Posted on: January 13, 2021

While considered crucial to the success of any business, many people tend to mismanage their money and overlook their KPIs. And they often wonder why business success has been quite elusive.

In this episode, REI Radio’s Chris Arnold talked to Larry White, his chief financial officer. They not only tackled the basics of money and metrics, they also covered the importance of radio as a marketing channel.

If you would like to build a solid foundation for your wholesaling business from the get-go, this is one episode you can’t afford to miss!

Key Takeaways

  • Difference between a bookkeeper/CPA and a Chief Financial Officer
  • Why cash is oxygen
  • How much you should be keeping in reserves
  • What 3-6 months of expenses should include
  • Why you need KPIs and why you should track them
  • What his background is
  • Where people can find him online
  • His thoughts on radio as a marketing channel

RESOURCES:

If you are Ready to Explode Your Wholesaling Business, Click here to Book a Free Strategy Session with me right now!

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Episode Transcription

Chris Arnold:
Welcome to the Wholesaling Inc Podcast, I’m your host, Chris Arnold, as always excited to have you guys with us today. Now, I got a little special treat for you. We are going to go down the path of money and metrics today. This is what you’re going to get. If you’ve been in the business a year or two years, you’re newer to the game, you’re really trying to understand the ins and outs of what it means to run a business, I’ve got a guest that’s going to come in today and talk about a few things that he wants you to know about money and metrics in the first year to two years of you running your business, really kind of some fundamentals.
And let me tell you this, the two things I see that really hurt businesses are the fact that money is mismanaged and metrics or KPIs are overlooked. I see this all the time and I think for a lot of people they want to kick this can down the road and go, “Well, I’ll get to the KPIs a couple of years down the road when I have more time, where I really start to understand the money side as I start to make it.” Well, we want to challenge you on today is that is backwards. You definitely need more important, I think that really most things in your businesses is to understand the money and the metrics from the very beginning because they matter most.
So, today I have Larry White on with us. I love this guy. He’s been a mentor to me, he is a confidant, he also is a fractional chief financial officer in my business. So he consults my company and we’ll get into a little bit of what that means. But Larry White, what’s up buddy? Welcome to the show, man, glad to have you.

Larry White:
Hey, Chris. Thanks for having me, I appreciate it.

Chris Arnold:
We were just chatting. You’re going to be down here in Tulum in about four or five weeks and you said you’re looking for a little hang time, just kind of you and me hanging out, sitting on the beach, chit-chatting.

Larry White:
Yeah, I love it. I love it because I get a lot out of my discussions with you too, buddy, you’ve taught me a lot as well.

Chris Arnold:
It’s going to be good. So before we dive into a few things that they need to know, people hear the word chief financial officer and they might not really understand what that means. So can you help people understand the difference between someone that is a CPA/bookkeeper, you might call those people controllers and someone that is a CFO or chief financial officer, what is the difference between those two?

Larry White:
Sure. A CPA controller, bookkeeper, those are the folks that actually put the numbers together for you. If you were to take a look at a number line and you look at a continuum and you would say, “What do they do?” They look at everything from today going into the past, so they look at everything historically. They produce the information that needs to be accurate and timely and they look at, like I said, they look at everything from the past historical going to today’s date. And what a CFO is is they take that information and they utilize it to forecast and to predict what may happen going forward based upon what happened in the past. And 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 that you can.

Chris Arnold:
So you would say then the skillset between a CPA/bookkeeper and a CFO is entirely different, right? Those are two different skill sets.

Larry White:
It’s very different, it’s very different. Because I think that 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?” And a lot of those folks were business owners like the folks on the podcast today. Let’s say I have that person so why would I need somebody like you? The difference is if you try to ask them for strategy or how do I do what I do, how do I take the business forward, or how do I continue to make more money? You’re not going to get that from a CPA who is actually, you give them information so that 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 exactly tell you what to do with your numbers and exactly what they mean and how to interpret them and how to interpret them so I make more money and more cash flow.

Chris Arnold:
Absolutely. And I’ll tell you guys, going years back, this was my thought process. I don’t have a CFO, I don’t really know what one does but I know that I need one, that’s all that I understood. And then once I met Larry and we engaged and he started helping me out that I really understood the value of a CFO, so if you’re listening that’s where I started. I was like, “I just know I need one. I’m just not sure why because I know that’s kind of a bigger boy level to play there, so cool.” So let’s get to the meat, right? We’re going to hit on a few things today about money and metrics that people that are newer to real estate, investors trying to build businesses, what they need to know.
So let’s go with this first one. Cash is oxygen. I think there’s a lot of questions, Larry, around how much cash should I have in reserves? I need to spend the money, I’m having to grow my business so I close the deal, I want to reinvest in my company to do bigger marketing, to make the snowball but at the same time I know that I can’t spend all of it. But I’m confused, I don’t know what cash reserves should look like. So, help us understand why this is so important when it comes to cash being oxygen, and then practically how much should people be keeping in reserves?

