Sacha: Welcome to the Greatness is Designed podcast, the podcast where we argue great businesses are designed. I’m your host, Sacha Alimchandani, the Managing Director of BrassRock Consulting. BrassRock Consulting is a Calgary, Alberta based firm that strictly focuses on helping companies grow or handle succession and transition planning, and we do this through management consulting and part time CFO services. Our hope is that you, the listener, are able to gain some insights from what we do here at BrassRock and are able to apply it within your business.

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So today we’re going to talk about forecasting, which is the core discipline of BrassRock. But we’re not going to talk about how you forecast; how you forecast would be boring. We’re going to talk about why you forecast, which I feel is very interesting.

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Now, when we’re talking about forecasting, to be clear, you know, we’re not talking about taking an income statement and replicating it to the following year, adding 10%, and that’s it. That’s fairly simplistic and that is not what we run at BrassRock. What we run when we talk about financial forecasting is very sophisticated. What we do is we look at businesses, we hear what management wants to do from a growth perspective in the coming months, we look at their inventory, their CAPEX programs, the dividends that they want to take out—because these people don't work for free, obviously—and we incorporate all of that into a balance sheet, income statement, and cash flow statement. And we’re always looking at that on a continual basis. So when we’re talking about forecasting in this podcast, we’re using that pretense.

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The big question is—so a lot of big companies do this, and a lot of small-to-mid-sized sophisticated companies do this as well—the big question is: why? Because let's be frank, why would you put in all this effort to figure out these numbers when really, at the end of the day, what you want to be doing is selling that product or redesigning that service?

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So, to help me answer the "why" question is Mike Haberl. Mike Haberl ran Prestige Landscape Group for 20 years, and Prestige, they constructed and did the landscape for these big new subdivisions. They constructed the storm ponds, the bridges, the parks—so very, very large-scale projects. And then Mike moved to LA West, and they’re an architectural landscape design firm; and this firm as well designs the layouts, but then Mike helps in managing the execution of those projects. Mike, welcome to the show!

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Mike: Thank you.

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Sacha: So Mike, let's sort of cut to the chase. You know, do you value financial forecasting? In your whole career experience, have you valued financial forecasting, and if so, can you tell us why?

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Mike: Oh, absolutely. Having the opportunity to work with BrassRock was enlightening, was eye-opening, was educational. I’ve said that more than once and I still fly that flag. What I thought that we did a number of years ago in regards to forecasting and job costing, looking at each of our projects where we were looking at our margin, I didn’t have a respect for the right way of doing it.

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In some respects, you know, we would come up with an idea or the vision of how we were going to grow our business and, you know, we just thought we could just walk down to the local banker and he would just, you know, write us a check and off we would go. Now understanding the method behind it and what it does and how it allows us to realize margin was the biggest thing, and it changed the way that we completed our project management, project by project.

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Sacha: You know, to be honest, I think a lot of entrepreneurs, they really get excited about designing products. They get really excited about doing sales and when they’ve got a great new idea, they want to go out and do it. The one thing that I feel about financial forecasting is when you have that new idea, it gives you the opportunity to project that idea out and to say: "Okay, it's a great idea, but how much does it cost? How much capital do we have? And do we have enough?" Because sometimes you can have a great idea, but you don't have enough capital and so you’ve got to somehow source that capital or wait on the idea. Arguably, one could say it’s controlled decision-making. Would you agree with that?

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Mike: Absolutely, 100%. It’s very interesting in our industry how everybody wants all the "big" work. And what they don't understand is the margin and where they have to achieve margin in order to do the big work or whether they’re doing a small amount of reclamation. And nine times out of ten, the margin is so different. But they all assume: "I have bodies in the truck, I’m writing invoices by the day, I must be doing okay," you know, no respect for what their costs are. And I learned that—the importance of it and understanding and not only the job costing, but it allows you to manage your people. It’s not just the project; you’re managing your people, you’re managing your company where the company’s not managing you.

