Entrepreneur Intel

EI - Patrick McCarthy
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Intro: [00:00:00] This is the unfiltered truth about entrepreneurship. Raw. No VS. No sugarcoating. Welcome to Entrepreneur Intel. I'm your host, Wes Matthews. Each episode, we'll learn from experienced founders and uncover the top 5 percent learnings that led to their success in all things personal, family, and business.

This show is sponsored by Stealth Consulting, delivering clear marketing strategies, ROI, and no surprises.

Wes: I'm super excited, uh, for today's guest, uh, want to introduce the guest today. He's an investor and mentor to early stage businesses. He's helped over 300 founders align their finances. He's honed his experiences at companies including Spoken Layer, Reviven and MakeLab. Fractional CFO and McCarthy Management Consulting.

Welcome Patrick McCarthy.

Patrick: Great to be here, Wesley.

Wes: Thanks so much. I'm happy to, I'm not happy. I'm looking forward to diving in with you. Uh, you've [00:01:00] been a fractional CFO now for about five years. Um, you know, what's one of the most important lessons you've learned thus far through your fractional CFO journey?

Patrick: Yeah, I think, one of the most important lessons I've learned is actually has to do with education. a lot of founders don't receive a proper education around finance. Most people don't receive a proper education around finance, especially not financial management. So in all of my work with most of my clients who are first time founders, really, I take an education or educational approach to finance, Not only am I presenting the numbers, I'm helping them understand the numbers of their business and learn how to manage them better.

Wes: I feel like finances, it's such like a fine art. It's either, I mean, I've had employees in the past that had, had no idea. Like regarding any numbers, like they didn't know what they meant. And I had this big period in my company where I went from like keeping [00:02:00] numbers Near and dear closed book to like opening up the books to show people profit.

I mean, they all thought I went home and just made millions of dollars and every dollar that came in the company I made, but talk to me a little bit about that. Cause I think it's really important, uh, for the listener and entrepreneur, varying levels, right? Most entrepreneurs that I know didn't go the conventional route.

They're not MBAs in finance. They have an idea, they launch a company, then all of a sudden it's like all these other things happen. And one is. Like, where do you start with that first founder, um, in your, in your process?

Patrick: Yeah, I think, um, the first step is always measuring and seeing what matters, right? Um, you can't fix anything in the business if you don't have data to understand what's going wrong. Um, and 90 percent of the time, most of the data that's out there for a business is touching finance in some way, even if it's customer data.

You know, uh, NPS [00:03:00] surveys, all of that impacts how you look at the business from a financial perspective, right? If I'm getting a, I'll give a concrete example. If I'm getting a slew of NPS surveys for my customer success team that are negative, I might go in and adjust churn on my financial model for the next few months, um, to, you know, kind of get ahead of the fact that customers aren't happy in that moment.

So, um, I think. You know, to kind of your, your statement before that, there is a big question for founders of what finances do they reveal to their employees? Um, and where is that, uh, does that help or hurt? Right. And there's lots of sensitivities, obviously a huge part of most companies expenses is payroll.

Um, and you know, there's conflicting opinions on how open you should be about payroll these days. And it's really a company by company issue. So, you know, I think my best advice to start is, you [00:04:00] know, your managers and mid level employees need to know what's going on with their areas of business. And so you need to find ways to uplift metrics, budgets, uh, and financials to them as quickly and as early as that's feasible in your business.

Wes: So what are you recommending to a founder? I mean, what, what should they know? Right. I mean, is that, Hey, you need to fully be able to understand a PNL. Uh, should they need to understand how to manage books? I mean, I think any good entrepreneur as they evolve in their journey, delegation is key. But I think with finances, like you need to be, Aware and trust, but verify and know where your dollars are going.

So talk a little bit about that in terms of, you know, is it just meeting that entrepreneur where they're at? And then slowly, like, what, what does that look like?

Patrick: Yeah, I don't think it's absolutely necessary for founders and entrepreneurs to have a complete grasp of the entire P& L, cash flow, balance sheet statement. Um, those statements are kind of [00:05:00] archaic, to be honest. Uh, they were designed in the early 1900s and haven't really evolved since. Uh, you know, GAAP accounting hasn't evolved much.

