107: Business Measurements are Critical for Your Interior Design Business
Michele 00:00
Hello, my name is Michele, and you're listening to profit is a choice. Joining me on the podcast today are Michelle and Alex Gage of Michelle Gage Interiors and Business Measurements. We're going to be focusing our attention on the need for business financial measurements that allow a business to know where they are and to use that data to make decisions on where they're going. If you've been listening to my podcast for any time, you know how much I focus on profitability, hence the name of the podcast, and as well as the importance of not only knowing your numbers but knowing what they're telling you, the story of your numbers, if you will. I've actually done quite a few trainings with the title, the story of your numbers. What Michelle and Alex have created is a dashboard that will help you know your numbers at a glance whenever you want. Knowledge is empowering. No matter where you are with your financials, listen in today. Don't forget to go to my website and check out the Understanding Your Financials course and the Master Your Profit course to really understand what all the numbers are telling you. Enjoy the podcast.
Every day empowered entrepreneurs are taking ownership of their company financial health, and enjoying the rewards of reduced stress and more creativity. With my background as a financial software developer, owner of multiple businesses in the interior design, industry, educator, and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to Profit is A Choice. Hey, Michelle. Hey, Alex, welcome to the podcast.
Michelle Gage 01:42
Thanks for having us here.
Alex Gage 01:43
It's great to be here.
Michele 01:46
I am excited to have a conversation with you both today about business measurements. Alex had reached out to me a while back, and we were able to connect and go through an online demo. I was really impressed and thought that there was a lot of great information. As you all know, I'm all about the numbers, all about the financials, and making sure that we understand because it doesn't do us any good to run a business if we don't even know whether we're making money at it, so I had to measure it. That is super important to me, and I know that it is for the two of you. Thank you both again for coming on and being willing to talk through this entire journey. I don't want us to just focus on the business measurements without talking about what it was that got us there or got you there. I think it's understanding Michelle's journey in the design world that made it even necessary for Alex to help create the solution to her problem. Michelle, can you start by just telling us about how you started your interiors business, a little bit of when you started, how long you've been in business, what you do, that type of thing.
Michelle Gage 02:56
I started my business at the end of 2016. I was working for a corporate retailer, and I thought I was at my dream job. I truly loved the work I was doing, but I really had a passion to have my own business and that business is to be in interior design. I've always been very into numbers when it comes to finances, not so much when it comes to math in school, but when it comes to finances, I'm very into the numbers. I knew that when I left my job, I wanted it to compliment the salary I was making previously in my corporate career. To do that in your first year is a little difficult when you're used to making a salary, and you're used to getting paid every two weeks. So, I actually started from day one on my own with an excel spreadsheet, where I would track the money I brought in every single day. Some days, there was nothing; some days, it was a larger number, but to see where I flushed out for that two-week time period. In doing that, I could keep track of my own projections for the year and see if I was on track to make what I was making at my previous corporate job. It became extremely tedious as the business grew to keep track of every dollar in and every dollar out. I found that I was accounting every single day.
Michele 04:11
Especially when you are doing it all in a spreadsheet.
Michelle Gage 04:14
Definitely! It was a little short-sighted, and how I initially set it up, it wasn't set up for long term growth. It was set up for day to day management. I could get a little bit of a pulse on where I would flush out for the year, but I never want to be in March, curious about what I'd make come to.
Michele 04:32
I'll tell you that is the same way I started when I did my business back in 2000. I managed everything through an Excel spreadsheet because at the time you're thinking, certainly, I can wrap my arms around this. I don't even know what I don't know. I don't even know the numbers I need to know at that point. So I'm just going to keep up with what I do know. What are the numbers that I can handle, and that's easy enough to compare, here's the income, or here's the check I got. I was even going as far as here's the client, here's the amount, here's the check number, all those types of things that we would keep in a normal check registry, was kept up in an Excel spreadsheet. I know that there are many people who are still doing that, I know that because I teach them many classes and courses. I'm always talking about finances. I asked them who's still doing the Excel and hands go up. Unless you are really an Excel guru, it is not easy to have Excel do the in depth reporting or analysis that we might be able to do in a QuickBooks or Sage or Fresh books or some other type of accounting software. I know having built accounting software for 10 years, which is what I did when I first started within a restaurant, I remember doing all the numbers and going "okay, now how do I analyze this and what do I say?" Or like you said, being able to go back and look at what was this like in March of the year before, especially as time went on. But I don't want anybody listening today who is keeping up with everything in Excel will think, "Oh, my gosh, this isn't the podcast me." This is absolutely the podcast for you. And for those of you that maybe have moved forward from that and are keeping your numbers in QuickBooks or some type of accounting package, I want you to know this is still for you. Again, we don't know what we don't know. I applaud that you even started with Excel because there are plenty of people who start nothing and then a year out have to go kind of recreate all of the financial stuff from the proverbial shoebox, go hand it to the accountant, and hope.
