E170: Financial Modeling and Analysis in Mergers and Acquisitions with Paul Barnhurst

[00:00:00] Ronald Skelton: I'm here with Paul Barnhurst. He is a financial advisor and FP&A expert, host of the financial moderators corner. And I'm blessed to have you on the show today. Thank you for being here. 

[00:00:12] Paul Barnhurst: Yeah. Thank you so much for having me. I'm really excited to be here on How2Exit and just chat with you for a little while today.

[00:00:17] Ronald Skelton: Awesome. Cool. So, there's a whole world side of finance that a lot of us don't understand. So I'm going to start off with a, I like to refer to this as I'm going to start off and pretend I'm ignorant on anything to do with finance for the danger of exposing that I might be right. So when we get into conversation today, I'm going to ask, cause I honestly believe a lot of the sellers that are listening here today and a lot, even in the buyers don't have the financial paralysis, financial knowledge that you do.

So a lot of, a lot of questions I have might be simplistic. But I think we can have a great conversation to relay to those of us out there looking to buy small to medium businesses. Looking to grow them and looking to potentially sell them, uh, at some point. What financial modeling is and financial concerns we should have or knowledge that everyone should have and when to lean into people like you, right?

Like you don't have to have it all. This is what you should know. Maybe this is what, you know, and when you get to, you know, this particular point, reach out to somebody like me. So we'll get into that later. Let's start off with your origin story. Kind of, how did you, uh, get started off in a financial world? How did you choose that path? 

[00:01:28] Paul Barnhurst: Yeah. So I will say I started my career writing government contracts. Worked for the Navy and pretty quickly realized writing contracts for the government just wasn't my cup of tea. And so I ended up switching over to, uh, our business systems office, doing a little more analyst work, some software stuff and said, Hey, I want to go back to grad school.

I don't see myself spending a career in the government. I want to work elsewhere. And so when I went back to grad school, originally I was going to do a supply chain and an IT degree. So a dual degree, an MBA and a second degree. And when I got in, I love my finance class. I decided to switch to finance. I'd always enjoyed numbers. Did a finance degree.

And then when I graduated, I went to work for American express. And so I worked there for about eight years and I started out doing some report writing a little bit of planning stuff. And this an opportunity to get promoted came up in what was called FP&A financial planning and analysis. And I said, promotion? I'll apply for that.

I want more money. Yeah, and got the job and have been doing FP& A ever since. And so that's a little bit of the backstory. And then about a year and a half ago, I started my own business.

[00:02:34] Ronald Skelton: Cool. Let's do a little bit of a, what is FP& A? It's not a title you hear in most, 25, 30, 50 person companies.

So what is it that you guys do? And how does it relate to the day to day task of an average business owner? 

[00:02:50] Paul Barnhurst: Yeah. So, FP& A stands for Financial Planning and Analysis, and there's a few core functions. First is budgeting and forecasting. You know, so very small companies, often that can be done by the CEO. Uh, sometimes you'll have a fractional CFO or, you know, some advisory, some financial advisory services.

Often those are done by somebody who has FP& A experience, because a big part of that is budget forecast. You'll be on that as Analytics. And as I like to say, really, what finances an FP& A role's goal where is to ensure you best spend the next dollar. Where you best spend it. How to optimize your spend of every additional dollar.

And so accounting, when I think of accounting, their job is to get all the backward looking books right. FP&A is to help you manage the forward looking 

[00:03:40] Ronald Skelton: I'm 51 so in most of my life of running businesses. I've been an entrepreneur since I was a kid. i've only got like even forecasting anything in the last probably 18 months.

Somebody introduced me to, I guess that probably two years, not three years. I started looking into mergers and acquisitions and realizing that cashflow is as important as all the other numbers they want to show you because businesses tend to be cyclical. And, you know, you need to be able to see that. So I actually, I instituted a 13 week, uh, I go sometimes 16 weeks on the pin on the business.

Um, Just cashflow spreadsheet. And it's very simplistic, but that's as deep as I get into it. Like, and I think it's hard, sometimes it's hard to forecast. Like, this week's good. I know what cash is in the bank. I know what bills, you know, and there's a rigorous recurring bills. There's, you know, subscriptions and fees and, and employees. But the real forecasting, the art of it comes into what should I expect coming up?

You start getting out, you know, eight weeks, 10 weeks, 13 weeks, sometimes they go to 16 weeks. And the reason I, I've had a couple of times where I've had to inject money into my business is that I probably shouldn't have had planned. You take something out and then put it back and you're playing this game.

That's why I got into this, you know. Let's, let's keep at least the 16 or 13 to 16 week forecast. I know big companies do this for all kinds of reasons. What are the advantages to having those forecasts and, and the, uh, you know having your expertise done inside of a company? Yes. What does it give the, 

[00:05:12] Paul Barnhurst: So we step back, before we even do forecasting, just talking financial statements. There's, uh, some data I saw that said, an owner of a company is three times more likely to be successful, if they're regularly reviewing their financials.

A lot of owners don't look at them, right? They got into it for their passion and they're concerned about the product and they know, Oh, they signed this big contract and they don't think about that. And you know, the lifeblood of any business, as we all know, we've all heard the saying cash is king or cash is queen.

You know, whatever you want to call it, is that's the lifeblood of a business. And so it starts one with understanding the financials, because if you're looking at those regularly, you're going to start to see trends. Like why is my revenue down this month versus last month? Why, why are my expenses up? Did I overhire?

Cause if you're not looking at it, it's really easy to do that. Like I have a friend where he's like, you know, he's trying to build out for a big business. He's like, I've overhired the last few months. I need to step back and rethink this. And I'm like, you need to make sure you're looking at those numbers, so that you can stage that correctly.

So I think it starts with looking at all your financials. But a key one and it really became huge after COVID not just for small businesses, but for everybody, as you know, many companies all of a sudden went from a regular business to 10 percent of it. It's like, okay, how long can I last?

