In this unwavering episode, Jon Morris, Founder and Executive Director of The Professional Service Community, shares how you can master your financial numbers to cut through the fog of stage four and lead your business with unshakeable confidence. If you wrestle with unreliable reports, question every spend, and feel blindfolded in your growth, you won’t want to miss it.
You will discover:
– How to turn gray decisions into black-and-white wins by letting your income statement be your toughest, fairest boss
– How to simplify your P&L into five key categories so you can instantly spot what’s driving—or draining—your profits
– Why boosting gross margin through small-i innovation lets you outspend rivals on sales without cutting corners
Episode Transcript
Scott Ritzheimer
Hello, hello and welcome. Welcome once again to the Start scale and succeed podcast. It’s the only podcast that grows with you through all seven stages of your journey. As a founder, I’m your host, Scott Ritzheimer, and I want to talk to those of you, particularly all those founders in stage four, yes, the disillusioned leaders who might actually be trying to fight the fight blindfolded, especially in the critical area of your financials. And what I mean by that is you’re probably getting a P L every month. Hopefully, if it’s on time, you you probably have a dashboard or some spreadsheets or something. But all those spreadsheet sheets that seem to work when you’re smaller, they’re now moving to a full time job to maintain, and you don’t know if you actually trust them, but you don’t know what else to do. And so today, our guest has built his company to nearly 40 million. Discovered the difference between founders who scale and founders who stall comes to whether or not they can really manage by their numbers. This is John Morris with us here today. Who’s the founder and CEO of fiscal advocate Inc, a technology enabled professional services company powered by engine BI software. John founded rise interactive in 2004 with $10,000 and over the next 16 years, he grew rise, ultimately scaling it to nearly 40 million in revenue before selling. The company inspired to help other entrepreneurs avoid the pitfalls he experienced. John created fiscal advocate to provide professional service services to CEOs that give them the financial clarity they need to grow profitably. The company provides accounting, financial planning, analysis and advisory services, along with proprietary software that surfaces critical financial insights. John, welcome to the show. Glad to have you here. I’m really excited to dive into this topic, because it’s one of the ones that I think creates some of the most insecurity and and just weird stuff inside of a business, but also between the ears of the founder. And what I want to do is talk through for a founder in this stage, trying to grow, trying to make sense of what’s going on, probably struggling with profitability. What are the numbers that they tend to look to, and what are the numbers that they should actually look to?
Jon Morris
Yep. So you mentioned the income statement. The income statement has all the insights you really need if you have it organized the right way and know how to read it properly. So in every industry, there are benchmarks, and it’s critical to learn the benchmarks of your industry. So I’m going to talk a lot about the professional service industry, because that’s my space and my domain, the best of the best, like in terms of performance, is 20% year over year, revenue growth and 20% EBITDA is 20% profit. So that’s just the starting point. Now there’s a whole bunch of numbers in between there, right? So you got revenue and you got profit, and then you have all these expenses. And so what you want to do is organize those expensive and I’m going to give you the five major categories that I believe are really important. So the first one is your gross margin. It is amazing, but how many people I talk to have no idea what their gross margin is, or their income statement cannot tell you what their gross margin is, so I’m just could explain it to everyone real quickly. I’ve probably put everyone asleep already. Since we’re talking about finance,
Scott Ritzheimer
I actually want to pause you real quick, because this isn’t something to fall asleep. I love where you’re going with this, because one of the things that’s so challenging for folks is that they’re getting these statements, and they’ve got like, 100,000 lines on them, yeah, and no one can make sense of that, and so they see that and think, Oh, I’m just not smart enough, or oh, I don’t have an MBA, or oh, I don’t. And it’s like, no, that’s not true. It should be this simple. Now, there’s nuance to it, and there’s digger, there’s deeper that you can go. But for folks listening, this is really important, you should have something like these five major categories. And I love exactly where you’re going with it, Jon,
Jon Morris
