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Best Metrics: Welcome to the Best Metrics podcast. Each episode, we meet with industry experts to discuss how they evaluate financial statements, what metrics they commonly use, and how their clients have improved. We'll also gather suggestions of how you can incorporate the same insights and processes into your own practice. Thanks for listening and enjoy this episode.

Glenn Dunlap: Well, hello and welcome to our first episode of [00:00:30] Best Metrics. I'm excited to have Marcus Dillon with us today. Marcus has 20 years of experience in accounting, advisory and tax management and is the founder of Dillon Business Advisors and Katy, Texas, which is just outside of Houston. Uh, Dillon Business Advisors is a full service accounting firm that helps their clients understand and navigate accounting, financial and tax positions. I saw Marcus presented the QuickBooks connect conference and really liked how he and his team were defining the roles of the past and present and the future, how you structure engagements and how you communicate all of this to the clients. So [00:01:00] if we have time, we'll talk about some of those things, but we'll we'll save that for a little bit later. Um, Marcus's firm specializes in a few industries professional service providers, CPA and accounting firms, health care professionals and family offices. Today, we're going to focus our conversation around professional service providers, which will certainly incorporate the CPA and accounting firms too. So without further ado, Marcus, welcome to the podcast.

Marcus Dillon: Hey, thanks for having me, Glenn, and thanks for allowing me to be your first guest. I know I was the first one, so. That's right. Yeah.

Glenn Dunlap: High honor. [00:01:30] Well, we appreciate it. This is, uh, this is pretty exciting. We're, uh, excited to launch this in the new year. And, uh, you know, it's kind of one of those, uh, uh, resolutions that I carried all of last year, and I'm glad to finally get it checked off the box at the beginning of, of this year. So, hey, you.

Marcus Dillon: Gotta start somewhere and hopefully we're starting the bar super low so all future guests can just build upon this experience.

Glenn Dunlap: Well, I doubt that's the case. Is there anything what else would you like to add about your firm? Because I think, [00:02:00] you know, as listeners are coming into this, I'm sure it's it's helpful to to kind of, you know, frame kind of, you know, other things about your firm. So.

Marcus Dillon: Sure, uh, you covered all the high points. So Marcus Dillon, I'm a CPA. Uh, we do, uh, have a firm that focuses on accounting and tax and advisory. Uh, we are based out of Katy, Texas, but we're a 100% remote firm. Um, so we were a legacy firm, saw Covid as an opportunity to go more virtual. So we still have some real [00:02:30] estate in Katy that we, uh, if need be, can have an office, uh, meeting in. But everybody is full remote across different states and all that good stuff as well. So, uh, we also part of our story, uh, DBA turns 13 this year and, uh, we started as a legacy CPA firm, uh, very much looked at tax services and annual relationships kind of as the benchmark for how [00:03:00] we went to market. And that has evolved over the years to where now it's more, uh, monthly recurring revenue, higher touch points, deeper relationships that we have with clients. And so that's been an evolution that we'll share a lot as well. And so the main thing with our, um, kind of story is always looking at ideal clients, looking at different metrics in our business, helping lead, uh, conversations with leadership to know [00:03:30] which way we're going and which which is successful, like how the business is, is becoming successful. So, sure, you hit all the high notes. Um, I run that with a team, a leadership team. Rachel, my wife is a part of that leadership team. So we run the the business together, um, and also employ about 17 people, uh, total at CPA.

Glenn Dunlap: Okay. That's great. And how many are in Texas and how many are outside of Texas now?

Marcus Dillon: So we started out all in the Houston area and Katy, Texas, and [00:04:00] we were able to a few team members actually moved to other parts of Texas. So Dallas and um, we have a couple in Dallas. We have 3 or 4 in Colorado now. So a lot of Texans moved to Colorado for, uh, various reasons, and our story is no different. And then we have a team member in Alabama, one in Ohio. Uh, we actually have a team member in the Philippines as well. So, uh, you know, we're kind of now across borders as [00:04:30] well. So it's all fun. Fun and games.

Glenn Dunlap: Yeah. That's fantastic. Well, when I was looking at, um, your, your background, um, one of the things that stood out to me was that you started your career in audit. If I, if I understood that. Right. And and and then made the transition to advisory. So one of the things I'm thinking about there is that a part, you know, as, as the profession is, is emphasizing advisory more. There are probably several of our listeners that are, um, you know, that are in the in the position where they're [00:05:00] either in audit or in tax and either being tasked to move to the advisory piece and or have an opportunity to and might be thinking about that. So, you know, what was your path from, from audit to advisory and kind of what, you know, what are some things that, you know, takeaways from that?

Marcus Dillon: Sure. Um, I was audit at a big four firm, uh, started there as a staff. I interned there and got to see such a small piece of. A business's financial position with those [00:05:30] type of clients with Big Four type of clientele. Uh, left Big Four because Rachel and I started having a family, uh, really early on in life and went to a smaller firm where the the bigger shift for me was firm size. So I went from a smaller, uh, from a large Big Four firm to a smaller firm and got to see the whole picture of a client's financial system. And with that, I was able to advise a little bit on tax planning rolled from audit to managing the tax practice at that [00:06:00] firm. And most small businesses want to optimize both their financial position but then also their tax opportunity. So I was thrust into that and had to learn, uh, tax planning and why that's important to a small business owner versus, uh, showing profit on paper and paying tax on said profit. So I got to learn both sides. And that was part of my story. And whenever I, whenever I went out on my own and launched DBA [00:06:30] at 13 years ago, that went with me. So while audit was a bedrock to my, uh, my financial education, it still helps me review, uh, financials to know what doesn't look right. Uh, which accounts should be a debit versus a credit and all that good stuff. But whenever you're working with small businesses, especially small business owners, and looking at metrics and KPIs, you have to balance in tax advisory as well, especially [00:07:00] if you're sitting in that CFO seat. Um, for a business that's maybe under 50 million, $5 million. Um, a lot of the work that you do with clients throughout the year is to help them optimize both tax position and financial position. So I think that goes hand in hand with kind of my background to really be able to see the full picture and know we're not placing too much, too much emphasis on either side because it has to work in tandem.

