Systematic Excellence Podcast

Building cash reserves to fuel your business with Ron Parisi

Episode Summary

Money makes a lot of us nervous, but as entrepreneurs, we simply need to discuss it whether we like it or not. Our guest, managing member of CPA on Fire, Ron Parisi, is dedicated to using his knowledge in accounting and tax experience to assist online entrepreneurs build a successful business and make better financial decisions. Listen to this episode as we discuss cash reserves: what they are, how much money your business needs to grow, and how to build your reserve up.

Episode Notes

Are you prepared to handle an unexpected emergency in your business? Do you know how much money do you need for your business’ safety net? 

If you already have a cash reserve - that’s great! If you don’t, it is important that you consider it an important part of your business and schedule some time to plan for it. Don’t let all your hard work disappear because of an unplanned situation!

Figuring out the size of your company’s cash reserves can be difficult, but in this episode, our guest Ron Parisi will tell you all about it. Ron is the managing member of CPA on Fire, and he is dedicated to utilizing his 25+ years of accounting and tax experience to assist online entrepreneurs to help them learn what they need to run their business as profitably and effectively as possible. 

In this episode of the Systematic Excellence Podcast, we focused on how to make your company less vulnerable to setbacks while making progress by securing a cash reserve. Join us as Ron shares some of his financial expertise with us.

We talked about:

➡️ How to determine your business’ unique cash reserves number

➡️ Steps to build your cash reserves from zero (starting today!)

➡️ Why you need to run your business as if you were going to sell it

And a lot more. Check this episode out now!

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Episode Transcription

Amalie: (00:00)

All right. Welcome back to another episode of Systematic Excellence Podcast. I'm Amalie Shaffer. I'm here with Janine Suvak. We're really excited to be here today. We're continuing our business hierarchy of needs series. And today we're going to talk cash reserves with a special guest. Money always makes me a little nervous, but I am really excited about this because we have an expert with us. His name is Ron Parisi and Ron is the managing member of CPA on fire. Rod is dedicated to utilizing his 25+ years of accounting and tax experience to assist online entrepreneurs. Ron's accounting and business insights have appeared in the Wall Street Journal Accounting Today and other national publications. As a senior executive, Ron built a multimillion dollar national book of business based on his accounting and tax expertise and his relationship to modern business landscape and risks. Ron provided his expertise in a relaxed plainspoken and useful manner. Ron doesn't speak in technical accounting tax jargon to impress, rather his aim is for the client to learn what they need to run their business as profitably and effectively as possible, which we're all really thankful for because technical terms I would get a little bit lost, but that's why I'm really glad that we're doing this series because we've been able to bring experts in to help us talk about the areas of the business hierarchy of needs, where we're not, you know, that's not our zone of genius. So we're really excited to have Ron with us today. All right, Ron, thank you so much for joining us today. We're really excited to be here, and talk about cash reserves, although it's not really, you know, everyone's favorite topic, but we appreciate that we have an expert here to help us and talk us through, you know, just, the information around how much you should have, how to make decisions with it, you know, depending on how much you have in your cash reserves. I think that it's a really important thing to be aware of, for a business when you're, you know, trying to make decisions. That's a huge factor in, you know, what kinds of things you can and can't do with the business. So I guess let's start off in, do you want to talk a little bit about like how someone determines how much they should have in, what's a goal that they should set and we'll kind of go from there?

Ron: (02:20)

Yeah, sure. You know, normally when I sit down with my clients and we talk cash reserves, you know, how much Ron, how much should I have in the bank? You know, my rule of thumb is usually 10 to 30% of annual sales. And, there's a lot of factors that go into that. Depending on sort of your life cycle of your business, what are your plans? One year, you know, I always say 90 days, one year, three years, and then lifetime, I'm a big believer. And we always try to cram as much as we can in the 90 days, and we never hit our goals in the 90 days, but over a lifetime or over five years, over 10 years, you give yourself, you know, if you're a creative entrepreneur, you've got to give yourself time to be successful. And, you know, I've been doing this 25 years, so I've seen a lot of successful businesses and, you know, sometimes it takes time to be successful, but to be successful, you know, you need the engine, you need the fuel for the engine and that's your cash. And that's why I think it's a very important point, you know, we're talking about, and that's your cash reserves today, so,