and just to take that a step further, and then you can drill down further, yeah, okay, so I’ll give you an example. One of the categories is your expenses as it relates to your back office. So I call it operations and finance. So but then you can drill down further. And you can see HR, legal, corporate, it general, admin and finance, you can break down to five categories under that category. So the idea is that when you look at your income statement, you want it to be as few rows as possible, because oftentimes that’s just filling up the page with garbage. And so I couldn’t agree with you more. So I’m going to start with explanation of gross margin, because this is honestly one of the most important numbers. Yes, it is, after you deliver the product or the service that you’ve been hired for, how much money is left over, and what is that as a percent of your revenue. So I’ll use it in two different categories. The first one is you sell pencils. You sold a pencil for $2 and you bought it for 50 cents. So you have $1.50 after selling the pencil $1.50 over $2 is 75% so that means you have a 75% gross margin. In the world of services, you have hired employees to do work for the client. You’ve licensed technology you might have travel. So when you take whatever your revenue is minus all of your costs, let’s just say you’re a $10 million company, and you spend $6 million to deliver for the customers, you have 4 million left over. That means you have a 40% gross margin, 4 million divided by the 10 million in revenue. Now the reason why this number is so important, before I get into the other ones, is because if you can continually figure out how to improve your gross margin, it means you have more money left over to either put in your pocket or to invest in your business. And so that’s metric number one in this middle. So you have revenue, then you have your cost of goods sold, and then you have your gross margin. So you have to have those three numbers. After that, you have what is called SG and a, and it’s a very fancy term for all of your expenses that don’t relate to the product or service that you sold, so your sales and marketing, your back office, operations and finance, your executive team and R D. Now in every industry, there might be some nuances, but for 95% of your listeners, those are the four major categories you need, and those are the major drivers of your business. And then after that, you have your profit. So you take your gross margin, or your gross profit, minus all of your non, you know, client or product related expenses, and that gives you your profit. So that’s the starting with the simple part. Now, as I mentioned in each area, there is a benchmark, so I’ll just give an example. In the professional service industry, 8% of your revenue goes towards sales and marketing. That means half the companies are spending less than 8% and half the companies are spending more than 8% and so, you know, as you mentioned, you know, in my bio, I grew this company from $10,000 to almost 40 million in 16 years, just knowing my gross margin as a percent of revenue and my sales and marketing as a percent of revenue, and the benchmark gave me a major edge. And here’s why I wanted to have a massive advantage in spending sales and marketing as a percent of revenue relative to my competition. So if I know that the average is 8% I’m going to try to spend 16 to 20% of my revenue in sales and marketing. Now clearly, if I’m a $35 million company, and there is a $10 billion company, you know, I’m probably going to be outspent in that area. You know, their marketing budget is just going to be much larger. But most of the people I was competing with were either my size or smaller. And so I was able to have the bigger booth at the trade shows. I was able to submit to more awards and get more recognition. I was able to have a team dedicated to search engine optimization. So that’s, you know, you know, one big, massive focus. Now, in order to do that, you have to figure out, how do you fund this? And if you can fund it by improving your gross margin without reducing the quality of your work, you know, so if you’re, I’ll go back to the pencil example. You can’t sell, you know, a crappy pencil. You know that you bought for five cents as opposed to 50 cents, still got to be the same quality. But you start thinking about, you know, how do you deliver? You know, it constantly improves. So we at rise. We spent a lot of money on innovation. One of the things that we spent time on was we would time track every single task, and we would aggregate it be like, okay, so if we automate this, this is 1000 hours worth of time every month that we don’t have to have humans and pay for them to do it, we’ll have technology do it. And then the other part is, once you have technology do it, your error rate goes down, the client’s experience becomes better, and so you actually get better retention and better gross margin, both at the same time.
Scott Ritzheimer
Jon, here’s what I really like about that, because a lot of folks listening are highly, highly innovative. They’re founders. They started the thing from nothing, created something out of it, super cool. But so often we mistake innovation as kind of up and out, like it’s the next product or the next service or the next big thing or new market. Market or something like that. And what you’re talking about, especially at this stage, is the ability to harness some of that creativity and point it in as well and say, Hey, how can we innovate to be more efficient? How can we innovate to lower our cost of goods? So I really, really like that. It’s a subtle shift, but it’s an important one.
Jon Morris
Yep. So what you’re talking about is what I call the difference between innovation with a capital I and innovation with a lowercase I, yeah, and I tell people to put a lot more emphasis on a lowercase i innovation, meaning we’re not going to go invent the next iPad or the next self driving car. You know, we are going to invent improved Client Onboarding and yeah, so that’s kind of the idea behind it.