Michelle Gage 06:35
Right, and that was a position I never wanted to be in. I always wanted to know what I was bringing in. I had a mortgage. I had bills to pay. It wasn't okay for me to just sit back and hope the numbers worked themselves out come tax time. But to your point, it wasn't built to scale, so great to do it in the beginning, but I was doing the math. I'm not an Excel guru personally, Alex is, but I was doing the math in each line. It was just becoming extremely time-consuming to the point where I wasn't working on the business as much as I was working in the business.
Michele 07:09
One thing that I love about you even doing it that way, and I certainly don't suggest that if people haven't started off doing every detail in Excel that they go back and do that now. What I am saying there was a huge benefit to that, and it was was a couple of things. Number one, it made you acutely aware of every number in and every number out. A lot of times when I'm teaching people how to do their financials and Profit First and all the things about analyzing, knowing, and understanding the numbers, sometimes they get really frustrated with me. They're really frustrated with the process, and what they say is something along the lines of, "Don't I have a bookkeeper and accountant or a financial person for this?" And my answer is always, "Sure you do. But you've got to know what to do and how to do it so that you can understand otherwise you don't understand any numbers, any reports." They're just giving you a bunch of gobbledygook that is in number form, and it's like reading a foreign language. You look at it and go, yeah, you gave it to me, check, and you move on. But, by forcing yourself to work on it, to capture it, to write it down again, to even realize what you don't know, I think it as an extreme learning opportunity. And it sounds like you took that to heart. First, realizing, "Okay, there's a lot of work to keep up with the numbers number two, oh snap. I don't know how to analyze this because my Excel maybe is limited," especially if you don't even know how to do sums and be able to build formulas in there. If you have to add and subtract to physically do the numbers, that's a whole different thing. Then the overwhelming amount of numbers and knowing how to pull them together. So I love that you at least learned some of it. It was enough of rolling up your sleeves to realize this wasn't sustainable.
Michelle Gage 08:59
What it really did is it made me know if I had to go after more work to hit that number. If my number was looking lower than what I would have been making at my corporate job previously, I knew I had to do more. I was doing a handful of different design related things, whether it was working with clients or writing design trend articles, I knew I just have to write one more article to make this work. So it did hold me accountable. I was so used to getting reports in my corporate job, which was a buying role, I was then also forced to analyze the data myself. But being a small business, you don't have that luxury. Nobody's creating reports for you. Fast forward to like 2018 when Alex saw me struggle so much with this, and he's like, "I think I can give you those reports you were missing."
Michele 09:50
It is really nice to have somebody hand you the reports, if you know what you're looking at, but also realizing in that moment that there's a data capture piece, then there's the data analyzation, and reporting. They're three separate pieces to the whole puzzle. So you're capturing, but you might not be analyzing and reporting. Here's the other thing, I want to talk about why it's so important to even data capture for anybody who's out there maybe somewhere on this continuum. You made the point, and I want to highlight it and put the big exclamation on top of the Profit First, the Master Profit and all of that explanation behind it, is when you have a goal, and you're measuring to goal, it's easier to achieve the goal. I know a lot of people, when we first started our business, I was guilty of this, I started my business without having a very firm sales goal for each month, each day, each week, each year, whatever. I kind of took what came to me at the very beginning, instead of going after what I needed to meet my goal. It wasn't until I really dug into all of my numbers and realized, to your point, I need to replace a corporate salary, or I need to make X amount. Then I had a goal, I could divide it down, and I knew this is how often I'm working, this is the amount of money I need to make, this is what I need to track to at least one item. I work with a lot of people that when they're first starting, they don't even know when they come to me, what their salary goal. They responded, "what do you mean?" They don't know that and will just say, "I'll just take what I get," but then it's always not enough. I like that you at least had a goal of here's what I'd like to at least
Michelle Gage 11:38
At my side, but I had to.
Michele 11:41
And that gives you a little bit of a drive to even analyze the numbers, look at the numbers, because you're seeing how close you are and how much more you have to do. Then later, I know we can dig down into more of the details, "I need to hold house jobs, I need three of these on each of these." But at the beginning, it's just, "I could write another article, I could take one more bookcase, then refresh."
