Join us as we talk with Jack Tompkins from Pineapple Consulting Firm who is a Consultant or Coach. Listening to this episode will help you to understand how do business owners know their numbers and become data-driven to get better insights into their business, efficiently.

Jack-Tompkins-squareJack Tompkins is a partner and founder of Pineapple Consulting Firm, a company that turns data into visualizations, allowing their clients to make more informed strategic choices. His roles ranged from analyst to product manager, and strategic partnership owner to team manager, all of which helped craft his ability to form Pineapple Consulting Firm.

Jack has now taken those analytical, financial, and partnership skills and offers them to small and medium-sized businesses that know how powerful data can be, but don’t have the internal resources to turn their data into a powerful business asset. With a strong drive to work with people (not just numbers!), Jack aims to have some fun working with clients while analyzing and visualizing their data through Excel and Tableau dashboards so clients’ past performance can inform their future strategy.

Transcript

Narrator:        Welcome to Cracking the Cash Flow Code where you'll learn what it takes to create enough cash to fill the four buckets of profit. You'll learn what it takes to have enough cash for a great lifestyle, have enough cash for when emergency strikes, fully fund a growth program, and fund your retirement program. When you do this, you will have a sale‑ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want, in the way you want.

In Cracking the Cash Flow Code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he's learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.

Josh Patrick:   Hey, how are you today? This is Josh Patrick. And you're at Cracking the Cash Flow Code. And my guest today is Jack Tompkins. And Jack is an expert on helping blue‑collar businesses become data driven. And that's what we're going to talk about today. So, let's bring Jack on and we'll start the conversation.

Hey, Jack. How are you today?

Jack Tompkins:           Hey. I'm doing great, Josh. Thanks for having me.

Josh:                My pleasure. So, let's start there. What would you say about, you know, being data driven? Why is that important? Let's start there.

Jack:                So, I've always been a fairly data‑driven person, but I know a lot of businesses, myself included, got into business with their gut instinct. And there's absolutely nothing wrong with that. I'm a huge fan of it. I use my gut all the time.

Incorporating data though, it opens up kind of a new door and you fully see your performance. You can completely dive into the numbers. You can completely see what's working from a marketing perspective, what's working from a specific job type perspective, and what's most profitable. And you can get into all those different numbers and really help grow your business. I like to say that you can be completely right with your gut instinct, but you could be completely profitable with the help of data, too.

Josh:                So, what kind of numbers would--

You know, let's take this in a beginning, medium, and expert. So, someone who is not data‑driven at all, just kind of goes by their gut and goes out, and does work, and looks at a checkbook and hopes the balance is getting a little bit bigger every week. What would be the sort of pieces of data that that sort of business owner would want to know?

Jack:                It comes down to some stuff that is not rocket science by any means. It is, think on the financial side, revenue and profit. On the marketing side, think leads and conversions. And then, what I call kind of the operational side, the actual doing of the tasks, or the work, or whatever it is that you do. Things like timing around it, time from start to finish and kind of those logistical pieces there. So, it's stuff that you already probably have a decent grasp of off hand. It’s just kind of putting them to paper and seeing, “Okay. Here's where the trend is going again. This is working well. This is not working well.” So, the beginner level is start with the things that you're thinking of probably fairly often anyways but just getting some more formality behind it.

Josh:                Cool.

Okay, so that's the beginning guy. So, it’s the pretty basic things.

How about we get it up to medium? Someone that is keeping that stuff already and they say, “Okay. This is nice but what's the next level we can go to?”

Jack:                Yeah. Then, you start getting one level deeper. So, from there, you could say, not just revenue and profit, but I can get into some things like gross margins, and labor cost, and things like that. And I would say, at that medium level-- Actually, I'll back up a second. At the beginning level, you might want to see those numbers in just a checkbook. And that's kind of the visual component of it. At the medium level, it might be looking at the QuickBooks kind of pre‑loaded dashboards, if you will, or even putting things into Excel and tracking things there so you have that kind of--

Josh:                What kind of things would you be looking at though?

