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Posted on: September 06, 2021
WI 769 | Business Accounting


If you want to run a successful wholesaling business, you need to understand accounting. However, that could get very technical. Fortunately, our guest today is an expert in that field. David Richter is the Founder of Simple CFO Solutions, and his company’s goal is to transform the real estate investing industry by changing the way real estate investors view their finances. It empowers business owners to keep more profit in order to live life on their terms by adhering to the “profit first” philosophy.

In this episode, David Richter will weigh in on the common mistakes that real estate entrepreneurs make when it comes to the accounting aspect of their business, and then he will give us insight into how Simple CFO Solutions manages those issues. He will also explain why “profit first” is one of the best strategies when running a real estate business.

How To Keep More Of The Money You Make (Legally) In Your Wholesaling Business Featuring David Richter

We are going to put our accounting hats on and talk about numbers. This might not be interesting to all of you but believe me, you need to know this. You need to understand how to read financial statements and accounting if you are going to have a successful wholesaling business. I got on an absolute expert. His name is David Richter and he is going to tell us all about the Profit First strategy.

He created Simple CFO. What Simple CFO does is help real estate investors implement a Profit First strategy to their business accounting. I am so excited because I have heard about Profit First for a very long time but I don’t know what it is or how it works. David is going to tell me all about it. David, thank you so much for coming and welcome to the show.

Thanks for having me. I’m looking forward to sharing.

Let’s start with a little background about yourself. Tell me about how did you get into the business that you’re in.

First of all, I hate accounting. I’m going to say that for all of you investors out there so we can be on the same page. My background is in real estate investing for about five years up in Northwest Indiana is where I cut my teeth. I read Rich Dad Poor Dad in college. That got me started down the real estate investing path and then the next few years was me buying properties. I bought rentals and started working with a company as well too.

At our highest point, we were doing 30 deals a month. That was wholesale, fix and flip, turnkey, sub-to, lease options, straight rentals and everything that you could think of. I got to sit in every seat there. I was in acquisitions, dispositions, project management, property management and accounting. I sat in every seat and it gave me a unique perspective of the whole operation.

At our highest point, as I said, we were doing 30 deals a month. At one point, we did 100 deals in 100 days. It was an exciting time at that place. One of the last seats that I sat in was that number seat. I liked that seat and I liked knowing a small business accounting and what the numbers meant like, “We’re doing 25 to 30 deals a month but we also have 25 to 30 staff members. As much as we are selling properties, that much is going out the door too.”

I was like, “Okay.” It unlocked a whole new world to me because up until that point, I was like a salesperson. I was doing these different types of things. Basically, I was a utility man. I come in, create a process and move on. That’s where I got to sit in some of those different types of seats. I got to see on the back end how all those seats combine into the actual numbers.

It was very eye-opening to see and sit down. What I did with the CPA for a year was ask him stupid question after stupid question, not knowing what things were inside of QuickBooks and all that stuff. Once it clicked, I was like, “We can analyze this thing and become a better company.” Long story short, about a year into that, we started changing some things and I, at that time too, made a big life change.

Numbers have the power not only to give clarity, but to actually change lives and businesses.

I moved across the country because we had sold some stuff. I wanted to be closer to family, moved to the Richmond, Virginia area and started working with another real estate investor. I went in there and helped him know his numbers because he said, “I have a bookkeeper but they’re not giving me the data. I’m not sure what’s going on.” I said, “You have cash. You’re in a good position. You’re making money but let’s dive into this because this is a pretty key piece when you’re doing 5 to 10 deals a month.”

We dove in and got his numbers all straight. After that, he said, “You’ve changed my life.” That blew my mind because he said the reason was when we dove into his books, he was very underleveraged in his properties. He was super underleveraged, meaning he had a bunch of rental properties like a 40 to 50 portfolio. He had built a little retirement nest deck there and he was about 38% LTV or loan-to-value.