Glenn Dunlap: You [00:07:30] know, it's interesting, um, just thinking through that path. I mean, there's certainly different skill sets in those different areas. When you think about what's sort of traditional public accounting versus what I might I don't know if you would agree with this, but I think a lot of what you're talking about in terms of advisory tends to be more management, accounting, where it's, uh, you know, the just not just looking at the numbers from the standpoint of reporting to someone external or doing it for the sake of, of tax calculations, but instead really kind of what are the numbers telling us? What, what how [00:08:00] do we how do we make sense of this? And what can we learn from this and where can we go. So it's a it's a different there's a little different. You know, you have to switch hats when you move from, from those roles. And so it sounds like you, you really did that. Um. Maybe. Maybe because you're forced into roles.

Marcus Dillon: Well, you're forced to adapt. And I think that's the biggest piece where clients are asking you questions that may make you uncomfortable. So you have to work with the skill set that you have and the data that you have. So a lot of that financial [00:08:30] data, what is it telling you? Um, so much of what we do now, um, in the advisory space with the teams that we lead, um, I would just say that we're more consulting than we ever have been as a profession. And and with that, you have to adapt pretty, pretty frequently how you do things and be ready to go based on the numbers that you have or the data that you have. So part of that is financial storytelling and being able to interpret [00:09:00] the metrics or the KPIs or the balance sheet, the tax term, whatever you've got in front of you. And what does that data, what story does that data tell? And then you've got to weave in all the non-financial data, all the emotional stuff that happened throughout the year to be able to tell that picture, too. So I think most, um, small CPA firm owners and leaders that are in my position have to kind of have to learn those skills that weren't [00:09:30] hot, uh, whether it was in college or in your first, uh, first jobs outside of college, that kind of help you adapt. And that's where we see a lot of fruit from those relationships with clients to be able to have those good conversations. Right.

Glenn Dunlap: That's great. Well, let's talk let's talk about some of the the lines and then maybe we'll, we'll, uh, circle back and talk about sort of reading between the lines. Um, yeah. Because I think that's a lot of what you're talking about is some of the subtleties of things that aren't necessarily on the financial statements themselves. [00:10:00] So, um, so, so thinking about, you know, meeting with a client, you're, you're in a situation with or, you know, a new client, a prospect, they're presenting you with financial statements or somebody gives you a set of financials for, um, you know, professional services firms. So what what are the first things like, you know, you got the PNL, you've got the balance sheet, maybe cash flow. Um, probably not. Oftentimes those two, it's the PNL and balance sheet. But when you're looking at those two statements, what are what are you typically looking at? I mean, I would [00:10:30] assume top line growth would be one of those things, but what else what else are you looking at?

Marcus Dillon: So we go back to, you know, that auditor hat, that nature that is ingrained in most of us. Um, and so you start to pick out what could be wrong, I think, for the most part. So you look for the negatives. That's just our nature as accountants or definitely mine, having that audit background. So you look for the negative pieces, like what could be wrong with this set of financials? Because if it was client prepared [00:11:00] or they had an internal bookkeeper that you don't, um, you don't have a background with that you have to rely on. Um, so I think that's part of where I start is like, okay, this is a great beginning place, but what what is this not telling us or what's not included here? It's so much nicer, like the way that DBA works with our team of three, that we have full confidence that our client service manager, our client controller, went over those financials and bless them. And we have full confidence to be able to then advise [00:11:30] on those financials. Right. But if we're reviewing a prospect or anything, we can't have that same level of confidence. So we start to ask questions, um, based on what this financial picture is telling us. And, you know, you start making some assumptions and you have to, uh, make sure that those assumptions can be backed up based on the responses of that prospect or that client.

Marcus Dillon: And so it's, you know, just talking through like, looks like you had a great year. Can you tell me more about that? And then if they come back and say we had [00:12:00] an awful year, like, okay, then something's not, uh, tying really well. And you look at a lot of times a PNL may say that they were profitable and their cash says otherwise. And so you have to explain to a small business client what happened to all the profit, because they associate available cash to profit a lot of times. And then you have to look at something like shareholder distributions to make sure, okay, you took a lot of the cash out of the business, or you paid down debt [00:12:30] or paid back the line of credit or exited a partner. There's so many things that could happen to that available cash flow that came from profitability. So I think those are the pieces, the questions that you have to start to ask whenever you're sitting down with someone and you don't have full confidence in the numbers, and then once you have full confidence in the numbers, once you do get comfortable that they are correct or that your team is now a part of their solution, then you can start. [00:13:00] Start dissecting and comparing and looking at metrics and KPIs. Um, but before then there's kind of that step of uncertainty, right?

Glenn Dunlap: Right. Yeah. And everybody, like you said when. You know, it looks like you had a great year and they feel like they had an awful year. I mean, there's always those things that are subjective. Uh, yeah. So you have.

Marcus Dillon: To as the advisor you have to bring forward like, okay, they may feel bad about the year because they no longer have the cash, but then you have to celebrate. But you paid off your line [00:13:30] of credit and you paid down the debt or paid off an old partner. So you have to be able to adapt really well to shift the conversation to staying positive.

Glenn Dunlap: So yeah, that's right. And it's not always positive news. So all right. So let's once you've once you've sort of established, uh, the you know, confidence with the financials or have concerns about it either way I guess, um, you know, what are sort of the big buckets that you're looking at? I mean, in a professional services firm, what are the [00:14:00] things like if you think about like, what can what can really change the performance with inside this company? So what are the what are the big areas we're looking at there.