Jack:                In terms of like metrics and whatnot?

Josh:                Yeah. What metrics? I mean, okay, I've got these basic metrics I'm looking at. Now, I want to go to the next level. What specific metrics would I want to have at that point?

Jack:                I'd say, again, the gross margin is going to be huge in pretty much every blue‑collar business. Things like labor cost too which may or may not be included, depending on your accounting structure. Those are going to be some two really big ones.

On the marketing side, it's where your lead’s coming from and where your conversions are coming from too for that matter. Whether you do Facebook advertising, Google ads, or anything like that. It's sort of that, “All right. Well, let's break it down a little bit further and see where things are coming from.”

Josh:                Okay. So, let's talk about gross margin for a bit because that's really, in my opinion, a hugely important intermediate number for somebody.

Jack:                Great.

Josh:                And, you know, I find, especially in blue‑collar businesses, that they don't really understand, very often, what drives that gross margin. So, when you're working with a business owner and you're teaching them about their dashboards, or teaching them about this component, how do you go about teaching them how to figure out what actually drives gross profit?

Jack:                Gotcha. It's a good question because it can vary a bit from business to business. But, I guess, sort of the overall answer that might apply to more businesses than not, it's kind of sticking with the definition of gross margin which is the things that you need to spend in order to get the job done. And that could be parts, that could be materials. that could be labor, things like that. So, where it's, you know, if you get $1,000 for a job, but you had to put in $1200 of parts, obviously, that's going to be a negative gross margin where the sort of not obvious case, If we go back to beginner medium, comes in is if you charge a thousand bucks because you mark everything up 20%. So, great. Your, you know, gross cost of sold, rather, is roughly $800 on a $1000‑job then you would say, “Okay. Can I do anything about that? Is there anything that I can shrink there? Is all of that necessary? Or should I mark it up 25% or 30% because there's more things that are involved than just the one part that I'm installing?” or something along those lines.

Josh:                Yeah. When we deal with gross margin with folks, we start off looking at the gross margin, obviously. And then, we say, “What are the components in there?” And it's usually labor and materials. And we look at the markup on each. We might like take a look at labor and say, “Okay. We're spending X dollars per hour. And what are we actually utilizing? What are we getting per hour?” And if we're paying $30 and we're getting $60 per hour, we probably have a problem.

Same thing on materials, if our material markup is 20% and our gross margin’s not right, and our labor is right, well, it means we probably have to adjust that material gross margin.

Jack:                Right.

Josh:                And the thing I found, which I found was really interesting, is that we have a security company client that you install security systems. And over the last five years, their mix of product versus labor, in a job, has become tilted way towards labor. And, as a result, their jobs are becoming way more profitable. So, we started looking at it saying, “What kind of jobs can we go after that have a high labor component?” And they used to believe that without a higher material component, they were losing money, which I found really interesting.

Jack:                Yeah. That's such a good one because you think, “Oh, the more people are working, the less profitable we probably are,” right?

Josh:                Right.

Jack:                But you look at the numbers and you find that-- like, that's a really cool story. I like that.

Josh:                I mean, they're actually-- I mean, they're billing too late-- their utilization of labor cost is three and a half times. Meaning that, if they pay somebody $30 an hour, their average labor rate they're getting is three and a half times that.

Jack:                Yeah.

Josh:                So, we focus on that really heavily with that particular group.

Jack:                Yeah.

Josh:                Let's move to level three which is the advanced folks. And I want to see if you have the same report that I have which, I think, every business owner needs to look at. So, if you're in level three where, okay, you're doing all those intermediate things. What's the steps past that that you would want to look at?

Jack:                So, you're kind of just moving down the income statement on the financial side. And that is, where else are you spending money? We've got the gross margin covered. We've got the cost of goods sold figured out. Now, it is, “What else are we doing? Is the marketing expense huge? Are things like insurance really big factor?” Payroll, obviously a huge one there. All those things that kind of are in that you could call it overhead. You could call it fixed expenses. You can call it variable expenses. Things in those buckets, on the income statement, are going to be huge in terms of your net profit.

