128: Financial Skills to Pay the Bills

In this episode of Boosting Your Financial IQ, Steve delves into the importance of financial skills and how mastering them can drive business success. Drawing from his experience as a CFO and his work with multi-million and billion-dollar companies, Steve highlights key concepts like building accurate forecasts, understanding LTV to CAC ratios, and combining strategy with financial acumen. Whether you're an entrepreneur, a business leader, or an aspiring financial professional, this episode offers valuable insights to help you grow your business, increase profitability, and achieve financial freedom. Tune in to learn how these essential skills can transform your financial life. 

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Transcript

Speaker 1: 0:15

Oh my gosh, what an incredible skill to have, because this translates to all different types of companies. Whether you're going into retail or pharmaceuticals or construction or whatever it may be, building a forecast is a really, really valuable skill. This podcast, boosting your Financial IQ, is about business, financial literacy, strategies for profitability and the principles taught at byfiqcom. My hope is that you will apply the lessons learned and that we can work together soon in my mastery program. Enjoy the show and don't forget to subscribe. Let's talk about financial skills and let me ask you a question Do you have the skills to pay the bills? When I was in high school, one of the first concerts that I went to was the Beastie Boys and I could tell you it was an incredible experience, and they sing this song Skills to Pay the Bills and it just always stuck with me and that runs through my head when I think about financial skills. And that's what I'm here to do is teach you all about finance so you can go out there and achieve financial freedom and make more money in business, but you need the skills. So check this out.

Speaker 1: 1:19

When I was a CFO, my right-hand person was the one who was in the role of FP&A, which stands for financial planning and analysis. Now, you may know by consuming my content that I'm a big advocate of taking strategy and finance and combining those two functions together to drive more value for a business. So in the FP&A role, this person had a ton of skills that helped me to do my job more effectively and to grow the value of the firm. And this is what I want to talk about today, and these are some examples of how you could take financial skills to drive more value in business and guess what? Ultimately make more money, whether you're an entrepreneur, whether you're a leader making financial decisions on behalf of your company, or whether you're aspiring and up-and-coming financial professional. Let's talk about this.

Speaker 1: 2:14

For example, when I was CFO, here's one thing that I always thought about, and that is LTV to CAC. Right, ltv stands for lifetime value of a customer and CAC C-A-C stands for customer acquisition cost. So the burning question on my mind, especially in my last role as a CFO of a fintech company we're growing really fast, we're raising capital and guess what? We had to generate returns on that capital and grow firm value. Otherwise, when it came time to raise additional capital, we were going to have a down round and that would be no bueno, you don't want that, all right. So I was constantly focusing on our LTV and CAC ratio because I knew if we could increase that spread, then the more money we poured into our marketing and sales efforts well, guess what? The more our firm value would grow. So LTV is calculated by figuring out how much gross margin you're earning per customer and then what is the lifetime value of the customer, and then comparing it to your customer acquisition cost, in other words, how much money you're spending to acquire a new customer.

Speaker 1: 3:26

Now when I would go to my FP&A partner, I would say look, we need to calculate this, and it's not as straightforward as just going to the income statement and being like, oh, here's going here and finding LTV. You have to take a variety of things and you have to understand the story behind the numbers on these financial reports, to extract this data and then to compute it correctly. Now there are also a lot of nuances. For example, do you include sales and marketing salaries? What about their burden? Okay, what about this expense or that expense that's kind of related to sales or business development? Do you include those? Or when do you exclude those? And that's why it's so important to understand the story behind the numbers so you can accurately calculate this, because the last thing you want to do is to have the wrong ratio, believe that it's correct, go raise a bunch of capital and then find out that your assumptions are wrong and you blow up the company. Okay, you don't wanna do that. But this is just one example of like financial skills, of reading financial statements and then computing this and determining look, okay, our LTV to CAC is 3X but then also understanding what are the drivers of the business to make it go to 4X and 5X and 6X, or can you? Is there a threshold? What's the benchmark? All these things play the part of financial skills. And guess what, when you can do that and you can understand it and the business grows, if you're in an FP&A position or if you're the CFO running a company and you know this stuff and the business is making more money, what does that mean to you? Well, it should translate into you making more money. Or you may want to say peace sayonara, give me more equity or I'm out. All right, I'm just kidding there. But seriously, that's one example. Here's another example when it comes to financial skills Understanding how to build forecast Six months, nine months, 12 months, 18 months, 24, 36 months, 60 months, whatever it may be out into the future.