Marcus Dillon: So a lot of times with professional services it's real easy compared to manufacturing or uh, e-commerce, let's say professional services. You're selling someone's time, right. So it's usually easy to boil down. So there usually should not be big swings with like an inventory or cost of goods sold like a, uh, another industry [00:14:30] should. So when when you look at professional services, whether it's a CPA firm, whether it's some type of physician, um, it just comes down to, are you are you selling your services, your time, uh, for something that exceeds your cost or your overhead? And right, whenever we look at that, there may be a break even to where you have to ramp up and scale to then become profitable, um, to where you have [00:15:00] offset, let's say if someone has an office space, their rent and some of those fixed expenses, they have to offset those first coming out of the gate. Maybe they have a team member or team members that are also on those journey with them, and they have to offset those expenses. So a lot of times whenever we look at profitability from the very beginning, we look at, um, what is what is the overhead that we need to at least cover, and then who on the team will help us scale revenue beyond just maybe the owner [00:15:30] or the one technician that started the business and be able to scale to a revenue that then supports the goals of the owner.

Marcus Dillon: Right. And I would say a lot of times, uh, so we we kind of defined our ideal client, our professional service industries, anywhere from 1 million in revenue to 5 million in revenue with a team size of 5 to 20. Okay. And so that at DBA, that's who we serve really, really well. And we know the pain points of that business owner from 1 to [00:16:00] 5 and then from those team members that they have, because we've gone through that journey ourselves and we can kind of speak into that and help, you know, keep people on, on, on the right path. So with that, I would say knowing your ideal client or your prospects, knowing what pain points they may have, gives you perspective that that you can build upon and that that's where it's that took a lot of time for us to learn. But once we know that [00:16:30] someone's gotten over that hurdle of start up like 500,000 or hitting that million dollar mark, then we can start turning the conversation to more optimizing, whether that's optimizing their team that they have or their resources that they have. Or maybe it's the goals of that professional services business owner to exit the business one day and start phasing down their billable time. And so I think that's what we look at within [00:17:00] our industry as CPAs, but then also for professional services as a whole.

Glenn Dunlap: Yeah. So would you say I mean those you feel the same. This is the same for an ad agency versus a, you know, an architectural firm versus a law firm. I mean, these are the same. They're going to have the same sort of, uh, hurdles between that 1 to 5 million that once they've kind of gotten past that, that ramp up or that scale up, and then they're going to have the same sort of challenges there.

Marcus Dillon: I would say every industry is going to have their [00:17:30] own unique circumstances. So, uh, you just named off three different ones that have three different three different hurdles or three different unique situations. So if you're working with attorneys, a lot of times that attorney has an ERISA account or where they're holding funds on behalf of a client, and not all of the money that that attorney has in their care is for their revenue, like for their funds. So with attorneys, you have to be careful to make sure that you're, [00:18:00] uh, showing retainers the right way and holding money in separate buckets for what is revenue versus not revenue. Uh, you talked about ad agencies, which we we serve a lot of marketing firms. And that's we we'd like that industry. Usually the mindset of those type of clients is really growth oriented. And they're in there and they're looking to stretch themselves. So that's fun versus somebody that's looking just to stay stable. So with marketing and ad [00:18:30] agencies, a lot of times you have to show them what their true revenue was and not what their revenue plus ad expense was. And so, you know, they may be in their mind a $5 million business, but they may have $4 million of ad sales in that 5 million. So you have to show them, no, you're actually a $1 million business. And we have to run your business like a $1 million business, not a $5 million business. So each of those are a little unique. Architecture [00:19:00] is a little bit, um, probably more aligned with like CPA firms where it's just you, you have your services and your people are your biggest expense, but the other definitely marketing agencies. Yeah. Your ad expense, if you include that in top line revenue, that's usually your biggest, biggest line item.

Glenn Dunlap: So thinking of the sort of the professional services firm, um NAICs codes, right. The five four ones. Uh, yeah. Uh, software development firms fall on that too. So what have you do you work [00:19:30] with uh, you know, software development firms and do you see what's different about them? So so not necessarily companies. Oh not really. You just like software engineers or developers that are doing custom kind of SaaS SaaS would be like a totally different model, right? So yeah.

Marcus Dillon: Yeah, yeah. So on that, it's uh, so software development, you have to if you if you do serve that industry, you also have to keep in mind how much of this is R&D related. How much are we looking for an immediate ROI return on investment? Um, like maybe some consulting or project based work that's [00:20:00] got a shorter turnaround time versus we're building out the software for a bigger a bigger plan, a bigger project down the road. And so you have to make sure you're capitalized correctly and all all of these different businesses. So just because you're in a NAICs code starts with five four. You know, you may you may have some unique, um, variables to keep in mind.

Glenn Dunlap: Yeah for sure. So that's interesting. So you could be. [00:20:30] Lumped into a category, but have some still some unique elements to your business. Inside of that, let's talk about the balance sheet a little bit for professional service providers. So if you're thinking about that, you've mentioned cash and sort of the cash. Um, cash flow over the course of a year. And just kind of, you know, the mindset of, um, I have cash, therefore I'm doing well versus, uh, I may not have cash and yet might be doing might actually be doing well. So, uh, can I just talk talk through some of those things? So, so [00:21:00] a cash are I would imagine would be a couple of the big things here for professional service providers. Yeah.

Marcus Dillon: And I think if you even just take an industry for example. So let's just let's talk about CPAs like CPA firms. Right. And I think the, the shift from most in our industry to be more MRR, more retainer, more getting paid in advance, right. If that's the shift that you're making, your ARR should become minimal. And and so I think that's the piece [00:21:30] where if you're comparing yourself to another peer in the market that is not embracing those same things, then you have to make sure that that your comparisons line up. That's right. So, um, you know DBA we made that shift. And so it's crazy. We did about $3 million last year. And at the end of the year we only had $400 in R. And so you compare that to another $3 million firm in the market where they built after the fact. And they just [00:22:00] they have a different a different model, then we're going to look completely different. And they may feel down on themselves because they're comparing somebody to somebody that's made that shift to billing an advance MRR or different things. And so, um, if you are trying to make that shift and you are, let's say a CPA firm or you're you're advising a professional services firm to be minimal on R, how you compare yourself to where you've been in the past is the biggest [00:22:30] is the biggest thing to look at.