Michelle Gage 12:05
Exactly, or things are good. I can take my vacation with a little bit of a relaxed attitude and not feel like that week I'm off, I'm not making money because I made it before I left, and I have a record of that to say, "Hey, girl, you're good. Go on that vacation, enjoy it. The money is already there. It doesn't come every two weeks in the same increment that you're used to, but it's there. You've made it, so you know, enjoy, what you've done and, kick your feet up a little. "
Michele 12:33
When we weren't corporate, I did that as well. It's very steady. Here's what you get all the time. Now one of the things I teach my clients to do is how to make it steady as well, even when we're in an unsteady income environment. Because we have the ups and downs and the waves and all of that and even more so with all of the different things that have been happening in 2020 with business, but it's never really every two weeks somebody says, "Oh, can I please pay your business to keep you on target?" That's not how that works, but there is a way to manage the money to make that happen, and it changes your mindset. You really have to look at what are the ups what are the downs, for example, historically January and February are usually slower unless you did all the work and October, November, and December to get January and February set. Been in the industry for 21 years, June, July, quite often slow, because everybody's on vacation. Also, based on where you live, all this could be slow. I'm down in the south, we go back to school, the first week of August, the phones start ringing when the kids get on the bus. As you move up that northern seaboard, it's moving more into right after Labor Day that the phone starts ringing, that's the cycle. This year the cycle has been thrown up, and it's falling down. It just is what it is, however, doing what we've been talking about kind of knowing your numbers and knowing how they all pan out, you still can adjust and move. Michelle, tell me a little bit when did you start feeling the pain, and what was the pain that you felt that maybe Excel spreadsheets or even just QuickBooks? When did you move to QuickBooks out of the Excel spreadsheet?
Michelle Gage 14:17
I want to say we got QuickBooks, maybe about a year and a half, two years into the business. In hindsight, I wish I had set that up sooner, and I wish I had set separate bank accounts up sooner. Those would be my two big financial learns. We kept the money separate but just a completely separate accounts.
Michele 14:41
I actually worked with a company just yesterday, that is starting her own. She's doing some shifting in business and is starting another company. The very first thing I said to her is, "I want your QuickBooks setup. I want the chart of accounts set up, I need a minimum of three bank accounts. We'll go to five or six down the list, but we're starting with three. Here's how they're used, and here's what's done. I need two credit cards. One attached to this account." I gave her the whole framework. She's like, "but why don't we start here," I told her to go to the bank, connect this to QuickBooks but this in the outline This is the minimum viable product.
Michelle Gage 15:19
She will be coming back and thanking you tenfold later. That is my biggest piece of advice to anyone starting a business is you might not have the money to put in that bank account. You might not be using that credit card right away, but just set it up because untangling the finances is really difficult.
Michele 15:35
It's so interesting to that point. We talked about not to commingle funds. We always think about commingling funds with our personal funds with our business funds, but when we put our funds for a cost of goods with our operating expense funds, we're actually commingling funds. We're just commingling funds that are meant to support our clients and vendors or the payment for that client with our operating funds. It's a different level of commingling. So if we do not commingle, we're going to be much better off, and it is easier because you set up the processes to make it works through that.
Michelle Gage 16:17
Alex has that set up with his business measurement system where it can identify the type of charge, which is really fantastic. But to your original question, what was kind of our breaking point? When Alex come in and say, "all right, no more working till 11 on the books, we got to figure this out," was when I started placing orders for clients. It's just it's a whole nother arm to the business, and you don't know what you're getting into. I started my business at 26, and I was doing strictly design work. I was having clients place the orders on their own. They were kind of managing that execution end of it, but it was a little hairy and a little dicey, and it didn't allow me to be full service, which is what I wanted to do. So as I started doing that, my first big couple of clients came in, and they assumed I was placing orders for them. I would start to shop trade, which helped to expand the business. That's when everything got just really, really too much for me to manage in Excel by myself. It was a lot of procrastination around placing orders because I knew when I placed an order, I had to go in and do manual accounting every time.
Michele 17:26
Sticking right with your operating expenses, and then cost of goods. Anything that we're doing that is just time-based, design base, there's no product, no cost of goods associated, are an easy follow through because you just move on, you can allocate it, you can spend it, but the minute you start taking people's money for a product, that you have to place an order and pay a vendor, maybe not all at one time, now you got to pay the vendor in installments. Which means honestly, you shouldn't be even recognizing your profit on that for three to six months. You got money that is sitting in multiple places with multiple payments and then it becomes like, "Did I pay him, did I not pay him, I paid him? When did it go to?" and you got internal purchase orders and external purchase orders. You're combining things for a vendor so that you can make minimums and maximums, and the whole thing explodes at that point.
Michelle Gage 18:22
And you have multiple vendors, and to your point, they have different terms of when they collect money. So we were in this position where at the same time, we had purchased a new old home that we were renovating, and that was an extremely expensive process to renovate that ourselves. So there was a lot of money we were spending on the personal side and a lot of money coming in that we didn't know exactly what's mine, what's allocated to something else. And to your point, what's an open PO and in my corporate job, we would get that list every Monday and we'd see what our open POS were, but no one was giving me that list in my business. I wasn't getting a list of what in my bank account. Is it really mine? Is whatever in my bank account really going to somebody else and I don't know when it's going to them. I don't know when it's coming in and going to charge me the extra 50% on the order. If it's delayed and it hits three months later, I just completely forgot about it. So all of that was just so much to keep track of whether it was in Excel or in my head or in any system we were using. No system was set up to track that.