Scott Ritzheimer
Yeah, I love that. I love that. So I really like, just to recap this, I really like this idea of simplifying the income statement, the PnL, down to those five big categories, and then you can drill down into five categories within that. I think that’s really important. I love the idea of focusing on gross margin and that small i innovation to drive it so, so important at this stage, I’m wondering. I’m wondering you, before we get to it, there’s a question I asked you, I was going to jump to it, but there’s something that I think is really interesting. You talk about gray information, and I’m wondering if you could just describe that for us and tell us why it’s such a big deal at this stage.
Jon Morris
Yeah, if you think about every decision we make, we are taking gray information and making black or white decisions with typically black or white outcomes. So for example, you know, I want you to invest in sales and marketing. I want you to have an advantage relative to your competition, that you’re spending more in sales and marketing than they are for the company’s exact same size of yours. But that doesn’t mean you’re gonna spend the money well, you know, if generating leads was easy, we’d all not be complaining about, how are we gonna go generate our next lead? So, you know, you have to make a decision. Am I gonna go invest in digital media and spend money on media, or am I going to go hire a salesperson, or am I going to go sponsor a booth? And so you have to make decisions on what you’re spending your money on. And so that’s my actually favorite part of business, is we all have to make decisions. We all have gray information, meaning we don’t know what the outcome is going to be, but the outcome is generally black or white, like your company is either growing every single year, or it’s flat, or you’re losing money, and so you can tell over time. Actually, I tell people the income statement is your boss, and it’s a very objective boss, because it will tell you if you’re performing well or not.
Scott Ritzheimer
Yeah, yeah, I love that, and it’s a hard thing to grapple with when you’re used to just kind of like, maybe it’ll work, maybe it won’t. You kind of get to control whether or not it was a success or not. Getting used to the space of really leaning into the numbers and looking at those black and white results can be a hard switch, but I think it’s a really important one, especially when a founder is trying to orient the team in the right direction, right when we’re all trying to work together. John, there’s a question that I have for you that I ask all my guests. I’m very interested to see what you’d have to say. But the question is this, what is the biggest secret that you wish wasn’t a secret at all? What’s that one thing you wish everybody watching or listening today knew?
Jon Morris
So I’m going to give you two things as opposed to one. The first one is, don’t worry about the exit. Just build a great business. And the second thing is, really focus on making it so that whatever product or service you’re selling is actually better than the sales experience. So if you deliver something where you know, because you’re always going to put your best foot forward, and then someone gets the product or the service like, holy crap, this is incredible. So much better than I even thought. You know you’re on to building something special.
Scott Ritzheimer
Yeah, so good. And I love that you’ve shared that, because it balances out. What we’re not talking about is just cutting cost of goods sold. By just cutting cost of goods sold, we’re really looking at ways of providing a better service, a better product, in a more affordable way for the company and everything that allows. So I love it. I love it. Now, John, there’s some folks listening. They maybe they’re in professional services. Maybe they’re interested in we haven’t even talked about the role of software on all the list, but that’s a big part of what you do. Where Can folks who are listening today find out more about you and the work that you do?
Jon Morris
There are several places. First of all, you can follow me on LinkedIn. I post every week, so please connect or follow you can go to fiscaladvocate.com we have a great resource section there, and you can send me an email, [email protected] I’d love to hear from you.
Scott Ritzheimer
Fantastic, fantastic. Well, Jon, thanks for being on the show. It really was a privilege and honor having you here with us today. Yeah. Appreciate it. For those of you watching and listening, you know that your time and attention mean the world to us. I hope you got as much out of this conversation as I know I did, and I cannot wait to see you next time. Take care.
Contact Jon Morris
Jon Morris is the Founder and CEO of Fiscal Advocate Inc., a technology-enabled professional services company powered by EngineBI software. Jon founded Rise Interactive in 2004 with $10K. Over the next 16 years, he grew Rise, ultimately scaling it to nearly $40M in revenue before selling the company. Inspired to help other entrepreneurs avoid the pitfalls he experienced, Jon created Fiscal Advocate to provide professional services to CEOs that give them the financial clarity they need to grow profitably. The company provides accounting, financial planning, analysis, and advisory services, along with proprietary software that surfaces critical financial insights.
Want to learn more about Jon Morris’ work at The Professional Service Community? Check out his website at https://www.fiscaladvocate.com/
Connect with Jon Morris through his LinkedIn at https://www.linkedin.com/in/jonmorrisramsayinnovations/