What Business Owners Should Do about Personal Finance: Entrepreneur MBA Podcast 2.2
Henry Daas, talks about what business owners should do about their own personal finance instead of their businesses. Mr Daas is a serial entrepreneur, business and financial coach, screenwriter, and the recent author of FQ: Financial Intelligence.
When Henry isn’t working, he is an avid traveler, golfer and tennis player. He has been married for 30 years and has been actively involved in raising 3 adult boys. Henry also actively trades in the financial markets and manages a few select people’s money.
The Entrepreneur MBA Podcast is hosted by Stephen Halasnik who is the Cofounder and Managing Partner at Financing Solutions. Financing Solutions is a leading provider of lines of credit to small businesses and nonprofits.
Why Financial Intelligence?
When Henry first came out with this book, Stephen resonated with it in terms of his last twenty-five years of building companies and he commented that he wished he had been able to read it twenty-five years ago. Stephen transitioned that the book relates to today’s topic on what a business owner should do about personal finance. Many entrepreneurs may believe that ninety percent of their effort goes into building their companies and don’t think much of the personal finance side of things. Stephen wondered why Henry thought of this as a topic for his book.
Henry commented that it was a wonderful question and very weighty before answering. His answer began by pointing out the lack of education on personal finance in the multiple years of school that most people go through. Henry said he had to learn those basic finance skills on his own. Stephen agreed that people needed to do better at understanding the financial aspects of their lives, or having that financial intelligence, and how that made the title of Henry’s book so fitting.
The concept of financial intelligence has been around for awhile, Henry said. There are courses and resources out there that are very tactically oriented. His example was that there are several resources helping people with getting out of debt that are tactical and give techniques such as the snowball and avalanche techniques. However, there isn’t really someone out there saying,“hey, how about you don’t get into debt in the first place”. That this would be the best strategy and the earlier one can learn on this more strategic approach, the better. Then someone will never need to learn how to get out of debt, because they will never get there to begin with. Stephen and Henry then discussed the change in educational landscape for entrepreneurs. Henry talked about his son’s college and a particular dormitory of about five hundred classmates that are all entrepreneurial based. This wasn’t around in the seventies when Henry was in college.
Entrepreneurs Should Keep the Personal Separate from Business
Transitioning into personal finance for entrepreneurs, Stephen pointed out that it can be hard for entrepreneurs to focus on sales and watch the top line in their business and not be able to translate that into their personal finances over the years. He brought up the typical chain of events where an early entrepreneur might focus so heavily on sales, then wisen up over the years, to still have concerns later on the line; especially when that entrepreneur might be spending heavily because they assume that business will translate eventually into their personal finance.
Henry agreed with this chain of events, saying that he sees this often with entrepreneurs. The focus on sales, sales, sales instead of profitability. It really comes down to profitability. Henry tells people that they aren’t a real company until they have told someone no. He has actually had to turn away business for a couple of reasons like the “low-hanging fruit” deals. Where it seems like a great deal, easy to get the sale, low effort. This is actually not a good deal, but still some will take the deal anyways.
Another part thing that Henry sees in terms of new entrepreneurs and Stephen’s chain of events is that a lot of new entrepreneurs aren’t segmenting business and personal finances. Stephen has met several entrepreneurs that manage their personal life right through the business. They don’t have a personal checking account, everything is conflated. Very early, Henry advised, the business owner needs to recognize the fact that the company is a separate organism.
Henry expanded on this by explaining in America, once someone forms their corporate personhood, as soon as they get a new EIN number for the company, that it is a new company. The entrepreneur needs to treat it as such and not mix it in with their personal, because it can get confusing and later on become almost impossible to unwind.
Stephen asked Henry then if he was an advocate for people not running personal expenses through their business or if he believes that people should be able to track that using a different method. Henry replied that they should be able to track through different methods. He said that his accountants in the past have set up an “owner’s account’ to track those expenses. If it’s a personal expense it goes into that account and one can file the appropriate tax forms for those expenses and be covered. He said that some people run everything as a business expense and that not only is that illegal, but it also is giving a false sense of what the business’s cash flow is.