What's my cash look like? I remember we had to approve. Every single payment that was made for every single vendor we had, during COVID and just it was just painful. And so we were watching cash like a hawk. And so a lot of companies start doing that, you know, 16 week cash flow. And so I think there's a couple things having, FP&A or Fractional CFO, whatever you want to call them, but some advisory services can really do.

One, they take your historical bookkeeping data, and they often help get it in order so you can really forecast. Because typically what happens is you have a bookkeeper, and many of them do an okay job. Because you as an owner don't know enough to be like, Hey, this is in the wrong place, and this really shouldn't be done this way.

And you're typically also forecasting at this point on a cash basis. And often when the FP& A comes in as you're getting ready to sell and you're growing in size at some point you want to start thinking of accrual accounting, right? Which is match the period with the expense or the revenue. So, you know, if I get a hundred dollars, a hundred and twenty dollar subscription to make it really simple revenue in, you know, if I'm on a cash basis, I recognize a hundred and twenty dollars today.

The reality is that obligations for the next 12 months. It was a one year subscription, so you should be recognizing $10 a month. When I, like, uh, I was working for a company and we were looking at buying a company and we had to try to make those adjustments because they'd done everything on a cash basis.

Like, well, what would that look like when we bring it over to an accrual to at least understand what the annual revenue would look like, because they'd have customers that paid them for three years and recognizing it all in one year. And so I think, you know, FP& A can help with a lot of those things, particularly if you're looking to be sold or acquired.

Because one of the most important things is, you know, having looked at some deals is you want to understand the books and understand the financials. And if they're not straightforward, it's going to give you a pause. It doesn't matter how good the business is. If it's hard to understand their financials, because they haven't had good bookkeeping, it's going to make you really difficult to pull the trigger on any kind of deal.

[00:08:23] Ronald Skelton: Absolutely. And even if it's the risk after, even if you pull the trigger on some of these, there's been a couple where, uh, you know, things have changed at the last second and we didn't get to deal. And then later on, it set in that, man, I'm glad we didn't get to deal. Right. Right. Cause you started going back in like, as you learn more, three years ago, I'd never looked at, you know, other than they made me take two, two, uh, accounting courses in my undergrad and two in my MBA, right? 

I didn't look at profit and loss statements stuff. I ran businesses for years and we didn't produce those documents to be honest. We just didn't. 

[00:08:58] Paul Barnhurst: And you're probably one of the lucky ones that succeeded despite that. 

[00:09:01] Ronald Skelton: Well, they didn't all succeed.

The ones that had really good profit, the real estate, you know, companies and the stuff that had really great profit margins, they did okay. Cause we had cash coming from everywhere. The ones that probably could have made it did suffer, I think. I know now knowing what I know now, if I had done the cashflow statements for, you know, some of the smaller businesses that have made it through those rough times, the times where we need to shut it down. 

There's times where like, Hey, we got a lot of cash into the company. I'm going to do distribution and pay for the down payment on the house. Right. You do that four months later, it's like, Oh, we're out of cash. And I, you know, like, I don't have anywhere to pull this from. We're going to shut this thing down.

It's not working. When, you know, you don't know that it wasn't working. You just, inside of a new business, you don't understand that cycles, right? You don't know if it's cyclical. A lot of times you think things aren't. A lot of companies are. A lot of companies are, you know, they have big sell cycles that they didn't realize until one, two, three years in where they starting to recognize that trend.

Somebody you might be able to look at the industry and go, look, you're going to have these cycles because you've seen dozens of other industries. But for most of the people out there, like myself that were, starting businesses young, he just went and said, everybody needs this. I'm going to make it and I'm going to sell it to them.

[00:10:09] Paul Barnhurst: I'm still figuring it out for my own business in the sense that I do a lot of, influence marketing. I have some podcasts. I do speaking events. I do training. I do a little bit of consulting and you know, the cash I've had months where, almost 30 percent of my revenue comes in one month for the year.

And you got to make sure you're managing that appropriately. Like just recently, I was like, I've been count got a little lower than I would have liked. And I had a bunch of, you know, payments due. And so on a few of them, it's reaching out going, Hey, that's, you know, late, which I'll get on them normally, but I'm not as worried when, cause I look at my P and L every week.

I look at the bank statement, kind of reconcile things on a weekly basis. I don't do a 13 week cashflow because it's a business of one. I don't need to do that because I'm seeing the bank and I know the cat, I'm doing cash accounting anyway. And so I have a good idea where things said, I know all my invoices, but yeah, it was one of those where, all right, well, this one hasn't paid.

I need to make sure these pay me. My wife wants me to get something done around the house. And you know, the business helps fund some of those things that you've we're talking about.

I mean, I highly encourage every, every business should be tracking their cashflow. Should be looking at their financials. And if you're not, or you don't know how to, you really probably should look at some advisory services. And what I always caution people is, you know, almost every company has bookkeeping services.

And a lot of times the bookkeeping will say they provide advisory services. And I say, if you're paying for advisory services and all you're getting is your financial statements, you're paying, you're overpaying. That's bookkeeping. You want them to be able to give some advice like, Hey, you realize your cash is like this.

Have you thought of doing this? We've noticed your margins are down, right? Some recommendations, some insights. That's really where that value comes from fractional CFO and FP&A advisory person, whatever you want to call it. Because, you know, many of these small companies outside of bookkeeping, Don't have a full time finance person.

You know, when he gets a 10 million, often you have somebody who's doing a little bit of that, past that at some point, you might get a CF, you know, CFO or whatever. But that first, first million dollars, almost nobody has a finance person. They just have a bookkeeper. 

[00:12:10] Ronald Skelton: Absolutely. I've interviewed so many uh, business owners, I call them interviews.