My recommendation to most people is get a bookkeeper very early on and make that investment to keep clean books. Um, and then create systems of interpreting that data that makes sense for you. Uh, and really, I say systems, that could be as simple as a Google sheet where you take the P& L and simplify that data into the most important points you need.

To me, that's revenue, cost of goods sold, operating expenses, profit, um, are really where you need to be looking.

Wes: And at what point does somebody like reach out to you or, you know, you have a founder, right? You're, you're, you're trying to launch a company and then it's like, I got to hire somebody to deal with this now. Like, can I just figure that out or deal with it? Like, when's a good time for you to come in?

Patrick: Yeah, I think, uh, where folks, you know, get the bookkeeper early on, [00:06:00] It's relatively inexpensive and it's critical to have clean books. Uh, and that data is going to be the most important at the early stage where a CFO or finance professional can really start to help is when you need clarity into your forecasting, right?

When you're, you can't just operate off of, uh, a will in a way, uh, you know, doing all the work yourself, paying a few contractors. Eventually you try to evolve, build systems, build processes, and that means spending more upfront. Um, and you can't really measure, you can't really make decisions around that spending unless you have a, a forecast you believe in for the business where you know, what cash you'll have flowing to be able to invest in marketing, invest in, you know, technology to move the business forward.

Wes: I would think at like an elementary level, like most founders have some sense of like their dollars and what they need to do. So like, [00:07:00] talk to me a little bit about the extent of like what a fractional or like what your services do for a business. I mean, are you like, Hey, here's a three year forecast. I mean, are you help, you know, entrepreneurs like obtain capital?

Like here's the vision. Here's what, here's what it's going to look like. And you guys, you come in, like, here's what's going to cost. Here's the capital you need. Like what, what all is exactly involved in the process?

Patrick: Yeah. I can give a, a, a breakdown of what, what my typical relationship with a founder looks like. Um, you know, the first step is really getting a grasp on their financial operations and make things, make sure things run and work right. That means evaluating their bookkeeper, making sure payroll is getting paid on time.

Their employees are happy. Uh, they're getting their accounts payable and accounts receivable are in order. That's very basic. You know, um, even someone without an understanding of finance could do a lot of that. And most founders do in the early days, they do all of those things. Um, and so what it comes down to next [00:08:00] is taking that data and then talking with the founders and seeing what their vision for the company is, right?

Okay. It's important and critical for me to know if they want to go down a bunch of fundraising path and build a billion dollar business, or if they want to build a lifestyle business that brings in, you know, a few million dollars a year of net profit and, um, that's what's going to make them happy. And that's their goal.

Those are two very different ways to run a business. Um, and the ways you optimize your finances and metrics and how you measure and look at things are going to be very different between those two businesses. A very high level example is, you know, the business that's looking for venture funding.

Typically the, you're growing at all costs, right? Um, the investments are being made by outside capital and your expectation is to reach certain metrics. Those aren't Always financial metrics. Sometimes they're growth and customer user metrics. Um, whereas, you [00:09:00] know, the founder who's looking for a life to build a lifestyle business, it's really get to a reasonable top line revenue at a highly efficient gross margin that can put out the bottom line that you're looking for.

Wes: And what do you, what do you typically see right now? I mean, like lifestyle for many can mean very different things to different people. Right. You mentioned like, Hey, this guy just wants a lifestyle business, spit off 2 million in net profit and he's good. Right. Well, there's some businesses, like I'm always curious around financial Like when do people start paying themselves?

Like I knew some entrepreneurs that just never took salary. I think that's crazy. Um, I, I'm all about profit first, uh, you know, build the team, but you gotta take care of yourself or you gotta start taking profits because if you're reinvesting all the time, at what point do you stop? Because for me, I feel like it's always something that you could grow for.

Like, so what, you know, how, how do you establish when you come into a company? Like, do you assist? What does that process look like? I'm, [00:10:00] I'm curious around that.

