The Path to Profitability


00:06 Hey, everyone. Welcome back to another episode of Boosting Your Financial IQ. Today, I’m going to be talking with Kristian Marquez. He is the founder and CEO of FinStrat Management. And we’re going to be talking about how to grow a company’s profitability. So I’m excited to jump into this episode because there’s a lot of good stuff that we’re going to be covering today. So Kristian, welcome to the show. Steve, thank you for having me.
00:31 So share a little bit about your background. How did you get into the world of strategy and finance? Is this something that you kind of fell into? Or when you were a kid riding around on your bike, you know eating popsicles, you said, “One day, I’m going to go into companies and I’m going to help them be more successful financially and just help them with their overall strategy.” No, it wasn’t that well thought out. So I did my undergrad in engineering, and so I always had a love for numbers.
01:01 But then after I got out of the service, I knew I was not going to be an engineer, but still wanted to take advantage of my math skills. And so I’m sure many professionals decided to pursue a career in accounting, finance, and investment analysis. And so within the industry, it’s equivalent to an MBA, but there’s a professional designation, charter financial analyst, charter holder, or CFA.
01:30 And pretty intense exam. Three parts takes three years. Pass rates are below 50%. It’s international in scope. But I passed, ended up getting hired as a financial analyst and was building on having served in a host of accounting and finance roles. Ironically, though, 2004, when I got hired, right after I got the license, I was three years into a nine-year stint where the president and CEO of the consulting shop saw an opportunity in healthcare IT and pivoted the group.
02:07 It had to do around Medicare modernization and ultimately Obamacare. Turns out it took on a tremendous amount of responsibility over that time. Vice President, General Manager, had to oversight about a third of the company’s top line, about 100 million-plus. And it was a great marriage between leadership and just understanding how a business ticks, understanding margins, understanding spend.
02:37 And from there, it snowballed. Now, I kind of joke when I bring this comes up. Healthcare kind of picked me. I don’t have a healthcare background. I had to teach myself, and it worked out well. But when it was all said and done back in January 2017, after a brief stint with a telemedicine startup, we closed the doors. I’m happy to talk about that as well. I decided to come back to my accounting, finance, and investment routes and start FinStrat Management.
03:08 Originally, serving as a fractional CFO, working with founders. In fact, predominantly, B2B SaaS companies venture-backed assisting them monetize their business, whether it’s a debt facility, price equity rounds, or sales of their companies. Fast forward, almost it’ll be seven years in Q1. I serve as a more traditional corporate role as CEO, but generally very grateful.
03:36 We work with dozens and dozens of founders today. We employ a host of fractional CFOs who work with them to include a whole host of other accounting and finance staff to effectively mimic an in-house team. That’s nice. And I’m sure you get a lot of exposure to a lot of different companies. So this is what I want to kick the episode off with, and we’re going to dive into all these different questions. Here’s a trend that I’ve been noticing. And it’s nothing crazy that other people haven’t noticed as well, but let’s just talk about this.
04:07 With COVID, okay? So COVID hits. Businesses get shut down. The government’s like, “Oh, my gosh, we can’t fall into a massive depression.” So they start printing a bunch of money and handing out to businesses. And during this time, through PPP loans and other tax incentives and other programs out there, these companies were flooded with cash. And they had this cash. And really, this cash helped them to pretend, a lot of them, that they had a business, a business that was more solid or more profitable than maybe they actually were.
04:40 Now, the pretend money is going out the door, and these companies are starting to see higher borrowing costs. The economy is changing. Consumer spending is changing. And now they’re like, “Wow, I got to come back to my business, make sure my operating model is solid, make sure my pricing structure is good, make sure my customers are really bought into my products and services in order to survive.” So I think a lot of businesses are waking up to this need for greater financial intelligence or just a better focus on their business.
05:12 What are your thoughts on that, Kristian? Yeah. So you know if you think about money and strictly in terms of supply and demand, if there’s a tremendous amount of supply, your perspective’s different if there’s not a lot of supply. And so, yes, the payroll protection plan loans that many businesses received definitely had a hand in it. But I’d say more so it was low interest rates.