Michele 19:23
That's when people talk about exploiting their business, if that piece is not set up properly, and it is a lot. We are not downplaying how hard it is. I see a lot of Google spreadsheets, a lot of Excel spreadsheets, and listen to what we're talking about today is separate from a project management, even a product management, you can get some information, but the detail the depth and the breadth of information, no one system holds it all. That's why everybody keeps yelling and saying, Is there one place and my answer is no, there's just one place that holds everything. Here's the trouble with one thing holding everything is that you can't be best at all things at one time. A product management slash project management system has a functionality. QuickBooks, for example, Freshbooks, Sage, Peachtrees, etc, all of those accounting have a whole set of rules that go around just the accounting piece, and they shift every single year. Then you've got this middle ground of analyzing it all for the business owner, and so I have yet to find a company that was great at all three of those aspects because each of them take such a deep dive to do it well. The resources and the amount of money that would be needed to make a one stop shop solution is extraordinary. I mean, millions if we're really going to do it. I know because I've helped a couple of software companies. We're talking millions of dollars and multiple years. This is not a quick get it done. It's not I gotta stay on top of it every single minute. So definitely your pain started coming when you're starting to do procurement which means you got multiples payments, you got different payment terms for multiple vendors. You got freight storage on top of freight on top of transport on top of a lot of things that cannot be done at one time. We got to go back a second time. You got more players. Now you got installers. You got a whole different set of vendors that are coming in to work through that entire phase, so there are more moving pieces and parts. You also brought up Michelle, that idea that I love. The thought is robbing Peter to pay Paul when you're Peter and you're Paul. So why? I would love for our joint clients at some point to listen to me on the Profit First and then look at a report. If we don't separate our funds, I'm pushing for more than two separations. I got a stack of bank accounts that I would have you do, but it is because of exactly what you said our natural propensity is to go and look at the bank account and say, "Oh, there's money in that bank account, therefore I can spend without realizing how that money has been allocated to be spent. And I don't care if you say I run 12 reports. The report can handle that." And I mean, you're not going to unless you go look at the report and say, "how much can I spend?" Our natural inclination is to go to the bank account. The reports that we run are secondary and they're supportive, but our natural thought is some people would go look at the p&l and then they way overspend because that is not indicative of what's in the bank account. Or they go look at the bank account, see the money, and they just think, like you said, "oh, that's mine, I can spend it without thinking this goes to the vendor. This goes to an installer or a support person or something else." And so the money becomes this great big nugget of funds. And we spend it 14 times.
Michelle Gage 23:10
Well, or if it goes to an employee, that was the other thing that happened in 2018, I started to need some help on the design side. I had been in business for a few years, and I had to pay somebody to help do some drawings, floor planning, things like entry-level design work that I couldn't get to, and I needed to know if I had the money to pay them. So to your point, you go look at your bank account, there's money there, and you're busy. So that's, that's the quick thing.
Michele 23:37
To check off that you looked.
Michelle Gage 23:39
Yeah, I looked at my finances, but no, that's not enough, especially if you're trying to pay somebody regularly, which is you know, in 2018, where I was at because I was starting to bring on, some freelance help. I eventually wanted that person to be part-time then full time, but I didn't really have a good grasp on how I could sustainably keep somebody employed. You never want to bring somebody on without knowing if you can continue to pay them for the work that they're doing and continue to pay yourself.
Michele 24:09
Yes, asking yourself, "Can I sustain payroll for me? Can I sustain owner's draw for me?" I get a lot of questions sometimes about when my clients got all the money sitting in the account, but they don't even know if they can take any. It shows up on both sides, not enough and too much.
Michelle Gage 24:22
And depending on where you're at in your design cycle, as you mentioned, the highs and the lows which are dead on to what we've experienced with the low February, January, February, and then the summer months. You need that money to last so maybe you made a lot in May, which is always a big month for us, but in the summer, it slows down a little bit, COVID aside. The money you made in May can help support the business through the slower months. That's the stuff that Alex had a pulse on, and he could see from a high level what I was struggling with, what I wanted to know, what I knew I needed to know, but I didn't know how to collect, analyze, and have it readily available to me when I needed it. Because maybe I didn't need to look at it every day, but some days I did, depending on where I was at with my business. He was able to devise the system that gave me the information I needed when I needed it
Michele 24:48
Alex, quick question for you, let's pull you in here. You saw your wife struggling, and you went, "there's got to be a better way," tell me about that.