Patrick: Yeah. I'm a big advocate for founders and owners getting paid. Um, I think, you know, the business is you and if you are not feeling comfortable in your day to day life, um, comfortable enough, you know, there's always discomfort. You're taking a risk starting a business. There's always discomfort, bad things are always going to happen.

Um, you know, there, you can't avoid all of that, but there should be a main baseline level of comfort to your lifestyle, um, that you're able to maintain through the business. And then it's really a personal choice of how hard and how heavy you want to invest and, you know, get the business to grow. You know, some people can build a very successful business working 40 hours a week and paying themselves a little bit.

Some people might say, I mean, I can do 80 hours a week for the next few years and, you know, make my profits a bit larger. Um, so at some, at some level, it's a personal choice. And then at other levels, it's, you know, a business choice deciding [00:11:00] what kind of investments you can reasonably make by taking, not taking a salary.

At the end of the day, I don't, I don't ever think it's worth it to make investments in the business versus a salary for yourself. Uh, because, you know, that stress, uh, that builds up at home can really tank the company.

Wes: So you're in the fractional world. I'm in the fractional world. You're a CFO. I, my company is a CMO. I never heard of fractional up until like a year ago, to be honest with you. So like you get the objections from clients are like, well, you're fractional. You're not in the business. How do you know you need to be here day to day to really understand what does that look like on the finance side?

Because for me, I think it makes even more sense on the finance side than it does on the marketing side, because. The numbers are the numbers. Um, and then you're giving like a non interested third party perspective and kind of guiding that entrepreneur. But like, what is, what does fractional mean to you?

And like, how does that work with clients? Because you [00:12:00] mentioned something early on. I mean, as you found a company, you're going down this path, a lot of these expenses and costs to start to show themselves, like I got to get a bookkeeper. I got to hire this person. I got to do a million different things, but fractional is like, you know, you're, you're paying a fraction of that cost. Um, so, so what does that look like? Like, what is a general entrepreneurial company need out of a fractional to be successful, to hit their goals?

Patrick: Yeah. I think, you know, the most important thing is setting expectations up front, um, on both sides. Um, and that's, you know, most critical to how I sell into clients is saying, it's telling them exactly what they're going to get out of this up front. Um, and usually it's music to their ears because it's a clear, consistent measurement and dashboard of their key KPIs and metrics from both the financial and operations perspective is number one.

Uh, I take most of the burden of payroll and compliance and taxes off of them as well, because I [00:13:00] managed that all of that typically through a third party provider. Um, and those two things alone are typically music to a founder's ears because it's. It's hours and hours and hours of time that they immediately earn back, uh, especially in the early stage.

Um, you know, the, on the other hand, my services and what I can do, can't scale past a certain point. Um, you know, at a certain point, fractional is not enough. Um, and they do need, uh, to either build a team under the fractional or invest in a full time, uh, C level executive in that role. For me, I found that that's been around on the finance side, the series B stage, um, which really means, you know, that's a vague term that can mean a lot of things, but I'd say 20 to $30 million in annual revenue, 40 to 50 employees is usually more than enough work for a full-time CFO or VP level finance person, um, to start managing.

Wes: And [00:14:00] like when you're engaging with a client and you're the fractional, I mean, are you, are you helping place that full time person or how does, how does one go from, Hey, fractional got me to where I needed to go, but now I need to make that further investment. Like what, what, what does that look like?

Cause if you're, I think that's one of the challenging things with fractional, right? Everybody, like once you come in and deliver good value. Then they want to hang on to you and they just want more and more of your time, right? But you're like, Hey, I'm fractional. I can't, I can't be everything to everybody.

Right?

Patrick: Yeah. Yeah. The easiest way to get a full-time job is to, to go fractional, I think, um, , if that's what you really want. Um, but no, it's, it's really true. I think, um, you know, especially when you build a relationship with someone, uh, it's hard to let go and, and, um, to say no also to doing more time. Um, but I, it's a, it's a very careful balance and I think you just have to be honest with yourself and honest with the founder, uh, or entrepreneur that, uh, there's, uh, [00:15:00] there's a lifestyle difference, you know, to being full time versus being fractional.