I've looked at so many different businesses over the last three or four years because we were involved in some big rollups. And so probably more than I should, if you had, I've been a standard ETA guy, I probably hadn't, uh, had covered so many, but for the first year, year and a half, probably almost two years, I was in a big rollup project and we looked over 200 businesses in a short period of time.

Like that's what we did. All I did for months on end was, eight to 10, one hour calls with owners, you know, on the week. And then, you know, we had a team that looked at the financials, but we had to look at them too. Right. So we could have an intelligent conversations while we're building rapport and stuff.

But that said, I don't know how many times I can't, I, I would have to, uh, need more than my fingers and toes to tell you how many times somebody go, what do you mean there's something wrong with my financials? My tax, my tax returns. Nobody, nobody's ever audited me. Right. A lot of these small bits, you know, and these are, you know, one, two, $3 million businesses sometime.

They just don't know what they don't know. I've had many of the older founders and stuff, not know they heard a profit and loss statements like never needed that ever to run my business. Like, yeah, but you need it now when you sell your business. It's what we look at, right?

I'll just give you the numbers. What do you need on there? What numbers you need? You know, and they just want to rattle them out of their head. And I was like, that's not how it works, right? Let's talk about, what I know you do things like financial modeling. So what is financial modeling? And how does that play in with mergers and acquisitions? Let's start with kind of how do the bigger companies use it inside of their M& A world. And we'll see how we can relate that to what we do in the smaller scale. 

[00:13:49] Paul Barnhurst: Yeah, so I mean when you think of financial modeling at its core, it is a decision making tool. A model is a proxy of reality that you're trying to build, right?

So whether that be, Hey, I need to buy these two new trucks for my business. What's that going to look like over the next three years? Does that make sense? What's the return on my investment? You know, all the way to, I'm thinking of buying Tesla. Big, huge model with, I got to borrow, I got to borrow, you know, 200 billion to make this deal work.

And what's that all look like with all these different pieces, right? So you got everything from, you know, back of the envelope and most simple model, it's like, all right, do I have enough money to go to the movies tonight. You weigh it in your head, that can be as simple as looking at your bank account, but you're using that to help with the decision, making a decision.

So it starts as small as that all the way up to as big as you want to go. And, you know, where the model comes in is, as soon as it's a decision that, you know, has some real money behind it. Long timeframe complexity, you really want to be able to build out a model, you know, back of the envelope is nice to start with, but it's not enough usually.

And so that's where that comes in. And you know, most models you'll want, especially for deals is some kind of three statement. You don't, you want to understand the cash, right? Cause at the end of the day, you're buying future cashflow. You're not buying EBITDA, you're not buying, gross profit, especially because of all the accounting things, what matters is what's the cash the business is generating. 

[00:15:22] Ronald Skelton: I love the idea of a model in the sense that I'm a big believer in human psychology and I understand that we have, everyone of us, you, me, we have all kinds of internal biases, right? No question. I was telling you before the hand, before the thing, we had to tell a young, uh, set of founders.

No, we're not interested today just because of the way they're positioned in the market and stuff. And that's hard to do. Cause I always build, I always start with building rapport. Like I, I want to, I want to get to know them, know there's somebody I want to work with beforehand. So when some, if you do the rapport, right, you know, telling them no stings a bit.

But they're financial. If I had a guy like you in it, you'd look at it, because the model that they've been using, what they're trying to use now and what the market is trying to do, I don't think line up. What I want to get at there is the financial modeling that helped take care of some of those like biases that you have. Like, Hey, I can't, you have a tendency to want to make things work.

But if you have a stringent model, it says, here's what we, here's what we look at. Here's what success looks like. Here's what failure looks like. The, you know, is that what you're talking about? 

[00:16:32] Paul Barnhurst: Yeah. It definitely helps with the model. So one, you know, the model, you're going to have assumptions. It really helps validate and helps you think like, okay, I need a growth rate assumption.

I need, you know, what's inflation going to be like? What's my cost of goods sold going to do over those next couple of years? What's my operating expense? If I'm going to double my revenue, can I really only grow my operating expense 5%? Does that make sense? Cause you often have these pie in the sky ideas.

And so a model can help ground that, but a model is only going to be a good as an assumption. You got to understand design. Like, you know, with the podcast, I do financial models corner, bringing a lot of expert modelers. And I hear it again and again, it's all about design. So that's easy to validate those assumptions, be able to look at the outputs and say, that makes sense.

Often just building a model will sometimes help you realize something may not be viable, that in your head it makes great sense. And then you put it down on paper. Like, I still remember the example when I worked for one big company, the CFO had sat down with one of the business leaders, he had this great idea, and he scratched it out. And she started writing down all the assumptions, and she's like, you realize based on what you're assuming here, you're going to grow like, you know, 600%.

It's going to be as big as the whole company. And it's like, Oh yeah, that's not possible. Let's rethink that now. But they hadn't thought of it that way until it was put on paper and the numbers were shown to them. And then you start to realize, Oh, that's not realistic. And you have those, those hard discussions sometimes that are needed.

[00:17:55] Ronald Skelton: I get that. And, um, well, one of the things. Uh, you said inside of that was, there's a lot of forecasting, there's assumptions made and stuff. What it brought to my mind was that like probably mid career, I was at the, uh, senior director levels finally getting to be in the, in the room with the CEOs and sit down the, we had, you know, the CFO, we had controllers in these tech startups and they would sit down and they would do their presentation to the CEO.

Ignorance is bliss when you first get into those meetings, even though having it college. The first three times I went one of the things he would say and oh he'd open the meeting with go Okay, boys, how long was in the oven and how hot. And I was like, what the hell is he talking about?

So one day, you know, I had my own one on one, right? How do you go sit with the ceo at least once a month and like what is my division doing and that stuff. I said, hey man, i've been in three of those meetings so far. And what do you mean by how long has it been in the oven and how hot? You're saying these guys are cooking the books.