Larry White:
What I have found Chris, and given what I do for a living I’m pretty conservative by nature, and given what happened this year because this year 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. And what I have found is those that really have done well planned for the rainy day. They plan and they understand what we go through cyclically in business, it seems like every eight to 10 years there’s always a downturn, there’s always something that we get concerned about that could drain all of our cash reserves. And I’m always of the opinion that we should always have three to six months worth of cash available, that if we never did another transaction, or we didn’t have any revenue in the door, that 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.
And the reason for that is, is that what I find is that when you don’t have those cash reserves people tend to panic and 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? And I find that folks that have that cushion, that three to six months worth of cash, have the ability to spend the time to actually evolve other revenue streams or evolve other directions to go in without making bad decisions because they know they can pay their bills. And they wake up in the morning, they’re comfortable… They’re not happy with the situation but they have the ability to make better decisions, knowing that they’re not going to go out of business if something trips them up and they have the ability to make a change in terms of pivoting their business to make sure that they stay in business for the long haul.

Chris Arnold:
Okay, here’s a question. I’m new to real estate, so I’m like, “Okay, three to six months of expenses.” What does that include? Is that for my salary or if I have other 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 three or six, how do I actually kind of mathematically come up with three to six months?

Larry White:
Sure. Well, the way I look at the real estate business is there’s four different kinds of buckets of expenses. You’ve got your commissions that you pay to your real estate folks.

Chris Arnold:
Like you’ve got the acquisition managers, right?

Larry White:
Right. But that’s really more commission-based. So if you’re not making a sale you’re not actually having to pay that out, so that goes out so 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. But you’re looking at marketing, you’re looking at your payroll, and you’re looking at your other operating expenses which would basically be everything else.

Chris Arnold:
Like software, or grant if I had a fax machine or a cell phone or that type of stuff. So when you say three to six months expenses, it’s enough to cover your marketing, your payroll and everything that you’re spending money on on the operational side and you multiply by that by three to six. Here’s my next question. Why three months versus six months? Again, that’s a span there, so I’m listening and I’m going, “well, should I be at three months, should I be a four, should T be a five?” How does someone dictate whether they should be between three to six months? How do I decide that for myself?

Larry White:
That’s kind of a judgment decision to be honest with you. I know myself and that the more cash that I have in hand to make a better decision and so that I can sleep at night and know that I can pay my bills. I like to have a lot of push in personally and 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 they don’t get concerned about that stuff. I always worry about, can I sleep at night and that’s a personal decision and something. But I would say 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.

Chris Arnold:
Absolutely. So if you’re listening what we’re saying is it depends on how risk adverse you are. I like to say it depends on how well you’re sleeping at night. So if you got three months reserve and you’re still not sleeping well, then maybe you need to kick it out up to four or five or six, but that’s really I think the best way to dictate how well you’re sleeping at night. So let’s move on to the second piece that percentages matter and we’ve already opened this up, which is great. I love this because I think a lot of new people, I know when I was newer, really struggled with this. And that is if you look at your business based on those four categories, this is a very simple way to really create silos of expenses in your company.
So let’s say those again. Your commissions that you pay out obviously to your acquisition managers, if you have any. You have your marketing silo, you have your payroll silo and you are in that payroll so that should be a part of that as well. And then of course you have just your operation silo. Here’s the question though that I think is important. What percentage of my revenue, and we define revenue as the total amount of profit that you’re bringing in every month, we’ll utilize some simple numbers.
Let’s just say that I bring in $10,000, I know that that’s low but we’ll keep it simple. If I’m bringing $10,000 of revenue in 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, Larry, really know what a baseline is for this, so let’s start to break this down.

Larry White:
Okay. What I like to do is I always like to work from the bottom up because obviously what’s I think is important, I think most people in real estate they say, “How much money can I make and how many transactions so what’s my revenue?” But it really doesn’t matter if you’re not putting any sort of excess cash flow 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.
And my rule of thumb always is, especially in this business based on my experience, is I always like to see 25% in profit and then I kind of work backwards and I say, “Okay, how much then should I be spending on payroll? How much should I be spending on marketing? How much should I be spending on operating expenses or so all other and how much should I be spending on commission?” For purposes of the folks on the podcast what I always like to talk about is I get 25%. And then out of that 100% of the total picture, what we do is we say, “Okay, we’re going to probably spend about 15% in commissions…

Chris Arnold:
That’s to the acquisition manager-

Larry White:
Correct.

Chris Arnold:
So roughly around 15%, okay?

Larry White:
Yeah.