Um, and there, some people will jump out and, uh, go full time. Um, I've seen happen to, to other folks in the space. Uh, and that's, you know, that could be amazing. I'm sure, you know, there's companies I've worked with that. I've thought about it. I've been, I've gotten offers and seriously considered it. Um, it can be really exciting, but, uh, I'm pretty committed to the, uh, fractional lifestyle for the time

Wes: Yeah. I was going to say, it sounds pretty terrible to be honest, to go in with one company, just from my perspective. But I'm also like, we have a fractional company and I'm not a fractional CMO. So like we have a team that does that. Um, like, so if you run into a founder like myself, where I'm like, okay, like how hard could this be?

Right. Or like, I've got a forecast, I've gotten the company. Like, I think it's pretty cool that you've kind of identified like your ceiling, which is [00:16:00] around 20 million, which I, I, I agree with you. I have experience up until that number. And I think at that number, things just completely change. And if you want to continue to grow and scale, like to an enterprise level company, but like, what, what, how would you speak to a guy like me or an entrepreneur, like, Hey, like.

I kind of want to learn on my own, right? Like I want to do it my own way. Are there resources? Are there things, books to read, things to do? that I fall flat on my face in three months and call you and say, Hey, I tried, but what would you recommend? I

Patrick: No, no, I, I, um, there's a lot of work I don't want to do. Um, I'd rather be spending time talking financial strategy with the founders, with a baseline knowledge, understanding of the model and the ability to update it themselves. And that's a big part of my approach. Like I said, be having the educational approach.

Um, every time I build something, I record a loom video of how it gets updated. And I share that with the founder. Um, so they're not tied to me in theory, [00:17:00] outside of, not for the modeling. It's not for the literal modeling, the literal data entry. Like anyone can do that. It's for the interpretation and strategy that we build around that together based on their vision.

Um, so I think that's one key component to standing out as a fractional. Um, really, you know, just seeing what parts of your business are repeatable by other people and which ones are not. Um, and then focusing on the ones that are not by allowing the founders, entrepreneurs to learn themselves, do it themselves if they want to.

Um, and then to the first part of your question, I actually taught myself financial modeling, um, over spring break of my sophomore year, uh, because I wanted to get internships, investment banking internships, but my school wouldn't offer financial modeling classes until my junior year. So there's a little bit of a disconnect.

So I actually, I sat down with, there's a ton of YouTube sources out there. You know, the investment banking focused ones [00:18:00] are a little heavy. Um, but they're the, the best resource possible for building a financial model from scratch. Um, so that's where I started. I think anyone can really start from there and, and build on that, uh, with real world experience.

So,

Wes: into it, but I've ran into it and they're like, well, why, why fractional? And I'm like, if you want a yes man, hire an employee. If you want me to not tell you what you want to hear and just, and be real with you. That's where I think fractional comes in. And I think fractional is beautiful because I don't know how you operate, but we operate in a sense of if we're not providing value or there's no longer a need, don't, don't pay us.

Like there's no long term contract. It's we're either providing value. And I think being in the world in entrepreneurship, things can change really quick. So like signing a, you know, three year contract on something is like so taboo to me right now. Cause it's like, it's all about value creation and driving value.

So like, keeping it simple though, like [00:19:00] if you're an entrepreneur, it's like, hey, like I want to hire somebody. To manage this, but like, how can I trust, but verify or know that this person isn't feeding me a loan of crap and they're stealing thousands of dollars out the back door of my business? Because that stuff happens, right?

Uh, so like, how do you, how do you protect against that? Or what do you advise?

Patrick: yeah, I think, um, it's super important to have good hygiene and your financial project practice. Um, making sure, you know, folks only have view only access to data instead of, you know, uh, change access to data. Um, it is a lot of trust, um, that entrepreneurs and founders place in me. Um, and I'm grateful for that.

Um, but you know, part of that too is, you know, being able to answer those awkward questions. Like, uh, you know, where, where's my money going is the, the base level question I get from. 80 percent of founders. [00:20:00] Um, and you know, having an answer to that also the meeting, ready to go

Wes: Is that like legitimately because they're just not paying any attention or like, where, where does that cause to me, I hear that from you. And I'm like, that's, that's crazy that, that they have no idea. Like I'm the opposite where I know like every dollar timing of everything. Like that's so important to me to like be in business.