Alex Gage 25:22
So the Excel spreadsheet days was really the beginning of what eventually became business measurements like how you describe the business owner doing the pluses and the minuses with basic Excel knowledge and making it work was exactly what she was doing. What I could bring to the table, at least then was taking out of some of the repetitive work and give her a better process. It was very rudimentary and just really started to make the report out of the data so she would be able to look at a dashboard. That's where all this started was to take out the repetitive work. My background is in technology and engineering, and my mind goes to the, "why can't the computer do this for me? Why is Michelle spending time when computers can do this. "So it really started with taking out some of that simple, summarization, reporting, and show it to her by week, show it to her by month, by type, whether it's ours or its product and start to just kind of throw information at her in a summarized way. Then it really just kind of kept growing, so I started trying to optimize and systemize more and more pieces of it. We really just iterated from there. Actually, business measurements in air quotes was really in Excel spreadsheets for a long, long time. It was still manual for a long, long time. Michelle was still typing in information, but we were using that to then present in a better way. Like she mentioned in 2018, when things really got established, we really got ourselves better situated in QuickBooks better situated with our client management software, then that's where business measurements blossomed into something different. Even though QuickBooks helped us manage purchase orders, and accounting details, the client management helped us to deal with proposals and invoicing, there still was a gap. We kind of blew up the all the existing systems to really establish ourselves in the right way. We still needed needed something that wasn't available in either QuickBooks or in the Client Management Software
Michele 27:16
Two questions for you. One, this very much sounds like Sarah Daniele with MIDOMA, the way MIDOMA started was she was a designer, and she was needing project and product management tools, but she didn't have at the time. So her husband with his technology background helped her to build that. Then they realized, "Oh, this is something other people want that." I'll make sure I link that to our show notes so that people can hear about it because I think it's a very similar experience to this. Alex, did you look into or try creating QuickBooks reports to do all of this before you decided to jump in and build it out because Michelle said I can enter it all in excel but I'm not an Excel guru. They teach my son so much in college these days, and he doesn't have an IT background, but that boy can create pivot tables. He is so far even advanced for me who's used it for years because of the way they're taught to use it. Alex, you know how to make Excel sing, but my question is, did you try sending up the reports in QuickBooks first, because they do have a report generator and report maker?
Alex Gage 28:32
That's exactly where we started when we said we needed to get our systems better managed. We stopped doing the manual data entry, and I said, "okay, we need to recreate what we had in Excel, then QuickBooks, then client management software. Alright, let's get it set up." I spent time poring over the details of what QuickBooks could report, customizing whatever was quote unquote customizable, and what is available to the online QuickBooks user which is what all of these client management software's make you use. You end up with a really simplified, quote unquote customization, which is great for a user who's going in there and be able to tweak a few things.
Michele 29:12
Basic reporting.
Alex Gage 29:14
Exactly, and it was limited where you pretty much couldn't break it, then I said, "okay, well, that's not quite getting where I wanted to go." We did set up some recurring reports to automatically send us information, but it had one big drawback that was you had to be in QuickBooks daily, weekly, monthly, however frequent. You could manage to add associating transactions, bills, and invoices with the bank transactions but that manual work limited depending on how accurate and how updated your financial information was. Michelle was spending all of her time in the client management software, and I was managing the backend of QuickBooks, but if I wasn't updating QuickBooks and that report automatically ran, but didn't get to it this week, that's actually a week old data. It was accurate for what it was updated through, and it had information that was somewhat presentable in the way we wanted it, but we couldn't combine information and really give the dashboard the customization on what we cared about. We heard this phrase a long, long time ago that, what gets measured gets managed. So being able to have on one sheet of paper, the things you need to measure about your business, business measurements that you can then react to, for example being able to know weekly income. I spent time in QuickBooks trying to get to that point. It had some things available. Some things were drawbacks and then the same thing on IV or any other client management software, the ability to run those reports. Those give you lots of data that you can reformat in different ways, but there's no really good way to get a good pulse of your business. You could sit down and dig into the data if you had the time to, but Michelle didn't, and then be able to get some information, but it wasn't the pulse that we need.
Michele 31:05
So what's interesting, having a broad spectrum of client base that I work with, and different people use the the management systems such as IV, MIDOMA design, or Advantage Design Manager, others, not everybody uses it the same way. Based on how they use that system, in turn changes potentially how they use QuickBooks. Some use QuickBooks as a generalized repository for income, but a detailed repository for business expenses. Others use the management system as the detailed repository for client based income. So all of the data, the detailed minute product specific data that a lot of times is sitting in their IV or their MIDOMA, is sometimes got roll it up to a high level number and move it over into QuickBooks. They're not necessarily transferring a line by line and everything but what that does is you can't get all the detail from QuickBooks for all of it, because it doesn't live there. Conversely, you can't go over to IV or MIDOMA and get the full on business picture because it doesn't hold business expenses, it only holds the data that is going back and forth that is associated with a product or service to a vendor or to your client. So you've got this top detail over in one system and the bottom of the PnL detail in another system, but if everything is not aligned at exactly the same time, you can have more confusion in your data analysis. If ones that they did through Monday and another through Wednesday, or through Friday, because it's getting all the transfers of data that you don't even know what you're looking at. To really be able to dial this in, which I think is what you have done with business measurements, is you're looking at data from both places wherever it is connected from based on the same date, the same time, and the same everything so it is a true representation of where your business is at that point in time. Is that correct?