Marcus Dillon: You can't compare yourself to others. And so you just have to compare your own cash and your R and maybe bad debt or whatever else you're tracking to where you've been yourself previously. Right. And so from a cash perspective, we love to make sure, like from a client perspective, we want to make sure that you've got probably three months of overhead in your in your cash reserves or able to employ pretty regularly. [00:23:00] Um, we also have to look at the liabilities to make sure that there's nothing coming up in the current, uh, year or even 30 days, 90 days, that's going to really jeopardize that cash position. And so sometimes whenever you have young or just newer business owners and they've got a line of credit, uh, we've had to show a cash position, net of line of credit, because just because they went out and pulled $200,000 out of a line of [00:23:30] credit, and now they've got $300,000 in their cash account. Yeah, that's not the same as having just $300,000 in no line of credit. So. Right, right. You have to know your client really, really well. Yeah. In today's market to be able to advise on that. And that's just something that as you get to spend more and more time with your client, know their goals, the storytelling should become easier whenever you modify that.

Glenn Dunlap: Right? Yeah. That's good. Uh, well, [00:24:00] and and you mentioned comparing you to you, uh, that, uh, that can be really helpful. So a benchmark, an industry benchmark as more firms trend to more of a, you know, MRR approach, a monthly subscription approach, uh, that will drive down their, their accounts receivable as long as they're collecting that. Right. So so they should see R go down and over overall we'll see the industry trend go. So RR should be going down. Uh, and so where you may have been comfortable with I think [00:24:30] CPA firms are tend to carry pretty long uh receivables in some cases. You know um and especially the bigger firms you see them, you know, there are a lot of solutions now that are trying to help them to speed up the collection on that. Right?

Marcus Dillon: Yeah. While we're talking about CPA firms. And that's just assuming that everything's been invoiced. We haven't even talked about the with the lag in in a CPA firm and some of those larger firms, um, where you may not have somebody that's incentivized to get an invoice out [00:25:00] or they just aren't good at billing, they may sit on whip for a month or or longer or longer. And, um, then you've got you're not just looking at your R trends, you know, your 30, 60, 90 day buckets. You've got kind of this whip, um, gray area that you haven't even invoiced for. And so.

Glenn Dunlap: Yeah.

Marcus Dillon: Right. I'll say, like it does get easier once you do move, move towards being paid in advance, whether it's through retainers or setting your your business clients up on a [00:25:30] on a. Encryption based and not committing to services outside of that. So there it helps run a better business. And whenever we look at running better businesses, it it helps you as a business owner have confidence in where it's going. And then it's also worth more because somebody more, more or less may come along and want to own that business. That's got good policies and procedures in it versus the one that doesn't. So I think that's the other piece. Whenever you [00:26:00] look at some of those, the reasons why you do what you do.

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Glenn Dunlap: Marcus said this may be an off the wall or maybe a really stupid question, but I'll ask it anyway because that's my role, I guess. No, no, there.

Marcus Dillon: Are no stupid.

Glenn Dunlap: Questions. Um, yeah. Thinking about, um, you know, in a construction industry, uh, they track under Billings and over Billings. Does do, uh, professional service firms ever put whip as an under billing on a on a balance sheet?

Marcus Dillon: I've seen it done both ways. Where some some do not do [00:27:30] an adjusting journal entry and just kind of keep it in their practice management software. But I actually worked in a firm where, uh, the partner booked the whip and did a monthly adjustment to tie back to the whip report in their practice management software. Just so their financial statements did were more accrual basis. Yeah. Um, so would it put an eye.

Glenn Dunlap: On would it put an eye on the fact that we've got all this whip sitting out there that hasn't been invoiced? I mean, that there's part of [00:28:00] part of it. Whip is sort of, uh, invisible. You know, if you're not paying attention on the financial statements, it could be something that sits out there that nobody knows. Like, um, you know, we're gonna we have what, you know, uh, 10,000, 100,000, $1 million of whip or whatever the number is. Yeah. Uh, that's just that that we need to get, you know, let's convert that to an invoice, and then we need to get out. Yeah, yeah, yeah. Because, I mean, like like you were saying, there's this whip that's not been invoiced. So we've got the, you know, the time from, [00:28:30] uh, the sale to or the work being generated and done to the, to the collection of that cash, I mean, every, every day that, that sits in whip or sits in are that's a, you know, extends that days sales outstanding and actually precedes it. Right. If we don't even have it in the in are yet. So yeah.

Marcus Dillon: Yeah I would say that. And you got you've got a variable where some firms don't even track their time. And so it's uh, you've got [00:29:00] um, you've got a, an industry that is changing the way that, that they do things very quickly in accounting. And so um, with whip, for example, if you do track your time and you haven't invoiced out all that time or cleared it against MRR projects or anything like that, then you could create an AG and or adjusting journal entry for those that um, and put it on the books, and then you're kind of carrying it more on an accrual basis. That way it just stays top of mind. And hopefully that [00:29:30] ties back to a whip report. Um, and really the only the driving factor in that should just be that you're running a better business, that you're looking at how you can invoice out faster or get paid faster, take money home faster. Um, like that's what it should be all about. It shouldn't be that you're sitting on this whip and whip doesn't pay the bills, whip doesn't pay your payroll. And whenever we think about professional service industries as a whole, [00:30:00] your greatest asset goes home every night and your people or yourself. And so I think that's the piece where, however you can start to make that shift and mentally think about, I've got to become a better business owner and how can I do that? Um, maybe that Whip journal entry is, is one of those pieces that gets you moving faster.

