At the time of recording this episode, we are in the middle of COVID-19, so we thought it would be a great time to talk about tools you can use to help your clients through difficult times with Adam Hale, the COO at Summit CPA. Even if you are listening to this at a later date, there are still some great tools you can use to help clients who are going through rough patches in their business. Listen to learn about how to support your clients and keep their businesses afloat through financial strain.
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“Times are different now with COVID-19, but these are conversations we need to have when the economy is doing really well.” - Adam Hale
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Jamie Nau: All right, welcome to today's podcast. So today we're right in the middle of the COVID-19 virus. So we thought it'd be the perfect time to talk about dealing with difficult issues with clients in difficult times. Obviously times don't get much more difficult than they are right now for any client, no matter the industry, no matter what they do. Pretty much everybody is trying to figure out how to take the next steps forward at this point. So, again, this won't be the only time you deal with this with your clients. Hopefully this podcast will be one that you come back to listen to. So Adam Hale is here again. Adam, let's start with just the basics. If a client’s going through a difficult time, where should you start? What topics should you bring up with them?
Adam Hale: You want to make sure that you have good housekeeping. Garbage in, garbage out is still kind of the classic conversation with clients. It’s really hard to consult on, you know, hey, it could be this or it could be that based on what I'm seeing. So really just, you know, I think having a really strong, tight relationship with your client is super important. So making sure financials are dialed in, they're done timely, they're accurate, and you have a real good understanding of what is going into all the numbers. I mean, I think that’s kind of a unique place for people providing Virtual CFO services, similar to how Summit has been doing it for a long time. We really understand what the revenue drivers are. We understand the expenses, how everything's connected. We make sure everything's reconciled, the balance sheets are tight, and it really puts us in a strong position then to do some forecasting, because I think that's the building block, and what you have to have first before you can even jump into forecasting.
Jamie Nau: And oftentimes, like you said with the housekeeping, you should already have a forecast in place, right? If you're doing Virtual CFO meetings, and you meet with your client every week, or every month, you are really part of that forecast process. So I think definitely the forecast is the route to go. But, you know, we've talked about this a lot internally, and I think the big difference in clients is clients with cash, and clients without that cash. The clients with cash there is still a lot of work, there's still a lot of thinking you need to do. But the clients without cash are the ones that are usually urgent right away. So let let's start there, Adam. So talk about if you have a client that doesn't have cash, and you're the Virtual CFO for them, what kind of conversations do you have?
Adam Hale: Again, as long as I've got a good understanding, I mean, if there's no cash in the company, you know, there's probably another systemic problem, there's probably a design problem. So we really kind of take two approaches, especially if there's something that escalates things. I mean, the reality is, most businesses only have 2 to 4 weeks of payrolls in their bank anyway. I mean, you know, whenever you have a client that has a healthy cash reserve and it's 10, 20 percent of their annual revenue, that still goes pretty quick whenever revenue comes to a screeching halt. I mean, whenever we plan for this stuff, typically we're like, oh, sales are going to dip 20, or 30 percent, what do we do? Or 50 percent maybe, worst case scenario. I've never really other than just a few circumstances where somebody is going bankrupt or something, have I ever really had to do any contingency planning for just a 100 percent halt of revenue like we're dealing with now. So it's definitely crazy times, and the cash burn is much faster and accelerated, even with people with healthy cash reserves. But that said, the way I usually diagnose a situation is before I get into the timing, it really does come to plan design first. So I know that's kind of a difficult conversation with some clients. So cool, I get it, I want to bill all this stuff out, but I need to know when I'm running out of cash tomorrow. So in order to diagnose the problem, because again, if we're in a really strong economy, and you're not making money, there's a problem. Something is not dialed in. Maybe the owners taking too much money out, there could be a bunch of different reasons. More than likely, you know, whenever you hear people say, well, you know, I don't want to pay taxes, so I know how to just lose money. No, you're losing money because it's not doing very well, you know sorry, I never spend a dollar to save a quarter. Most of that stuff is just it's nonsense. So anyway, plan design, break down the revenue, breakdown the drivers of the revenue, understand the direct and indirect costs, go through all the overhead items. Make sure you have a good understanding about when they come out and about how much they are. Bump that up against reality, because what'll end up happening is you'll make this nice little sketch of what the client is telling you, and how everything works, and then you're going to want to take that and bump it up against what happened last year to look for trends and go hey, I hear what you're saying. We do this, this and this, but that's not what our financials are saying. So, again, that comes back to the housekeeping. Are we recording things wrong? Is there you know, do we have accurate information to back that up against? Or do we just have this different kind of view of the world of what we think should be happening? But the reality is it’s not. Clients don't understand a lot of times the difference being a markup and a margin, you know, and I've made a pretty big impact with clients just walking through that definition before, and realizing that they need to move the needle a little bit on that stuff. So I think that's step one is the planned design. I want to look in a vacuum, at what a one year cycle looks like, and make sure that we're profitable. Then I can backfill in debt, like because sometimes you have to be better than good. You know, a lot of times companies without cash, it's because they're paying down debt. So then I say, Okay, cool, we built a plan for 15 percent and I think that's pretty top notch, 15 percent bottom line. However, you need 19 percent to pay for taxes and to pay debt. So this plan, this design, is not going to work. So we've got to go back to the drawing board with overhead. We have to go back to the drawing board with team costs. You know, all those kind of things, material costs if that's applicable, and then look at our drivers again. Now, you don't want to get pie in the sky and throw everything on revenue because, of course, nobody's met a forecast they didn't love. You want to make sure that you're bathing it in reality. You know, we talk about that a lot, but I think once you've done that and you come up with a plan design, then you can mobilize that and look at it in terms of a forecast.
