During this episode, Joe Woodard talks with Dawn Fotopulos, associate professor at The King's College and award-winning author of “Accounting for the Numberphobic: A Survival Guide for Small Business Owners."
See how Fotopulos believes today's accountants are uniquely positioned to not only support the success of small business clients, but also to stem the staggering rate of small business failure in America.
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Thank you for tuning in to this episode of the Scaling New Heights Podcast.
Full transcript of the episode follows:
Joe: Thank you for tuning in to this episode of the Scaling New Heights Podcast. During this episode we will talk with Dawn Fotopulos. Now before we get into the conversation with Dawn, I want to thank our podcast partners. That's Neat, SmartBiz, and Entryless. SmartBiz is a lending facilitation company, they help companies to secure SBA loans. These are traditional bank loans at low interest, but without all the headaches. They streamline the SBA application process so your clients can easily apply online and receive funds as quickly as 7 days after the application is complete. You can learn more about SmartBiz loans, and you can also take advantage of their $500 discount on loan closing costs by going to woodard.com/podcast.
Let's talk a little bit about Dawn Fotopulos. Dawn is the associate professor of business at the King's College, and the founder of www.hiddenprofitprophet.com . It's dedicated to helping fast growth businesses double, and even triple profitability and cash flow in record time. As an experienced entrepreneur and small business turnaround expert, she has rescued hundreds of small businesses, and helped thousands of others reach their full potential.
Dawn is a certified facilitator of the Kauffman FastTrac program, a CEO leader for the Job Creators Network, and award winning author of Accounting for the Numberphobic: A Survival Guide for Small Business Owners, just named one of the top business books by Small Business Trend. An expert in her field, she has been featured on MSNBC's Your Business, and the New York Times Small Business Summit, and in Forbes. You can find out more about Dawn at www.hiddenprofitprophet.com. Dawn is also partnered with Woodard Institute, teaching a course for us cyclically on how to make significant changes in profitability for your client.
Now before we get into the conversation with Dawn Fotopulos, I want to talk to you about Entryless. Entryless automates bill pay and it seamlessly integrates with numerous cloud solutions, QuickBooks, QuickBooks online, Sage One, Xero, and others, and it converts your paper bills into electronic data, and automates the bill entry, as well as the payments to the vendors. If you provide outsourced accounting services, you really want to get to know this product. Entryless is offering our podcast audience a special offer of up to 2000 automated bills for free. You can learn more about that at woodard.com/podcast.
Now let's get to that conversation with Dawn Fotopulos. Dawn, welcome to the podcast.
Dawn: It’s great to be here, Joe.
Joe: Dawn, I know you are passionate about small business success, and you've done your homework. There are some very sobering numbers out in the space around small business failure. Why do you think the failure rate among small businesses is so high?
Dawn: Let's take the first part of your question, which is a great question, what is the small business failure rates in the United States? It's really staggering, Joe. Fifty percent of small businesses fail in the first four years of operation. If you took that money and you went to Atlantic City, you'd have better odds. And, by the way, they're failing faster than they have over the last 20 years.
I believe the reason that they're failing is not what you hear very often. Most often you'll hear, "Oh, small businesses are failing because they don't have enough startup capital. Oh, they're failing because of this and that." No. They're failing because the people who are running them do not understand how to measure their profitability and their cash flow. Let's just start there. Basic business disciplines.
The reason we feel so convicted about this is because when we were at Scaling New Heights and I was asking the accounting professionals who were there, "Do you send monthly statements to your clients?" Everybody raised their hand. They said, "Yep, we all do it." They do it like clockwork. God bless them, right? Then I asked the follow-up question, "How many of your clients actually open up those files and look at them?" They were hysterical. They all started laughing. I said, "Why are you laughing?" It's because no one ever opens them up and looks at them. Then I asked the third question, "Those who open them ... " Less than 1%, that was the feedback. "Those who open them and actually look at them, how many of those people actually understand what they're looking at?" The answer was almost nobody.
We had these incredibly talented small business owners out there offering their services, doing a great job, and they're ignoring the operations of the business. It's not the fact that they don't have enough capital, it's that they don't know what to do with the capital that they do have, and they don't know they're in a crisis until they've really burned through all of their cash and they have no other options.
Joe: What I'm hearing you say is the information is available and the people who have the highest level of access to that information, the strongest understanding around that information, are unfortunately not part of the solution. They may not be part of the problem either; they're just standing by in the wings and not taking action. Everybody listening to this podcast, or the vast majority of the folks listening to this podcast are in the accounting profession.