Glenn Dunlap: Right? It's interesting. We in the firm I worked in every month, uh, you know, right after the, the first of the month, the CFO, COO would, would walk around and kind of flog [00:30:30] all of us and make us get, you know, get everything turned in so they could invoice and send things out. You knew when when you saw John walking down the hallway that, uh oh, it's time, it's time to invoice. So they're like, well, if you if you take it.

Marcus Dillon: All the way like I was, I've been fortunate to work in different firms that had different policies. And so you've got some people in our industry now that that don't have that background to know why, why we've progressed the way that we have and why some people are still [00:31:00] doing things the way that they have. But if you take, for example. Getting paid something as easy as getting paid for projects and things, and then you start backing out like, okay, it takes us from the time we invoice to the time we get paid. That may be 30 to 60 to 90 days, right from the time we actually do the work, which is whip to when we invoice it, that may take 30 days. And then on the front end of this, you see younger people who may get frustrated with the profession and leave, [00:31:30] um, how do you become utilized. And so like that's the first step. And that same person who walks through that office like, hey, you should be invoicing your whip. It's probably also the person making sure that of the available resources we have of the available team members we have, are they being properly utilized and billable to a certain extent, because that's what then drives whip, which then whip drives invoicing and invoicing drives getting paid. And so I think that's kind of something that got lost [00:32:00] in translation from the younger generations, who are now frustrated with the way that some firms are run.

Glenn Dunlap: Right. Yeah, that makes sense. All right. So so cash are plus whip kind of, uh, things and making sure there's no big payables that are outstanding. What else. Anything else on the balance sheet that we're kind of paying attention to.

Marcus Dillon: If we're looking at a professional services firm balance sheet, you really don't have many assets unless you did a big leasehold improvement for an office or [00:32:30] you're just equipment intensive. You know, you need certain machinery to do what you do. But now, um, CPAs, for example, laptops or $1,500, you know, you can go out, um, servers, probably a hosted solution or something. You pay for monthly. Um, so I think, I think that's where your assets are really hopefully current in nature, where, where it's just really going to be majority cash or are from a liability perspective. With any business you have to look at, okay, [00:33:00] do they utilize credit cards? And there's a place in the business for that. Um, and then also what what loans did they acquire the business or did they acquire a client base to get started. And so I think those are unique to every business. Do they have a line of credit. And that kind of drives how we use that cash to pay back, you know, some of those liabilities that we have. So I think professional services are are a little cleaner and more simplistic than so many, so many moving pieces [00:33:30] with other industries. And, you know, just that's why we we feel called to serve simple industries because it makes our life easier and we can spend more time with the client advising them.

Glenn Dunlap: Yeah. Well, yeah, we have, we have, uh, a lot of firms that are serving like construction industries, for instance. And every month there's more trucks and more loans going on in the books or, you know, so there's a lot of, like you said, a lot of moving pieces for those. So, so it's it's typically you're expensing more of those things.

Marcus Dillon: Yeah I think that's [00:34:00] that's great that they're called to serve those industries. And just like there's so many conversations around niching down that once you kind of feel that you're called to serve those, those industries, then you kind of move all in, um, on those industries because you get to know them really, really well for sure. And, and then you know what looks right and what doesn't. Whenever you see the same industry financials over and over and over again.

Glenn Dunlap: So. So when you're [00:34:30] thinking about like the you mentioned it before, the, the KPIs or, you know, metrics that that you would use. So you know, we've kind of talked through PNL balance sheets. So thinking about like what ratios and metrics you would typically look at here. What are some things that, you know, maybe financial statement, maybe some operational things that, uh, you know, would be off of a trial balance, for instance, maybe it's something else that some, you know, revenue per employee, profit per employee, something like that. So what are the key things you're looking at here?

Marcus Dillon: So I think that [00:35:00] that KPIs can get so generalized and broad in nature. Um, if you're a CPA or an advisor, uh, working with a client, I would say, do you know the goals of that client one, three and five year goals? And then based on that conversation with the client, then you adopt a set of KPIs that align with those goals. And I think those are the pieces where instead of always presenting a KPI that really doesn't apply [00:35:30] to to that client situation, then being able to pick and choose which KPIs do make sense to go over and really pay attention to. Because if you're paying attention to the KPIs, then that should tell results that. Then adjust how things are doing in the business or the decisions that are made to drive better KPIs in the future. So cash is always king, uh, regardless of business. So you want to look at liquidity and you want to look at do you have your your current [00:36:00] assets over current liabilities, you know, just for a quick ratio and different things like that. So we use that across the board for, for pretty much all, um, clients. Okay. The other then you can start getting specialized. And so some KPIs, um, professional services, if you've got a similar type of role consistently throughout the business, can you do a revenue per headcount. We've seen that in different things. Tracked. You have some financial data or some [00:36:30] data that you have to kind of add in to what you would pull out of a trial balance or general ledger, and that gets fun.

Marcus Dillon: Um, so you've got to make sure that you've got a good system where you can pull that data. Cpas are usually good because they have practice management software that also aligns with, you know, the firm's accounting, right, general ledger. And if you're looking to go, let's say you're a CPA firm and you're looking to go more in the MRR path and more subscription [00:37:00] based, then you should be tracking your MRR, you know? And that's where whenever you compare yourself to your previous self, is that MRR improving or has there been churn? Um, which that's another term that most CPA firms don't incorporate. And so churn is, you know, where you've got monthly revenue and it's churning out people are no longer doing business with you on a monthly basis. So maybe that's a KPI that you pay attention to further into that MRR journey versus [00:37:30] if you're just serving clients on an annual basis, your your monthly revenue may be all over the place just because of the timeline or deadlines associated with those projects. So, um, that just kind of goes back to that one statement, like make sure whatever your goals are, that you're aligning those goals with KPIs that tell you how you're doing.

