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details. This is Optimal Work Daily,

1:01

episode 1272. building What

1:04

is a portfolio career and how to build one?

1:07

Part 2, by Daniela of iliketodabble.com.

1:09

And I'm Dan. And I am your narrator

1:11

Dan, welcome back to OWD, and if you

1:13

heard me yesterday, you know that today is

1:16

going to be a continuation episode, part 2

1:18

from episode 1271. If

1:21

you haven't checked out that one yet, I would

1:23

recommend going back and listening to

1:25

yesterday's episode first. But if you

1:27

are all caught up, let's get to the second half now.

1:31

Building Forecasts from the Bottom

1:33

Up by Dr. Jeff Cornwall

1:35

of drjeffcornwall.com. Once

1:38

revenues start rolling in, entrepreneurs have nothing

1:40

to worry about, right? After

1:42

all, the market has verified that their business model

1:44

is sound. What could possibly go wrong? Well,

1:48

actually, many things can go wrong. One

1:50

of my late father's favorite sayings was,

1:53

the single biggest cause of business failure

1:55

is success. Entrepreneurs

1:57

who are unprepared for the challenges of growing a

1:59

business can often derail even the

2:01

most promising business model. So,

2:04

how should you plan for growth? The

2:06

first step is to make sure how big you

2:08

really want and need your business to become. Reverse

2:12

Income Statement The best

2:14

tool that I have found to engage in

2:16

smart planning for growth is to use what

2:18

I call a bottom-up income statement. Rita

2:21

McGrath and Ian McMillan called the

2:23

process discovery-driven planning in their classic

2:26

article about this technique first published

2:28

in HBR in 1995. I

2:31

learned it from my late father back in the 1970s. The

2:34

basic logic is this. Start with

2:36

how much you want to make when planning for the growth

2:38

of your business. Let me

2:40

offer an example based on using this tool

2:43

to help my daughter Maggie and son-in-law Matt

2:45

when trying to figure out how big to

2:47

grow their commercial painting business, Harpeth Painting. Bootstrapped

2:51

Beginnings Matt had

2:53

bootstrapped Harpeth Painting. Initially, Matt

2:55

kept his day job with a commercial

2:57

construction company to support their family. He

3:00

worked on the new business mornings, lunch

3:02

hours, nights, and weekends. Having

3:04

identified a niche in the market and executing

3:06

the startup well, the business grew steadily during

3:09

its first year. Right around

3:11

the first anniversary of the launch of Harpeth Painting,

3:13

our daughter gave birth to their third child. Harpeth

3:16

Painting was doing well. Its cash flow

3:18

could make up for the salary he'd been earning, and

3:21

they had accumulated a good cash balance in the

3:23

new company. Maggie said, we

3:25

now have three kids, including a new baby. It's

3:28

time for you to work only one job. So

3:31

Matt took the leap of faith and quit his day

3:33

job. How Big is Big

3:35

Enough? Three years into the

3:37

growth of the company, Maggie came to me wanting

3:39

help to determine how big they needed to grow

3:41

the business. It was doing well, but they just

3:43

weren't sure how far to take its growth. They

3:46

had no real aspirations to build an empire or

3:48

even a big company. They just

3:50

wanted to earn a financially stable living from it.

3:53

The business had grown to about 25 painters. Any

3:56

bigger would require that they start to invest in

3:58

some administrative physicians to help them out. Maggie

4:01

and I met in my office and began to

4:03

whiteboard a financial model for the business. Step

4:06

1. What are your financial needs and

4:08

goals? I asked Maggie

4:10

how much they needed to take home each month

4:12

to live comfortably. The business was

4:14

already generating enough income, so that number

4:17

was their current personal budget.

4:19

We only added a bit to this number for cushion. Next,

4:22

we added income tax to that number, as their

4:24

company is an LLC. We put

4:26

a little extra in this estimate as well. Finally,

4:29

I asked what they intended to save each month.

4:32

Their business is one that will not have much,

4:34

if any, value when they are ready to retire.

4:37

If they have equipment or even a building of their

4:39

own someday, this will have value. But

4:41

Matt is the business. All of

4:43

the work they get is built off of

4:46

his relationships. So that means that any savings

4:48

for retirement, college, etc. has to come from

4:50

the cash flow of the business over time.

4:53

Maggie gave me their target savings, which was

4:55

a reasonable amount. I doubled it. We

4:58

now had the foundation of the financial plan to guide

5:00

the growth of their company. Step

5:03

2. Overhead.

5:05

Their business has a fairly simple overhead structure.

5:08

Matt and Maggie both draw a paycheck. The

5:10

company rents space for trucks, equipment,

5:12

inventory, and an office for Matt.

5:15

They have a couple of people on salary. We

5:17

also added in marketing, insurance, and so

5:19

forth. They are both dedicated

5:21

bootstrappers. The apple doesn't fall far from the

5:23

tree for either of them, so their overhead

5:26

was all quite reasonable. Sometimes

5:28

when I do this technique, I find lots of

5:30

bloated expenses in a business. Not this

5:32

time. With overhead and what they need to

5:34

make from the business, we now know

5:37

how much gross profit sales minus

5:39

variable expenses, COGS, the company needs

5:41

to earn. Add everything up

5:43

we have so far, and we have that target

5:46

for a required gross margin. Step

5:48

3. Required Sales. To

5:51

determine sales required to reach the financial

5:53

aspirations of the owners, we use this

5:55

formula. Required sales

5:57

equals required gross margin slash

6:00

gross profit margin. Let's look

6:02

at this with completely hypothetical numbers. Overhead

6:05

equals $20,000 a month. Required

6:07

earnings for the owners equals $10,000 a month.