That’s like the loans were 38% of what the actual value was of the houses. He said, “I want to pull the equity out and do something with that. I would be willing to go up to 55% to 60%.” He did. He took out several hundred thousand dollars at that time. This was right at the beginning of COVID. He was sitting on hundreds of thousands of dollars worth of cash and couldn’t do any options. What he did is he bought another fix and flip and some more rentals and sat on a lot of the other cash to be sure like, “What’s going to happen during this time?”

I gave him those options and that’s when he was like, “You’ve changed my life here.” I said, “I need to start a company, really get in and help more than one investor at a time.” What birthed Simple CFO was my experience in real estate investing and the power that numbers had not only to give them clarity but to change their life and their business.

The idea of Profit First, for those that don’t know, Profit First was a book. It then became this well-known accounting strategy or philosophy. Explain to me what is the Profit First philosophy?

During that time, when I was first starting my company, I had a bunch of good mentors. One of them is Gary Harper. He called me up and said, “Have you read the book Profit First?” This was several years ago. I said, “No.” He said, “That would go well with what you’re doing.” I read it that night took ten pages of notes and said, “This gives a structure to what I had done with that one investor. Let’s get into this.”

Profit First at its core is cashflow management directly for the owner’s benefit. It’s almost like accounting for the entrepreneur where it’s actually for the business owner that we can understand. I could plainly understand it. You could plainly understand it. CFOs, accountants and bookkeepers who get it can understand it too to help implement this.

The traditional accounting formula is sales minus expenses equals profit, meaning placing your top focus on sales, your second priority on expenses and your third priority on profit. After you pay your mom and everyone else, you’re left with the profit, hopefully, at the end of the day. Maybe once a year, you get to pull some profit out.

The Profit First formula is sales minus profit equals expenses. You have to have sales, take your Profit First and then have the business to live off the expenses that are leftover. That, in a nutshell, is the Profit First mentality. There are specific strategies and tactics in order to implement that, like with bank accounts and whatnot. We can go into the actual tactical strategies on it.

The big thing about Profit First is the mindset. It’s that strategy. It’s thinking about money management differently than you’ve ever thought about before. It’s making profit a habit on every single deal instead of a once-a-year thing that you hopefully take out. It’s making sure you and the business are healthy. Inc. Magazine did a study where 51% of all owners everywhere with a business do not pay themselves anything.

WI 769 | Business AccountingThat is an epidemic. That is a worse pandemic than what we’ve gone through because that affects families and the jobs of the other employees if you have other employees. Profit First gets down deep to say, “Are you taking care of yourself? Do you have what you need?” It’s putting that oxygen mask on you before you go out and help other people and making sure that you have profitability and that your company is growing on a healthy scale.

Everyone wants to scale up. Ninety-nine percent of entrepreneurs want to scale up. Profit First helps you build a habit. You could be profitable now when you’re doing two deals a month versus years or months down the road. You’re doing 5, 10, 15, 20 or 30 deals a month and still having the same healthy profit margin or that little edge that you’re protecting to make sure you always, no matter what stage you’re at, have built some profitability there. That’s the philosophy behind Profit First.

From time to time, I am going to ask you to define certain things because not everybody understands financial statements. In your first couple years of being a real estate entrepreneur, you’re understanding real estate and then start realizing that you need to understand your books and financial statements as well. What is a profit margin?

An example is you’ve heard of the margin in a paper. If you’re writing a paper or whatnot, there’s usually that margin. If you’re printing a paper, it has that blank space around the edge of the words. It’s the same thing with profit margin. All those words would be your expenses and everything that you pay. The margin would be that distance around that gives you a cushion from the edge of the paper. That way, you’re not running off the paper and not getting your point across of whatever is written on that paper. It’s building in that actual margin to give you a cushion. Honestly, a profit margin is the best because you can use your profit for whatever you want.

I’m talking profitability after you’ve paid yourself and saved for your taxes. Building a profit margin in order for you to have a cushion of cash that is yours. That is the return on investment for what you did as a business owner of taking the risk to start a business, especially with real estate whether that’s rentals, wholesales or whatever it might be. You’re taking that risk to go out there, find the deals, hustle, get that, build a team or whatever it is. Profit margin is that wonderful little cushion that you’re building for yourself in order to make sure that you always have the cash available and that you have the cash for what you want or two.