Jamie Nau: I think the important thing, just to kind of summarize what you said there, the last thing you want to do is add a bunch of debt to a client that's not going to last a long time. So if a client doesn't have a good model, and doesn't have a good plan in place, and then you're going to go through and add on 200, 300 thousand dollars of debt they're never going to be able to pay back because their business is unsustainable, that's a big mistake, and that's a mistake from us as an adviser standpoint. Sometimes we have to have those tough conversations, and say, in order for us to take on this debt I want you to show me a plan that's going to bring in 19 percent, 20 percent profitability for you, because I don't want to straddle you with debt and then you not be able to pay it back. Then we're in a tough situation, three months from now, or four months, or maybe a year from now. So I think that's a big thing. You want to make the company has a plan for, now that we have this extra expense on the books, how are we going to still be profitable when we haven't been profitable in the past? And so it is always a tough conversation because you're usually with a company that's tough, and then the day comes where something goes wrong and it’s like oh, crap. I only have $20000 in the bank. How am I going to survive? You know, those are the companies that you have to have those tough conversations with, and be like alright now we are going to give you a bunch of debt and you're going to try to do something you've never done before, which should be profitable. So I think it's a very good conversation to have.
Adam Hale: Well, it's a slippery slope. I mean, people then go into factoring in their receivables or like you said, getting those daily, or weekly pay back loans that have an enormous interest rate. I mean, you got to treat it almost like, and I know time is super valuable, so if somebody comes to you and they're like, hey, I don't have any money, what do I do next week to make payroll? I can't help you with next week's payroll. I mean, the reality is, at that point we're just blocking, and tackling, and trying to figure out what you're going to do. You're going to have to move some pieces around. What we need to figure out is, why do you only have one week's payroll? And how do we fix that going forward? Think about it. I mean, you know, for those of the listeners that haven't been through a reorganization through bankruptcy, whenever you go to put together a plan for that, the court wants to know what does your forecast look like? Do you have the ability to move forward? If you cannot build a profitable plan, then you might as well just go to total liquidation. So that's kind of the mentality, and the movement that we take. So right out of the gate. But you don't want to do it haphazard, and that's why I was saying, like, you really got to dive into all these things, build it out, then once you have it, then you can use that tool to say, okay, this is what we need to be. This is where we should be from an industry standpoint, this is where you need to be because of the situation you're in. Now, let's plug that into the forecast and play out where you are today. Bake in your actuals, and this is where we fold the balance sheet into things, and we can kind of see how upside down you are, play out all the payments, and go from that standpoint, because now what we're talking about is what your burn rate is, and what you're ramp time so that we can kind of see how much runway we have.
Jamie Nau: I think you have to make sure again, if you're a small firm and you're the only CFO it’s easy. But if you're have three or four CFOs working for you, you have to make sure that you have CFOs that are strong enough to say I can’t help you with next week's payroll, what would you want me to do? Like I have been trying to tell you for the last six months, you have to save more cash and now you're not. Now you're leaning on me to help you with next week payrolls. I think you have to have CFOs that are strong enough to give that advice, because it really is like so many people out there that just want to fix the world. They say okay, let's see what I can do to help you with that. Really, a lot of times there's not much you can do other than trying to get a line of credit in place if they don’t have it already, or pick people not to pay, which is just not a fun conversation to have.