05:43 And so you know if you look at traditional portfolio management, return is one thing, but so is risk. And so any financial planner, whether they’re working one-on-one with an individual or they have a corporate CFO hat on, understands it’s not just about making money, but you have to understand in the context of which time horizon and how much risk you’re willing to take. And for a very long time, a yardstick or benchmark, if you will, is what is the government paying on a 10-year treasury?
06:16 The idea being that your counterparty risk is almost zero because everyone expects the government to pay. If you can earn more than that, great. But why would you enter into an investment where you’re not guaranteed to at least earn what a 10-year treasury is paying? And so with the federal government keeping interest rates near zero, what happens?
06:39 People take a lot more risk because they’re trying to look for a return and they’re looking for the open markets, whether it’s trading stocks, buying real estate, or investing in early-stage businesses, which is important to note because there is a tremendous amount of risk in cutting a check for someone who’s trying to figure out whether or not the business they started is going to have a bit of longevity. And so that changed. So Fed starts raising rates in March of last year.
07:10 And now on the open market, 10-year treasuries are trading at an over 20-year high. Call it almost, what, 5% in the last couple of days. And so if you think back to the explanation I provided, people are now asking the question, “Well, if I can at least earn 5% of my money by buying a 10-year treasury, you know why would I invest in something that has the potential to yield less or invest in something that can make me more but just give me a tremendous amount more risk when 5% is a decent return.
07:43 And so really, I think that’s the lens or that’s the set of circumstances that’s impacted not only how founders are thinking about financial discipline. It’s also the circumstances that investors, whether they’re venture capital or their investors, otherwise known as limited partners, are looking at cutting checks. So I’ll finish it by saying, “Absolutely a bit more disciplined amongst our clients.
08:15 And if there’s no shortage of articles, it’ll tell you that venture capital is having a more challenging time raising capital. That’s not to say they’re not. They are. There are a lot of fantastic investors out there, but there’s probably consensus that it wasn’t as easy as it was before the Fed started racing, right? Absolutely. Yeah. So now companies have to be more disciplined. They have to look at their cash flow. Now they’re looking at their bottom line more. We’re back in the day. I mean, I was working for a FinTech, and you know Prof Building didn’t matter.
08:44 I mean, it’s just like, “Here, we’re just going to give you a bunch of cash. Prof Building doesn’t matter. Just grow the top line.” And you know it’s just kind of crazy, wacky economics there. So let me ask you this. Let’s talk about profitability specifically. What strategies have you seen in your practice in working with these companies? What strategies have you seen that work consistently to drive higher profits for organizations? In simplest terms, it’s a plan.
09:08 And so the analogy I like to use is that if let’s say your end goal is to sell your business, to undertake the endeavor without a plan would be the same as me saying to you, Steve, go build a house. Well, you’d say, “Well, I need an architect.” Well, it’s the same concept. We wouldn’t go off to lay a foundation or put framing in place unless all of the involved parties knew exactly what we were working towards. And so business is the same. It generally takes the form of a budget and then subsequently a forecast.
09:40 And so budget, now you hear people talk about Q4 being budget season for businesses that are on a typical calendar year, fiscal year. You know You’re basically laying out in writing a set of expectations around revenue and expense. And then as the year unfolds, while you’re working on your plan, you’re also assessing your performance against that budget. So this idea of a yardstick is really, really valuable in getting towards profitability.
10:10 Because you know if you’re not disciplined or if you see another shiny object, you run the risk of winding up in a position where you’re close to running out of cash or running out of cash because your plan didn’t account for the decisions that you’re making. And so the other part of the budget is the forecast. And so the budget is looking is answering the question, “What took place relative to what we were expecting?” And the forecast is then saying, “All right.
10:40 Well, we know circumstances change. We don’t live in a static world. Maybe we had a feature or function that’s resulting in more sales, or maybe we lost a key employee, fill in the variable, there are changes. And so we’re updating our future expectations, whether it’s for the remainder of the year or the next 12 months and answering what if. And that what if is very valuable.
11:10 And so I’ll give you a little bit in the weeds of how we do this. But if you think of a P&L, so there’s revenue, cost of sales, and then operating expense. Revenue is going to be a function of existing clients, expansion, churn, right? So the ability to sell more to the existing base, factoring any loss because clients purchase less or because you lose clients. But then layering on top of that, your pipeline.