The largest demographic of our listenership, since this is the Scaling New Heights podcast, and Scaling New Heights is a conference for QuickBooks ProAdvisors, our largest listener demographic is QuickBooks ProAdvisors. How can ProAdvisors help turn the tide?
Dawn: That’s an excellent question. Here's my hypothesis, Joe. Nobody in the world, nobody on planet earth is better positioned to solve this than Intuit ProAdvisors. Think about it - these people are sitting on all the data. They see everything that's going on every month; they see all the nuttiness that goes through a small business. They see it and they know how to fix it. The question isn't whether or not the ProAdvisors are the right constituency; they are.
I'll tell you what, when I worked with small businesses directly, the biggest hurdle that I have found is - the first thing we have to do is - we have to fix the numbers, because the books are always a mess. In fact, Intuit has done surveys to find that 87% of small business owners do their own books and 45% of them claim financial illiteracy. That's not a problem, that's an epidemic!
The good news is if somebody has hired an Intuit ProAdvisor to do their books, they should have a far higher level of confidence in whatever information they're looking at, and that information of course is the mirror to your business. It's like looking at the dashboard on your car, but it's your financial dashboard. You've got to look at those dials and understand what they're telling you, so that you can make better business decisions. Everybody thinks that the books are for the IRS, and they're not. The books are there and the monthly statements are there for the business owner, but most business owners can't read them.
How do we solve the problem? What I recommend is the first thing that has to happen is the business owner needs to get smart about some basic, basic accounting terms. That's why I wrote the book, Accounting for the Numberphobic: A Survival Guide for Small Business Owners. It's the stuff that they should have learned and they never did. They may be great photographers, and landscapers, and interior designers, and you name it, but they never learned how to run a business. Numberphobic is not for dummies; Numberphobic is for smart people that basically need to get up to speed really fast.
The book has been useful because it does what the ProAdvisors frankly don't have the time to do. They don't have the time to sit there and give tutorials. However, once the business - and I've tested this by the way - once a business owner reads the first four chapters of the book and then they sit down with their accounting professional, it's a much richer, much more insightful conversation. And we get to where they need to be in terms of profits and cash flow a lot faster when they do this.
The first step is for the business owner to learn the basics. They’ve got to step up to do this and it doesn't take long. Maybe they could do it in a week. The second thing that has to happen is they need to look at their ProAdvisor as an investment, not an expense. The way that's going to happen is if the ProAdvisor's role changes from just a subcontractor basically, or a support system, to a business therapist. The real value of a ProAdvisor is not just reconciling the books every month and the business owner doesn't fully get this. I'm going to be speaking about this by the way, at the QuickBooks Connect Conference in a few weeks.
The real value is in saying, "So what? Now what do we do? How do we double, triple, our profitability and cash flow?" Because that is what's going to double survival rates. First thing, the small business owner has to step up and learn the basics. Numberphobic can help them do that. The second thing that has to happen is they have to be willing to hear what the ProAdvisor has to say to them, and perhaps the ProAdvisor can get compensated based on results, and not just trading keystrokes for dollars, so that everybody's got a real vested interest in the success of the business.
Joe: Dawn, I like a couple of things you said there. I'm going to get back to your car dashboard analogy and I'm going to drill down on it a little bit, make some additional implications and applications, but I like what you said about charging the client, pricing based on the result. Just recently, just a couple of weeks ago, we had a podcast episode with Paul Dunn, one of the authors of the book Firm of the Future, and we really drilled down on this distinction between efficiency, which is an internal measurement that's production focused, and effectiveness, which is focused on the results that you generate for the client.
The old model is, I look inside and I try to increase my profits. The new model, and the much needed model I heard you commission us to do, is to focus on the client's margins, the client's wealth, the client's benefits.
Dawn: That’s right, Joe.
Joe: Then we price proportionally that benefit. Everybody can go listen to the podcast episode with Paul Dunn, but the pricing, it's a little bit tough because it's a subjective art. Just think about the joy of that, right? We go from hourly billing to this whole new adventure of transforming small businesses.
I want to get back to your analogy of the dashboard. I love that one because if I'm driving the car, and I am the typical driver, I am looking at my gas level, and I only glance at the gas level from time to time. A lot of us just wait for the light to come on. That's called an alert in a business intelligence solution. Pretty much we're just looking at speed, right? We wait for the alert on gas, we wait for the alert on oil pressure, we wait for the alert on transmission fluid, and all the other little things.
