The Financial Systems Every Real Estate Investor Needs

0:00Especially in the real estate investing world, I have the weekly, monthly, and quarterly cadence. And weekly, I would say you move the money. So, if you got any income during the week, by Friday of that week, move it from the income account to the other accounts. And in the book, I even break down depending on the size of your business, here's like some gold post percent- percentages to put in those different accounts. So, if you're just starting out, there's different percentages than if you're a million-dollar business. So, that's where I would get, you know, like something like that.

0:31We have some handouts and stuff that we have as well, too, on that. But that's where, depending on the size of your business, that's where the percentages are going to be. But like you said, Kirby, start where you can. If you're already in business and you're like, "Oh my gosh, I'm upside down," start with 1% or start with a set dollar amount that from every deal you do, certain amount goes into one of those accounts. The bigger habit here is you, as a business owner, getting good habits versus the bad habits that most entrepreneurs have.

1:03So, that's really what we're trying to do is provide some good wealth habits for you. And that's the first thing you can do. So, that would be weekly, move the money from the income account to the rest of the accounts. Monthly, I would at least review your accounts, cuz I like to tell people the three most important numbers to know as the business owner, to master your money, and to become a master of the money game, is what did you make, spend, and keep, especially over this last month. What came in and how much? Where did it go? How much did we spend?

1:34And did we get a good return from what we spent? Third thing is, what did I actually keep? Like, what did I put into those golden trio of bank accounts into the the core three there, the profit, owner's comp, and owner's tax? Because another one that I heard Kirby within the last few years that was great, because if you're listening this podcast, you're probably a problem solver, identify as a problem solver. And one of the guys that I was at a mastermind, he said, "A lot of us as business owners, you know, we're fighting fires all the time, but if you're constantly fighting fires in your business, you're the arsonist." And I was like, "Oh, man, that is really good." And it hit me right between the eyes.

2:12And I was like, "This is so true." And a for a lot of people, it's because they don't know how to follow the money. The money can usually root out what's the real issue here. What is that root issue in the business? And to be able to know, okay, is it really upstream? Are we not making enough? Or are we just not being a good steward of where we're spending it and not getting the returns we should? Or are we spending too much? Or is like, you know, things are going out of control? Or we're just not keeping what we need to, and I'm not paying myself what I need to, even though we've grown and we should be able to pay now to this point or whatever it might be.

2:44Now you can ask better questions because that's really the job of the CEO or the owner. The better questions you ask, the better answers you get. And so this system, if you if you review on a monthly basis where your cash went, you'll ask yourself better questions for this next month that you're leading into, and then you start to forecast better, and you start to know, okay, this is what happened last month. How can I make this next month better? Third thing is quarterly. The quarterly rhythm with cash I love as a Profit First professional here and like getting this out there and writing the book because on a quarterly basis, we tell people take your profit account and have fun with it.

3:21Like up to 50% use it what you want to with it and do what you want from that account and actually have fun. We've had people that have taken trips. We've had people that have gone to Taylor Swift concerts concerts. We have people that have bought couches. We have people that have installed pools in their backyard. Like it really doesn't matter what you want out of life. It's what do you want that money to be put towards? That's yours. You know, like that you want from the business. So that's what I love on the quarterly basis taking the money out. The only other reason, so if you were sitting there a while ago like you said Kirby and you're like, "Ah, I'm upside down." The first thing I would do before you take the profit out to have fun is if you have some bad debt that's hanging over your head, I'd use all the the extra dollars to attack that debt first.

4:04Knock that debt out, especially if it's like credit card debt, revolving debt, or if you're in a Ponzi scheme and you've got some extra loans on the books and stuff that you shouldn't have right now and you need to clean those up, use that extra money to start paying things down like that. Then once those are gone, we can use that profit account for what it's really intended for is that pro- that cash profit to fuel your wants and your why of the business. So, that would be what I would say weekly, monthly, and quarterly as far as rhythms go in the Profit First system. — Yeah. Hopefully people can see how this gives you permission because like I was saying in the beginning like when we had a a big account with all this cash in it, it was mostly borrowed money for the rehab on all these different projects that we're, you know, flipping and and so I didn't know like maybe there was profit in there that I could have

4:52Used to pay off some debt and that would have saved some expenses and maybe there was some profit that I could have just taken and had fun with, but like I said I felt like I was always robbing the business as opposed to at the end of the quarter, I know this is all profit set aside and and I can guilt-free use it for what I need to use it for or want to use it for. And then the other thing is like if you're if you have rental properties, for ours every short-term rental that we purchase, we have a line item in the expense column of expenses and capital expenditures, you know, so these are things that are going to come up on your properties.