As part of the work with Financing Solutions, Stephen will ask people what they make. They often times answer with a certain amount and then become stumped when asked how many personal expenses they are running through their business. Stephen suggested that people might say they make $90,000, but in reality are making closer to $160,000 because of all the expenses ran through the business.
The Personal Balance Sheet or Net Worth Statement
Stephen asked Henry to explain the part in his book where he discusses the personal balance sheet, or what is otherwise known as a net worth statement. Henry said that whenever someone applies for a mortgage, they want a person to list their assets and liabilities. So with companies, it is a little different, because you may have capital assets that need to be depreciated, and that is typically not seen in personal finances. With personal finances, one lists everything they own or keep as an asset, maybe a car, a house, jewelry. And then they list all of their liabilities — car loan, mortgage, a whole bunch of different things. A person takes both of those and balances them out and the bottom line should be in the black.
The example used in Henry’s book was a made-up family with a net worth of about $400,000. He said you then have to take it to that next level, another part of his book, he calls the “thick green line”. These are the things that cannot be measured using the net worth statement. The corporate term for them is “contingent liabilities”, such as paying for college. This wouldn’t be something reflected on the balance sheet, but it is a pretty hefty bill that will be faced 20 years down the line. To take it to the next level, potential big bill should be considered and planned for as early as possible. Same thing with retirement. It is important to project.
The thing that caught Stephen’s eyes with the balance sheet was listing all the liabilities and assets for the business and listing all the assets and liabilities for personal fineness. Stephen said that most people don’t think of the “accounts receivable” side in terms of the cash that most business owners put into their own business that isn’t counted as an asset on their personal balance sheet. Similarly, with accounts payable, people don’t necessarily consider what they owe others as a liability. So if someone puts together the value of their home, minus the mortgage, and all the other investments they might have against their liabilities, including what they owe to other people, they will have a better notion of their net worth. Stephen asked Henry if, in his years of coaching people, he has seen people already doing this.
Henry said that people might do more of a snapshot. He said that people need to take a bunch of snapshots and view them over time, to look at the here and now. But also need to project, look to see quarter by quarter and year by year. With business, a three-year time window works. For personal, maybe 20 years out, which can be hard for people with all the variables and moving parts.
As for the people not really making excess money, Henry said they need to go back and realize if they created a business or if they created a job for themselves that they can’t quit. There are two things people need to look at to see if they have a problem — gross margin and cash flow. If one can figure out those, they can pretty much run any type of business. Unfortunately, as Henry has seen, many don’t know their own numbers. Some even just look at their bank account and don’t consider costs. In this case, they might be better off working for someone else.
Stephen agreed and said the most important part of being in the business was, “are you growing your net worth”. When doing a personal balance sheet, it is important to ask, “am I increasing my net worth”. Henry agreed, adding “it’s not what you make, its what you keep”. Putting money away for a rainy day fund is not the same as overpaying taxes over the year to have the government give it back in the form of a tax refund. It would be smarter to put that into a mutual fund to extrapolate over years, take advantage of compound interest. Henry said it was staggering to look at the numbers over 20 years which can be hard for people to understand. However, an entrepreneur needs to take this approach if they want to grow their business and not work for someone else.
Stephen said that while he doesn’t watch what he spends, he also doesn’t have expensive tastes. The investments he has made have paid off. Other entrepreneurs keep spending and it inhibits their future growth as an entrepreneur. Henry compared that to the the dot.com bust where companies that spent tons of money on gorgeous offices with very expensive furniture went belly up. He said the approach of attracting high dollar clients with expensive furniture is nonsense.
For Entrepreneurs, it Comes Down to Margins
Stephen asked Henry which key performance indicators (KPIs) he would talk about with clients that didn’t really have any. Henry answered cost of goods sold. That people are usually not doing a good job of tracking that. It is good to know what it costs to create something like a 2,500 word article, per Henry’s example. Ball-parking those numbers can be fine so there isn’t an extra cost to track the numbers. So 2,500 word article is is charged at $500 per article and the cost is $250, then there is basically a hundred percent margin. That information needs to be considered with new clients and if that same margin can’t be met, then the business owner should say no. This goes back to the earlier part of the conversation. If a business owner wants to level up that have to say no, they can’t take the business.