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Sacha: That’s a really insightful point, because a lot of times people own businesses—or they have these dreams about owning businesses—and so they build these businesses, but then they become Goliaths and because they don't have a handle on their business, they de facto become the whipping boy of their business.

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Mike: Absolutely, 100%.

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Sacha: Right? Because employees want raises and banks, you know, want you to meet covenants, and because they don't have the right controls in place—and sometimes they don't even know how to fully manage their business from financial statements—they become the whipping boy of their business.

 

Mike: Absolutely, 100%.

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Sacha: And so let's dive into how it helps you manage employees. Could you expand on that?

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Mike: Well, I think it’s important that if you look at it—no matter what your business looks like—if you’re set up where you have different divisions, are the divisions making money? What gross margin are you achieving within each division? And then you really need to break it down further and say: "How can we justify giving somebody an increase in compensation when you really don't know whether that individual is actually making you money or not?" You could have the star employee—and we’ve all had them—but he might make you the least amount of margin. And it just puts it into perspective when you go back to the comment of being the whipping boy, and so not everything is aligning in order to be successful or set up for success.

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Sacha: We see it quite a bit where we walk in on prospects and people have high praise and accolades for the star player. And maybe it’s because of a relationship or maybe it’s because of history, but it's all anecdotal. And sometimes, to your point, when you actually look at the projects, they are succeeding, but sometimes they’re not. And that’s got to be a tough realization for any business owner.

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Mike: Absolutely. Business is emotional. Typically, a small-to-mid-sized business owner wears his business on his sleeve. And when you get caught—I’ve been there where you get caught in the emotion of your business and the business is running you as opposed to you sitting and breaking out: "Why is the business running you that way, and where are the areas of opportunity?" And we always think it's the "big fix," and it’s not the big fix. It’s—the dollars organize themselves; it’s the pennies you need to control. And if you don't have a handle on—and I didn’t have a handle on it—I looked at my balance sheet and there was money left at the end of the day, I thought I was doing great. But I never understood how, and that’s what I was taught, that’s what you taught us. And it’s not only is it eye-opening, but it’s also—I wish I would have done it 20 years ago because I have a totally different respect for it now.

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Sacha: Those sort of learnings are constantly being applied, I imagine?

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Mike: On a daily basis, absolutely. When we’re building a budget for a project, I wear two hats: I wear the client representative/consultant/project manager/contract manager hat, and then I also break it down to justify the cost associated with it like a contractor. So I put my contractor hat on and I say: "Okay, this is what I need, this is where I need to be, bottom line". We always look at what we consider or what we call "value engineering". What can we do to build the same project with the same end result for less money? How do we do it? And we do that by—we look at costs associated with it.

Sacha: It’s about managing the pennies.

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Mike: Absolutely.

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Sacha: Especially when people talk about value engineering, they’re always looking for this one—there’s this hypothesis that you can go and you can do this one thing and it will magically produce some big savings, and that’s just not the reality. We’re about moving inches versus moving in feet or meters, right?

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Mike: Absolutely. In our industry, one of the biggest costs for the business is moving people. And when we physically started breaking down what it cost to move 100 people around a large metropolitan area, it was mind-blowing on how we had to change how we move the people in order to put the same product out there. The spec didn't change; it was: "Okay, how can I achieve more cost savings?" Well, it was about moving the people around. That was a huge one.

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Sacha: A lot of times when people talk about cost savings, they say: "Well, I’m just going to put it onto my subcontractor, whatever they—I paid them $5 last month to do this, this month I’m only going to pay them $4". And that is a very naive way of thinking of value engineering. It’s all about what can I do as the person putting out to tender, how can I make this more profitable without impacting my partners?

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Mike: Absolutely. When we talk about our trade partners, we value the trade partner because without them we cannot achieve success. And it’s not the trade partner, it's not the manufacturer, it's how you manage all of it combined and how you move it and how you direct it. You know, yes, I mean there’s always the push for further output: "Increase—if you increase your output, you increase your margin". Oh, no, it doesn't always work like that. In fact, nine times out of ten in my experience, if you increase the output, you decrease the margin.