5:26You're always going to have to replace the roof at some point and the furnace and, you know, touch up the paint and all that stuff. And so a lot of people don't put that in their numbers and and we put it in our numbers and then we actually have an account that's a repairs account that a percentage goes into every month and I can't tell you how good it feels to just watch that accumulate and then as soon as an expense comes up, instead of having any level of stress about it whatsoever, I I say to myself, "Well, I knew that was going to come up.

5:58It's what we've been saving for and I've got 15 grand sitting in an account right now for these repairs. So, I just move it over to my OPEX and pay the the repairs." It's It's like so, you know, less stress, so much less stress than if you're living off everything that comes in and then all of a sudden a repair comes up. You're like, "Oh, this is killing my" People say that all the time like, "Oh, that you know, yeah, you're you're doing okay until a repair comes up." And I'm like, "I don't understand that. Like, why why would you not plan for repairs?" Cuz you know that your house is going to break.

6:29It's like It's getting worn out every day. So, so, yeah, like it it's just it's night and day difference. A- And when you were talking about you know, the kind of being the arsonist in your own business, causing the fires that you're putting out, it kind of reminded me of the four stages of you know, entrepreneurship that you've talked about or be four stage of of CEO, being a CEO. Can you kind of talk about what that looks like and how you progress through the the four stages?

7:01— Yeah, so as far as being a business owner, there's another great book that I'm going to highly recommend to people. It's called The Road Less Stupid by Keith Cunningham because this is what I don't know if you Have you ever read that one? It's such a great — I love it. — such a great book. But, this is where Keith Cunningham, the author, is actually who Rich Dad Poor Dad is based off of like the Rich Dad character. He's one of the two. I read that years ago. I thought that was super interesting since we've all read Rich Dad Poor Dad. But, Keith Cunningham wrote a book about thinking better as a CEO.

7:36And in there, he gives four stages of being an entrepreneur. And one of the the first four are artist, operator, owner, and then the board. Basically, you're going to be the creator, you're going to be a technician, you're going to be the business owner, and then you're going to be an investor in your own business. And a lot of people never get out of that artist {slash} creator or the operator {slash} technician, those first two levels, because once they create the business, then they're in the business all the time.

8:07You go from like, oh, this is a brand new baby and look, I got my first deal under contract to like, okay, I've got some good mentorship, I know how to build a system, I'm out there on appointments on a weekly basis, you know, you're starting to build that portfolio, you're starting to get houses in the door. Then, it just never ends. And then you're wearing all the hats, right? Like, this is the small business owner. A lot of people never take the leap from being that owner the from the operator technician to being that business owner.

8:38And even like the other books, there's been the four cash flow quadrants, right? I think that's another book by Robert Kiyosaki. That's a great one, too, where he talks about going from like self-employed to being a business owner. It's the same concept, but a lot of us never take that leap. And I think, honestly, Kirby, one of the biggest reasons is we never master our money. We never really put the money where it really should be going. We don't know our returns. We don't We make a lot of decisions from gut feeling versus actual data. A lot of people never really become the business owner in that sense, where that's why I even teach now you're playing the money game.

9:13Like, if you want to be a business owner who has systems in place, who has people in place, who have all these things so you don't have to do everything all the time in the business, you need to become a master of money. And you need to know the data, and you need to know the numbers. And that's really where I believe Profit First helps people take a big leap from being the technician to being that owner operate that owner and that business owner because once you know where the money's going and you can make better decisions and then you can hire where when you need to without breaking the business.

9:46You can invest in the systems you need to in order to grow. Honestly, a lot of people need help with becoming a better leader. You don't know how to give up things. And there's a big mental hurdle when you're an entrepreneur and a solopreneur going to a business owner that you have to break through because what got you here will not get you there, right? That's another very famous book title out there. But because we don't know how to get to that next stage or how to let go of the vine in EOS terminology. Like we have to let go of some things and put people in place in order to get out of the seats where we're more in the business versus working on the business.