But to hear you say that and I know some of my other entrepreneurial friends are like, yeah, I have no idea It's just kind of happens. I'm like that's that's crazy.

Patrick: yeah, I think, um, a lot of folks operate by bank balance. Um, they log into their business bank account and they see where it's at and they're either happy or unhappy and usually unhappy, uh, and then make decisions based on what they see there. Um, which is a very reactive way to run a business. Um, where, you know, to switch that into proactive, you do need to build out a [00:21:00] cashflow model, understand where your money needs to go and when it needs to go, right?

Uh, in order to be able to pay, pay yourself a profit at some point. Um, so I think it's, part of it is a mindset switch, right? It's like when, uh, financial advisors tell you don't look at your retirement account, right? Uh, because it's changing every day. It's going up and down crazy. You just have to trust that in the longterm, it's going to go up.

It's hard to build that trust with the financial, with a business, because you know, there's our expenses. You're worried about revenue. You're worried about sales. You're worried about your pipeline. Um, unless you can build confidence around that with data, you're going to be stressed every time you look at your bank account.

Wes: So that brings up a good Question or thought like what do you recommend and this is probably varies across all different types of businesses But like cash reserves, right? Like what's a good just sort of standard operating procedure for a business Do you have any quick bites there?

Patrick: Yeah, quick [00:22:00] bite there. I think it's same as personal, the personal recommendation that most people give, which is three to six months of operating capital for the business in the bank account, in a treasury account that you can't touch, um, is really where you want to be.

Wes: so with that being said like that's where you want to be but then you hear these statements like most americans are living check to check or What's the reality of businesses when you start to get involved? I mean, how, how, how mind blown or shocked are you when you start working with some of these companies?

Patrick: It does nothing surprises me anymore, uh, unfortunately. Um, no, a lot of folks have to operate on a shoestring. Um, at least to get started. Um, and it's, it's, uh, it's really stressful. And that's one of the beauties of forecasting is that you can sometimes see a way out, right. And at least identify, uh, the path out, uh, which is, Where most founders are [00:23:00] stressed.

Wes: So what about like, how does this tie into like tax strategy? I think in my world of entrepreneurs. tend to get this very confused on who's responsible for what. So you mentioned bookkeeper, fractional CFO. Now you have a, an accountant and then there's like tax strategy. How does this all, I mean, are you advising on that as well?

Or like, how does that play into this?

Patrick: Yeah, for the most part, um, I work with C Corps. The taxes are very straightforward. Um, the ways to get around, the advantages you can get for a C Corp are pretty straightforward, and the law, the letter of the law, is very straightforward. For S Corps and LLCs and partnerships, it's actually less clear. Um, and there's a lot of, uh, conflicting advice out there.

So what I would say to entrepreneurs is, um, Your finance stack, um, when you're approaching a million dollars in revenue should really look like [00:24:00] bookkeeper, book, uh, bookkeeper, some kind of CFO slash financial advisor, and then a tax accountant, um, the bookkeeper and the CFO prepare the statements for the accountant.

So all they have to do is file. And that should keep your costs fairly low, uh, and lean on the finance side between those three, uh, folks. If you can find an all in one, that's great. Um, I actually think it's nice to have a little bit of check and balance checks and balances between different, uh, people and organizations.

Wes: Yeah, no, that's great. So just to reiterate, cause I think that's some valuable information. Like as you're approaching a million dollars of revenue somewhere in that realm, bookkeeper. Some type of fractional CFO. You probably don't need a full time at that, at that stage. And then a good tax accountant. Um, what are your thoughts on like my business, my businesses have always been wrapped around reoccurring revenue, uh, because my brain's very simple.

One plus one is [00:25:00] two, uh, for me, like growing and scaling a reoccurring revenue model business is, I don't want to say it's easy, but the math is easy because when you're accumulating new clients and they pay X. That fuels growth of the company, but then there's that side, right? But a lot of businesses are project based like Feaster Famine.