Stephen used a personal example to expand on this. His sister had a similar business to Stephen, a staffing business. She felt that if she could place $2 or more on top of her cost, then it was that much more than what she had before then she was good. Stephen explained to her that she would need to consider the extra costs for that extra $2. Compared to Stephen’s business that would only consider a 25% margin or higher business. She went out of business because she had a 25 million dollar company with a huge payroll and wasn’t making the margin. Stephen learned the higher the margin, the better the business. The idea is that people flood in to high margin business and competition becomes stiff. Henry said that what happened with Stephen’s sister can be seen as an issue with opportunity costs. Spending so much money on the $1 clients, there isn’t enough resources to spend on the $3 client.
Henry then said it was similar when he was in the leasing business. His partner would go down a rabbit hole of doing smaller leases for people. He would say to his partner, it is the same amount of effort to do a $10,000 lease as it is to do a $10million lease. It makes more sense to spend that time on the $10million lease.
The next KPI that Henry recommended for business owners to track on a consistent basis was infrastructure costs. For example, software as a service businesses see a little bit of creep. AWS or other services might raise their prices, raising infrastructure costs, and that’s a huge thing for smaller businesses. Anything commoditized like that needs to be reviewed every six months to seek better vendors or to leverage current vendors for a better deal. Henry said it is amazing how many entrepreneurs don’t want to have a that conversation and end up leaving money on the table. He said it’s the same with human capital costs.
Stephen then transitioned to KPIs on a personal level. Henry told him that insurance costs is a yearly cost in volatile markets that should be tracked. Mortgage rates should also be tracked because a few bases points difference might be worth the exercise in tracking. With investments, its good to stay on top of “where is your money” and if it is growing. Reducing expenses and increasing income is how someone can drive up their net worth. A person can only drive down their expenses so low. The sky is the limit for the income side with investments.
From a finance standpoint, Henry sees risk as a universal issue with several people. People don’t understand risk, how to mitigate, and how to manage risk. A business owner, or W2 employee, the concept eludes folks. A mortgage was used as an example, it’s a high risk. Someone might want to move to a better place with better schools. This is a smart move and a smart opportunity for the whole family. While this is manageable day one, costs to maintain the house and live in a high property tax area might not balance out, if say raises or income isn’t matching those costs. This was seen during the housing market crash.
If someone’s goal was to be self-employed for their whole life, the risk they are running is their ability to be self sustaining down the road. It’s hard when money can’t go into the business and a business owner can’t really tell if their business is successful or sustainable until recession. Henry said that during the recession he and his wife’s businesses were hurt. But they had back stock and resources to put into play to get them through the hard times. The goal is to get through the rough economic times, which will not last forever. This shows the importance of putting money away, which will hopefully be used for retirement instead of being used during economic hardships.
Stephen’s businesses were also hurt during the recession and because he had built up his net worth he was able to start another business. Henry further the point by saying that even other factors, like other companies and technological advances such as the internet can change the margins for a business. If that happens, then the entrepreneur needs to pivot.
When Henry first started meeting clients, it seemed the majority of them typically have issues from the money side with not knowing their numbers. The overarching issue with finances is psychology. When he was writing his book, Henry used Maslow’s Hierarchy of Needs. He said that psychology is the base level. That psychological approach to money will be predated on that attitude. It might be a pointless exercise for Henry to teach someone how to trade in the stock market if they are too afraid to make a single trade. He said it was the same thing with entrepreneurs, they have a particular mindset that they can go their own way and do it. They are rare and once an entrepreneur, always an entrepreneur.
Even in his twenties, Henry paid a lot of attention to what he would eventually write about in his book on financial intelligence. His parents and environment growing up led to his scarcity mindset that led to more than 40 years of hard work to get to the point he is at now, where he can take a breath. He said it doesn’t take a rocket scientist to have financial intelligence and manage personal finances. People just need to get out of the mindset of needing to be a rocket scientist in order to manage personal finances correctly.
Stephen concluded with the following summarized action points for listeners.
- Get educated about finance and personal finance, especially the basics. A good start would be to pick up Henry’s book.
- Pick KPIs for business and personal life and start to track those.
- Set a smaller, more tactical goal. Such as putting a set amount of money into a SEP Account. Something to really commit to.