Profit margin is expressed in a percentage. The higher the profit margin, the better they’ll look or the worse. When you were thinking about the Profit First strategy, what is a healthy percentage for profit margin? Do you have one for a wholesale company?

I love selling companies like wholesale, flipping or whatnot. If you’re in a wholesale company, there are different stages and levels. Let me be very clear here. Profit First deals with cash in the bank. That’s different from your financial statements and the traditional accounting of QuickBooks and everything like that someone might show you.

I want to be very clear because when I say it’s profit percentage, you might think, “That’s pretty low.” What I want to differentiate between what profit cash-wise is versus what it might show on your actual financial statements like a profit and loss for that income statement. In Profit First, let’s say if you’re making $0 to $250,000 in assignment fees or wholesale fees in a year, 5% would go to profit.

That’s healthy for the profit portion. That’s not what you pay yourself monthly or saving for taxes. That’s profit. When you’re at the next stage, there’s a whole printout we call the TAPs, Target allocation percentage is what the official term is. At each stage, those percentages either increase or decrease depending on the size of the business.

In a nutshell, the profit first mentality is sales minus profit equals expenses.

If you are at that first level, it’s 5% to profit. Mike Michalowicz, the writer of the original Profit First book, said, “After studying thousands of businesses, the percentage is 5% for that first level from $0 to $250,000 and then 50% to pay yourself.” In the beginning, you’re not having a lot of people running around for you. You got to make sure you’re paying yourself. Also, the tax is 15%. If you see right there, 50% plus 15%, that’s 65%. Plus 5%, that’s 70%. That’s going towards you.

On your actual profit and loss, you would show a net profit of 70% because that’s the margin you’re building for yourself overall. Cash-wise, the profit is 5%. The difference between profit and owner’s compensation, where he says that 50% is profit is for the reward of the business that you draw from every quarter. That’s not a steady monthly thing that you draw from. That’s a quarterly distribution to yourself.

That owner’s comp though is more like, “What do you need to live? What is your lifestyle? Can your business support that with that percentage?” When we start working with businesses and show them the TAPs, they’re like, “I’m nowhere near there.” It’s like, “You have to start with your current allocation percentages or CAPs.”

If you can’t start at 50%, where can you start for yourself? What is your business doing? Can we work towards those targets? As you scale and grow to that change, it goes from 50% to 35% or from $250,000 to $500,000 for what you should be paying yourself at different stages of your business. How much you’re making those percentages will fluctuate depending on where you are specifically and the size of your business.

This can get super technical. I made the best decision ever in my second year in the business by hiring a bookkeeper. He manages my financials. I have even given him more responsibility. He’s almost like a business manager. He has taught me a lot about my financials, projections and keeping us on budget. There were some key mistakes I was making in my payment structures. It should be the sales representatives because I’m scaled. I have a team and a lot of them are commission-based.

By making a simple mistake on how I was compensating them was causing me a lot of financial instability. As we were not factoring in expenses into that fee, they were getting commissioned right off the top. Working with a bookkeeper and making that change definitely changed the profitability of my company. Sometimes you have to be a business owner and say, “We’re changing your commission structure. If you don’t like it, we’ll hire someone else.” I had to make those decisions and it has been very good for me.

Let me take you on a little journey of what I feel like are the three key team members of your financial team. You’ve got the bookkeeper, CPA / accountant and then a CFO. Let’s compare it to a doctor’s office or a hospital. The bookkeeper is like the nurse that comes in and checks on you every day and makes sure you’re taking your medicine and you’ve got all your ducks in a row.

You’ve got the CPA who is like the specialist. They come in to do surgery. They’re coming in from a real estate perspective to save you money. They should be saving you money and getting you structured in the best way to protect your cell from excessive taxes. They’re the specialist. They perform the surgery. You’ve got the CFO who is like the doctor. They come in and make sure you have a healthy plan.