Glenn Dunlap: Um that's good. Yeah. So revenue per headcount, you look at things like, so you said, you know, understand what the goals are. So if I, if a client [00:38:00] says to you, I want to I want to double the growth of my business. So you're looking at things like revenue per customer or client so that they can identify. Oh, do you know that means you need 1000 new clients next year or something like that? I mean, are you able to kind of get into some of those things with them as well? Do you look at that as, uh, from a forecasting perspective or what? Uh, what else do you look at on that side?

Marcus Dillon: We do. Um, so a lot of, a lot of the hard work that we did within DBA, we'll do with clients. I think [00:38:30] they understand that, that that's everything that we've learned and employed. We can then turn around and use with them. So professional services, do we have somebody that is in a niche specialty. Um, do they know who their ideal client is? And can we direct marketing dollars at those ideal prospects. And we can get an ROI on marketing spend? So that's something else to look at. And um, how how that customer journey plays out. Because if [00:39:00] they're losing money on new customers, then it doesn't make sense to grow. And like what what are we trying to do here. So a lot of times we'll separate out, um, vanity metrics like top line revenue and different, uh, revenue per headcount and different things like that, which may just be seen as, um, vanity. And then we'll look at other metrics which are just good sound business metrics that really come down to maybe cash flow to owner net [00:39:30] operating profit before discretionary expenses, all of that to make sure that we're still profitable. And if we've got some vanity metrics that we're watching and we're trying to grow the business over a one year, three year period to then stabilize and then kind of get to a certain mark that makes all the sense in the world. But if the business owner that we're meeting with has no plan in place, and they just want to hit a revenue mark of, let's say, $5 million. That's we have to kind of peel back [00:40:00] the onion a little bit and really understand why they want to hit $5 million. Maybe. Maybe they just can't tell us that they want to hit 5 million, because then they think that they can bring home $1 million a year. And so it's asking those prompting questions and continuing to ask them until you get the answer that you think, uh, is really driving that first statement.

Glenn Dunlap: Right? Okay. So so I'll put you on the spot here. So you mentioned liquidity as something. So what [00:40:30] do you see? Yeah, I'll preface this question by saying that one of the things that we've seen over the last few years. Take COVID and all the money that the government injected into the into the economy that, you know, for for business owners in particular. And so we've seen numbers inside professional firms, um, health care practices as well. Those are really different than, than what they were. But what do you see. What is from a liquidity standpoint? You mentioned like a, you know, a current ratio for instance. Like what [00:41:00] what do you see as a what do you expecting to see as a current ratio for a professional services firm? Which current ratio, by the way, will define it as, you know, the, you know, the current assets divided by the current liabilities. So that would give us a chance to see like how many dollars we have to pay. What uh what liabilities. Right. So so what are you typically seeing in a professional services firm?

Marcus Dillon: One they can be all over the all over the board. But I would, I would want if we were really working with a client I would want a 2 to 1. Um, just [00:41:30] that way. That way we have cash to take to take advantage of opportunities that come along the way. Um, also, those can be specialized per client. And whenever we step back and scan the whole we want 2 to 1. And sometimes you may have a business owner that they just don't keep much cash in the business for whatever reason. Maybe it's a liability concern or whatever. And they've got a different model. As long as we're okay with that, um, we can bless it. But [00:42:00] other than that, like, we want available cash, so there's not a concern when payroll comes up every two weeks or whenever that note payment comes up, that we're not jumping through hoops or trying to go pull money out of a line of credit. So 2 to 1 is kind of the sweet spot. Um, if we're over that great, they can take a distribution. Um, also like to see a lot of times, um, just a methodology, whether it's profit first or some type of, uh, cash flow structuring to where [00:42:30] there is money being set aside for taxes, for profit distribution. And we're living on less in the operating account account than we really need. So I think those are those are the great things. Like once you have a client fully on board and understanding methodology, they've got some cash in the business. They're able to take distributions once a quarter. They've got their taxes set aside like that to any accountant. That's like a great client to have. Yeah.

Glenn Dunlap: Right. Right.

Marcus Dillon: Uh, so that's where you got to you got to work to get [00:43:00] them in that shape.

Glenn Dunlap: So a 2 to 1, um, current ratio, current assets to liabilities, current assets are going to include cash receivables, inventory. If they carry inventory probably not much in in professional services firms. But so let's just say assume for a second it's mostly cash and receivables. I suppose you could have prepaids and other stuff but we're talking cash receivable. So yeah. Um, they could be they could have less cash than they have in current payable in current liabilities. Right. Because [00:43:30] they could have a lot of it in receivables. You mentioned they might carry a lot lower amount of cash. They can have a high amount of ah. Is there a number inside of that that if you were to back out you know quick ratio backs out inventory. But if we're not really dealing with inventory here and we've got a high amount of receivables in here, is there a number in that that you kind of go, hey, we're we're running dangerously close here or we need to speed up some of the collections here. Or do you monitor like are days or what. How do you kind of.

Marcus Dillon: Ah yeah you hit it are days is usually [00:44:00] what we look at. So. Okay. Um, we, I personally don't want more than a 5050 split in cash and ah, just because. Yeah, I, I want the client to be more in control of their money than their customers. Yeah. Um, financial habits driving the decisions of our client. So whenever we review, let's say, a monthly client, we're reviewing their. Ah, um, by, uh, by buckets, right, 30 to 60 to 90 days. [00:44:30] And we're also addressing after 90, are we really going to get paid on that? Do we need to send collections or are we just writing it off? And that way we're not quickly looking at a number and assuming that's a good receivable. So I think that's also hygiene. When we look at just the hygiene of the financials, which is a obviously that's a physician term that we use a lot. So they understand hygiene. And so we're trying to have good financial hygiene within their their data. And [00:45:00] so I think that's the other piece where if if it's not realistic that we're ever going to receive that money, then we need to back it, you know, back it out and show it as an expense or a bad debt write off. Um, but yeah, the 50 over 50 is really where I feel comfortable. Um, if we could do more. Kind of like DBA is pretty much 99.9% cash and no are like, yeah, that would be better. So.