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Sacha: And that’s usually the case.

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Mike: Because it's a knee-jerk reaction. You’re being pushed by a client and so you have to drop everything and you have to go, and that’s—that’s the immediate thought as opposed to: "How can I get there a week earlier? How can I get there a day earlier?" Changing nothing.

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Sacha: So you’ve actually hit the bedrock of BrassRock. We’re all about strategic planning, we’re all about financial forecasting, and this is exactly it, which is: how do we plan better? On that note, let me ask you: in all your time, what's your feeling on planning? So a lot of times, business owners, if they do a plan—let me preface this—if they do a plan, they do it, you know, maybe once every year or every five years. When it comes to thinking about your strategic plan and your forecasts, how often should you be looking at this stuff in your experience?

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Mike: In my experience, I went from the annual planner to the semi-annual planner, and we drilled it down to the day planning. All the time, because everything is a moving target. There’s always—I don't think it matters what business you’re in, there’s always a challenge that you become faced with and so you’re always changing things up. Well, so what is the net impact of the change in the grander scheme of things? We spend a lot of time, you know, looking at—a great example is, you know, people want bonuses, but the reality is at the start of the year, if you’re not hitting your margin on jobs and you’re not hitting your plan on jobs, you already know a year down the road those bonuses aren’t happening. You know that today, unless you make a decision to change something. On the same token, if you’ve done well and you’ve organized and your gross margin is doing better than what you thought, you can now start looking at buying that Ferrari or Lamborghini or whatever, right?

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Mike: Absolutely.

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Sacha: So I guess this dovetails into my next question, and maybe it's obvious, but: do you feel it's important with regards to managing capital?

Mike: I guess the question becomes: if you don't understand your costs associated with what it is you’re trying to achieve, how do you know how much money you need to borrow? Or how much money you need to operate? You need to understand the business in order to sustain X number of dollars of costs per day, has to generate X number of dollars in revenue to achieve X number of dollars in margin. Because the one thing that I realized after time is you don't just simply go down and borrow X number of dollars from the bank and then start buying things. You know, we’ve all borrowed money for growth. But how are you going to pay for that growth? What is that growth costing you? Very easy to grow; very easy to go buy a truck—anybody will lease you a truck, you just sign on the piece of paper. How are you going to pay for it?

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Sacha: There’s not very many competitors in your guys' industry when you actually look at what you guys do. But do you find it—the financial forecasting—as a major competitive advantage when it comes to the execution of these projects?

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Mike: Oh, for sure, absolutely. We have the luxury today of being involved with a handful of different contractors that achieve the same end goal but build differently. It’s very interesting how you can tell which groups deal with their costing going out the door and the groups that don't. It doesn't matter whether you’re building a park or whether you’re manufacturing a product in a warehouse to be shipped, you’re always looking at completion dates and how quickly can we complete to achieve the financial success of it and the collection of the money. Because the money still has to flow. And it’s interesting if you don't surround yourself with the right partners, what the negative impact that that can have on your business in the bigger picture ultimately affects your balance sheet.

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Sacha: You tell me whether from an adaptability point whether forecasting helps, because there’s going to be, I imagine, bids that you’ve won, bids that, you know, you’ve been working on a long time and you’ve won them, but then the client says: "Well, okay, we’re not going to do the whole program this year". Or at the same token, you know, you’ve won all this work and you originally won like half a subdivision, but then they’ve said: "No, you know what? We’re doing the whole thing this year". Tell me your experience with that—one, does it happen? Two, how much of it do you have to go back to your financial models and look at "How am I going to do this in a profitable way?"