As a matter of fact, there's so many little icons that are hidden now on the dash, that I don't even see them unless something goes wrong. What I'm hearing you say is let's pull out that owner's manual with the client, let's let them know all of the metrics that are on that dashboard, and the most likely action that they need to take if something happens. If the oil level goes low, the most likely result is you have a leak, or you're burning oil.
Dawn: That’s right.
Joe: If we have a mechanic listening in, I get that there could be more, but there are about two key probabilities. Then when we're pulling this owner's manual out, there are only about 10 monitors, metrics, or dashboard indicators that you need to worry about as a driver.
Then I heard you say something else, and this is where I'm going to extend the analogy. I think you are commissioning QuickBooks ProAdvisors to be mechanics. To not read just the metrics that they give their client to read and to monitor, but to be like a mechanic. These days you pull into the shop and the mechanics connect the computer to the car, and their computer talks to the car's computer, and they're getting huge, huge volumes of data that I couldn't care less about, unless it indicates something is wrong.
Joe: That would be like a fully formed business intelligence solution. If the ProAdvisor is the mechanic, and the small business owner is an extremely equipped educated driver, we could turn this whole thing around.
Dawn: Yes! That's exactly right, Joe. Think about it this way, your mechanic isn't going to drive your car any more than your accountant’s going to run your business. The analogy really holds, but the mechanic still has a very important role, right? He keeps you safe. The other thing too is that the ProAdvisor is the red light on your dash, or the yellow light on your dash; the ProAdvisor is the one who's going to say, "Hey listen Joe, you got to pay attention to your cash flow. Your cash receivables outstanding, your days outstanding, they're starting to expand, and you got to jump on that. You got to go start collecting against your invoices."
I can't even tell you Joe how many - I have taught thousands and I mean thousands of small business owners - how many of them don't even invoice their clients on a regular basis. Let's just start there, like basic business disciplines. The ProAdvisor can become a strategic partner, and not just a service provider, which is what we're arguing for.
Let me give you an example of how important a ProAdvisor's role is, and how I need to sort of slap some small business owners upside the head to pay attention to what their ProAdvisors are telling them. When I was at Scaling New Heights, I ran into a woman who was from Mississippi, she had a very heavy southern accent, and she said, "I was talking to one of my clients, and I'm looking at his books, and I'm seeing these weird journal entries, like thousands of dollars. I said, 'I think you've got something going on.' He's like not paying attention.”
I said to her, "Well what do you mean by that?" She said, "Well, I thought somebody was really stealing from him, and I said to him, 'Let me do the audit. I'll dig down; I'll figure out who's siphoning off the cash, but you got to really stay on this, because this is a problem.'"
The guy didn't listen to her. He didn't listen to her. He had her as his ProAdvisor for I think ten years. This woman knew his business super well, probably better than he knew it. For six months he ignored it, and then she calls him up six months later and says, "Hey Fred, are you buying feminine hygiene products from Walmart?" The guy said, "Uh, no." She said, "Well you got $15,000 worth of feminine hygiene products that have been spent against your business from Walmart." All the sudden, he was out, when he added it all up, $25,000. That was his bottom line, gone.
My point is the ProAdvisors have visibility that the small business owner doesn't necessarily have. We have got to listen to these people, because they know their business. Part of what I'm arguing for Joe, is to say, think of your ProAdvisor not as an expense, as an investment.
In that particular equation, she was going to charge this guy $500 to do an audit six months before. He didn't want to spend the money because he thought it was too much money. He didn't invest the $500 to figure out who was siphoning cash off of him, but he was willing to absorb the $25,000 loss because of his own negligence.
I use this example to open up small business owner eyes, to say, if you invest $1 with a ProAdvisor, you're going to be getting $10, $50, $100 back. If I were an investment advisor and I asked you, would you do that trade with no downside risk? Of course you would. Any thinking person would. It's a different way of thinking about what the ProAdvisor's role is. And they have to inhabit that role without asking permission to do it.
Joe: I love what you say there at the end. Obviously within the constraints of professional ethics, we all assume that. Don't wait for permission. If they're not inviting you into the boardroom figuratively or literally, then at least create a figurative seat for yourself there so that you're providing critical information that you can give to the people who do get to go into the boardroom and sit down. The more that you do that, the more they're going to have drill down questions.
They're not going to know how to answer them, and you're going to get yourself invited to the meeting. It's part of this whole process I call back office to the boardroom. Not that you stop working in the back office, but that you've got to be the tether between the two. To just put a fine point on what I mean by that, is everything you've meant here Dawn. The numbers - the accuracy of the numbers - is the means to the end, it is not the end.