11:37 And so you know my presumption is that every business has someone who’s selling, whether it’s direct or indirect. But having a good handle of what that looks like enables you to pull it into that forecast. You want to probability adjust it because just because there’s a deal in the pipeline doesn’t mean it’s going to close. You also have to factor timing. But once you get a sense of what the profile of future deal flow looks like, you can now start to back into what are my cost of sales going to be?
12:11 You know Do I have a product? If so, what’s the expense associated with that? How much am I devoting to sales and marketing then? What’s my general administrative or just underlying infrastructure? By having structured all of this information, you can start to get to your bottom line of what net income is going to look like in the next quarter, year, 12 months. And I’m not suggesting that a forecast has to be perfect because time is the enemy.
12:41 You still got to pay people. Expenses going to be incurred, but it really starts to kind of get back to building the house. You know It helps answer the question. If I’m not already profitable, am I on track or if I am profitable, I’m going to stay that way. The last part I’ll add, not with any of the structure of what I described, is this concept of benchmarks. And so I’ve always been a fan of someone says, “Well, hey, you know my sales and marketing is 20% of my spend is 20% of revenue.
13:12 Is that good or bad? I don’t know. Are you paying too much or are you not paying enough?” And so I’d encourage anyone in the C-suite to have an answer to that question. There’s no shortage of free resources on the internet that you can look for to see, depending on what industry or business model you have, how much do people spend on OpEx? What is a good gross margin? And I encourage our fractional CFOs include that in their conversations.
13:43 I would tell any founder or anyone in the C-suite to ensure that they have a handle relative to what they’re selling and factor that into the conversation because you can say, “Oh, I’m going to go gangbusters. And I mean, I’m going to devote 50% plus of our spend to sales and marketing.” Well, there’s a reason why everyone isn’t necessarily doing that. And if you do it, you know you better have demonstrable ROI for new business.
14:12 And so, yeah, I mean, I would say foundationally, it’s what I just described, budget forecasts, and then just factoring in a bit of guardrails in the form of benchmarks. So I think that’s a great story. And I agree. You know Companies should have these tools in place and understand their financial position and where they’re heading into the future. Okay. So now that they have this, I mean, that doesn’t necessarily drive profitability in itself. I mean, creating a budget.
14:40 Like I know I’ve created a lot of financial models, and I always joke that in a budget, really, the plug is revenue. So you can build a budget, build out your costs, and you know that’s the easy part. And then to make the bottom line, whatever you want it to be, just change your revenue. And that’s where companies come up with these wild forecasts like, “Oh, yeah, we did you know 2 million last year. We’re going to do 10 this year.” And it’s like, “Okay. Well, how are you going to do that?
15:06 How are you going to grow the top line to 10 million?” It’s like, “Well, I mean, we’re just going to go out there and do a good job, and we’re going to just work really hard.” And it’s like, “That’s not a strategy.” Wave my want. Yeah. So yeah. So talk to me about this and talk to the listeners about, “Okay. Great. I got these tools. I see my bottom line. Okay, now, but how do I actually grow profitability?” Let’s take a quick break. All right, I have to interrupt the show, but I’ll be super quick.
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16:35 Now, back to the show. So I think it’s important to distinguish between two concepts. One, profitability, meaning what’s revenue minus expense, and then top-line growth, which is going to impact how much money or not that you’re making. So let me just start. I’ll work from the top down.
17:00 From where I sit, anyone who’s got a product or a service that they’re selling should have an understanding of what market they’re in, who their buyers are, what problem you’re looking to sell. And then from there, whether it’s a founder-led effort to close deals and/or team, understand that once you know how much you’re going to spend, you know there’s a lot of iteration that takes place. You know So I can just talk from my personal experience.
17:30 We use a combination of indirect and direct sales efforts, but we’ve cycled through a whole host of different tactics to see what they would yield. And what we realized, you know sometimes ads don’t work. We’re not getting any hits, so why would I continue to spend money there? And so you know obviously, it’s difficult for me to speak to any one business because I do feel like it’s different. But I do think there is one overarching theme that I have learned that is core to any business gaining traction.