He's like, no, no, no. All accountants, you know, they forecast and they make assumptions and stuff. And I wanted to know how bad they're, how long it took them to come up with their numbers and how bad they had to reach out there and how big are their assumptions? Right. What are they based on? And it's kind of my joke is to, it gives them an easy way to say, Hey, we had to reach here to make this work. Or, Hey, this is very solid grounds we're standing on. 

[00:19:12] Paul Barnhurst: Definitely for forecasting. I, uh, I really liked the oven example you gave there. I haven't heard it that way, but you know, I've sometimes heard it said like there was, um, I'm looking at buying a company. And we're talking to my boss about it and the deal had fallen through. And I was telling him, I go, so how bad were the assumptions?

He goes, we had sprinkled that thing with unicorns and rainbows and we still couldn't make it work. You know? And so it was like, all right, that tells me that's just a bad deal. 

[00:19:36] Ronald Skelton: Yeah. Let's talk about, during the evaluation process, what can smart ETA people do, is what are some of the simpler financial models as financial tools? We all look at balance sheets. Um, we all try to come up with, you know, look at what they turn, you know, how they came up with their own EBITDA and, you know, what were the ad backs and stuff.

One of the things I don't think many ETA guys do, or at least in the interviews I've had. I think I look at it more than, more than most people is that cashflow. Uh, so what, what things should we look at from your perspective and knowing our potential for where this company could go. We can see where it's been.

I mean, that's what the P and L statement is going to show. That's what all the, you know, three years of tax return. We got a pretty good view, view of where it, where it's been. I think your unique perspective is you're able to take a look at it and go, this is probably where it could go. 

[00:20:31] Paul Barnhurst: Yeah. So I think there's a few things to look at, and it's not even so much the financials.

I mean, obviously one thing I'm really gonna understand is what's happening with operational cash. Ignore financing and investing, because at the end of the day, that's what I need to fund the business. That's where working capital comes from. That's where the excess comes from as you're operating cash.

If it doesn't, you don't have a sustainable business over the long run. You can only fund it so long for it through investment and financing. You know, as I heard someone set, say at one time, they were talking VC and I've always loved this, they said, uh, you know, high tax, so high customer acquisition cost business.

VC funds it. Low CAC, P& L funds it. And over the long run, the VC won't fund it. So get your CAC cost, you know, but you're going to have to acquire. But what I want to understand is what are the key metrics in the industry? I want to understand a little bit of the economic. It's really about some of those operational metrics.

Like, okay, what, how long they're gonna cover, uh, contracts for the customers? Is there a big risk? Do you have a high concentration? So really, I think it's going beyond just the financial and looking at some of those operational things. Also in the financials, great things to do is, look at the, the P and L on ratios and say, okay, if it's a certain industry, how does that compare to benchmark?

Are there some areas I should be really concerned about? Is there any big liabilities out there? Like I look at it and why do they have a tax liability that's tripled over the last three years? Am I going to get hit with a big surprise? And why do they have a, any other kind of liability. So I think, you know, there's some things on the balance sheet, balance sheet can always surprise you.

So just making sure, particularly on the liability side and any accounts that are growing, that they can't explain. I think that's important. And then beyond that, I want to understand operationally how the business works and how those metrics impact the financials because at the end of the day, financials are a lagging indicator.

Almost nothing in the financial is a leading indicator. The business operations are your leading indicators and they're really going to tell you more where it's going than the financials will.

[00:22:38] Ronald Skelton: I got it. I'm a big fan of the leading indicators and, and then lagging indicators and KPIs and that type of stuff.

One of the things you hear about in the mergers and acquisitions space all the time is the, turnover or the employees leaving after the deal and everybody's tracks, you know, tracks that and that's, that just irritates me because it's, it's a lagging. It's, it's after the fact, there's nothing you can do about it. And nobody's built any tools out there for leading indicators as to, Hey, this is a, should be on your radar that your communication isn't going very well.

And, um, but through AI and some other tools, I think we could build it up fairly easily, but that's another conversation. What are key leading indicators that, a deal might be questionable? Like what are some of the key, you know, what would be something we look at as far as in the financials that would say, Hey, you need to take a deeper dive into this and look at the industry as a whole and see if this matches the industry.

[00:23:35] Paul Barnhurst: Yeah. I mean, I think any time you see any kind of trend where things revenue side are shrinking, you see expenses going up that are higher than you would expect, right? There's a normal, there's an inflation rate, and things are in line with inflation. So I think those ratios can really help, like, you know, one thing I really like to do if you want to look over time is a simple horizontal, a vertical or even a horizontal analysis.

So vertical is a good one, as you take everything as a percentage of revenue. Say, okay, cost of goods sold are 20 percent, operating expenses are 40 percent, interest is five, taxes are 15. And look at that over months or quarters, years, and just see, is there a trend here? Is okay, why is my cost of goods sold been slowly going up, but my revenue stayed flat.

Is it because the industry's becoming more competitive and therefore that's going to continue and continue to squeeze my margins. So I think, you know, looking, really good thing is to look at trends using some ratios and different methods within models that, you know, any good modeler can build you to really be able to see if there's some things that you're not going to notice when you just look kind of at the numbers and go, okay, revenue's gone up.

Yes, revenue went up, but all right, revenue went up 10 percent last year, 3 percent this year and 1% is predicted for next year. Okay. That's slower than the cost of inflation. So basically we're not even covering price increases, right? Sometimes you don't think about those things because you see it on a raw number.

You just think, okay, it went from 10 million to 10 and a half to 11. This thing's growing. I can take it from there and looking at it on ratios helps you normalize. It allows you to benchmark it and really kind of get into it and say, are there surprises in here I'm not seeing? 

[00:25:23] Ronald Skelton: Some of the ones I look at out there.