Obviously, if it's an owner operated, the owners pay. How much they're taking, whether that's an owner's draw or anything like that. Are they paying themselves more than they should? Is that impacting the business negatively? Things like that.

On the marketing and operational side, you can get into things like cost per acquisition for marketing which basically means, “Okay. We're spending-- I'm just going to use general numbers again, a thousand bucks through all of these different marketing channels.” And that gets us an average of, I don't know, one customer. So then, our cost per acquisition is $1,000. And so, getting into metrics like that is definitely kind of that next level, maybe expertise level, on the marketing side.

Josh:                So, where would a cash flow statement fit in here?

Jack:                The cash flow is great. I'm glad that you bring this up. And, obviously, on Cracking the Cash Flow, we’ve got to talk about it.

It's a huge piece because, right, cash is always king. And so, the difference between your AR, your accounts receivable, and your accounts payable and things like that, that'll make or break your business, regardless of what business you're in. If there's not cash on hand to do things, then, right, your business kind of, at least, struggle.

So, once the income statement is figured out and, obviously, the cash flow is kind of the result of things on the income statement and balance sheet. Once those are figured out, then I totally agree getting into the cash flow statement is going to really help time out when projects happen, when you need to get paid, how much you might charge for a late fee and all that kind of stuff.

Josh:                Well, it also will tell you that you can be profitable and run out of cash.

Jack:                Right.

Josh:                I mean, that actually happened to me. And the reason was, I had no idea how to read a cash flow statement. And we were buying a million‑and‑a‑half dollars’ worth of vending machines a year. And that million and a half dollar cash outlay doesn't show up on your income statement.

So, most business owners, I know can read an income statement pretty well. They sort of understand a balance sheet, but they don't have a clue-- and this is some sophisticated business owners that I know, don't have a clue about how to read a cash flow statement.

In fact, this actually happened to a client of mine. And it happened to me also, except this guy doubles his business in three years. And he didn't realize that it cost 23 cents for every dollar they added in business to expenses for inventory, and receivables, and equipment. And he actually ended up looking at running out of cash. Luckily, his business balance sheet was strong enough where he could go and borrow the money to fill that cash deficit and the bank was glad to loan it to him. But now we have them looking at that cash flow statement on a weekly basis to understand what happens to the cash.

Jack:                Yeah. It's a good one. Once you get, especially to a certain size, Where's the cash going? To your point, you can be completely profitable but not be able to pay for anything. And it's a very interesting situation. The cash flow is not an easy one to read. Absolutely not. I’d [inaudible 00:12:27] reading--

Josh:                Yeah. I find it's the most difficult statement to read and the most important one to understand.

Jack:                Right, right. It's one of those-- well, like we call it, it's kind of that expert level.

Josh:                Yeah. I typically spend five to seven sessions with somebody before they understand a cash flow statement.

Jack:                I believe it. I believe it.

Josh:                So, you know, it's just counterintuitive. You look at, you know, your inventory go up and that's the use of cash. And you look at your inventory go down and you think that would be a bad thing but it’s actually a source of cash.

Jack:                Right.

Josh:                And the same thing with receivables, your receivables go up and you say, “Gee, that’s a good thing.” But that you're using cash when you do that. And if you don't understand that, it's pretty easy to end up in a position where you’re just flat out a cash.

Jack:                Right. One thing I was actually talking about this morning was the PPP loans. A lot of those are kind of deferred revenue. So, on the balance sheet, they're classified as a liability because you have to do something with them. But that doesn't mean that it reflects the same on the cash flow statement. So, a very good point. Things kind of can get wonky and maybe unintuitive on the cash flow statement.

Josh:                So, let's talk about another thing. Let's talk about backlog. Do you ask your people to track backlog? And if so, why?

Jack:                The folks that I have talked with--

I like tracking backlog. And we do talk about that a bit.