Adam Hale: Yeah, and I'm going to channel some Kenny Rogers, I know he was just in the new, butt, you’ve got to know when to hold ‘em, and know when to fold ‘em. I mean, there's some situations where you get on a call and I've told the clients, I'm like hey, look, we built a good plan, you are so far upside down the only way out is to walk through a re-organization. And I feel comfortable going into re-organization because I know we have a good solid plan moving forward that we can prove is workable. The problem is, it would take you 10 years to get out, or you're going to end up throwing good money after bad money, and we're going to be in too tough of a spot. So sometimes the reality of that conversation is just that. So whenever you turn it into the forecast, and you play everything out, it's just like, now you've got to double your sales at great margins, is that possible? Not really. So what does that mean? What does that look like? Then the next step that we take internally is we take that runway, you know, that monthly runway in the forecast. So going from plan, to forecast, to the actual week over week cashflow. So we use a tool where we bring in all of the bank balances and everything. Everybody that we owe, everybody that owes us, all the automatic transactions, and we play out a 13 week cash burn. So the forecast, whenever you're dealing with charts of accounts, can get a little imperfect, if you will. And so, you know, you're looking at the design, and then you're looking at your runway and are going, okay, I think this is manageable. Now you have to get to like ground level, in who are we not going to pay, and who has to pay us in order to make payroll? How do we balance the line of credit? Those kind of things. That's whenever we get it to that third level, whenever we're getting a little bit deeper, if we're at like ten thousand feet at the plan, and five thousand feet at the budget, now we're at ground level, and we're getting ready to dig in. So we go through that. We figure out as much of the stuff that we can move, as many of the chess pieces we can move on our own. Then we have to probably go in and try to look at restructuring debt without bankruptcy. So that means as a CFO, getting on the horn and making connection with the banker and saying, hey, look, here's the situation we're in. I feel confident about our plan to dig out. This is what kind of relief I need from you. Whether it's an interest-only payment for a while, or if it's a deferment, possibly a reorganization, that's tough whenever times are not doing well, they're not going to be too apt to help with just refinancing a bunch of other debt. That’s not really going to be their thing either. They don't want to take on more exposure. So I think that's whenever you actually then go below the surface, and start helping them work through restructuring debt with credit card companies or with banks.
Jamie Nau: I think that weekly plan is really where we CFOs comes in. This is when our clients need us the most. What we've done at Summit is we've made sure we've talked to every one of our clients as soon as soon as possible. Just checking in with them and seeing where they're at. But I also think, you know, when Adam's talking about the detail levels, this is the best thing about having a CFO on staff is you're prepared more quickly. So that’s what we've told our team, and what we've talked about as a team is, a lot of companies go into this and they're in a wait and see mode. Let's wait and see what happens next week. Let's wait and see how many clients leave us. Let's wait and see where things are going. What a client with a CFO has is they can scenario play those out. They could say, okay, right now we know we're here. So these are the steps we need to take. We need to try to renegotiate our rent. We need to let go this one person. That's where we are at today. Where are we at in two weeks from now, if three of our clients have left us? What are the steps we need to take? We need to make those steps quickly. And that's really where a CFO comes in. Doing that planning and laying things out. Presenting the best case scenarios and the worst case scenarios. Asking, what are we going to do if each of these happen? So when those situations happen the client know the steps they need to take, and feel confident with because they've already seen the scenario. So then they know, okay, three weeks from now, we didn't lose 10 clients like we thought we were going to. We only lost six, so that puts us in this realistic scenario, these are the three people you need to let go, or these are the four expenses that you need to stop paying for. So they're ready to make those decisions really quick once those scenarios actually come out. I think that's really where us a CFOs are building value with our clients, and our clients are like, wow, I'm glad I had a CFO during this time because the person that doesn't have the CFO is just waiting to see what happens.