Um, I, you know, we, cause in the NDAs and stuff, I can't ever say business names and stuff. But a lot of times you can just look at their, just look at the numbers and then it causes bigger questions, right? But when I was telling you about earlier, I was like, okay, what happened between 20 and 21 and 2022? It was the biggest the thing that caught our attention was they, they even admitted it. They said it, you know, competitors came out of the woodworks. You know, when we first started doing this, we were the only ones doing it in the last three years, there's now 65 companies doing exactly what we do.

Right. Or, you know, there's just a, you know, dozens and dozens. I looked it up and found out I could find 65 pretty easy. But when they first started off, there's like two, maybe three people that formulated what they did as a company, right? Like, well, that's not going to go away. How did you, how did you adapt to that?

This didn't have an answer, right? Doing what you're doing, they probably could have picked that up a long time ago. They could have, you know, looked at forecasting, looked at their numbers, realize things are starting to drop, realize that, a lot of times as business owners, we know what's happening.

We just don't want to admit it. But seeing in the numbers is going to cause it to, cause that realization to surface, right? It's like a blemish on your skin. You feel something sore one day and then like, you know, something's coming there. You can wash that and clean it. You wait until there's a full blown, you know, pimple or something.

You're like, okay, now I got to deal with this thing. I think that happens all the time with business owners. We see things happening. We see that competitor outbid us. We're bidding against three others instead of where we've never competitively bid on a, on a job before.

But if you really tracked what you, you know, with what you do in the, in the forecasting and stuff, I think that you could get early indicators of that. You can start going, look, people are coming into the space faster than we can adapt. We better create a unique selling point that's so strong that they go to us for X.

But you know, here I am hiding size 2020, right? I see what happened to that company. I see what happens to others. Being able to look at it and look at, you know, numbers on a regular basis and a normal businesses operating, you know, scope of things they need to do. How time consuming is that, right?

[00:27:35] Paul Barnhurst: Yeah. I mean, it definitely takes time to, you know, track your metrics and things, but at the end of the day, you know, what, what we measure gets improved, right? If you don't measure and manage it, nothing happens. And so it's just, it's so important. And it, like I said, it starts with the operational and then it leads to your financial, both of them.

You need to be looking at them together. And, you know, as you were mentioning, you know, kind of the business Them not noticing the change in the industry, right? We all know the life cycle of a business and every business is going to get more competitive. I've seen that in me going into entrepreneurship and an FP&A doing content creation and influencing.

When I started the number of guys talking, a number of people talking about it on LinkedIn, we're pretty small. Now I see people all the time and a lot of them have bigger followers than me. It's okay. How do I differentiate? How do I make sure I'm continuing to grow my business and make sure I'm generating the revenue I need to?

And so I know exactly what you're talking about. And sometimes you can see that in the financials and sometimes it's really just being honest with yourself and looking out at the landscape and going, okay, from when I started to today, things have changed. I don't need a model to tell me that I just need to be, you know, let that bias go. 

[00:28:42] Ronald Skelton: Yeah, you got to be able to kind of look out there and go, you know, who's into my space now? And you know, what did that look like six months ago? And what does that look like in the future? I got that. So let's go back to the numbers and the financial, like, you know, day to day. What is a typical, I'm going to do a, uh, what is current and what should be. Is the way I'm going to frame this.

The typical size of company revenue wise, it reaches out to somebody like you and say, Hey, we'd really like to get better at our, uh, financial modeling and, and understand what's happening in the future. And can you come in and help us do some stuff?

[00:29:19] Paul Barnhurst: Yeah, so people like me, I'd say most of the time they tend to be smaller companies, often that haven't hired a financial staff.

I've had some reach out to me, sometimes it's when they have somebody going on maternity, or they want me to come in and do an assessment. But in general, people that are doing FP&A, CFO, it's often fractional. And so most of them that are out there helping companies early on that are wanting to grow and need those insights and value.

If you've got a stable business, you understand it well. You're very comfortable with it. You're really not looking to grow. It's that family business. You may not need the fractional support. You may be happy with how it's going. I still think it's good sometimes. Make sure someone's looking at that cash flow and looking at the trends. But really where it's very common to bring in is companies are really trying to go, grow or raise capital is another case.

You want a good somebody who's been through that before. CFO that can come in and say, okay, let's clean up your financials. Let's really talk about your options. Let's talk about what your value is and what you're gonna really need to give away versus, the person that thinks, alright, well my company's worth 10 million and I will give you, I want $3 million for you and I'm gonna give you 10% of the company. 

Wait, how's that work? You know, the math, that type of thing. 

[00:30:39] Ronald Skelton: Right. If you ask that business owner, he doesn't think it's about math. He's thinking about, well, it'll be worth this when I deploy that money and I do X, Y, it's going to be this size. And you should have, you should be, and it's not how it works, right?

They don't see the price mix, mismatch that you just explained. You and I just seen it cause we've been delving the numbers more often than most of these business owners. Four years ago, I'd have been the same thing. What do you mean? I, you want more than 3 percent of my company or 5 percent of my company. Like this company is going to be here. It's going to be a hundred million dollar company.

Why would I give you, you know, 10 percent of it when you're only gonna loan me at three, you know, $3 million. I'd have been in that same argument probably. Uh, but you don't, it's when you go through these processes, you look at what's happening. You start to realize the logic behind why investors have to do what they do. Is,

[00:31:25] Paul Barnhurst: They got to get their return as well. And it's risky investing in business. Especially if you're investing in startups, very risky odds are you're going to fail. I mean, unfortunate reality. 

[00:31:36] Ronald Skelton: So revenue size, you say it's just your standard, they're doing a million plus a year. They probably ought to start looking at financial modeling or when, when should they start? I mean, 

[00:31:46] Paul Barnhurst: Again, some of it depends. You have some that are, are savvy. I mean, I think obviously from the beginning you want bookkeeping. If you have one or two customers, I think part of it depends on complexity. The more complex the business, the earlier you should bring someone in. I think almost every company that has, you know, that's more than a solopreneur.

