goals from a forecasting perspective?”
It’s all about planning and also cashflow preservation, which is important. Let’s say you had planned at the beginning of the year that I’m going to do a $1 million top line and based on our math, we’re going to do $250,000 in profit. What happens if we get halfway through the year? We say, “Here are our results for the first part of the year. We expect that same trend to occur the second part of the year,” then it gives you an opportunity to maybe understand where you might possibly need to pull back on expenses to maintain the cashflow that you currently had planned for. It’s all about planning, creating the roadmap and allowing yourself to maintain cashflow even if you have a downturn.
If somebody came to you in a downturn and said, “Larry, I need help,” and you went in and realized there was no tracking of KPIs, metrics and so forth, how effective could you be in even helping someone that didn’t have that data? How much trouble would they be in the downturn?
You would want to get in and at least take a look at something historical, and it gives you an idea of where we think we’re going to be going forward. We set up a structure, but the whole point of this thing is a lot of people are afraid to talk to a finance person. People get embarrassed.
You’re not going to grow your business unless you go open kimono, or you’ve got to let somebody into the financial side and take a look at what’s going on. You have to drop your ego.
The whole point of this thing is that any finance person makes you feel bad about not planning and not doing what you should do. That doesn’t work for me. My whole point is, “I’m in here to help. I’m in here to take what happened in the past to not point fingers and figure out how we move the ball forward and get it right going forward.” What happened in the past is what it is.
I don’t expect people to know what I know, but my job is to make it as simple as possible so that somebody can understand and move their business forward on the back of a napkin. If I can do that and help people who don’t understand finance, then I’m doing my job. I’m not here to make people feel bad because they haven’t planned. We put a stake in the ground and we figure out based upon what the business can do and get somebody doing what they love to do and what they’re good at. I take the rest of it off their hands so they can do what they need to do and guide them in a certain direction.
If someone wants to reach out to you, they got some questions and they’re like, “I like this guy,” you want to toot your own horn, but I’m going to push you to a little bit. For people that don’t know your background, what’s your pedigree? Where did you come from?
The rule of thumb is to see 25% in profit.
I tell everyone I’m a recovering CPA because I’m an entrepreneur by nature. I happen to know the finance and accounting stuff, but I’ve worked for startups all the way up to $400 million companies. I was the CFO of Elizabeth Arden Red Door Spa. We had locations all over the country. I have also worked for the Head of GoDaddy, Bob Parsons. I was his personal CFO. He’s worth about $3 billion. I headed up to the finance side in his family office. I also started my own company.
I made flame-resistant clothing for oil and gas and public utilities. I had to set up production lines in Latin America, so I learned how to speak Spanish. I had the opportunity to raise capital and get a company sold, and I did pretty well on the sales side. I’ve seen the gamut. I’ve worked in real estate and a bunch of different industries. For me, it’s a math problem, but the thing that I love more than anything is I love helping people achieve their dreams. If I can be a help and a conduit to that, that’s where I live and breathe because I love to see people do well. That’s what is fun for me and why I do what I do.
Larry, if someone wants to reach out and learn a little bit more about you, where do they find you?
I have a website, which people can take a look at. It’s LKWConsulting.com, or you can email me directly at Larry.White@LKWConsulting.com. I’ll respond and say hello. If I can be of help, I’d be glad to be of help.
I’m glad that you and I crossed paths years ago. You and I are always working on projects, which is exciting. I’m glad to have you in my corner as well. Larry, I was going to ask you this question. You know the ins and outs of my business and we’ve been utilizing radio as a marketing channel. You’re in there looking at what each thing we do does. You always say $3 to $4 is a healthy amount. What are your thoughts as a CFO understanding all of the marketing channels that we do and the usage of radio and the value of that as a marketing channel for us as a company?
I like to think that every expenditure in the business should yield a return. I’m not spending only to put butts in seats, as I like to say it, but they should be helping yield a return. Meaning they should be either contributing to revenue or helping to reduce expenses. What I mean by that is if you’re spending on marketing, my rule of thumb is you should be able to evaluate each of the specific marketing channels. That may be direct mail, radio, TV and web. It may be a number of different things. You need to take a look at those types of things separately and understand what each of those channels is contributing to your top-line revenue and your profitability. If they’re not yielding at least 3X to 4X on your spend, you’re probably spending too much on it and need to go in another direction.
You taught me that early, and that’s why for us, radio has passed through this test working with Larry. Out of everything we’ve done, it’s consistently been somewhere around $3 to $4 return depending on the year. In previous years, we go back and say we were pretty much around $3.50. If you don’t know, Larry is part of that decision-making. He’s kept the radio on because he believes a $3 to $4 return is healthy for marketing channels. If not, he would tell us to scratch it and get rid of it.
As always, if you’re interested in learning more about radio and utilizing that as a marketing channel in your business, check this out. Go to WholesalingInc.com/REIRadio and book a call. See if your market is open. We sold out a lot of markets at this point. A lot of people are beginning to utilize radio and calls going, “There’s no one in my market. What I got to do is to take this over because it’s wide open.” It’s been cool to see the returns of what we’ve been able to create for a lot of different investors around the country. Larry White, I call him Bronco. I appreciate you coming and sharing with everyone a lot of the wisdom that you instilled in me over the years that you and I have been out. To the rest of you, thank you so much. We will catch you soon when we add more value. I’ll talk to you later.
About Chris Arnold
Chris Arnold is a 15-year Real Estate veteran who has closed over 2500 single-family real estate transactions in the DFW metroplex. Chris is the founder of multiple companies that are managed by a US virtual team, which allows Chris to run his organizations while living in Tulum, Mexico full time. His passion for leaders has led to the creation of Multipliers brotherhood which serves the top 5% of real estate entrepreneurs out of the US. Most recently Chris has launched his REI Radio coaching program. This program is designed to teach real estate investors the marketing stream that everyone knows about but NO ONE is doing!