Why do we track it? It's kind of what is yet to come. And a high amount of backlog or a large amount of projects in backlog is not necessarily a bad thing. It's typically a good thing, I would think. Maybe some businesses think differently. But that means you have, obviously, things to come in the future, cash to come in the future. I could see the negative side, absolutely, where it is. We can't get to this. And, you know, maybe people want service right away. Maybe it's just we need to hire more to get this done right away. But then hiring becomes another issue. So, I totally see both sides of it, but I do lean towards tracking it because it is an indicator of future events.

Josh:                Yeah. Well, we actually believe the metrics that are most important are the ones that are predictable about what's going to happen to your business in the future. I mean, looking at your P&L and your balance sheet is a good thing but that's history.

Jack:                Right.

Josh:                I mean, it’s good to tell you about what happened in the past but nothing is going to tell you in the future. And the two things that we find, that will tell you what's going to happen in the future, this is in a company that's, say, a construction company or somebody like along those lines and do projects manufacturing, is that how much do you have in your backlog? And what is he activity and proposal level of your sales team? Those two things are going to tell you what's happening in your future, 60, 90 days down the road. And if you're not tracking those two things, you don't know ‘em well, there's a good chance you're going to have a problem.

Now, backlog is good or it could be bad. It depends how low it is or how big it is. You know, it is possible. We have a client right now where their backlog is actually too big and they're going to start having clients who are going to complain because it's taking too long to get the jobs. So, what we told that particular business, we said, “It's time for you to hire another crew.”

Jack:                Right.

Josh:                So, that sort of information, in my opinion, is just absolutely, you know, critical when it comes to telling what's going to happen in the future.

And the same thing with sales activity. I mean, if I know that, you know, for every 10 calls that somebody makes, you get three appointments which creates one sale. Well, if I'm not tracking the appointments I have, which is really the critical thing, and how many proposals we're putting out, and what our closing ratio is, then there's a pretty good chance that that backlog will start shrinking. And the reason it started shrinking is because their salespeople aren't doing the job right.

Jack:                Right.

Yeah, it's a really good indicator of a lot of things, to your point.

And one thing that is kind of on one end of the spectrum, on my business, is kind of that forecasting, and budgeting, and projecting. Everybody kind of wants to have that or knows that they should have that. And you could say, “Oh, we're going to grow 10% this year.” That's great. And that means it's going to show like this for every month. That's all well and good but backlog is such a better indicator. And it's a real indicator. These are real things that are going to come in, to your point, 60, 90 days, even further, in some cases. And so, you can use that of, “Okay. If we keep the backlog steady and we keep growing that everything else kind of falls into place,” in theory.

Josh:                Yeah, in theory. But if backlog starts to drop, then you have to start looking under the hood and saying, “What's causing this to happen? All right, did we just become this really efficient machine and we can do more business now?”

I mean, one of the things we ask people to do is use a technology called Scrum, if they're project based, because it will help them improve their productivity. And when I use it with contractors, we typically take 30% or 40% of labor out of jobs.

Jack:                I believe that.

Josh:                So, you might have a healthy backlog, as we're introducing Scrum, and we find that backlog shrinks, and shrinks, and shrinks. Well, it’s not because we've been doing things badly. It’s because we've been doing things well. And what we need to do at that point is probably focus on sales.

Jack:                Yeah. I absolutely agree. I'm actually a big fan of Scrum too. I do two‑week sprints in my business a lot of time, too.

But you're absolutely right. It's when something becomes more efficient, right? Whether it's a technology use or just even a mindset, or anything like that, and things start slowing, it's kind of, again, an unintuitive result of becoming more efficient and faster to complete things. But it does give you that heads up of, “Hey, here's what's happening. This is the new way that business is going, so we need to bring in a whole lot more business or you could start charging more, or whatever, to compensate for it.” But, ideally, you do want to do some sort of compensation. So, it's an interesting business discussion.

Josh:                That's another good point. So, how do you use metrics to test pricing?

Jack:                This is a good one. I know we're close to coming up on time here, so I'll keep it brief.