They’re the ones strategizing with you on your overall health to make sure you’re moving in the right direction and saying, “Let’s look at your past data. This will determine your future data. Let’s look at what’s happening right now and prescribe to you those courses of action.” A CFO also should be helping you with your decision process and not necessarily making decisions.

WI 769 | Business Accounting

Business Accounting: Profit margin is that wonderful little cushion you’re building for yourself to make sure you always have the cash available and the cash for what you want it for.


It’s how to make the decisions and think about the Profit First like, “We sold this deal. I need to make sure that the business has at least this before paying expenses out. We got to make sure we have this on every deal in order to make sure that we stay in business and are able to provide for our employees and make sure the circle of life happens.”

That’s what I would say for those key people that are on your financial team that you might have all at the same time or as you level up. What we offer as a fractional CFO service is you’re not going to pay for us like you would a full-time CFO $150,000 and $200,000-plus to sit in that seat and be there full-time. What we do is have general meetings either twice a month, once a week or once a month depending on where that business is.

We do that usually by a percentage of the revenue in order to make sure we are your profit coach. We are that doctor too. We’re prescribing and we’re that investment. Let’s not just think all about the expenses. Let’s think about what’s driving your business, what is the overall plan and strategy and where you are headed.

That’s one of the things most people don’t know. Do they want to sell their business? Do they want a legacy and leave it to someone? It’s getting the end in mind and then saying, “What are we working towards then? Are we on track? Are percentages holding you accountable to that profit margin like we talked about? Do you have the ability to grow? Do you need to either build in more margin? Do you need to add a new bank account in order to stay for that person that you might want to hire?”

That’s what overall the three different people that sit in those financial seats and what their different roles are. We’re working with about 30 businesses on a recurring monthly basis and we keep growing. We’ve got seven CFOs on the team that handles about 4 to 5 clients each and a whole process behind the scenes. We’re rocking and rolling, helping people not only make that money but also keep it and have that confidence that they’re making the wise financial decisions in their business.

I have a bookkeeper. I have a CPA. He’s an accountant who worked under a CPA but can still do taxes and all that. I have that and a bookkeeper. You’re the CFO. You would come into my company, work with my bookkeeper, make sure that she arranges QuickBooks the way it should look and give the advice. That’s amazing because I had been looking for this person before. They’re expensive. I tried to find someone to work as a part-time CFO and it was insane how much this person charged.

It’s the financing. We could tell if it is insane or not based on what we do. I know that it can get pricey.

She was quoting $250 an hour.

We don’t do hourly. We do monthly based on the percentage of revenue. You should never be paying more than a certain percentage on certain aspects of your business too. In the financial department, that should be a certain percentage of the business. As a CFO, we should be making sure that we’re not above a certain percent. That’s why we take all of that into that factoring behind the scenes. You got to make sure that in those different areas of your business, you are allocating resources to them but not too much.

Being a real estate investor, I saw this piece missing. No one had someone who has either real estate investing experience or could speak plainly to the owner like, “Here’s what’s going on. Let’s have a conversation and talk about the thinking process behind this.” It’s helping the owner gain more competence in their decisions. That’s what we’re there for. We sit at that CFO level.

The three key team members of your financial team: the bookkeeper, the CPA, and the CFO.

We are at the same table as you are. We’ve got a round table. We’re sitting around it, helping you guide and make decisions towards that and saying, “Bring us your idea. This is what we need to be thinking about. Here’s what we can do. Here’s another perspective.” It doesn’t mean that you’re going to take our word and do what we suggest. It’s just like, “Here’s another way to think about it,” that you might not have had that angle before.

Before we wrap up this episode, I wanted to ask you a question. What are the most common issues that you see when you acquire a new client? Give me 1 to 3 of the most common issues that come up that you see and common mistakes that business owners are making with their accounting.

There are three main clients that come to us. Number one, they’re in so much financial pain that they need someone to help dig them out of a hole, meaning they don’t have a set of books or the bookkeeper had no idea what they were doing and they have no financials. Some people come to us that don’t have anything at that point or their tax returns haven’t been filed for years. We have seen a lot of crazy situations.