Dawn: That’s right.
Joe: Ron Baker even says, "The imprecise measurements of the right things, are infinitely greater than the correct measurement of the wrong things." What he's trying to say is we even over-rate sometimes a perfectly reconciled balance sheet, right? If you'd know that you’re accurate to within material discrepancies, you have the level of accuracy necessary to trend out the data. Then maybe we need to stop, to put it in grammar terms, stop parsing sentences and trying to find every little tiny missing comma or uncrossed “t” and start focusing on writing poetry.
Dawn: That's right.
Think about this, Joe. Every number tells part of the story. The numbers are nothing more than the mirror to the business. I'm going to challenge every single ProAdvisor who's listening to this podcast to do the following. You will approach your client and say, "Every month I want to go through the statements that I send you. I want to go through them with you, and I'm going to ask you to make an investment of time and money to do that. Because what we're going to do is we're going to put together a plan for you for the next 30, 90 days. Now, we're going to be entering the 4th quarter of the year, this is an ideal time to get into this discipline, so that you can begin to lay up forecasting for 2017."
Instead of waiting for things to happen, you begin to get ahead of the curve, and start planning, right?
If we did nothing else, but if ProAdvisors sat down with their clients and went through three statements every month, or even just the P&L and the cash flow survey - even if we got that far and spent an hour, or an hour and a 1/2 doing that - that would already get us such a far distance over where we are right now. That would begin to build that bridge that you were saying between back office and boardroom.
Any client, any small business client, who is unwilling to that, is not worthy of the ProAdvisor's time. Forgive me, but I feel very serious about that, because that means that the business owner is not concerned about viability. What I have seen is when a business owner can't pay their bills, instead of sitting down and looking at the business and saying, “What can we improve?”, instead the knee jerk reaction - and I've seen it a million times, right – is to run out into the marketplace and kill ourselves to find new customers and we cut our prices, because we're so desperate to ring the cash register.
We bring in new customers at a discounted rate, we kill our gross margin. We just bought ourselves another three to five man hours of brutal labor every day. And we can't figure out why we're killing ourselves and not making any money!
It is time to stop the madness. The ProAdvisors are the ones that can help small business owners make more money with the system and the client base they already have. That's the key. You don't want to grow your business, you want to grow your profits and your cash flow. I mean, it's like crazy-making when I look at all these gurus out there that are talking about growing your business. No, you don't want to grow your business, you want to grow your profits and your cash flow. Gross margin is the key. Nobody knows that but ProAdvisors, and it is high time we took the blinders off and started to partner with these small businesses, not just to do the reconciliations and the tax prep, but to do the monthly reviews.
The other thing too Joe, is that a lot of these business owners are solopreneurs, or they're one or two man shops. It's something like 80% of small businesses in the US are solopreneurs, so they don't have any accountability. Some loose ties maybe to a banking relationship or an investor, what have you, but these ProAdvisors, they're desperate for accountability. Some know it and some don't. But to have somebody come alongside of you who is for you, who knows how to get you where you need to be instead of you in a desert for 15 years, and who can get you there in a few short months, do you know what that is?
I recently worked with this spectacular ProAdvisor, he's a CPA and is just a super smart guy who has been in the business 20 years. We worked out a plan for his client, in fact, through one of the courses of the Woodard Institute. Here’s this guy who's been installing granite countertops since he was 22 years old and he's 55 now.
There's a fuse on that business, you're not going to be installing granite countertops when you're 77 years old. This guy doesn't have time, and he hasn't been making money for 20 years. The ProAdvisor and I sat down and we cranked out a structure of a plan. He delivered it to this guy and within 3 weeks he changed his pricing model. Within 3 weeks his entire profitability profile changed. What if we could do that a hundred times, a thousand times, a hundred-thousand times? What would happen to small business survival rates if we could do that, Joe? Using the ProAdvisors is the point of this.
Joe: And what would happen to their ability to thrive?
I'm just going to mine into a couple of things you said there, because you've said some really good things. What I'm hearing is that there are really 3 levels of this, and until you reach level 3, you haven't made a difference. Level 1 is the accurate tracking of what was, which we've already determined is a means to an end, right?
Dawn: That’s right.
Joe: Then you have the indicators that give you alerts and measurement data about both what was, what is, and to some degree, what will be. Projective analytics, right?
Joe: Those measurements are important to discuss with the client. The underlying theme here, everything you've really been talking about Dawn, is actionability.