So like, are you going in like as a CFO's role to go in and help create? New strategies around the existing products and come up with new ideas. Like how extensive is that strategy talk you, you, you referred to earlier.

Patrick: Yeah. I mean, a big focus of mine is always margin, right? Um, unfortunately a lot of entrepreneurs chase all revenue versus revenue that's actually valuable. Um, and that's a killer. Uh, it doesn't feel like it is because money's coming into your account. Um, and you're, you're winning revenue, your top line's going up, but a lot of project based businesses suffer from bad [00:26:00] clients, um, unfortunately.

Uh, and so that's a big focus of mine always is, you know, is this revenue good revenue? Um, and I agree, you know, recurring businesses are amazing because you, you have a foundation and a reasonable assumption that most of that revenue will move from month to month, right? And you can build in a churn assumption based on who's left before, uh, and With some degree of certainty, what your cashflow is going to be for projects.

Usually what I'll do is build out a project pipeline tracker for folks, which really looks like, give me your whole pipeline likelihood to close, uh, when actual cash is going to come through the door for payments, when we're actually going to pay contractors and, uh, subs on this, and then build out, you know, what that pipeline looks like over the next few months.

So they know, you know, what they can spend or not spend on these projects.

Wes: So now you're starting to get involved a little bit with the sales group, right? Because you have to now look at their CRM and look at their stages. So I'd assume you walk into those [00:27:00] situations and that's completely messed up, or they don't even have a CRM. Like what are some of the pivot points on that sales CRM that's important?

For a financial guy like yourself, um, is it like new lead? Like, you know, do you go like 10%, like a percentage, like 10 percent will close. 50 percent will close 90 percent like what, what's some good data points for you that give you confidence as a CFO?

Patrick: I think, um, cleanliness in that data and making sure it's up to date is most important, uh, for a sales team. Uh, I really want to know and honesty, right? Um, it, it behooves me a little. It's like, I get confused sometimes because, you know, sales team, most sales teams don't get paid off of pipeline. So having a make believe pipeline really doesn't help anyone.

Um, and you know, I do an honest assessment when I get in of the personalities on a sales team. And then I have my own either [00:28:00] discount or assumption about their assumptions, uh, on who's going to close when. Um, and I do a lot of my companies, I'm talking to their sales team every week to get updates on pipeline.

I'm making evaluations and assumptions in the financial models based on what I'm hearing. Yeah,

Wes: We have a running joke, uh, with just people I've done business with for many years. We had a sales guy who every week would say this one client's closing. And he literally said it for like a year. And it was just like the funniest, I mean, shame on us. So. He was around that long, but like, it was this funny that I think it's going to close next week, you know?

And, but that's interesting because like the, the, the, the CFO side, then it touches all departments. Right. So in my model, right. Entrepreneurial company, you have sales and marketing ops and finance, right? So you have, and then technology. So like you have the sales side of it, but then you also have the delivery.

So like, what's important. I know this probably isn't a one size fits all question, but I'm going to ask you anyway. What's a [00:29:00] good average target. An entrepreneur should shoot for, for gross margin or net profit. Is there just something like, here's a benchmark, you know, is there like, what's that magic number?

Patrick: I think the benchmark I've played around with is a net operating margin of 20%. That means for every dollar you make, you're putting 20 cents to the bottom line. Um, that's an extremely healthy business for the most part in most industries.

Wes: So let me ask you a question on that, right? So business example, there's 2 million in revenue, right? It's led by two partners and an LLC. They got to make money, right? They're the C levels, they got to pull out some salary. Are you deducting that salary from that 20 percent using averages? Or where does that come from to come up with that 20%?

Patrick: Yeah, that's a great question. Um, I typically would consider their [00:30:00] pay that 20 percent is their pay. Um, that goes to the owners of the

Wes: So if they're like though, but if they're active in the business, right? Like say they're the head sales guy or they're leading delivery, they're working their butts off. Would you still apply that to the bottom line?

Patrick: No, I think what I would do is I would just adjust the metric and take the same. Put salaries in operating expense so they get paid every month, which is just practical. for how we all live. Uh, and then just subtract that out of the, so maybe instead of a 20 percent target, it's a 12 percent target because they're getting, they're taking home, you know, a few hundred thousand.