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Mike: I think one is as impactful and/or quite frankly dangerous as the other. Because when you build your model, you look at your crystal ball and your vision, you know you have to create X number of dollars a day in order to cover X number of costs a day. Well, one impacts no differently than the other. The loss in revenue, unfortunately, you build your company, your overheads, your staffing, for a certain volume. And when the volume is impacted either in a positive or a negative way—healthy growth, slow healthy growth is easy to plan for. It’s easier to manage; it's—you control it, you control the growth. As opposed to: "Oh, yeah, we do have this project and we’re going to pull it off the shelf and you’re going to go build it tomorrow," or "We’re going to put it back on the shelf because we don't think we want to build it". Now you’re reacting; now it's a knee-jerk reaction, it’s not as methodical. It has a massive financial implication.

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Sacha: Because you understand what this stuff is and you understand what the impact is going to be six months down the road or a year down the road, do you find that it makes you more confident? A lot of times people they don't know these things, but they know they got a sale, but they’re not fully sure if they can pull it off. If you understand all the capital outlays—you know, and you’ve forecasted it all out—and you know things are going to all be fine six months down the road, do you find that that gives you confidence to get up today to handle today's opportunity or fight or whatever?

 

Mike: Absolutely, and it gives you the opportunity to focus on the opportunities that come in the door to the business. You’re again controlling the business, the business is not controlling you, where maybe this opportunity doesn't fit within the business model. And not every business owner looks at things like that; they always look at the sale. And the sale sometimes can be detrimental because you’re not set up properly for it, you don't have the resources for it, you don't have the right people for it. One of the things that I was taught is I don't want to achieve a sale; I have no desire to achieve the sale. What do I want to achieve? I want to achieve the margin. The sale is the sale; it’s the margin I want to achieve.

 

Sacha: What do you say to people who: "Hey, I do the forecasting, I get it, but what's the point? It never works out". So what do you say to those people?

 

Mike: I think I look at it from a—difference of—the forecasting is a template and a model to work towards. And if you are managing it, it is going to change, it is going to fluctuate, but understanding why it does. And you have to manage that all the time; you can't look at it at the end and say: "This is what it delivered, so I’m either going to keep it or I’m going to throw it away".

 

Sacha: So you’ve had the experience of working with bookkeepers and forecasting—I mean obviously you’re a pro at it now—but you’ve had the opportunity of working with bookkeepers and forecasting, accountants and forecasting, and then us, you know, financial and management consultants in forecasting. What's your thoughts and perspectives, pros and cons?

 

Mike: I think there’s pros to all of it, to be very, very honest with you. I think the biggest thing that I’ve learned is what each one of those functions and each one of those roles how they affect the company. Finance is completely different than accounting. Accounting is historical; it's what you did and it's all the past. And you’re taking all that data and you’re plowing it into your system—whatever that system looks like—and it gives you what the past gave you to today. That’s what that sort of in my mind, that’s what it looks like. The financial is forecasting; you’re looking ahead. And it’s not guesswork; it is reality. You know, we used to take it right down to: "What did that man cost us per hour, per day?" And we used to build that through 100, 150 staff collectively over a 28-week period. And, you know, it told us how much equipment we needed, it told us how much capital we needed, it showed our cash outlay per month was X dollars. And then we could go to the financial institution and get their support so we could explain ourselves better. So I think the two functions are very, very different.

 

Sacha: By having this, you’re able to run your business and have a good assumption about what's going to happen in the future, because a lot of businesses now have moved to a virtual environment. And to your point about adapting to changes, you know, when everybody’s going to the same office, you can see people working and you can know that people are working. But when you can't see that anymore and it's all Zoom calls, your only other way of making sure that that works is making sure that the margins are hitting what they need to be hitting.

 

Mike: Absolutely.

 

Sacha: Mike, I got to say thank you so much for taking the time to speak with us. I greatly appreciate it, also the endorsement, I appreciate. Thank you for being on our show.

 

Mike: It was a pleasure. Thank you very much.

 

Sacha: That was Mike Haberl of Prestige Landscape Group and LA West discussing how forecasting allows you to see around corners in your business, be adaptable and versatile, have controlled decision-making, and manage growth in a predictable fashion at all times. My name is Sacha Alimchandani. Thank you for listening to Greatness is Designed. If you want to listen to other episodes, go to brassrockconsulting.com/podcast or wherever you source your podcasts.