Alex Gage 33:29
That's exactly it and to go back to your point of one, one system can't be everything in these three different areas. To bring in elements of your QuickBooks p&l, but doesn't bring in all of the nitty gritty detail of these annual revenue dollars were because of hours billed to the client, whether from a commission or from selling products. Also commercially, it doesn't break down every expense, it's giving you a roll up of that information, and they should match if you go look at QuickBooks. You should be able to see the same total numbers you would see on business measurements, but the beauty of what business measurements offers that QuickBooks doesn't is it's directly getting that bank transaction and not requiring you to categorize it. So as long as like we talked about in the beginning, your setup where your business is running on its own bank accounts, every transaction in that bank account is associated with the business, then when you look at those numbers, you're at least seeing the high-level revenue, the high-level expense and the high-level profit. If you deposit the cheque you go home, open your computer, it showed up in your bank account, it's on business measurements. This gives you the ability to project reality for the end of that month, the end of the year, through the exact moment you've taken on that big expense, that big job without having to make sure you're updating QuickBooks or your accountants updating QuickBooks and there's some efficiencies in saving the money on designer side. We don't have to have that meeting with your CPA, if that's how you're getting your financial information. This has given you daily information to know hashtag know your numbers, and really have a pulse every single day of where you stand.
Michele 35:16
Interesting about that is, for example, if we were to talk about QuickBooks, we can run our reports and a cash accounting or in accrual accounting. So we run in cash account, we're only seeing as much as it's tied into bank accounts or as much as we are manually updating it. We used to say trash in trash out, when I was working with a client yesterday and they gave me a report to look into, an Excel report that they created. The first thing I said then was up in the top left, I want to see the date it was run, I want to see what you're trying to accomplish on this report and I want to know where you're pulling the data from, because that matters. You can't just show me a report and I don't know if it came from QuickBooks or did it come from your bank account, or it come from IBM? Or is it pulled from multiple places? You have to tell me where it's pulled. Those are three basics. When we are in QuickBooks alone, we are running the majority of our financial reports within with a cash or an accrual and then we see the differences but we're having to manipulate it in our minds. The difference between where I am and where I'm projected to be. So if we're looking at accrual only it's kind a longer term projection, if you will, based on if you have everything entered bills and invoices, because it's not just what you've received in cash. If we're looking at it only in cash, that's only telling us a snapshot. We're having to look at every report separately and combine the data to do some analysis in our brain, to see the Delta or the difference between the two to figure out am I okay, am I not okay, how am I going to surf this wave? What's so cool is when people always ask me, "Michele, how do I manage my cash flow?" I will tell them either they have to choose to manage it by the p&l or manage by the bank account. You got to choose one, you can't go back and forth because they're not always the same. I tend to go off the bank account, because that is a true indicator when we do profit. First, we do it off the bank account. We don't do it off their QuickBooks. They may have screwed up QuickBooks because they may not have entered it. No offense to QuickBooks Online, but they cannot keep a bank account connected for a long period of time. Any accountant or any bookkeeper frustrated with their bank accounts that is connected to QuickBooks Online because sometimes it shows broken links. I say earlier, our natural way of doing things is to go look at the bank account. And so here's what I love about business measurements. From what I have seen and what I have understood, so Alex, if I totally get it wrong, it's on you to correct me here. I'm gonna wait to dig in more but from going through the process with you, watching it, and looking at it, my understanding is that, it combines the best of cash and accrual accounting, meaning it's going out to the bank account and pulling in the numbers. That's our cash. It's doing the projection, which is an accrual type process to show us what is out there, so that we not only see where I am, but we see how it's potentially going to play out going forward. And I love that because that is that analysis that we're having to do in our head with two static reports.
Alex Gage 38:49
You've got it exactly right, that it's definitely is a blend. That's what really came out of the gaps between all these reports was the in some cases, you want to look at it with this one viewpoint and then many times you want to take those two things and mash them together.
Michele 39:01
And that's the key, you're right, that is the piece that allows us to take the data, to look at it, and then make business decisions. That's why most of my clients when they get those reports from their bookkeeper or their accountant, or they generate them to send it to me for us to do our monthly review. My rule of thumb is I need you to send it to me in cash and I need you to send it in accrual, because we're going to have to smush all that data together to get the answer that we want. It's not an either or it's the end.
Michelle Gage 39:33
Do you mind if I interject for a second? Because I think that is so important. I remember a few years back, I'm in this interior design Facebook group and somebody made the comment chimed in by another designer about how their accountant told them, they had enough money coming into the business that they could hire an employee. Congratulations, that's great, but my first thought was, you needed somebody to tell you that it's time to hire? I don't ever want somebody to tell me what I've made, when I can hire, if I should invest in that photo shoot. I don't want somebody else to be responsible for the decisions that I need to make as a business owner. That's where Alex and I did many many weekend sessions deep dive. This didn't just come together, we put hours upon hours into it over a couple of years. I never want to be in a position where I'm waiting for somebody to tell me what I've made, what money is available to me, and what business decisions make sense for right now. I know what business decisions make sense for me right now because I know where I stand financially. I know that it's the right time to invest in this three-day photoshoot that I have coming up. I know that potentially we might be hiring somebody at the end of the year, and the finances are there. If I feel like it's the right time to do that, I don't want to be straddling this line between I don't know if I have the money to do this or I don't know if the business is secure enough to do this. I want to know this is what I need, and I either have to work towards it to make it happen financially, or the money is there right now, and I can pull the trigger to make that decision as I need.