Amalie: (03:28)

Yeah. Do you have any specific examples of people that you've worked with or clients that you've worked with that, you know, struggled with that part, but once they were able to, what adjustments did they make in order to build that up without really just like losing all the business? What did they do? What was the change that they made, in order to build up that cash reserve so that they were in a better position?

Ron: (03:56)

Yeah. I know you guys spend a lot of time talking about, you know, just general bookkeeping and accounting and understanding your business and you know, why you can be the best at your industry. You know, sometimes you still can't be successful. The first thing you gotta know your numbers. And you have to have a budget. I hate, you know, this was Mr. Boring talking about excellent. But, you know, through technology nowadays, you spend a little time, it can go a long way with, you know, online platforms, QuickBooks online, Xero, Wave, things like that. You can get your books in pretty quick order. But you know, before we kind of talk about like one client, the thing that I tell my, especially my starting off entrepreneurs, that are going to catch you and that's loans, right, taxes and inventory. And, you know, I think a lot of folks are very good at, "okay, this is what I took in this month. This is how much I wrote checks." But they don't understand that, you know, usually those three, you know, very rarely hit the P and L, the profit and loss statement. And, you know, every December and January, you know, when we're doing the taxes, "Oh my goodness, Ron, how do I owe this taxes? I don't have any money in my bank account." And a big, big thing to know walking in is, you know, your P and L can only get you so far. Your cashflow is your most important, you know, where where's your money going and being ready and I preach no surprises, no surprises, you know, know what your tax liability is. I know you guys are big proponents of Profit First. I use this modified Profit First. It's customizable to everybody, but like the big pain in the ass is when you make the money, you put the money away for your tax liability, number one. And I'll talk about my, you know, the client that I serve, right. Let's say it's, Jan, right. I'm mostly in the online space. I catch clients when clients have an approvable business, you know, they've had success and now they want a two X, five X, 10 X that business, right. Number one, you know, particularly if you're in the eCommerce space, number one, you know, a limitation to growth is cash, right? Growth consumes cash. So again, you know, knowing what, OK. Plotting out that growth, how much is that going to cost? How much is that going to cost today? And I now understand you're going to make a lot of money year two, year three, but you'll get there with the cash that you currently have. So we really are big proponents about forecast budgets and looking at consumption of cash toward a very high growth trend. So, you know, Jan usually understands that, you know, we recognize limitations. We take, you know, whether it's banks, loans, investors, partners, building joint ventures, you know, because you know, there's a lot of creative entrepreneurs out there and, you know, you give them the fuel, the cash, and you give them the platform they're going to be extremely successful. And that's what I work with, with my clients. Other clients pretty girly in the startup phase. You start telling them, well, you need 30% cash reserves for your business. You know, they just shake their heads and there's no way. So, you know, I don't want to be "Oh yes, everybody has to have 30% to be a successful business." You have to understand again, where you are in the life cycle. And, sometimes, you know, you do have to go under rich crackers diet to be successful. But you know, once you have a sustainable business, this is where the profit first putting money away comes into play because let's just call Paul, right. Paul's been very successful on his business the last 10 years. Right. But then you look at Paul's balance sheet, not only as a business, but you look at personal and you say, "Oh man, you've been doing great the last 10 years. You have almost nothing to show for it. Right. Okay, you've been making your $6,000 contributions for your IRA. And that's the only because their CPA has been telling you to do that, but otherwis you haven't built any personal vault." And there's the ability to build personal wealth as you're successful, if you are disciplined, if you understand, and everybody thinks that, "alright, I'm going to make, I'm gonna make $10 and I'm going to put $10 and 50 cents back into business because I'm going to make $12 tomorrow." And again, you know, you need to be very good at business and you need to be, very good, or, you know, very good at the tracking, or you need to hire somebody to help you. Big proponent of, you know, unique abilities and understanding what you're very good at and only doing that and being successful and surrounding yourself with the right team. But, so Paul, you know, that when Paul comes and sees me and has, you know, almost a zero balance sheet, you know, things have to have to change because most likely Paul's working 12 hours a day and is getting burnt out. And really, I think it's a mental thing, you know, when you don't have a lot to show for your business, sometimes, you know, entrepreneurial life can be up and down, you know, sometimes you're going to not, you know, you have that hot prospect that says, no, you know, you, sometimes it's, you know, it can be a roller coaster and you need certain markers to show you, "Hey, you are making progress, you are going to be successful." And, so that's where, you know, making sure as you're making the money, a certain amount of that money goes back into Paul's pocket and gets put into a savings account, brokerage account.