That’s the biggest thing. Do you have numbers and data that drive your business? That’s all that is. One quick sidebar here, with QuickBooks account or whatnot, think of that as the CRM of your money. That is what it is. It’s categorizing where you put your money. If you’re a real estate entrepreneur, you know there’s Podio, Salesforce and all those different things. That’s why you need that. That’s why so many come to us burning on fire because they don’t know what their numbers are.

You’ve got the opposite extreme of they have their ducks in a row, they’ve got a great bookkeeper but they’re missing that financial business accountability and the perspective of a CFO from the financial perspective. That’s where other people have retained us for. It’s to hold them accountable and sit in on high-level or level ten meetings or whatever you might want to call it depending on what operating system you’re running on.

There are middle-of-the-road people that come to us where they’re like, “I’ve got a good bookkeeper but she or he might need some training. I’m not sure they’re putting everything in there. The chart of accounts, I don’t understand. I don’t understand the financial statements. Can you teach and train me? I want to be a more savvy business owner.”

Those are the big things that people come to us with when they realize, “I need to get serious about this. Either I’m in so much financial pain because I have no numbers, no nothing or the IRS is knocking on my door,” or it’s those other iterations of like, “I have been too scared before to ask for help in this area because I thought having a bookkeeper or a CPA would be good enough. I need someone to be a part of my team and give me this financial security, financial perspective and financial help to help our cash and help the decision-making process in our business.”

David, I love the service that you’re offering. I cannot stress enough how important it is. Are you on any of the social networks as Simple CFO on Instagram or anything? Can people follow you?

For Instagram, I have a personal account. It’s @RichterScale91. If you want to follow me, I’ve got a social media poster that takes all my content and posts it there. If you need help, there are little snippets there. I’m on Facebook as well. We’ve got a private group on Facebook, Profit First for Real Estate Investing. That’s free info. We have posted stuff in there. If you want some of these charts, graphs or to ask some questions, that’s a good place.

WI 769 | Business Accounting

Business Accounting: You need someone on your team to give the financial perspective and help the decision-making process in our business.


I also have a podcast as well. It’s Profit First REI Podcast where we talk about the mindset. I have had over 60 people that have implemented Profit First that has been on that podcast telling about their experience and what it has done for them and their business. I know a lot of people will be reading this and it’s going to grate them that they would have to face their finances but after interviewing dozens of those people, there is hope. Those are the two main places.

ProfitFirstREI.com is where we house our podcast and on all the other different places. If you want to ask about our services, that’s SimpleCFOSolutions.com. If you go there, right on the homepage, it says, “Apply or take the business health checkup to see how you’re doing.” If you go to that website, go right there and apply for the services. We’ll see if we are able to help you right then and there and get on and do what we call a discovery call. As I said, we’re profit coaches. We want to make sure you’re at the place where it makes sense and that we have the right person for you that can really help you. That’s how you get a hold of us.

Thank you so much for your wealth of insight here. I definitely got a lot out of it. Follow David. It is important that you take charge of your financials as a business owner. If it’s something that you’re resistant to doing, get over it because it will make or break you. I promise. Get yourself and the members of your team as soon as you can afford to do it the bookkeeper, accountant or CPA and CFO.

If you are loving this episode, please make sure you share it with a friend. If you are interested in learning how to invest in real estate virtually, check out my coaching program at www.VirtualInvestingMastery.com. I have an amazing group of students. We have had a ton of success with an army full of virtual investors. Thank you so much for reading. We’ll see you next time.

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About Lauren Hardy

WI 734 | Cash Buyers ListLauren Hardy is a virtual Investing expert and real Estate influencer who owns multiple companies in the real estate industry including real estate investment, coaching, and software companies. She is also a Wholesaling Inc coach and co-hostoftheWholesaling Inc Podcast. Her experience in the last decade has been focused on real estate investing and creating products and services to serve the real estate investing community. If you are interested in investing in real estate virtually, house flipping, or virtual landlording, Lauren’s your girl

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