Michele 41:06
They might very well want to come and hire me if they need those.
Michelle Gage 41:13
But to that point, can I hire a lawyer? Can I hire an employee? Yes! I mean COVID has changed all of our businesses in many ways, and I know one thing we're doing is looking to where we can invest this year to make 2021 so much better than 2020. I know what money I have to invest, and I think that is the tricky position that designers sometimes find themselves in. Either because they're not interested in the numbers or because it's just too time-consuming and overwhelming.
Michele 41:41
Overwhelming. This is why you have to have the understanding of your financials, which teaches you even how to understand the numbers, to look at numbers, and analyze it. If you don't even know what to analyze, what to do, and how to look at it, for example on your reports, if your report was spit out to somebody and they're not taught how to read the report, it's useless. We got to understand the information somewhat for us to be able to analyze and use it to make a decision. I have quite a few that will say to me, when we first start working together, I'll say, "you know, how are you doing financially?", "I don't know, I haven't gotten a report from my bookkeeper." And I'm like, "no, no, no, nay. You should be able to do that." You don't have to be the one doing all the detail. But we are the ones who need to be able to provide the oversight. Alex, you used the quote, what you measure gets managed, and I've always heard you measure what matters. So you measure what matters and then you manage it, but you got to know that it matters to even get the information.
Michelle Gage 42:46
It's a multi-step process. But yeah, to your point, you're in control and in charge of your business. You have to be fully in charge and the point you made earlier when we were talking about how important the finances are to the overall health of the business. It's such a key component because it informs everything that you do, if you should stay open. It's a very crucial aspect to what we're doing. You can't get into the business just for the love of it. It has to feed your lifestyle, and it has to provide for you.
Michele 43:17
Absolutely, so Alex, fill us in in our last few minutes together, tell us all about business measurements. What does it do? We've kind of talked about it from a very practical and tactical standpoint but tell us a little bit more. It's even more robust than some of the things we've talked about? Share with us about that.
Alex Gage 43:33
Sure. The real base structure is an automatically updated p&l balance sheet and chart of history. It's a one-page view of your business both where it is today in cash, what's the end of the year will look like. What it will look like for both for profit, revenue, and your projected taxes, as well as a breadcrumb trail of where you've been over the last, two, three years or however far back you'd like to look. It's a glance of where you're at but quickly digestible. You can get it updated every day, every week, every month, however often you'd like to see it. It gives you the information you need to know. Am I up this month? Am I down this month in my project to the end of the year to be where I want to be? It requires connection to your bank accounts and QuickBooks to give you that information. On top of that, the other places that it really shines is the ability to give you company-wide reports across all of your client-related information. Things like tracking all of your purchase orders in one place it is just connected to your client management, and it will be able to see all the purchase orders you've placed. If you're using that diligently, then it can update itself automatically. You can come back in and say, "I've got tracking for this order, this one's at the warehouse." You can keep all your purchase orders for all your clients at one spot, filter, or pivot at however you would like because that can be customized to. We can have client-level reports for profit, so you can see how much revenue you've brought through a particular client. How much cost of goods have been associated with that particular client over a certain amount of time. You can really see where you had to compromise. Maybe you had a client that you had to pay attention to because they're a little more price-sensitive, and you ended up slightly lower on your profit margin than you want it to be. You can really keep tabs and aware where you should spend your time as it relates to clients. Depending on which system you are using whether it's IV or MIDOMA, there's a few other add on pieces that that can be incorporated as customizations, but it's really primarily that one glance, p&l sheet with a balance sheet and history. Then the client level reports whether their purchase orders or profitability per client.
Michele 45:42
So Alex, you have totally geeked out on all of that.
Alex Gage 45:46
It's been fun. It was one of the things that really sparked the passion in me is watching Michelle struggle with the manual data entry and really going off the deep end on how do I make computers do all of this? How does the designer not do anything? And as I really pieced all this together, it's really formalized over the last year, how does this just run and no matter what I can not look at our report, checking it weekly monthly, however often. It's just it's so satisfying to come back later and know that this just run smoothly, and it's given information to the people that need it. I may not hear from someone, a designer who's using business measurements for a week, a month, two months, six months, then I go back in, and I can see that all those time they've been getting profitable, useful information. It runs and extremely satisfying to know that the tools we built for Michelle can help other designers grow and make the right next step in their business. Quite honestly reacting to the downturns in their business, the moment they happen versus three, six months down the line when they're already knee-deep in it. They could have had the information sooner.
Michele 46:51
So did you get your wife back?