18:00 It’s this concept as the founders are the best people, at least in the beginning to close deals. As compared to what I see happening a lot is a founder of C-suite going out and hiring a VP of sales first, thinking that that individual is going to drive your revenue assumptions. And not to say that they aren’t competent. There are lots of competent VP of sales, but it’s a little bit of like putting the cart before the horse.
18:28 You know Really understanding the role of the vice president of sales, it’s more to close deals and manage a sales team. And so I do think my very strong opinion is that founders should hone their messaging first, be satisfied that they can be consistent in closing deals, and then go out and hire two account executives and confirm that it can be reproduced and then hire VP of sales. Now, as far as expectations about how much someone should be closing, kind of going back to benchmarks.
18:58 I mean, you’re right. If someone thinks they’re going to go from a million to 100 million in a year, it can be done. I mean, OpenAI’s ChatGPT is a great example or a good example of how it’s feasible, but they’re the exception. Yeah And so really, it comes back to, “All right, well, what’s a reasonable expectation?” And again, depending on what you sell, but I’ll use B2B, SAS as an example.
19:26 If you can have new sales of 5% month over month, that’s a great new sales percentage to hit. Obviously, there’s the law of small numbers. So if you’re first starting out, it’s going to be larger. But depending on the size of the business, it’s really going to go a long way of what those expectations are. And if you go back and you look for those benchmark resources, you can absolutely get a sense as to what somebody’s expectations should be. Okay. Let me ask you this.
19:56 I mean, because basically what you’re saying is, okay, one strategy is to improve the sales effectiveness of the organization, and that can be done in a number of ways. And I think that’s really good, and that’s true. Let me ask you about pricing because, obviously, with inflation, that’s a big deal. How important is pricing and getting pricing right for owners, founders, CFOs of organizations? The answer is it depends on what stage the company’s in, and it depends what you’re selling, and it depends how mature your space is, i.e., how many competitors are there.
20:29 All of that said, I do think there are also rules or not absolutes, but definitely guidance I would provide anybody for purposes of this conversation. In simplest terms, charges absolutely as much as you can. I say that because I’ve learned there’s two types of buyers. There’s price sensitive and value sensitive. So in all things being equal, we want to build a business on selling to value-sensitive versus price-sensitive people.
20:58 And so price-sensitive, no matter what you sell, they’re always going to ask for a discount or less. And if I were to again, it depends on the business, but presuming your business is not dependent on volume. Let’s use Amazon transactions as an example. If your business is not dependent on volume, if you’re competing by lowering your price, well, what point do you stop?
21:24 And you still have expense as compared to someone who is value-driven. Well, you know what’s the mindset of someone who’s going to buy from you because you make their life faster, better, cheaper? It’s because you’re generating a return on whatever it is that they’re spending. Yeah And so the mindset of the business should be, “How do I provide the absolute best product and/or service?” And by adopting that mindset, what I found, it puts you in a position to charge more.
21:58 Now, obviously, the question is, well, what do you charge? Well, it goes back to exactly what I said before. It’s like, well, okay, well, what is your cost of sales? That expense that you’re going to incur every single time you close a deal. You know If you’re doing professional services, you got to pay people. If you’re selling software, you’re going to have cloud hosting, maybe commissions. Knowing the answers to those questions are invaluable. And then you have to look at your infrastructure and what it takes to run your business. But with those answers, you can then start to back into a starting point.
22:28 But you can also reference other competitors. Yep. Absolutely. All things being equal, I generally default to charge a lot because it’s also a lot easier to lower your prices than it is to raise them, even if you’re wrong and you got to come down. Yeah. Well, and I think it’s important in what you’re kind of alluding to as well is you know when value exceeds price, people buy. When price exceeds value, people don’t buy. So what most people do is that they’re not demonstrating the value.
22:59 Either they don’t have the strategy in place. They don’t have a solid go-to-market strategy. They’re not going after the right ideal customer, whatever it may be. The product may be flawed, their service, you know there’s quality issues. And therefore, the value is not being demonstrated. So the value is lower than the price, the perceived value, so customers aren’t buying. So then they discount their price, which has a major impact on profitability. So I always tell companies like, “Yeah, I agree with you.