Amalie: (10:44)

I think that's really important the part about paying yourself. I mean, that's something that, I mean from day one that working with a bookkeeper, that's something that Janine and I have set up and, that money that's our cash reserves goes into an account that we actually labeled "the vault." So it goes there, there's a percentage, it lives there. There's always a percentage that's going. And we never missed that. And we always get paid. You know, even if it's less, money still comes to us as being paid. Not only is it good because I mean, that's how a lot of businesses fail is that that person, the person that runs the business never makes any money, but it's also kind of a boost, like, "okay, I'm actually physically seeing something come to myself every month from the business." Whereas if you're day in, day out, month in, month out, and you're not seeing anything come back to, that gets like, I mean, that's a long road to be on. You know.

Janine: (11:42)

There are people who are putting their payroll on credit cards and just crazy. I can't imagine.

Amalie: (11:48)

Yeah. I also think that, as you grow, I know, I think Ron, you and I actually talked about this when we first met, but, including not just, you know, the inventory, but the team. So as the business grows, like your team's going to grow, you're going to have to hire more people and you can't do the same amount of business with the same team you started out with, everything has to grow at the same time, your inventory, your advertising, your, you know, and then, and your team and all of those things need to be included in that when you're doing the forecasting, I find that a lot of it's that doesn't get included in it when they're doing the planning is the team, you know, you have this huge, big thing. One of the things that we talk about a lot is because we work with people in very similar situations that they've been successful in. They're ready to go to the next level, but there's some indigestion internally. And so, one of the things that we recommend is when you're, if you're thinking about hiring that project manager, that's going to help you do this big launch, hire them before you do the planning, don't do the planning and then hire them, because then you're not even thinking about the cost of having that person on your team. Do that in the very beginning, have them be part of it. And it's like leaving all that out, you can't rely on the same, you know, two person team to do something that a 10 person team should be doing, you know? And have you found that to be true as well?

Ron: (13:13)

Absolutely. The one book, you know, I'll throw a book out there it's called, a kind of a quirky name. It's "The road less stupid", right. Keith Cunningham speaks about and is a big thing, when I do my monthly meetings with my clients, right? What hat are you wearing today? And, you know, we talked about that, the technician hat, you know, going back to Mike Gerber, technician hat, manager hat, but then he talks about CEO hat. And then he talks about an investor hat. And then the concept that an investor hat is huge because, it really makes you step out of your business, and you know, okay, you're not a hedge fund who's putting money into the business. You're putting something even more important to the business and that's your time, your energy, and you have to wait, you know, the opportunity costs. So, that's a very important hat to wear when you're in that growth stage, you know, that you guys are advising your clients," Hey, get out, get out of the office." I know COVID is tough, right? Wherever you need to go the living room or go over to the corner of your kitchen, you know, put that investor hat on and really say, "okay, I really think I can do X in gross revenue. What is it going to take to service all those new clients?" Okay. Like you mentioned, it's going to take a new project manager. That project manager is going to cost X plus payroll taxes. Plus they're going to have to buy that individual computer plus whatever benefits, you got to literally think, you know, strategize longterm. "Okay. What is this going to cost me? Alright, and then how am I going to pay for those additional factors that's going to get me the two X to five X to 10 X." So, but it's important that you put on that investor hat. And like I said, everybody's go, go, go all the time. And they don't take the time to, you know, to work on their business instead of in it. So

Janine: (15:19)

Yeah, well, along those lines, so I was in a conversation the other day about, I guess the gist of it was that, it was when we were talking to Chris, Amalie, the gist of it was around, you know, running your business or looking at your business as if you were going to sell it. What takes have you on that?