Chris Arnold:
Clear on that.

Larry White:
I would like to spend about 20% of my total revenue on payroll…

Chris Arnold:
On payroll, that’s wages, DAs, anyone that you’re paying to do labor within your business.

Larry White:
25% on marketing, and then 15% on everything else. So that, on your operating expenses, your software, all that kind of stuff, and if you were to do the math and say, “My revenue was 100%.” Deduct to all of those things you should come down to about 25% profit.

Chris Arnold:
Okay, so let’s break this down. First of all, if you’re a solopreneur you don’t have the overhead, this isn’t going to be in the sense of you being in 25%, anything close to that, right?. So you have no expenses, you have no acquisition managers, that’s fine. Just know that you’re running a very mean lean healthy bubble and 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 really care building a large team, I want to stay small, lean, and mean, and I’m going to run up 50% plus profit margin.” It’s totally fine.
Others are listening and going, “You know what? I really want to build this thing into a business. And so if I build it into a business and get out of me to run all of the day-to-day interest possible for me, then I’m going to have to scale and that’s going to cost money. So the percentages that Larry is giving is really 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.
Now, let’s also say this, this is just kind of a basic guidance. You might have shoots and percentages based on how you run your operation or your payroll, different things like this, but this lease gives you kind of a baseline to look at. So let’s break this down a little bit more and I want to repeat it real quickly so if someone’s listening and they got 25% roughly profit margin, 15% acquisition to manager, roughly 15% for operating costs, all those types of things, about 20% for payroll and 25% for margin. So if you’re listening you’ve got this. So what do you want to elaborate on this with these percentages here?

Larry White:
I guess the thing that’s most important is that what you talked about scaling, which is really important. You talked about what’s important here is that this will give you the ability to scale your business. So some folks who may be a sole practitioner and they’re saying, “You know what, I’m bringing in 75% of my revenue. I’m able to keep that.” But what you’re limited from is you’re going to be really limited for growth. And that’s kind of the thing is you’ve got to spend money to make money as we all know. And if you have the ability to bring in a team, maybe you can take that from $250,000 a year, $500,000 a year that you’re bringing in to $10 million a year.
And 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. And so that’s what I think is really important, is 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 personally don’t have to work for.

Chris Arnold:
Absolutely, I love it. And the big thing we want you to understand is begin to look at your business in percentages. If you’re looking to grow, you’re looking to scale, you’ll make most sense by taking the four or five areas that we talked about, five if you include net profit in that, and understand them as silos and percentages of revenue. If you begin to 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 again, drill this home, all the time I don’t think there’s anyone listening to podcasts that hadn’t heard track your numbers and know them.
I though want to know from a CFO’s perspective why you think this is important. Because if I’m listening I’m going, “I know it’s important but man, you’re going to really have to deliver me a serious 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.” And by the way, if you’re tuning in and you want to put a face with a name, you can always go to YouTube, check us out and subscribe at Chris Arnold Real Estate and see what’s going out there and come kind of take a look at Larry and I hanging out here on video today. So Larry, let’s talk about the numbers, the KPIs. What are the reasons why I need KPIs and tracking?

Larry White:
Numbers are a weapon, they’re a roadmap, they’re important. What do we always say? It’s kind of an easy anomaly but failing to plan is planning to fail, okay? It’s very simple. But if you want to go from New York to Boston, New York to Philadelphia, you need to have a roadmap. You can’t just get in the car, put your finger in the air and say, “I’m going to get there from here.” You always need a roadmap and that’s the benefit of having numbers being your weapon. You need to have a roadmap, you need to 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 they’re checklists and 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. Because 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.

Chris Arnold:
I like that phrase that the numbers are a weapon. It’s this idea of taking the math that exists in your company and really shaping that into a sword or a machete, just kind of 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 be able to move forward with what you want to accomplish in your life.
The next one obviously on why KPIs are important is forecast, right? I don’t think most people… I know when I came to you, you started talking about forecasting and I’m like, “I can forecast in real estate?” I really 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 three, six months, you take us out an entire year. Let’s talk about the value of forecasting if you have your KPIs and your metrics.

Larry White:
Well, what it does is it gives you… Again, all this comes back to is the ability to plan and to 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 yourself the opportunity to say, “This is where I’m going to be.” And if you don’t reach those goals, then what it does is it gives you enough time to say, “Okay, if I need to pull back on expenses or I want to invest more in the business because it’s really doing well, what do I need to do? How much cash do I need to put into the business in order to achieve those goals from a forecasting perspective?
So again, it’s all about planning and it’s also about cash flow preservation, which is really important. Let’s just say that you had planned at the beginning of the year that I’m going to do a million dollars top line, and based on our math we’re going to do $250,000 in profit. But 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 cash flow that you currently had planned for. Again, it’s all about planning, it’s all about creating the roadmap, and it’s all about giving yourself the opportunity to maintain cash flow even if you have a down year.