10:23Like this answer there. I'm just quoting all the books that I know out there, the E-Myth. But this is where a lot of people never take the reins or they never let go of the reins and they never take them in as far as the numbers go and then they need to be able to let go of the ones that don't serve them. Like if you're in a seat right now that you don't love, that you're not the best at, and someone else can take it over, then just do a cost analysis. What does that mean? Okay, what's my dollar per hour? You as the business owner is probably a way higher than one seat that you're sitting in. So, is it time to replace that seat and could you do more revenue producing activities versus being in that seat just because you either like it or because you don't want to give it up or you can't trust someone.

11:05And you're really going to have to take a hard look at that. So, that's a that's a tough question to answer succinctly because there's so many things that go into it versus just, "Oh yeah, work more on it versus in it." Well, it's like, "Okay, how do we do that?" Well, for me and just for the sake of this podcast, I think a big way of taking that back for yourself is knowing the numbers, is being able to be a master of money and knowing the flow of the money, having money to work with in these accounts so it gives you options and time. So, that way if things happen in the business like there's a big blow up or in the whether it's in your personal life, the market, whatever it might be, you have cash that you don't have to just say, "Okay, shoot.

11:44I've got to everything else aside. I just have to dig in here." It's like, "Well, no." That cash gives you peace of mind to be able to say, "What is my next best move here?" And then in the good times, you can really put the pieces in place to be able to say, "I don't want to be in this seat anymore or I need to get out of it. I need to be able to invest in someone to be able to come and take this over or a system to come and take this over for me." So, that's where if you're in stuck in the artist / creator or the operator / technician, Profit First can at least help you build a good financial base to say, "Okay, what do I have to work with in order to get to be the business owner of my own business." — Man, that's so good.

12:21I For people who are listening to this, I I can like when I go back in time and think back to like 2011 when I was just starting my real estate business right out of the army, I read E-Myth that year and you know, it talks E-Myth is kind of it's a a version of of this escalating yourself as as the CEO and getting out of the tactical day-to-day. And I remember getting anxiety like hearing about this for the first time thinking, "I need to get myself out of the business so quickly." You know, and and so don't feel like overnight you have to go from the artist to the board.

12:58Like that's not going to happen. You know, you you do need to get some reps in. You it's okay to like operate in the business. I think the key that you're talking about is to recognize what it is that other people could be doing that could elevate you to doing a higher dollar per hour activity. And and you can continue to elevate and I never until you just said this just now, it never really occurred to me that this didn't really happen for me until I started using Profit First. There was there was a very direct correlation in getting my money under control and understanding what's earmarked for what and being able to outsource.

13:40And I tell people all the time, we spent way more time on one short-term rental than we do on 43 short-term rentals that we own now. Because we have a four amazing individuals that work for us full-time that work in shifts and they do all of the day-to-day stuff that we used to do on one. And so we we took ourselves out of the day-to-day. You know, we still work with that, you know, we meet with them once a week on a on a weekly basis and we'll jump in for for strategic level items, but day-to-day tactical stuff, we're just not involved.

14:15And I never could have imagined that it looking like that or if I'd have the budget for it or you know, what that would look like if I hadn't implemented Profit First. So, it's really interesting that you you bring that up and kind of the correlation between elevating yourself and and understanding your numbers. — Yeah, I think it does. It unlocks that level in between technician and business owner. Once you actually know the numbers cuz now you're not flying off the seat of your pants anymore. It's like now we can go out there and make real business decisions based on real data and dollars in the bank account.

14:47— Yes, exactly. So I brought up at the beginning that I'm I get asked about you know, does it make sense for me to hire a fractional CFO or even what is a fractional CFO? You know, a lot of people have heard of a CFO, but what's a fractional CFO? So, can you kind of explain what your your fractional CFO business does? And then also how somebody who's listening to this knows is it time to bring that person in? Are they different from like my tax advisor or CPA or bookkeeper?

15:18Like what does that look like? — Yeah. Well, if you're sitting there wondering, how do I pay myself more or what can I do in order to build the business better, you're asking CFO level questions. A bookkeeping question would be, where do I put this number in my books? You know, or like, in QuickBooks online, where does this go? You know, that type of thing. And a CPA question is usually about what do I do at tax time or like, how do I pay as little as tax with my taxes as possible. A CFO question is more about, okay, how do I get to where I'm actually paying myself what I need to or how do I make sure that I never run out of money or how do I grow this to where I want it to go?