Adam Hale: Yeah, I think that's a great point. So you heard me kind of walk from ten thousand feet to getting dug in. The problem is, that's a couple month process. So if a client's coming to you and saying, hey, I need to make payroll next week, what do I do? They just now engaged, that's going to be a tough call. So that's why it's important to get in front of your clients as soon as you can. Engage them in that kind of retainer based model, the VCFO, where you can have that ongoing relationship and understand everything. So to your point, whenever we need to, we can just flip a switch. And there's lots of times where we'll do modeling during our forecasting call. So it's like, okay, I need a good, better, best kind of approach. It looks like we're going to have to do this. We call it scaling up or scaling down. So we help clients scale their business up so, that they're, you know, as they grow, they're growing profitably and not just, you know, running after the vanity of revenue. And then we also help clients scale down. So there's been a ton of times where a client is like, hey, we lost this, or we lost that, or my pipelines really dried up, what's my runway look like? We'll get on a call and play it out. We kind of put in the doomsday scenario, you know, albeit not what we're in today, but do some scenarios. Then the clients like, oh, I didn't realize I had, two months to make the decision. Then we just we draw a line in the sand and say, hey, we've got three weeks, let's see how A, B and C play out. Then in three weeks that's when we need to make another decision. If these things haven't panned out, then we have a contingency plan A, plan B and plan C, that kind of thing. And you can do it super-fast on an hour call with a client.
Jamie Nau: There's a lot of comfort to both the CFO and the our client, if we're just doing what we've always done before, right? So to Adam's point, I've already done modelling with you in the last 12 months, I've done it with you eight times, now we're just doing it again. Same tool, same spreadsheet, same software, whatever we're using to do this modeling. I'm pulling up the same thing. I'm doing the exact same thing we've always done. I'm just doing it with a bit more drastic cuts in there. There's a lot of comfort in that. Being like, well, this isn't as scary as I feel because we're basically just handling it the same words, just putting bigger cuts in there. So I think both from the CFO standpoint, and client standpoint, if they've done this practice over and over again, it just adds a little bit of comfort. We just need to assume, instead of our worst case scenario, which is a 20 percent cut, maybe now our worst case scenario is a 50 percent cut. The cuts are a little bigger there. So they've done it several times, and it just adds that extra comfort to them when they're going through that conversation.
Adam Hale: Yeah, I agree, repetition definitely helps. I know I'm going to be working through some stuff with a client today, and it's all going to be about, you know, just load balancing on the income statement. How do we keep the P&L in balance? So what they have done is they have a client list, and they've knocked off certain clients that are no longer going to be paying someone. We're just pausing. So we're feeding that all through the forecast, and then looking at what all of our financial ratios look like, and then applying that into the balance sheet through our forecasting software that we use. They can see in real time, you know, when they run out of cash, what happens to their cash, and they can also see where they need to cut. So if we lost client A, B and C, they can see tangibly we need to cut X amount of dollars in salaries, which equates to so X amount of people. We need to figure X amount in administrative stuff, X amount in marketing, you know, just to keep things proportionate on the way we scale down. I think that peace of mind, and that understanding of knowing when and where to cut, is something that you can only provide if you're delivering this kind of a service on a regular basis.
Jamie Nau: And having those conversations are not easy. You know, you're talking about people. You're talking about people that have jobs, and have families to support. The conversation is never easy. I can tell you this much, I've been on those conversations, both in my previous life at large corporations, and now as a Virtual CFO several times with clients. The first thing that people are going identify is, there's two or three people they were thinking about cutting anyways because of performance, and saying, you know, if we have to get rid of two or three people, these are the two to three. You know, we’ve been trying to work with them and hold on to them on, getting them up and trained, but now that we're in these tough times, I just don't think they have it. So they're always going to have that first level of cuts to people that are they were going to remove anyways. Doesn’t make it easy, but it makes it easier. So I think that's the first thing you'll notice when you have these conversations with clients. That's usually kind of a bad case scenario. Now the worst case scenario, that's what you have to start talking about. People that are valued team members, and they'll start talking about furloughs, and start saying, well maybe we could just have them take a cut in pay. Those are the type of conversations that you're going to have when you get to those deeper cuts. So Adam, do you want to expand on furloughs, pay cuts, and where you stand on those type of things?
Adam Hale: Yeah, you definitely have to be careful of furloughs versus layoffs. You know, some of the furlough stuff, their still an employee for an amount of time. Doesn't mean they can't get unemployment, it's all applicable to a different state laws. So I don't want to get hung up on that. But we do a lot of times have clients that come to us and say okay, well, what if we just take the entire team down 30 percent and we hang onto everybody? I've seen it work, you know, for a short sprint here or there. But man, there has to be really super special circumstances, because what ends up, in our experience, and Jamie you might have a different one, but I think we share the same view, what ends up happening is the employees that are really good, know who the employee that aren't, and they don't feel as though they should be in that same boat. They're like, as you mentioned earlier, they know where the dead weight on the team is. Then they're like, hey, why don't we trim that first? And if that's been trimmed, and then we all have to do, then it’s a different conversation. But if the first answer is just a trim across the board, you're going to end up losing the really good employees, and getting stuck with the not so good employees. Especially is the economy's relatively okay, and you're just going through a thing. I mean, again, the circumstances today with COVID-19 are a little bit different than what they were two months ago. But believe me, these conversations happen in fantastic economies.