6:10

Estimated income tax from pass-through income

6:13

from the LLC equals $5,000

6:15

a month. Estimated monthly

6:17

personal savings goal for owners equals $5,000

6:19

a month. Required

6:22

gross margin equals overhead plus

6:24

earnings goal plus pass-through taxes

6:26

plus savings goal which equals

6:28

$40,000. Gross profit margin equals 20%. Required

6:34

sales equals $39,000 divided by .20 or $200,000 a

6:36

month in revenues. So,

6:41

for this hypothetical example, the company would

6:44

need to maintain annual revenues of about

6:47

$2.4 million to reach all of the owner's

6:49

personal goals from the business. So,

6:52

we don't need to grow anymore? When

6:54

I did this with Harpeth Paintings' actual

6:56

numbers, Maggie was delighted. As it

6:59

turns out, the current size of the business is at

7:01

50% more than they need to hit their

7:03

targets. That was great news, as they

7:05

had just met with their two supervisors and all

7:07

of them agreed they loved the current size of

7:09

the company. Step 4. How

7:12

much cash? Maggie's next

7:14

thought was that she was not sure they wanted

7:16

to take out enough cash to meet their savings

7:18

goal quite yet. Their business model

7:20

required putting out cash upfront for jobs,

7:23

and they would rather not do this with

7:25

their line of credit unless absolutely necessary. So,

7:27

the last step was to determine how much

7:29

cash they needed to have as an average

7:31

balance to meet the working capital needs of

7:33

the company. My rule of thumb

7:36

is that every business needs to have a goal

7:38

of at least 30 days operating cash on hand.

7:40

That means that if no cash comes in for 30

7:43

days, there's enough cash in the bank to cover that

7:45

period of time. Given the cash

7:47

flow challenges of a commercial painting company,

7:49

I recommended at least 60 days cash on

7:51

hand and 90 wouldn't hurt. I

7:54

believe, personally, that six months would not be

7:56

an excessive amount. Some argue that this

7:58

is poor asset management as cash is not a good thing.

8:00

cash really earns nothing. For me, having

8:02

cash in the bank helps me sleep well at night.

8:05

That is a value much higher than any interest I might

8:07

be able to earn. Moral

8:09

of the story. Rather than

8:11

growing the business simply because you can, know

8:14

how big you need it to be to meet your

8:16

short and long-term needs. Life is

8:18

short. There's more to life than running a business.

8:21

Don't get me wrong, I love being an entrepreneur. However,

8:24

I also love being a husband, a father,

8:26

and a grandfather. We love

8:28

to travel, hopefully someday soon. I

8:30

love to golf, and I love to spend time with Anne.

8:33

All of that takes planning when you're

8:35

an entrepreneur, and the bottom-up income statement

8:37

can help. You

8:43

just listened to the post titled

8:45

Building Forecasts from the Bottom-Up by

8:48

Dr. Jeff Cornwall of drjeffcornwall.com. When

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it comes to hiring, don't go searching for the

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So when you're hiring, the process is much faster,

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and you only have to consider applicants that are

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Terms and conditions apply. This

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10:14

thank you to Dr. Jeff. Growing up,

10:17

entrepreneurship and small business was normal

10:19

dinner time conversation at the Cornwall

10:21

household. This set the stage

10:23

for a decades-long career pursuing entrepreneurial

10:26

ventures and sharing his knowledge in

10:28

the classroom. Jeff has spent more than 40

10:30

years now as a serial entrepreneur. In

10:33

the 1970s, he started several small businesses

10:35

and was involved in various family ventures

10:37

as well. In the late

10:39

80s, following several years in academics, Dr.

10:42

Cornwall co-founded Atlantic Behavioral Health Systems

10:44

in Raleigh, North Carolina and spent

10:47

nearly a decade leading the company

10:49

as president and CEO. After

10:51

growing the business to more than 300 employees,

10:53

he and his partners sold most of their

10:55

health care holdings and after the

10:58

sale, Dr. Cornwall decided it was time

11:00

to return to the classroom to share

11:02

his experience and knowledge with aspiring entrepreneurs.

11:04

He's now the president and CEO of

11:07

the entrepreneurial mind and his blog was

11:09

named one of the 100 best websites

11:11

for entrepreneurs by Forbes magazine. So

11:15

Come by Dr. Jeff

11:17

Cornwall for a lot

11:19

more articles. That's drjeffcornwall.com.

11:22

But that is it for this episode of Optimal Work Daily.

11:24

I do hope you enjoyed it, and thank you so much

11:26

for being here. You know, that is of course how we

11:28

keep this show going. It's listeners like checking

11:31

in every day and clicking subscribe or follow in

11:33

your podcast app and telling friends and family about

11:35

it when you get a chance as well. So

11:38

hope you have a great rest of your day and

11:40

I'll see you again tomorrow for your optimal life.