You have a few people, you know, a million of revenue. You probably at least should have somebody come in and look at it and give you some recommendations. Maybe you're looking at it pretty good. You're a little bit savvy, then you don't need it. But if you really are not financially savvy at all, I think it's good.

Especially, if you're looking to grow or do any kind of transactions in the future. Sooner, the better to have somebody in because, right, we all deal with, every company deals with tech debt. Especially any software technology company. Same is true of accounting and finance. The longer you let that debt build, the more of a problem it's going to be like. All right, well, you got to get sold and your systems are a complete mess.

The new company is like, well, now I got to put in a million dollars to systems just to, you know, understand things.

[00:32:49] Ronald Skelton: Right. It's the same, I guess it's the same way as, uh, I mean, I've seen it all though. I mean, I've walked into companies where I was like, okay, I really like what you got going here. Can you show me your financials?

And, you know, they pull out some handwritten notes practically. You know, they print 'em out of the computer, but it's Excel printout and they don't even know how to do a proper printout. So it's, you know, just brutal. And then I've seen beautiful profit and loss statements, cash flow statements, stuff.

I, I walked into a manufacturing company, really liked the owners. I was with a little team of people. I was just one of the members on the team. When it came down to see the, see the financials, he walked us into a room that had nothing but these, I mean, a big room, had nothing but giant lateral file cabinets. 

And he opens them up. He starts pulling those green books out and he opens it up. Then I started looking around and I realized none of the people and they all have a phone on their desk, but nobody had a computer on their desk. Some of the younger people working there had a laptop. They brought in on their own to do some of their work, but he didn't supply it.

It was a manufacturing company. He didn't think they needed it. The sales guys didn't have computers. They kept everything in notebooks and then log books. But when he opened those up, the profit and loss statements, the balance sheets and the cashflow stuff he showed me were the cleanest, easiest to understand I've ever seen.

[00:34:04] Paul Barnhurst: That's, that's amazing. That would have been fun to see. 

[00:34:06] Ronald Skelton: Yeah, it was one of those, you know, he goes, my father was a CPA. He started this on the side. He just taught everybody, this is how it's done. And we've always just kind of done it this way, right. It's a second generation business. 

We was like, we just, I don't even know why we do it that way. We put this here, you know, nothing's really changed in the last 60 years of this company. Everything's done a certain way. When you buy this supply, it goes on this line in the books. And when you buy, when you sell it, it goes on this line in the books.

And he couldn't tell you one rhyme or reason why it was done that way. It's just, he goes, we do it the way my dad did it. And the tax guy doesn't complain when we hand it over, get our taxes done. 

[00:34:41] Paul Barnhurst: That's funny. You know, funny story when you talk about, you know, doing it on paper. Yeah. So. I recently did an interview with, I called it the history of modeling.

And we had three guys that are modeling. And one of them tells a story, 1978, build this model for a deal. And he was in South Africa. And they had to use, they built it on a mainframe. So the bank would rent out the mainframe at night and it was cheaper in the evening. So they'd go in mid, at midnight, coded it on Prosper with punch cards. 

[00:35:13] Ronald Skelton: Punch cards. Yup.

[00:35:13] Paul Barnhurst: And that was the first model he built. And I'm just like, I can't imagine. And then one of the other guys was telling us how, yeah, I remember when I first started, you know, 12 columns on a green sheet of paper and we had 10 pieces of paper for the model. 

You think of how it's come, but the concepts are the same, whether it's on paper or punch card or computer. It's really about making good assumptions, thinking through the analysis and helping guide your decision making.

[00:35:38] Ronald Skelton: Let's talk about where, where do people start? Like if they, today they, they've heard our, they've heard your message.

They want to learn more about what forecasting looks like. They need some kind of intro. I know you, you do a lot of stuff on, on LinkedIn and stuff like that. Where can people just start getting their feet wet as to, I want to become more financially knowledgeable about my business and about businesses I'd like to acquire.

[00:36:05] Paul Barnhurst: Yeah. I mean, I think there's a lot of different places you can go. Obviously LinkedIn, you can follow some of the people out there. There's people that speak on every subject. If you Google it, you can find it. Like, okay, I want people to talk about exiting a business. You can find it on LinkedIn. I want someone that talks about financial modeling.

You can find it. So, I mean, that's one area. And then, you know, I think going there, you start talking to one or two of those people and asking advice. If you're looking to get support, there's, there's tons of firms out there that do fractional services. And, you know, I have a lot of friends that do it.

If anyone ever needs, if they're looking, beyond just learning about it, but saying they're looking for some support, they're always welcome to drop me a note. And I'm happy to give some referrals, to some, some companies. And some of that depends on what industry and what they want, you know, who I would give them too. 

So I think there's, there's so many different ways to learn. I think the key is just, okay, what do I want to learn about and getting started?

[00:37:02] Ronald Skelton: And full disclosure, our primary sponsor will is, is a company that does outsource accounting, fractional CFO stuff, but they don't do the education side.

I don't think, but they, they just do it for you. It's a done for you cloud based offsite type of thing. So just didn't want that to, didn't want to pop it up later and go, he didn't, we had the whole show and he didn't even tell me that he was going to be, having an ad in the middle. That's, that's who they are.

They're a great company. What did you, like you have a great podcast out there. You've got, you've had, I guess, one and one in the past and you've got one you're starting now. What is that about? And who, who, who's your average listener for that one?

[00:37:37] Paul Barnhurst: Yeah. So they're definitely different between the two. So the first is called FP& A Today. That one's been out for a little over a year, just released episode 75 today. And so that one is really for the corporate FP& A professional. Whether it's small company, big company, talking about how, how can they better support the business?