Jamie Nau: I think to that point, even now with COVID-19, like let's say you go, and you give 20 percent pay cuts across the board, and yeah, you may hold on to those superstars for the next six months, but once the economy does turn around, those people are going to remember that. They may think, they give me a 20 percent pay cut in order to keep on employees that are not performing as well. What? Where's the loyalty? Why would I stay with this company when that's the way they handle this type of thing? So it really is, from my experience as well, I agree with Adam, I think the pay cut path has not worked out the majority of the time, One, it's not good for moral. Again, you're telling people that the business is struggling, which they already know, and this is how we chose to handle it. Now everybody's upset versus the two or three people got laid off. The last thing you want is a team of 30 people upset because their pay just went down.
Adam Hale: And don't get me wrong, the intent is good. Everybody's like, hey, we're all in it together, and definitely love the kumbaya-ness of that proposal. It just practically usually doesn't go over very well for all the reasons we just mentioned. So you definitely have to be careful.
Jamie Nau: Cool, so I am going to take a second here to throw our e-mail address out there. We're always looking to improve this podcast. So if you have any topics you want to talk about you can e-mail us at: cpa@summitcpa.net. Again, any conversation ideas you want to throw our way. Also, if you want to be a guest on the show. We're going to have a couple of guests coming on the show, we're excited to get those out there, so if you want to be a guest as well feel free to e-mail us at: cpa@summitcpa.net. We are looking forward to hearing from you. So we're kind of get closer to the ending, any other big tips that we should be talking about with our clients? Any housekeeping stuff?
Adam Hale: Right now, given the situation with COVID-19 and everything, what I would say is that we need to focus on documentation right now. So hard costs, soft costs, that kind of thing. If you're setting people up, if your clients are setting people up to work from home, and they're having to buy hardware, or they're having to do system updates, or hire IT people in order to facilitate that stuff, you know, a recommendation is to put it in a separate class, or maybe a different chart of accounts, kind of bucket all this stuff. We know that the IRS, and the government loves the deal and tax credits. So whether they're real time tax credits, they're talking about right now that might offset, you know, handling payroll, or potentially something on the back end similar to how they calculate R&D credits, maybe a year from now after the dust settles there will be additional benefits that we could use to either offset loans, or get money back somehow. You don't want to be combing through a client's stuff, you know, a year from now trying to figure out if it was, or if it wasn't. Just go ahead and start document that stuff right now. I think that's a really important tip. And then, of course, just make sure that even though your clients are going to be wanting to cut fees, and cut back, they're going to need you, you have to figure out a way to stay engaged, because they're going to need us more than ever right now. So make sure you have three years’ worth of business returns ready. Make sure you got some financial statements ready. You’re ready to present online lost sales, prep all your owners to get their PFS going—that Personal Financial Statement is going to be important right now. For anybody impacted you need to get a loan through the SBA, or whatever other means that comes out over the next couple weeks.
Jamie Nau: And anybody that's hired you to be a CFO wants you to be forward looking. What Adam talked about there, okay this is what we can expect. We've seen how quickly they've tried to act in terms of getting things out there, in terms of support. But there's always going to be more, there's always going to be tax credits. I think that having those conversations with the clients, saying, just track the time you're spending on this. So that way if there are tax credits you’re not having to go back a year from now and trying to find this data, because that's pretty much impossible. So I think giving those forward looking tips is really important and what clients expect from a CFO. I can't tell you how many reviews I have been in where a client is saying, you guys just aren't forward looking enough. You know, this is a way for us to be forward looking. This is a way for us to be proactive about stuff that could happen and really giving our experience from the past and saying hey, we've seen this in the past, and this is the kind of stuff that you'll probably need in a year from now. If they don't need it, at least they have it and got value from that conversation. So any final thoughts, Adam?
Adam Hale: Nope, that's it. Like I said, just get sticky with the client, make sure you get in super deep, and you'll be able to answer all these questions that pop up, and help them clarify direction going forward. Most important thing we can provide.
Jamie Nau: Yep. This is this is where we see our value. The CFO is who clients want to talk to when there are problems go. There's some advisors a client will go to, and we're definitely one of them. So make sure you are there, and talk to them as much as you can.