Ron: (15:39)

Yeah, I mean, that's one of the first conversations I have, you know, what's your exit strategy and our exit strategy, you know, I'm 25 years old. What do I need an exit strategy? Everybody needs an extra strategy. And, you know, with my business, I'm going to be at this until probably they have to remove me. I just love it and I don't have any plans to retire, but I always do have an extra strategy because you never know, you know, what the opportunity or what the offer is going to come in and say, you know, Ron, you know, your business' CPA on fire would be a great addition to X, Y, Z business that I wouldn't even think about. What's the number? And you also should manage to that number, because like you said, we never know, you know, what life can throw at us, and being just a prudent investor, you should know that number.

Amalie: (16:35)

How does cash reserves play a role in the exit strategy? Like what role does it play? Does it make your business worth more obviously cash wise, but I mean, is there some benefit, like as part of your exit strategy, is it to make sure you have a certain cash, you know, a certain amount of cash reserves, is that like a box you need to tick when you're getting ready? You know, you need to hit before you can exit, or?

Ron: (17:05)

You know, when we do deals, right? The due diligence team that comes in to look at that, look at your business. You know, it's not necessarily how much cash you have in the bank. It's how well you've been utilizing that cash. And how, and if you've been, had the ability, if you shown a track record, like for your company, if you've shown a track record of the ability to put money aside every month, right? That's a huge feather in your cap, right? The discipline, obviously this business has enough cashflow to be able to, you know, have a savings account for the owners, be able to pay their bills, be able to tailor their taxes and be able to fuel, you know, future growth. You know, that's what buyers want to see. They don't want to see the guy that's putting every last dime into the business and not seeing, you know, super high, positive cashflow. So, you know, it's not necessarily how much you save. It's the cashflow that the companies, you know, there's going to be a big factor in how they evaluate companies and there's always strategic niches, but one thing is the cash. And especially now, nowadays, you know, people want to see that positive cashflow. So it's very mindful. And again, I can't emphasize this enough having clean books, you know, if "somebody is interested in my business, I don't have anything really ready to show them for the last five years. Can you help me?". And a lot of, a lot of prospective buyers aren't willing to wait around. So, you know, if you really do have an exit strategy, you know, or I believe you should have an exit strategy. And part of that is, you know, being able to document, you know, how you guys are doing every year, every month. So

Janine: (18:47)

It was interesting. I spent a lot of time in the world of aviation and you can't when you have an aircraft, like they're missing their maintenance log that makes the aircraft work plus, and I imagine it's very similar, right?

Ron: (19:00)

That's a, that's a wonderful analogy, right? Yeah. How have you been, how have you been caring for the CR plan, how you can carry into this car before buy it, you know, same thing.

Janine: (19:11)

Exactly. So.

Amalie: (19:12)

Go ahead. Sorry. So let's say you, someone that's listening doesn't have that, you know, 10 to 30%, let's say that they don't have that, what's your recommendation then for a per month, you know, a percentage or that they would be needing to put aside, do you have a recommendation? If they would start today. Okay. "Starting now, I heard the podcast, I don't have the cash reserves. Where do I start?" What would you recommend to someone that doesn't have that?