How can you be better at being at budgeting, at forecasting, at telling the story of being a business partner. So that's really what it's really designed for that corporate FP&A person or someone who wants to get into it. From time to time, you'll get people outside that will listen to it. If you don't, you're thinking, Oh, I need to build out my FP&A, for my company, then go might, may not be a bad idea to listen just to get an idea of what's, what's good FP&A supposed to look like.

So, you know as you're starting to figure that out. And then the second podcast is called financial modelers corner. And really we interview some of the best modelers in the world and talk about how people should think about modeling and different experiences. And I'll give an example of a couple of guests.

We had a guy on, uh, by the name of, uh, Dim or Dermian Early. He's the two time world champion in financial modeling. 

[00:38:40] Ronald Skelton: Yeah. Well, there's actually a competition. You guys. There are. Yeah. I'm having to go. Yep. Accounting. That, that, that just doesn't seem. 

[00:38:48] Paul Barnhurst: There is a financial modeling world cup, but there is an Excel e sports. It has been seen on ESPN three. I think it was, but on ESPN.

[00:38:55] Ronald Skelton: Wow, I thought I was nerdy in the computer world. I love it. 

[00:38:59] Paul Barnhurst: And there is a world championship that will be in Vegas this year. I will actually be attending. So if anyone's interested, just let me know. But yes, I'll be interviewing a bunch of the champions. For the podcast. 

[00:39:08] Ronald Skelton: So that, that sounds cool. I didn't, uh, they need to have a small, we need to do that. We need to do a SMB-M&A uh, world championship or something like. All the holdco's com, compete with, you know, good deals they got done. I don't know that Right. I don't know of any other businesses that do that. I mean. 

[00:39:24] Paul Barnhurst: It's pretty amazing to think. Excel is an e sport, right? You just don't, you don't think about it.

[00:39:30] Ronald Skelton: ThAt's really cool. Uh, in the realm that I think all professions should have something to aspire to. 

[00:39:39] Paul Barnhurst: Yeah. And it's a fabulous way to learn. I competed. I got completely annihilated recently. You know, my first time competing, they decided to put me on the live stream with other people and you'll see four names and you'll see one name that's almost, the entire time that was at the bottom.

That would be me. And if you want to hear about the experience, actually just this week's episode on FP& A today is about my experience competing. So we talked about it and another guy did it with me and we kind of shared what we learned and why we think it could be beneficial because the reality is the biggest thing is it helps you get better at it.

Yeah. Yeah. The competition is just to make it fun. Some people love to compete and just about anything. But the real key is it, it forces you to find new ways to solve things, new ways to think through things and you become better in Excel and you become better at modeling. 

[00:40:26] Ronald Skelton: So I'm a very visual person and I'm getting the vision of like you're sitting at a computer with an Excel spreadsheet or something and they just start throwing numbers at you.

Like, you know, here's net profit, here's revenue, here's cost of goods, and you have to build something with it. Well, how does this work? 

[00:40:39] Paul Barnhurst: Yeah, so there's, there's two different ones they do. So there's one called the financial modeling. There's the financial modeling side where they give you a modeling case.

They give you all these assumptions. You got to start building it out and figuring out what the answers are and answer the questions. Then there's the Excel e sports, which is not a financial modeling case. So an example would be one, I just worked out, actually, I just, I studied with the guy weekly. We go through cases.

And so we were doing one called the lumberjack case. And what you got is you got this grid in Excel, where you have five different types of trees. You have a road in the middle and you have different assumptions. Like, okay, it costs $2 per square you travel for transportation. It costs $10 to cut this tree per meter and each tree has so many meters and your production is this. And you'll get questions like, okay, based on these cells, tell me how many places you need to move to get to the road.

So you got to figure out, okay, how do I do a math problem that tells me in every single grid here, how far I am from the road? What's the closest without going diagonal? The next it will be like, all right, well, what's the, uh, profit I would make if I cut all the pine trees? And then it's like, well, what if I only cut the ones that are profitable?

Because depending on how far away they are, it may or may not be profitable. And so they just get harder and harder. You got like half an hour where you got to be working super quick to solve these. So it starts from very easy to basically very hard. And usually there's like five different kind of steps in them.

[00:42:05] Ronald Skelton: You just described hell to somebody who's bad at math. Now I'm good at math. I love math in high school and, and I like math. I almost did a math major for my, my undergrad degree. So it's not me, but I was just thinking I have some really good friends who are really horrible at math and you're just trying to describe like, okay, we're going to take a word problem and give you an Excel spreadsheet and you got 30 minutes to get it.

You know, I think you just described some level of Dante's, uh, I don't know what third tier of hell would be, but that might be it. 

[00:42:31] Paul Barnhurst: Well, you know, if you like numbers or you like those types of things, you can go watch the last one. ESPN did it about a month ago. I think it was on ESPN Ocho or something like that, but, uh, it was elimination style.

So every five minutes they eliminated a contestant based on the lowest score. 

[00:42:44] Ronald Skelton: I'm going to go look for it. Just for morbid curiosity. I, I am a collector of random facts, but one of the things the family says all the time is like, you've got the most random stuff in your head. I like, now I know there's a world cup of financial modeling and I'm going to go watch a couple of USPN episodes just to see it and to experience what that looks like.

Maybe I'll even learn something in it and I could use it. But, uh, yeah, that's, that's the sorry we got sidetracked but uh, 

[00:43:07] Paul Barnhurst: We got they do. But anyway, I, I watch them and I'm just like, You can do that in Excel? I mean, it, it's pretty crazy some of the stuff they do. 

[00:43:16] Ronald Skelton: There's actually, I think even a TikTok, uh, thing where the lady's making high six figures.

[00:43:21] Paul Barnhurst: Kat Norton, Miss Excel. She's a millionaire. 

[00:43:24] Ronald Skelton: Making millions. I was giving, giving her a little bit of leeway there. She's, so she's making millions showing, if I remember it, she's attractive and she does it to music or something or what, but she's showing Excel. 