Glenn Dunlap: Yeah. Your are days is a fraction of a day. It's it's less [00:45:30] than a day. So. Yeah. Yeah.

Marcus Dillon: Well it's funny because that's one client that we did a tax return for three years ago. And we've got him on like a payment plan. And the leadership team is like, you should just write that off. And I'm like, nope. I'm doing it to remind me, like, this is why we don't accept those type of clients anymore. Yeah. And so every month I draw $50 from his ACH. And it's just a reminder, like, this is why we do what we do. Um, yeah. It's good.

Glenn Dunlap: Uh, traditionally in a professional [00:46:00] services firm, some that aren't moving to the subscription model yet, what would you see in terms of are days? What uh, what what's kind of a typical thing or where do you where's your head at? It's about 30 days roughly. Or I.

Marcus Dillon: Would hope. Um, so if we're looking at CPA firms, for example, I would. I would hope your whip is 30 days, right. You know that maybe you don't have any more than a month or two out, uh, within your whip. And then when we look at when you've actually invoiced something, are we getting paid [00:46:30] within 30 days? If that's your business model? Um, now, if you can shift to getting paid in advance, we're going to lead with that. Like we're going to help our friends in the CPA industry to go get paid first, or send your engagement letter with ACH and credit card authorization. That way when you're done with the project, you just turn around and draft the invoice that you just just sent. So there are a lot of ways to make that shift. Um, and I see more and more firms doing that and continuing [00:47:00] to take small steps, um, as opposed to being so worried of ripping the band aid off, uh, at one fell swoop.

Glenn Dunlap: Yeah. Now, you mentioned something. I made a note here earlier. You said you like to see 90 days of cash to cover overhead, or 90 days of overhead and being held in cash. What do you include in the overhead? Are you including all compensation and all rent and insurance and all things? And, you know, is it is it everything there, or are you looking really more just below compensation, down to the opex kind of thing? [00:47:30]

Marcus Dillon: We're looking at opex. So, um, okay, we during Covid, uh, we had a lot of conversations with business owners that never had to furlough employees, never had to lay off employees because dental practices, physician practices were always just so stable. They just never had to have those conversations. So our clients that lived through that in Covid and we had to help them. How do you furlough employees? And they go get unemployment benefits and you're not able to work during this time. They are now open to that. If something [00:48:00] were to happen in their business, they do have those options now. So we don't include all the compensation in that 90 days just because if we aren't able to work and generate income, that's probably only going to be like two weeks to 30 days at max. And so, um, I think there's a lot to be thankful for during that season of Covid. I know there's a lot of negative, uh, but it it did help mature some business owners that never had to live through a situation like that.

Glenn Dunlap: Right. Those [00:48:30] are good. Um, so just that's, uh, thinking through the, the numbers and sitting on that, I don't think.

Glenn Dunlap: Uh.

Glenn Dunlap: I would be. It would be hard pressed for me to think of how many professional service firms are viewing cash that way. I think we see the sort of the running joke is a lot of times the professional service firms, the owners are looking at cash and they, they, they distribute, um, um, all of the, all of the available cash out and, and, uh, assume that everything is going [00:49:00] to keep operating well month over month. And, and that's when they, they don't hit, you know, they forget about the, the big, you know, payment that's coming up or, or somebody they don't get paid in a timely fashion. And then it's, uh, you know, all hands on deck to scramble that kind of thing. So that's a good safety check to make sure you're holding that cash in reserves.

Marcus Dillon: Well, and you also may have clients or listeners that they empty all the coffers at year end because they don't want to pay tax. Right. So they go do things or whatever. And maybe they're just [00:49:30] uneducated that anything that's in the business can be taxed on. Well, given your structure, that may be completely wrong, because if you're a pass through entity, that doesn't matter. So I think those are some of the pieces where there's a lot of education that can still be done for our small business clients on what is taxable, what's not, and how you have those conversations is really you can use the data if you have full confidence in the data to help drive those conversations, because the data should be non-emotional [00:50:00] the data is just black and white. We can add in all the gray, all the emotion that we want throughout. But the data, if it's good, it should just be a matter of pointing out what the data is telling us. And so I think the metrics speak into that. If we're comparing ourselves to industry or if we're comparing ourselves to our previous self. So I think those are the pieces that you kind of have to keep in mind whenever you are doing that storytelling, whenever you are having those advisory consultations with your clients.

Glenn Dunlap: That's good. When you kind of let one [00:50:30] of the questions I had on my notes here that, um, you know, sometimes the information that we have to share with clients is not positive, right? It's negative or it's it's difficult. And one of the common themes that I hear a lot from, um. You know, uh, from professionals that are making that transition into the advisory space is like, how do we have that conversation where we're talking to them about things that aren't going? Well? I mean, you know, you might have to do that with an audit. You might have to do that with a with a tax return. But that's just sort [00:51:00] of is what it is. Uh, some of these things become suggestive because now you're talking it's subjective because you're talking about, you know, somebody's baby and you might be pointing out things that they are or aren't doing right. So how do you have that conversation with somebody, um, you know, and just kind of broach those, those negative things.