Chris Arnold:
Yeah. I love it, man. And then let me ask you this. If somebody came to you in a down turn and said, “Larry, I need help.” And you went in and realized there was no tracking of KPIs, no tracking of 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 down turn?

Larry White:
Well, look, you know what? You would want to get in and at least take a look at something historical and then it gives you kind of an idea of where we think we’re going to be going forward, we just set up a structure. But the whole point of this thing is a lot of people are afraid to talk to a finance person. They think that they’re… you know that people get embarrassed and if things started going-

Chris Arnold:
You’ve got to go open kimono. Again, you’re not going to grow your business unless you go open kimono or you got to let somebody into the financial side and take a look at what’s going on, you have to drop ego.

Larry White:
Absolutely. And the whole point of this thing is that any finance person that makes you feel bad about not planning and about not doing what you should do, that just doesn’t work for me. My whole point is, look, I’m in here to help. I’m in here to take what happened in the past not point fingers and figure out how we move the ball forward and get it right going forward. Look, 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 actually understand and move their business forward on the back of a napkin.
And if I can do that and help people who don’t really understand finance that well, then I’m doing my job. I’m not here to make people 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, and I just take the rest of it off their hands so that they can do what they need to do and guide them in a certain direction.

Chris Arnold:
Yep. I love it, man. Well said, well said. So starting to wrap up here, again, someone’s listening in today. Maybe they want to reach out to you, they got some questions, et cetera. They’re like, “Man, I really like this guy.” You want to throw in horn but I’m going to push you to a little bit. For people that don’t know your background, real quickly, what’s your pedigree? Where’d you come from?

Larry White:
Well, I tell everyone I’m a recovering CPA because I’m actually an entrepreneur by nature, I just 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 Spas and 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 the finance side in his family office. I also started up my own company, I made flame-resistant clothing for oil and gas and public utilities. Had to set up production lines in Latin America so I learned how to speak Spanish.
And I actually had the opportunity to raise capital and get a company sold and did pretty well on the sales side. So I’ve seen the gamut, I’ve worked in real estate, I worked in a bunch of different industries. For me it’s just a math problem but the thing that I love more than anything I love helping people achieve their dreams. And if I can be a help and a conduit to that, that’s where I live in brave because I love to see people do well and that’s what’s really fun for me and why I do what I do.

Chris Arnold:
Awesome. Larry, if someone wants to reach out and learn a little bit more about you, where do they find you?

Larry White:
Well, I have a website which people can take a look at. It’s lkwconsulting.com, or you can just email me directly at Larry.White, as in the color, @lkwconsulting.com and I’ll respond and say hello and if I can be of help, I’d be glad to be of help.

Chris Arnold:
Awesome, man. I can’t speak highly, again, I’m glad that you and I crossed paths years ago and you and I are always working on projects, which is exciting and so I’m glad to have you in my corner as well. Now, Larry, I was going to ask you this question, but again the ins and outs of my business and you know that we’ve been utilizing radio as a marketing channel. So you’re in there looking at what each thing we do it does, and you always say three 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?

Larry White:
Sure. I like to think that every expenditure in the business should yield a return and we always need to ask ourselves that question is, I’m not spending just 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 that if you’re spending on marketing, my rule of thumb is you should be able to evaluate each of the specific marketing channels. Now that may be direct mail, that may be radio, that may be TV, that may be web. It may be a different number of different things and you really need to take a look at those types of things separately and understand what each of those channels are contributing to your top line revenue and your profitability. Because if they’re not yielding at least three to four X on your spend, you’re probably spending too much on it and probably need to go in another direction. [crosstalk 00:27:51]… your profitability, now and into the future.

Chris Arnold:
And you taught me early and that’s why for us radio has passed through this test working with Larry. Because of everything we’ve done, it’s really consistently been somewhere around three to $4 return, depending on the year. In previous years we kind of go back and say we were pretty much around $3.50 and so if you guys don’t know, Larry is part of that decision-making and he’s kept radio on because he believes three to $4 return is healthy for marketing channels, if not he would to tell us to scratch it and get rid of it.
So 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 beginning to utilize radio and going, “Man, no one in my market.” What I got to do is to take this over because it’s wide open, and so it’s been really cool to see the returns of what we’ve been able to create for a lot of different investors around the country. So check us out at wholesalinginc.com/reiradio. And Larry White, I call him AKA Bronco, I appreciate you coming on today and sharing with everyone a lot of the wisdom that you instilled in me over the last several years that you and me have been out. To the rest of you guys, man, thank you so much, and we will catch you soon when we add more value. I’ll talk to you later.

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