[00:43:37] Paul Barnhurst: Excel tips. Miss Excel, she, her best day, at least a few years ago, there was an article about how she did 100, 000 in sales in one day. Or six figures, I think is what it said. But, yeah. 

[00:43:48] Ronald Skelton: Yeah. Six figures in a day. The other thing you're a specialist in, and I don't want to totally, uh, overstep is using AI. How is AI going to, the last couple minutes here let's talk about how AI, AI's gonna help financial modelers.

What is it gonna change? And what is it just not, it's just not gonna do? 

[00:44:05] Paul Barnhurst: Yeah, so I mean, I think the first thing with AI in general is, there's a lot of different types of AI, right? I think what everybody thinks of AI right now, all they think about is the language learning model, is chat GPT AI. <Which is horrible.>

Now, AI, those things in and of themselves are not great at math. But code interpreter, which is connected to ChatGPT, can do a really good job, or you can train it on the database where it's pulling back the facts from the numbers. So I think what we're gonna see, you know, initially is we're starting to already see the tools.

I've seen a number out there where they're gonna help, you know, help us write the formulas for Excel. Help us analyze the data if you're using Code Interpreter. I think they'll do some really good job with analysis, particularly when you have them write the code for Python and then you just process it versus you ask them to do the math.

Not a good idea for a language learning model. It's like Dante's Hell, right? For the person you mentioned that hates some numbers. Bad idea. But I think eventually I think the day will come that AI will start writing the models for us. We'll get the basic framework, you know, 80 percent of it can be done by the tool.

But where you're, where the model are still going to be incredibly valuable is, can you help validate the assumptions? Can you be, can you think critically and make sure that what it gave you makes sense? Can you take it from that 80 to the hundred? You know, making those little tweaks that they're just not going to understand because the nuance of this business is different than the last 10 they saw in this industry, right?

Cause they're just, they're parroting. At the end of the day is really what AI does. I mean, a lot of people talk about the intelligence and all that, but it's, you know, it's coding to parrot the information it's been fed and apply it to the context you've given it. 

[00:45:45] Ronald Skelton: You see times in the near future to where things like common tools, like Xero, uh, QuickBooks and stuff like that. They start providing better modeling. I mean, do they even, I bet zero does it's a mid level. Do these tools even provide what you do? Like models for what you do or just on the, 

[00:46:03] Paul Barnhurst: Most, most accounting software and ERPs have some kind of budgeting module. You know, which is a, some of that modeling. You know, I know QuickBooks has one, I'm sure zero does, you know, any of your bigger ones.

But the reality is most people want to go with a dedicated tool. Excel, Google Sheets are the dominant, Excel is the dominant player in the market. 70 percent sheets in general. Beyond that, you have a ton of tools that are now designed for startups. Designed for, hey, a company that doesn't have, a full time finance person to help an owner.

And there are all kinds of different tools out there that people can look at. Everywhere from, you know, $50 a month, on up to big, huge tools that, you know, it could be a hundred thousand plus a year managing a global company. And so the market's extremely crowded at the moment. There's probably 150 plus tools out there.

We'll start seeing consolidation cause it's just, it's exploded the last couple of years. I get, I get hit up. Almost weekly, I learned of a new tool. I'm like, oh, I didn't know about that tool. 

[00:47:04] Ronald Skelton: So when does it become over too much? Is there a point where it's analysis paralysis? Or you just, you're just spending too much time staring at numbers? 

[00:47:14] Paul Barnhurst: Without a doubt, and I think the key is you got, you got to have a framework and a purpose. If you just start digging in for numbers for the sake of numbers and you're an analytical person, you're going to get into analysis paralysis. It's a question of when, not if. And so I think you got to remember, okay, there's exploratory and there's explanatory analysis.

All right, well, if I'm doing exploratory, how long am I giving myself to just kind of play with it and look at things and do I have a purpose? You know, when you're trying to explain something, then you have very much a purpose. Okay, what do I need to know to explain that? So I think having those type of frameworks, thinking about what you're doing and depending on which one it is, putting some limits in place and some focus will help you avoid the analysis paralysis and limiting the amount of data you ask for.

You say, hey, give me everything. Good luck, right? Because if they really give you everything, you're going to be there a while. So think about what do I really need to see? So I think there's definitely some frameworks and processes you can apply to help limit that. It still happens sometimes. I think we've all been guilty of it. I know I have. 

[00:48:14] Ronald Skelton: So last, last two questions, cause we're, we're out of time here. Um, if somebody can remember one thing from the show today about what you do and about, you know, we're in that we're still in the, our customers or our clients, or they're buying companies or trying to sell companies, what would you want them to walk away from the show with?

[00:48:33] Paul Barnhurst: Yeah. So I, there, there's two things you said. So the first would, you know, get it, getting support to help you from a financial standpoint is worth it. 

You need to decide when that makes sense, but don't be, don't think bookkeeping alone is sufficient if you don't understand numbers. And the second is, modeling is about helping you make better decisions.

You don't need to think of it as a black box. I mean, it could be very simple sometimes. But a model is, the, the most common decision making tool in corporate America. There's no reason to fear it. 

[00:49:06] Ronald Skelton: Awesome. Awesome. And then, um, how do, how do you want people to learn more about you? 

[00:49:11] Paul Barnhurst: Yeah. So, you know, obviously the first way LinkedIn, anyone can find me there.

Uh, you just look at my name, Paul Barnhurst, the FP&A guy. That's my website, fpandaguy. com. And then also I have the two podcasts. People are welcome to tune into either of those fpanda today or financial modelers corner. So any of those ways. 

[00:49:28] Ronald Skelton: Awesome. Thank you for being here today. It's been very entertaining and educating. I appreciate your time. 

[00:49:34] Paul Barnhurst: Thank you very much. Appreciate it. 

[00:49:36] Ronald Skelton: Cool. We'll call that a show.