Speaker 1: 5:21

This is really important because, think about it If you go into a business, what do you think is probably one of the top things on the owner's mind Whether it's one owner or a board, or whatever it may be I could tell you it's cash, cash flow. Especially for a startup business, right, or a business that may be struggling, cash is always super critical. Now, if you're just looking at a budget, an income statement budget well, sure, that could see down a profit, but that doesn't tell you free cashflow. Now you have to take that profit and then account for changes in working capital and your capital expenditures. You have to add back depreciation and amortization and do these adjustments in order to arrive at free cash flow. But then you also have to understand okay, is it unlevered free cash flow or levered free cash flow, and which one do you use to communicate to the stakeholders that need this information?

Speaker 1: 6:14

So when I was in the CFO role, I would train my team how to build these forecasts, and that's what I do at Boosting your Financial IQ. I have a program called Financial Pro and I teach people how to build a forecast based on their analysis and then take that forecast and then create a valuation model to determine how much can the company be worth if you go down this path or this path and combine it with strategy. But when it comes to forecasting, having skills to build out a forecast is super, super important. I just hired an intern. His name's Nate. He's doing an awesome job for my company, cultivar. He's working on a ton of companies for me and he knows how to build these forecasts and I'm teaching him and I'm like, oh my gosh, what an incredible skill to have, because this translates to all different types of companies. Whether you're going into retail or pharmaceuticals, or construction or whatever it may be, building a forecast is a really, really valuable skill. So that's one thing that I want to emphasize here.

Speaker 1: 7:13

Let me give you another example. A while back, I was working with a company and they wanted to evaluate what impact it would have on their business if they raised prices by 10%. Well then, what I did is I built out a model, because I had the skills to build this model and I had this little calculator and I had two assumptions. Number one was, if they raised their prices, it would have X impact, but also it would have an impact on profit. But it also have an impact on volume, right? So if you raise your prices, your volume may go down or may go up and you have to account for both things. So I built this model, but then I also incorporated in their customer churn and some other things to make it really dynamic. And that was super valuable for the company because they're able to play with this calculator and then ultimately they raised their prices and it resulted in a return greater than $1 million. I mean it's a huge impact just by being able to build off this calculator and to evaluate what the impact would be on the company and its customers. And it was a win-win for all because customers sure they had to pay higher prices, but they got a lot more value because the company changed its packaging, doubled down on improving its quality and so on and so forth.

Speaker 1: 8:23

So yeah, it's just is a great thing, but having those skills to evaluate all those different things is really important. You can't just go into a company and say, yeah, raise your prices 10%, because maybe raising prices 10% is going to result in a bigger churn, which is going to hurt the business more than it's going to help by raising prices by 10%. Maybe the sweet spot is 7% and that would maximize profitability. You have to know these things and have the skills in order to evaluate these types of situations. So, in summary, if you have the skills to analyze a company, to really understand the financial performance of a business based on the income statement, the balance sheet and the statement of cash flows and all the drivers that are related to those specific financials, and then you can take that analysis and then extrapolate that and build a forecast to understand the future of the business and then evaluate things such as return on invested capital and cash flow and so on and so forth, and then you can build a valuation model which explores different strategic options. So, for example, this strategic direction like expanding geographically. Or maybe there's this other strategic option where you're going to buy other companies, engage in M&A activity, and when you can evaluate a business based on these strategic options and tie it back to the strategy. Oh my gosh, you're going to be a powerhouse in business, but you have to build the skills.

Speaker 1: 9:41

So I went through years of this. Okay, I got my undergraduate in accounting and finance, got my master's in accounting, got my CPA. I worked in public accounting. After all that, I got my MBA with a specialty in finance and international strategy and then I've been in the Excel world in financials, turning around companies like hands-on doing this stuff for years and years and years. So it's not going to just come all at once. But I can tell you, the sooner you get started the better, because it makes all the difference in the world. Trust me, I would not be able to do what I do today without financial skills.

Speaker 1: 10:16

And in fact, when I'm working with companies, oftentimes I'll ask the CEO. Over time I'll say why did he hire me initially in the first place? And more times than not they say the reason why we hired you, steve, is because your financial acumen and how you combine that with strategy. Because in the past maybe they found a strategist but they didn't have the past. Maybe they found a strategist but they didn't have financial skills. Or they found an accountant type but they didn't have the strategic skills. So when you can combine these two together, I'm telling you it'll make all the difference in the world. So in the meantime, keep building your financial skills, get the skills to pay the bills and you will improve your financial life. Alright, reach out to me if you need any help. I'd love to hear from you and until next time, take care of yourself. Cheers.