23:25 You should be charging commensurate with your value.” So you know if you’re delivering a lot of value, you could charge a lot for your price. But you’re not going to go to a Motel 6 and be able to charge per room what you know the JW Marriott charges. Totally different experience. Totally different delivery. Totally different quality. But that’s the perceived value. But I am going to pay that for a Motel 6 because I know that the value is going to be lower.
23:52 I have my expectations already set if I want to stay in a discounted place like that. So I think that’s really important to businesses. It’s like one of the best ways to increase your profitability is through price premiums. But you can’t just get there by raising your price if you don’t do the work on the back end, kind of like you’re alluding to with this other stuff. Otherwise, you’re just going to lose customers. You know Unfortunately, I agree. And unfortunately, I never bookmark it. But about 10 years ago, I came across a white paper that some researchers did by looking at the most profitable companies in the S&P 500 over the preceding 50 years.
24:26 And they looked across every single industry, every subsegment. And they said there was only one variable that they found across every single most profitable company, and that was pricing. Interesting. They were all considered premium pricing or service providers product offers in their space. Yep. Absolutely. That’s a good point. So let me ask you this. What about the reverse side? Are there strategies or things that companies are doing that really hurts their profitability?
24:55 Like Are there any trends that you see where like, “Dang, every time they do this or because they’re doing this, they’re really leaving a lot of money on the table.” Yes. So earlier, you know if you think about earlier, you heard me reference expansion and churn. Expansion is when you have an existing client and you sell more to them. And so you know a little bit in the weeds, but one of the metrics that we measure is customer acquisition costs.
25:26 How much does it cost to acquire a client? There are other metrics that we look at. But if you think about there is expense associated with acquiring a new customer. But once that customer is acquired, notwithstanding customer success, which is business-dependent, because you’ve already spent that money, technically, there’s a higher ROI if you can get that business to spend more or that customer to spend more.
25:51 And I think that’s really important because, obviously, it’s dependent on the company and what it is that they’re selling. But if someone’s already a customer, and you can figure out how to give them additional value beyond what they originally purchased, you can improve your margins because you don’t have to concur that same amount of expense.
26:12 And so I absolutely encourage any single business to answer the question, “All right, now that they’re a customer and you have your core offering, are there add-on services that you can offer?” And I mean, that can take a lot of different forms. I mean, it could be you know if you’re selling informational products, maybe it’s another newsletter, access to another podcast. If you’re selling software, you know maybe they start with the introductory tier.
26:41 And then once you see how much they’re using it, you say, “I’ll give you access to the second tier,” and they now are spending more. I mean, I think the limit is your imagination relative to how well do you understand what problems you’re solving for your clients. But yes, absolutely. Expansion is a very big deal, especially if you think about it. So in my world, one of the things we look at is not only churn, but net churn.
27:07 So if we subtract expansion from gross churn and expansion is greater than churn, i.e., the amount of money that you’re making from your existing base exceeds the amount of money that you’re losing. Arguably, your business still grows even if you don’t make an additional sale. And if you think about that, that’s a great business so that when you see a slowdown because interest rates are going up, the potential exists to still grow because whatever problem it is that you’re solving, you’ve positioned it in a way that you’re not dependent on acquiring new business, which is great.
27:43 And so yes, a long way of saying, big fan of get someone in the door and then figure out how you can add more value for them and charge for it. Yeah. That’s great. Well, this is great. You’ve provided a lot of great insights here. It’s time to wrap, Kristian, but I appreciate you being on the podcast. This has been a great discussion about a company’s profitability and more. You know We talked about strategy. We talked about forecasting and budgeting and knowing your numbers and a lot of different topics that all intertwine into this very important discussion about profitability.
28:14 So Kristian, thank you for being on the show. I really appreciate it. Steve, my pleasure. Thank you for having me. And for everybody who’s listening, if you go to and you go to the guest page, I’m going to have a guest page for Kristian Marquez. Once again, he’s the founder of FinStrat Management. I’ll have a page for him with his bio, with his links if you want to learn more about what Kristian’s up to and how to get in touch with them. So thanks again for tuning in. Thanks again, Kristian, and cheers, everyone.
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