Using metrics to test out pricing. Well, there's a couple of ways you could do it. One is looking at, “Okay. We want to be at X percent net profit, whichever margin you're looking at, and say “Okay. That means we need to price this way.” Great. We did it. We priced it. We've got the margin. However, revenue has declined because we scared too many people off. And so, then, you go the other way. Okay, let's pile in revenue. And then, kind of, you know, this is a lackadaisical way to say it, but see where the margins fall. And then, you say, “Okay. We need to kind of find the middle ground between those two.”

So, it is an interesting, do you want to start with the end goal in mind or do you want to start with-- it's kind of like do you want to start with the top line in mind or start with the bottom line in mind? And then kind of meander through that.

Josh:                Or the gross margin in mind.

Jack:                Right, right. Exactly. Yes. Yeah, that's a better way to say it instead of the top line, yeah.

Josh:                Yeah. I like to compensate salespeople based on gross margin, not gross sales.

Jack:                I think that makes a lot of sense, actually. Yeah, because they're just getting jobs that cost a whole lot. Good job, but you're not helping the company as much as you could.

Josh:                Right.

So, one of the things that we do is we say, “Okay. With your sales team, you need to track all lost business which is easier than you think. And you need to find out why people are saying no and they're not saying yes. And if they're only saying no because of price, 1% or 2% of the time, I can guarantee your prices are too low.

Jack:                Right.

Josh:                If they're saying no, over 10% of the time, your prices are probably inching up towards too high. So, around 10%, if you're not hearing 10% no one price, my guess is your prices are too low and you need to start experimenting by inching them up.

So, the same client again. I had them raise their prices 5% now, every two months, and they're still not hearing no’s. You know, the owner doesn't think this, but I think they can raise their prices another 20% because they are significantly below the nationals. And they only want to be 10% or 15% below the nationals, not 40% below.

Jack:                Yeah. It's a scary process but it's-- I mean, it's worth testing. One no could tell you a whole lot.

Josh:                Yeah. I mean, if I raise my price 20% and I lose 5% of my business, I'm 15% ahead of the game, so why do I care?

Jack:                That's exactly right. Yep, that's exactly right.

Josh:                So, Jack, unfortunately, as you said, just a couple of minutes ago, we're running short on time. And we are. And we're out of time. So, if people want to find you and have you help them put together dashboards and metrics, how would they go about doing that?

Jack:                Best way is to find my website. Again, my company name is Pineapple Consulting Firm. So, the website is pineapplecf.com, as in pineapple consulting firm. I've got all sorts of ways to contact me, examples, videos, before and after’s and all that fun stuff there.

Josh:                And I have two things I would like you to do. Number one which is you're listening to this podcast recording or maybe you're watching on YouTube or Facebook Live. But, if you do listen to podcast, go to wherever you listen your podcast and please give us an honest rating and review. It's really important. It helps people find us. And the more reviews and ratings we get, the more people can listen to the show. Now, if you love us, tells you love us. And if you hate us, I hope that's not true. But if you hate us, you can say that too and I'll just cry a little bit.

And the second thing I want you to do is I have just published my second book, The Sale Ready Company. And it's a continuation of our parable with the Aardvark family. Folks who have read it find this really interesting. Even people not in business are telling me how much they enjoyed this book and are just loving that.

So, it's easy to get. All you’ve got to do is go to www.salereadycompany.com. You can buy the book for half price there because I want to get the book out in your hands, $7.95. You know, shipping and handling is included. And we have seven or eight bonus pieces on our resource center that come with the book. So, again, it's www.salereadycompany.com. And please buy the book in there. Also, after you read it, leave an honest rating and review on Amazon or wherever you buy books from.

And this is Josh Patrick. We're with Jack Tompkins. You're at Cracking the Cash Flow Code. Thanks a lot for stopping by. I hope to see you back here really soon.

 

Narrator:        You've been listening to Cracking the Cash Flow Code where we ask the question, “What would it take for your business to still be around a hundred years from now?”

If you've liked what you've heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102, or visit us on our website at www.sustainablebusiness.co, or you can send Josh an email at jpatrick@stage2solution.com.

Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.

 

Topics: cash flow statement, cracking the cash flow, gross margin, data driven business

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