15:57Where I usually like to equate the CFO in this whole world, the financial world to like, if you go to the doctor, right? If you go to the doctor and let's just say you're in the hospital and to see the doctor there and if you're in the hospital, you've got a nurse and she's checking on the day-to-day. That's like your bookkeeper. You It's like the We need to know your statistics, your vital signs. We got to get all the day-to-day junk out of the way. And obviously, that's what a bookkeeper does to keep the day-to-day in order. Then you've got the tax a person who's usually like a specialist in another way and they're going to cut your leg off.

16:29You know, I'm sorry, but it's like, here it is and here's here's how not to take as much of your leg as possible. Then you've got the CFO who is more like a personal private doctor that doesn't really work for the hospital. Like if the hospital's the IRS because the nurse is making sure everything fits in with what they need and the tax person as well, then the CFO's more like a private doctor that goes to your home and says, how do we stay out of the hospital as much as possible? Like, I know you don't love talking to your bookkeeper. I know you don't love talking to your CPA. Like, how do we make sure that you build the business you want, that you're healthy? Like, are we really, you know, like, I want you to lift weights and I want you to do this stuff, but I also want you to go out there and have a lot of fun and take vacations and do all this.

17:08So, how do we do that? So, that's what the CFO is more like a private doctor and practically, what does that mean? We do three things with every client that walk through our door. We call it the financial foundation. Like if you want to have a business that serves you, these are the pieces we believe you need in place no matter how big or small your business is. Number one, you need profit first in place. Like you need a cash flow system because you as the owner need to master your money. I don't care if it's you're making 10,000 a year right now or a million to 10 million a year. Second thing that you need to know is your numbers.

17:39You do need to have a good bookkeeping in place. You do need to be able to produce a profit and loss, a balance sheet and cash flow statement. We need to be able to tell your business's story. You need to know your business's story. You need to know it by the numbers and you need to make decisions by the numbers. The third thing we implement is a dashboard. So then we take all that data, profit first and a cash flow system plus your QuickBooks and all that online gunk that you don't want to look at and we put it into a dashboard that's built for business owners to say, "Here's cut and dry bottom line stuff of what you need to make decisions on." It's really good for people that have buy and hold portfolios that want to know how much cash they're really keeping at the end of the day and like how much they need to allocate for capital expenses, stuff like that.

18:21It's really good for fix and flippers as well, too, who want to know their cash flow during during the actual fix and flip process. Am I going to run out of cash? Am I going to have enough to finish all the projects that I have on deck? That dashboard's really for people like that have a lot of in and out. If you're wholesaling, that's great. You're more of a marketing company. Now we're just going to say, "Okay, what are our returns?" Like the dashboard's really around how are we getting deals in the door? How are we going out there and making sure that we're getting enough leads in the pipeline, that type of thing. So that way you have exactly what you need.

18:51But that's what the first three things we do with every client because we call that laying the financial foundation. You need to know your cash, need to know your numbers of the business, then you need a very simple way to read them to make decisions because that's how you get out of the seat you don't want to sit in. That's how you build financial freedom. And then Kirby also asked, "When's a good time to reach out?" We have built in the real estate sector here like a couple different levels. If you're I would say you need to be making at least a hundred thousand in revenue to reach out to a fractional CFO. Now, I would say specifically us cuz if other fractional CFOs you need to be making around a million usually, but we have like a 60-day program where we literally implement those three things in your business and you know, basically have have it all set up for you so you have a good financial foundation.

19:37So, if you're from like a hundred thousand in revenue to five hundred thousand in revenue, we put you through a 60-day program for with one of our CFOs to get all that stuff up and running and then we train you on how to analyze the numbers during that time so you become a savvier business owner. Then if you're above 500k in revenue, you're it's a good time to reach out to us for the ongoing of like having a CFO as part of your financial team because we're fractional. That does That means we're not going to be there full-time and that doesn't mean you're going to be paying hundreds of thousands of dollars a year. You're going to be paying a very small fraction of the price as well.

20:10But to get a high-level financial leader on your team, not a glorified bookkeeper, not a glorified tax accountant or anything. This is an actual chief financial officer on your team helping you grow the business like you want to and I have story after story of like people that have been doing a deal a month versus like ten deals a month and like how things have landed for them, what different accounts, how the dashboards helped and we could go into all that, but that's really what a CFO does, what we do specifically and then the different times you could reach out or what to expect depending on the business size you're at.