Alex Gage 46:52
My wife yes, especially timewise.
Michele 46:57
She was saying that she was working till like 11 o'clock or into the night, and you were like, "seriously, come on."
Michelle Gage 47:01
Well, he got some of his time back too because I dragged him to Panera every weekend and we'd sit down for hours, and I'm like all right...
Michele 47:09
Oh, so a marriage saver too.
Michelle Gage 47:12
Yes, now you can go to brunch without your laptops, leave your laptop behind. You don't have to talk about the business finances over eggs.
Michele 47:26
It's true, to reclaim the way that you live is important. So it's not just the reclaiming all the manual entry and the analysis or not even knowing what you need to look at, it's also reclaiming your peace of mind to be able to make decisions based on the data. Because again, if you get junky data, you potentially make a junky decision. You got really good, great data that you know how to interpret and know what to do with, then you can make a well-informed decision.
Michelle Gage 47:55
Right and not spend hours and hours digesting it and agonizing over the information that you're looking at. To Alex's point, it's a snapshot. It's a quick glance at where you're at, what the health of your business is and from there, it's up to you to agonize over, am I ready to hire from financial point of view. Are you at the place where you can train somebody, which is a whole other decision. But being able to have the financial clarity has just been so beneficial over the last couple of years.
Michele 48:23
I love it, because sometimes when you look at the data, the answer could be right in your face. It's just there. And you're like, "ah, that was easy. I shouldn't have stressed". When I am with my clients, they would ask, "how did you know that within three minutes. I've been looking at this forever." And my answer was, "this, this, this." And they're like," oh, that's it?" Yeah, that's it. So I love that we have this available. Thank you both so much for sharing and telling us about the journey to build business measurements, then also how it can impact a business, and impact a life, especially your own life by recalling and reducing stress.
Michelle Gage 49:01
I just want to thank you for having us on. I listened to your podcast every week, and I think the thing that's really fantastic is, we like talking about money, but not everybody does. I think you do a really nice job of making the conversation approachable. And we've been talking about certain points in our business, I forgot to mention earlier, around that 2018 time, I had also downloaded that checklist, the financial checklist off of your website, and used that to get me in gear where you had ratings for, on where you stood with everything. I looked at that, and I saw areas where I could improve. So that really helped to kick things into high gear for us. So I just love that you talk about money and you don't shy away from it. Because to your point, we need to talk about it to be able to make those informed decisions, and it's a process, but I think you do a nice job every week guiding people.
Michele 49:49
Oh, thank you, Michelle. That checklist is out on my freebies page. If anybody goes to ScarletThreadConsulting.com and goes under freebies, you can still download that. I recommend that you do it at the beginning of the year, and that you do it mid-year because sometimes to Alex's point earlier, take your eyes off what needs to be measured and realize that when we spend our attention, fixing one thing, we can sometimes let go of something else. For some of my clients, we go through that every quarter, just to see, especially as we're learning, growing, and trying to look at and measure more and more things.
Michelle Gage 50:23
It was so helpful because I thought I was maybe a rockstar in some areas where I wasn't or found out I had strengths that I didn't quite understand at the time. I believe we did at the beginning of the year. It totally is eye opening, and I think it's a great place to start. If you're not comfortable talking about money and you're not sure where you're at but you know you should be somewhere and you should have a good pulse on it, I found it to be beneficial. I dragged Alex into it when I was taking it. I was like, "let's do this together." So another marriage bonding experience.
Michele 50:55
Tell us your Facebook group that everybody can go to.
Alex Gage 51:00
There's a private Facebook group - business measurements for designers. There's also a business page, and it pushes people to the group. So go join that because there's lots of information, videos on the specifics of the things we've talked about today,and breakdowns where we really get into the details of what are the reports that you can get, what can you see, and it really gives you a better picture of it. That's the best place to get the information.
Michele 51:22
Michelle, and Alex, thank you so much. This has been a really fun conversation. I felt like we could sit here for another couple of days to keep talking and geeking out over all the numbers. I appreciate your time that you're sharing and Alex; we're so glad that you joined Michelle so that we can have this available for the whole industry.
Alex Gage 51:38
Yeah, we're excited to keep growing and getting everyone the information that helps them grow.
Michele 51:43
That sounds great. Well, thank you both so much.
Michelle Gage 51:43
Thank you.
Alex Gage 51:43
Thanks.
Michele 51:43
I'm so thankful to Michelle and Alex for such a great conversation. I seriously could have sat and just dug in even more, and using empirical data to make decisions in your company is so much better than just working on gut instinct. I love, I guess you could also call it geeking out, working with business owners who want to know and own the numbers of their business, because having this info is exactly what we need to be able to scale. You can watch my masterclass on the Aim with Intent Methodology that I teach, go to https://www.scarletthreadconsulting.com/landing-page-aim-masterclass and then reach out so I can help you grow the business you want. And as I often say, remember, profit doesn't happen by accident.