Wes: So say we do that, right? And say it's, but we get 20%. So essentially we have 400, 000 of net profit in this company. What do you advise for a business now to keep in the company, distribute? What do you see out there in terms of giving back to employees? Like, do you have any nuggets there to share that could kind of.

Help some entrepreneurs that struggle with that

Patrick: [00:31:00] Yeah, I'd say first caveat is business structure, right? Uh, and then the second caveat is, you know, optimizing for taxes. Um, you know, I, I think you should always be, uh, trying to keep as much in the business as possible. Um, and reinvest where you can, but some businesses, there's just no reinvestment to make.

You, you've made what you made, you know, there's no marketing button. You can press and certainly create more demand than demand is what it is. Um, and in those cases, I think you should take home. Uh, that capital and, and, um, you know, as long as you have that three to six months in the bank for next year that we're talking about, you should be in a good position.

So I think building up that base of three to six months of operating capital is step one. Um, once you have that, you can start looking at making additional investments into the business. Is there a technology you can invest in that would increase your margin? Uh, there are sales channels you're not activating right now that you could, you could activate.

Uh, and that's where you can start to put some of that capital. And then in terms of, you know, [00:32:00] employee bonuses and, um, benefits and profit sharing, I think that comes much later, uh, in the life of a business than I typically deal with. Um, but you know, people are your, one of your key resources, uh, as an entrepreneur for the longterm.

So just always try to treat them well and

Wes: yet. Everybody wants to make more money, right? And in today's day and age, especially since COVID everybody's remote, everybody's offering all kinds of money and benefits and all these things. Everybody wants to own part of your company and stock options and all these different things. It's, it's pretty wild out there, but I like that advice.

It seems very, uh, I love Dave Ramsey, like I love the safe, like, Hey, just get to your first three to six months, put that away and then start to think, right. You have your business obligations first, but do you have any ideas or tactics around like take a service business or take like a normal, a typical entrepreneurial run company.

They have 400 grand, like what's some low hanging fruit. [00:33:00] That they could pump money into to get a far greater return down the road. Cause people see that at the end of the year, they typically wait till the last minute they haven't prepared. But what are some things that could really help out from your perspective and, and, you know, investing in different vehicles?

Patrick: Yeah. I get, I have a heavy focus on margin. So the first thing my mind goes to is building technology to increase your efficiency in the business, right? Um, when I say building technology too, that doesn't mean hiring an engineering staff and, you know, building an app. Uh, it really can just mean, you know, zapping certain apps together, zapping certain data together.

Um, or you're going to process or a systems engineer who knows who can make your services easier to, uh, to, uh, deliver to clients for a project business. Dashboards, you know, that type of thing that, you know, makes your products more appealing and competitive to clients. [00:34:00] So that's, that's usually some low hanging fruit.

There's a lot of manual stuff happening in entrepreneurial businesses, um, that can be automated, uh, and then improves margin for the longterm. And then, you know, exploring sales and marketing channels, uh, that makes sense for your business, right? A mistake. A lot of invest, uh, entrepreneurs that I've worked with have made is, um, Pouring money into channels that don't serve them.

For example, B2B businesses spending lots of money on Facebook makes very little sense for the most part. Um, you know, you, you, you'll find some people and, you know, Facebook is very good at delivering upfront, but in the longterm, it's probably not a great channel for a B2B business. Um, whereas, you know, LinkedIn, Google, SEO, your money could be going elsewhere.

So that's a mistake I'd, I'd warn founders from is making sure that Not Facebook specifically, it's good for certain businesses, but make sure your channels are right for [00:35:00] you and then use some of that money to invest in them.

Wes: Yeah. I mean, that's typically where we deal with clients, right? They'll say, what, what, where's the best place to do X, Y, Z. It's like, well, It depends, right? Depends on just like your question earlier around lifestyle business, like are they in growth mode? Are they trying to stabilize? Um, it, it all depends.