Ron: (19:42)

Yeah. Yeah. I think that for the first step is to save something. "I mean, don't, don't say, okay, once I get to, once I get to a million dollars in sales and I'll start saving, or once I get to this point, I'll start saving." But I think the safe thing would be, you know, "Hey, how much is your positive cashflow, right. And then how much are your catches and, you know, principles of the ways I'm trying to pay back if you have any debt." And then I would just, you know, start off with 10%. Start off with 10% of positive cashflow, put that aside and then start, start reevaluating that, but the most important thing is to start. And, you know, I hate to be the bearer of bad news, but if you say, "Hey, Ron, you know, I'm looking at my books. And, after I pay my taxes and my debt, I don't have any money." You know, you better have a pretty aggressive growth plan. And, because, there's nothing worse for me that pains me just working with entrepreneurs is just watching somebody, you know, work extremely hard and making them money.

Janine: (20:53)

Nobody wants to be on, right.

Amalie: (20:55)

Yeah. Sorry, Janine, go ahead. What were you going to ask? I know, I apologize. I stepped on you.

Janine: (20:59)

Actually, your question was pretty much similar.

Amalie: (21:04)

Yeah. I mean, I think it's important to understand, like, you know, if someone's proactive and ready to make a change, you know, just taking one step at a time. And I mean, obviously working with a bookkeeper and a CPA, you know, we work with both, and we highly recommend working with both when something is not your expertise. And I think Ron, you mentioned this in the beginning is you need to have someone that, that is their expertise because it isn't, I mean, I'm sure I could probably master, I could probably figure it out, but what does that take? What am I being taken away from by doing that? You know, it's just not, I mean, we run our team, like our employees and our contractors the same way. Like, what's their expertise. I'm not going to have someone that is trying to master something when I can get someone that it comes easy. Let's just let everyone do what they're good at. And then everyone's happy, you know, ultimately, but I think we talked about, you had mentioned, that's kind of how you run your business as well, and what you talked to your clients about, like, just let us do what we're good at and you do what you're good at, right?

Ron: (22:05)

Yeah. I would say, I'm sure you guys help with this is that there's levels to this, right? There's no proverbial onion, you peel back, you know, okay, "Hey, I'm really good at this. And this is the only thing I'm going to do as an entrepreneur." That's not really being realistic, you know? So just remember, you know, you can you start peeling back and as you become more and more successful, you know, I just feel, you know, clients get into this trap where, "Oh, I don't, I don't want to do this. I don't want to do that. I can only do this", but this may only take up 10 or 15% of their time. And, you know, they have to, you know, again, you know, going back to my original point, you gotta be patient. Success comes. And it's, you know, making sure you have a good plan to get a good business plan.

Amalie: (22:50)

And setting priorities too. You know, like if you have a list of 10 things you don't want on your plate, I mean, you start with the first one, get that off, and then, you know, you, but just having priorities, I think helps too.

Ron: (23:03)


Janine: (23:05)

I was chuckling to myself, when you first said that was like, clearly a man of experience. When the first point you want to make to entrepreneurs is to be patient can lead to, that impatience to get, it's what drives them to get things done. But it's also a trap.

Ron: (23:24)

The adversity, man, as much as you, we were just talking about this, I'm in a coaching class. And he said, he had a very similar situation that I did. You know, I had a big setback in my twenties with partners and this job, he's a very, very successful financial planner. And he said, "Ron, you know, I lost like major six figures in my twenties with partnerships." And he said, "that was the greatest lesson I ever learned." I said, "absolutely." You know, it's hard to imagine that those setbacks are lessons, but overall, you know, it's part of being an entrepreneurs like fail fast, boom. Next, fail. But, yeah, I don't, you know, I don't know, the partnership, my experience with partnerships is certainly, well, in my life today. But how do you guys, how do you guys stress patience with your clients? I'm interested.

Amalie: (24:25)

Make plans with deadlines, and stick to them. You know, we make them make plans and like you said, forecasting, but anything that you want to accomplish in your business needs to be forecasted, not just the money. I mean, the plans, your launches, what are your services, all of that, it's all planning, you know, and looking at all the little details, who are you going to need on the team to get this accomplished? What role are you playing? How much time do you actually have to spend on it? You know, it's like getting down into those details. It's uncomfortable, but that's the only way that we can really put together. And once you start to see this project, come together, you get to see how big it is. You're like, "Oh, okay. Now I understand."