Dawn: That’s right.
Joe: Because we could sit down with a client, go through all of where they were, are, and projected will be, and not give them anything to do, and we still haven't produced an effect.
I'm hearing you say that small business advisors need to be experts on the administration, production, growth and success of small business, and then they use the measurement tools in that trade. Did I hear you right?
Dawn: I think that's right Joe, but I would simply say keep it small at first, keep it really limited. Our tendency is to give more data, and more information, thinking that that's more value, and it's not necessarily so. Sometimes what we end up doing is just confusing the business owner. What I really like to do is just get back to brass tacks, right? How much cash do you have in the bank? How much does it cost you to run the business?
Here's one of the things that we do and that I've done with ProAdvisors through the Woodard Institute that is a very powerful exercise. I ask the ProAdvisors to sit down with their business owner, ask the business owner to close his or her eyes, and say, "Okay, make believe ... Fast forward, it's 2 years from now, everything you dreamed of in the business came true." It's called a visioning exercise. "Now I want you to write down what does the world look like?"
It accomplishes 2 things. The first is that a lot of these business owners - and you know this, I've seen this too - their nose is to the grindstone, they're fighting the cash flow wars, they're exhausted, and sometimes they lose the vision for why they got into business in the first place. They're in too deep to pull out, but they're not really at cruising altitude, and it's really a horrible conundrum to begin. It affects their marriages, their family lives, everything. When you do this visioning exercise with them, you give people the freedom to dream again.
We did this actually with one client, he's a search engine optimization expert, he's a solopreneur, and he said, "Oh man, I would love to be able to hire this one person. She's so wonderful; she worked for me for a while, but then I lost a few clients, I couldn't afford to pay her anymore. I want to hire her back. It was like the best time in my business, she's brilliant at what she does, and blah, blah, blah." Here's this guy who all the sudden said, "Oh wow, I can actually hope again."
What the ProAdvisor did was work backward, and said, "Okay, if you want to hire this person, what would you have to pay her? What would it cost you? How much do we need to generate in gross margin? What type of clients will pay you enough in revenues to provide that kind of gross margin? What type of work would you do? How many man hours, blah, blah, blah.” We put together this spectacular action plan that you're describing and it's like a paint by numbers. All of a sudden, the business owner can not just see their way clear, but they can see their way clear within a time frame.
Here's where ProAdvisors can really add value, Joe. Every single guru that's out there will tell you, "Well do these 50 things, or do these 100 things," but nobody puts their neck on the line to say, "And you will get the results within a time frame, within 6 months, within 12 months." Do you ever hear anybody put their neck on the line to give you the time frame? No, but I can tell you after doing this for 17 years, that if the road map is built properly, and if we just focus on those top 4 key indicators, or top 10 key indicators, you can get there in record time.
Joe: Dawn, this is a perfect way to bring all this thing to a close, because we're out of time, and we could go on like this. You're so exciting to hear you speak. I'm passionate about small business success, I'm fired up, but you know what I'm hearing you say in this last point is Covey's timeless principle of "Begin with the end in mind." A lot of people know how to quote that principle, it's one of the most famous principles in all of business coaching. They forget what Covey ultimately means by it. Covey says, "If you begin with the end in mind," here it comes, "You are the creator. Until you begin with the end in mind, you can create nothing."
Folks, if you've been excited about what Dawn has said, first, go get her book Numberphobic, check out her course at the Woodard Institute, go to her breakout session at QuickBooks Connect. Dawn's going to be with us at Scaling New Heights 17, go to her breakout there. Really get to know her. She's got the passion, she's got the knowledge, and she has the practical steps to get you to the point where you can be an agent of small business success.
I want you to end here with that. I want to end here with that challenge that Dawn just gave us. With yourself, with your clients, begin with the end in mind, project out where your clients want to be in the next two years. Then what Dawn is saying is don't over engineer the path. She's telling you to find the key elements from the financials that will be the compass pointing the client toward the true north of that end goal. Then create something alongside the client, be a co-creator in their small business success.
Dawn, I know there's so much more we can say, they're just going to have to go to your breakouts and your courses to get it, but it is so great having you here. Thanks so much for being on the podcast.
Dawn: Thank you, Joe.
Joe: Thank you for tuning in to today's podcast and our conversation with Dawn Fotopulos.
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Now for more information about this episode, to explore more episodes in the podcast series, or to learn more about our annual Scaling New Heights Conference, visit Woodard.com. As always, we encourage you to stay tuned, stay connected, never stop learning, and scale new heights.