Marcus Dillon: So the best way to deliver negative information is well in advance of whenever it could be necessary. And so, um, if you are meeting with a client throughout [00:51:30] the year and you start, you start to see trends that aren't going the right way, it's better to voice those concerns sooner rather than later. They they aren't going to get easier on their own. So if you see profitability is great, you can be a cheerleader. We want to be cheerleaders for our clients all the time. And because we're in a unique position of maybe, maybe being one of the only ones that know their financial results, be a cheerleader when you can congratulate them, you know, pump them up. But you also have to say this [00:52:00] profitability is also incurring some tax liability down the road. So how are we? How are we setting money aside just as as a worst case scenario, we're going to pay the tax. So we've got to set some money aside to pay that tax. Or what strategies are we looking at to offset some tax liability if that's the case that we want to do so, having those conversations proactively being disciplined enough to want to have those conversations with your clients, it's it's all the it's all the maturity [00:52:30] and all the stuff that isn't fun. It's not it's not cheerleading. Um, but the sooner you do have those really hard conversations or just conversations, um, they don't all have to be hard because it's a lot easier to talk about. This is all relative. It's a lot easier to talk about a $10,000 tax bill than a 10,000 like than a $100,000 tax bill. And so if you address it when it's lower, then we can start talking through as it grows.

Glenn Dunlap: Yeah okay. That's so so that's [00:53:00] a positive in one sense a positive thing because you're making money right. You're profitable and you're making money. What happens when you see things like margins are slipping and profitability is going away. And so I guess part of part of what I'm what I heard in that in your last response is, is that, um, you've you've got to be looking at the data frequently. So it's not just something where this is going to, we're going to wait till you're in and go, oh my God, what happened? This is going to be something you're paying attention to, uh, on a frequency and then have some expectations. Like we we're expecting that [00:53:30] that you're going to, you know, uh, revenue growth is going to be here. Profit is going to be here. Uh, and then so so those communications you would have had to have already had just sort of, uh, some baseline relationship and communication with the client to to even be able to tee up that conversation about, hey, your profits going really well or your profits are in the, you know, tanking. Let's talk about either of those things. Right. So, so that's a that's an, uh, I guess part of the delivery to me is what I'm hearing is there already has to have been a relationship for you to be able to establish, [00:54:00] you know, what's right, what's wrong, what's good, what's bad. Let's you know, what are the expectations and let's help you work towards those, right?

Marcus Dillon: Correct. I think for us it was I was frustrated leading a CPA firm that was doing projects based on historical results. It was after the fact data. We couldn't you couldn't do anything advise on anything. Uh, three months to nine months after the fact. Think about somebody that's on extension. There's just nothing we could do. Right. So part of our story is because of our frustration [00:54:30] and disappointed clients that couldn't do anything. Um, we started to change our business model to be more proactive and have fewer clients. Um, that's that's just how we we had to move, um, with our, our shift. So if you are able to have conversations timely in the current year, then you can do better planning. Um, and so like that's why we did make the shift. And so all of our clients have a couple tax projections throughout the year. [00:55:00] We've got them set up on monthly financials to where we know whether it's the client controller or the client CFO when things start shifting. And it may just be the timing from a month, month or a quarter, but it's on radar. Um, you start to see things and you can start to point that out. And depending on the time of year, you could adjust quicker or give it time to kind of fix on its own, maybe given timing. But yeah, I think the biggest piece is if you want to advise clients more proactively, you have to get [00:55:30] them on on something where you're seeing them throughout the year. And yeah, and it won't be done. By itself. You have to be. You have to initiate the change to where either your current client base wants to see you more, or you need to go find clients that want to see you more and transition the other client base. Yeah.

Glenn Dunlap: That's really good stuff. Well, Marcus, any any other thoughts as we as we start to wind up here?

Marcus Dillon: I [00:56:00] think the main thing we've we've said it before, the, the goals of the business should drive the metrics that are being monitored. And I think if, if a business owner or an advisor knows what those goals are and how they're unique to that business owner, then the business owner or even yourself, if it's your own business, you're more likely to want to pay attention to those metrics. So what has helped us is if we know somebody that is invested in [00:56:30] those metrics and those goals, then they want to talk to us. It's not no one wants to talk about a tax return. So if your only metric is tax owed, like no one wants to talk to you, but if if it's if it's good growth oriented goals or things that you're looking at where maybe it's business owners production hours going down. I know a lot of CPA firms are trying to figure that out, and how the partners are less of the technician and billable entity for the firm as a whole. So if that's what we're [00:57:00] monitoring, and then that's what we continue to advise on and strategies to reduce those owner hours, then you should want to share that data and see how how the how the business is reacting. So I think goal alignment and metrics always go hand in hand. And hopefully the listeners build out whatever KPIs they need to hopefully go hand in hand with those goals.

Glenn Dunlap: Yeah. No that's great. That's great. Well, I really appreciate you sharing. [00:57:30] Um, you know, the, you know, your experience with working with professional services firms. I hope that, you know, I it's there were some, some takeaways from me. And I've been an owner in a professional services firm. So you know, we're worried then. You know that was good. Yeah. Um, no, this is, uh, this is really good. And I think, uh, you know, again, kind of thinking through, um, you know, the, uh, anybody that's making that transition or starting to work in this profession, you know, to serve professional [00:58:00] services firms, uh, that, you know, maybe has come from a different industry or thinking things differently. That's, uh, those are really helpful tidbits as we, as they move forward. So I appreciate you sharing those things. Uh, so one more thing before we let you go, Marcus. What, uh, if, uh, listeners want to reach out to you, get in contact with you. How could they do that?

Marcus Dillon: Yeah. So it's pretty easy to find me on LinkedIn. You can just type in Marcus Dillon, CPA. Hopefully I'm the only one in Katy, Texas. Uh, you can also follow our team's journey at Dillon Business Advisors. Dillon advisors.com. Um, if [00:58:30] anyone has any questions or there's any area where we can fill in the gaps, please, please, please reach out. And we would love to have a conversation with you.

Glenn Dunlap: Fantastic. Really appreciate your time today. And thanks for joining us. And, uh, you know, until next time.

Marcus Dillon: Thanks so much, Glen, I appreciate it.