But my question to you is, is there a back of the napkin numerical number in terms of like what you should pay a salesperson and or marketing, like what an entrepreneur should be sort of forecasting? I get information from all over the place from entrepreneurs. I just dealt with a client today. She has not spent one cent on marketing in 20 years.

And now she's realizing that that's going to change. And she about had a mini stroke when we came out and gave the, Hey, around 10 percent is what we're thinking. And she about fell out of her chair because she hasn't had to do that. And then I always get asked all the time by entrepreneurs, like, how do I calm [00:36:00] salespeople? You know,

Patrick: Yeah, it's a great question. I think, um, you really, typically what I do is build a mini model. I know I, I refer to models a lot. That's just the way my brain works, uh, to take into account all the assumptions, right. Um, you know, especially in the day and age we live in now, remote work is a pretty big assumption.

Uh, and should be taking into consideration for how you're determining someone's comp, because it takes away all of their commute time, right? Uh, it's freedom of a lot of freedom, um, that people have come to expect, but you know, it also alleviates some expenses on the business, including, uh, if you're fully remote having an office.

Um, and so you have to balance kind of that with. Other things like what's the market comp in the area? What's that specific person's previous comp? Uh, what is their target? Uh, and so I think, uh, I can't give [00:37:00] anyone a perfect formula, but you really just have to line up all your assumptions and, uh, weight and balance them appropriately.

And then, you know, equity is a big one these days too in early stage companies. So, um, typical, there's a lot of actually research done around that and some guidelines online that folks can find in a pretty quick search. Yeah,

Wes: stage entrepreneur and you're looking to bring on a sales team, like, is it, what's a good rule of thumb? Is it 10 percent gross? Is it, you know, You know, cause I think that's a, that plays into a big factor in terms of what you're selling, what the likelihood of that salesperson being able to make a sale, what's the life cycle on that sale.

You know, I think it helps to be brutally honest with whomever you're talking to, to say, Hey, like, realistically, I think you could make X and this is how many sales acquisitions that we think you could do. Um,

Patrick: there's a constant battle in sales, um, and with sales employees between base and variable comp, um, and I think that's the heart of [00:38:00] it. So, you know, my recommendation to early stage entrepreneurs is you want to go as low on base as possible and as high on variable comp as possible because, um, that reduces your risk that this salesperson is not successful.

Wes: do you see success with your experience in the inside look on these companies? Like is a hundred percent commissioned salesperson. Like, are they driving value or are they just like, they can do whatever they want. I mean, they can just not produce or to me, like that idea is just so it's, it doesn't exist any longer.

Patrick: I've never seen that work. I've never seen, uh, commission, commission only contractors work. Um, also, um, what I've seen work is just, uh, giving those early sales folks who are kind of developing the sale pitch with you, developing the, the sales side of the business with you, really, really strong variable comps so that they feel the impact that they're making, um, [00:39:00] and get compensated for the lack of base.

That's, you know, what's fair. And so, you know, I would really recommend whatever your margin can handle. In terms of commission, um, giving that to those early salespeople in the form of variable comp and keeping the base as low as possible.

Wes: Um, no, that's great, Patrick. I really appreciate it. Um, thank you for allowing me to fire hose you all over the place, like a typical visionary would, right? Uh, but you provide a lot of value in terms of like what entrepreneurs are thinking about some of the questions that are brewing around in their head.

Um, if somebody needs fractional services, I know you provide that. What's an easy way for somebody to, to bounce some ideas off you, get in contact with you.

Patrick: Yeah. So they're free to reach out to me, uh, over email. I'm pretty fast. Patrick@mystartupconsulting.Com. Um, I'm always happy to take an initial call to and give people a quick 30 minute audit of what's going on in their finance side of their house. So, uh, yeah, [00:40:00] please, uh, don't be afraid to reach out.

Wes: Well, great. Thank you, Patrick. Provide a lot of value. I really appreciate you coming on today. Thank you so much.

Patrick: Uh, great to be here. Thanks, Wesley.

Outro: This has been another episode of Entrepreneur Intel. Thank you for joining us. For show notes or other episodes, please visit us at entrepreneurintel. com. Until next time.