Janine: (25:07)

Yeah. And we also give them a place to put all those good ideas, right. It's like, just put it over here and we'll coordinate next quarterly meeting. We'll go through the whole list. And so it's not telling them no or stop because they can't, but it gives them a place to put it and then focus that.

Amalie: (25:27)

There's gotta be a real good reason to take us on a different route. You know what I mean? Like once we're going there, there's gotta be good justification for trying to take another one. And it can't just be that you just read a new book and got a new idea. You can write that. And we'll look at that in three months. Okay. I mean, it's tough, but that's what we're here for. And that's what we're good at. So that's why people hire us. Like you can be as out there with the ideas that you want, like do it all day long, just, you need to keep that on a Google doc and we keep heading forward with the plan. You know.

Ron: (26:02)

That's funny, I'll tell you, I was talking to three partners in a very entrepreneurial venture and they have their one thing that's successful, but then they have two other things that, you know, two other income streams that they want to go after. And I'm like, "yeah, you know, you got a perfect number one, no matter how juicy that Apple, it looks, you know."

Amalie: (26:22)

Well, that's okay. We have thick skin. So that's what we're good at. We're there to give them a kick in the ass when they need it and let them know like, all right, we'll get to it, you know, and it'll be fine.

Ron: (26:33)

But I just real quick back to the cash flow, I just kinda made a kind of a list of, you know, things like what would drive you to have more cash and have less cash. You know, the fact that a lot of my clients don't have accounts receivable, you know, they work with Stripe or PayPal, but if you do have accounts receivable, you know, those terms sometimes can go, you know, especially when you're looking at an economic difficulty, you go from net 30 net, 60 test, maybe now a hundred, you know, 120 days. So, you know, I would put more cash away if you have a lot of AR. Marketing, if you have a really solid pipeline, hey, I'm getting 10 leads a week and I'm landing one or two leads a week, and I've had a nice track record for the last few months, less, you know, less cash I would be, I would feel more comfortable as your advisor. Right. And we talked about, you know, big growth, more cash, you know, it's just unnecessary or ways to get cash. Okay. And then just, you know, you don't want to hear about it sometimes, but sometimes you do need that joint venture, or you need that investor that comes in and helps you get to the next level. And that's an important sort of a mental hurdle that I have to get over some folks. So they don't want, this is their business. They don't want to give it up, but sometimes, you know, to make that next leap, you really have to kind of be open for that. And then just, you know, where's your clientele? If just one client make up a third or half of your income that could be gone next tomorrow. You know, obviously more cash in that respect. If you add, if you're selling something, you know, repeatable item, you know, probably less cash is necessary and you have a good track record, reoccurring income, obviously lower cash. So there's a lot of factors between that 10 to 30%. But for me, that's a really good goal to start off with. And again, life, you know, where in the beginning, you probably going to have less cash, as a mature company, you should have more. And if you don't, then you really need to, you know, do everything we just spoke about planning, budgeting, profit first or some form of it.

Amalie: (28:52)

Awesome. Ron, thank you so much for being here. We really appreciate it. That was really helpful. And, you know, anyone that's listening, if you know, someone that would be find this episode useful, make sure you share it with them and subscribe to catch the next episode. And Ron, if anyone wants to get in contact with you, maybe need you to save their ass, you know, get them on the right path or where can they find you what's the best place to connect with you?

Ron: (29:16)

Yeah, absolutely. Sure. So, the name of my firm is a CPA On Fire. And so you can find at and, you know, we're, we specialize in virtual CFO services to growing online entrepreneurs, but really thankful and very grateful to be invited. You guys do great work on this podcast. I've listened to a whole bunch of them. So thank you for inviting me.

Amalie: (29:41)

All right. Great. Thanks so much. Alright, bye.