This week I'm joined by Jeremy Hyde, Regional Director of the FD Centre. Jeremy explains cash flow, value, profit, and bottom line, plus why marketers and finance directors can be a perfect combination for a growing organisation.
This week on the show we're going to be talking about what can finance do for marketing. I'm joined by Jeremy Hyde, who is the Regional Director of The FD Centre. They are a company that lends finance directors to smaller organisations. Jeremy, I think there's a huge view amongst marketers that finance is a bit scary, a bit boring, or even worse finance people are there to stop us doing what marketers want to do and be innovative. Is that true?
Absolutely true. Yeah. I've been doing finance for 35 years and I find it scary, boring, I'm not sure about the blocking bit. But no, I should be serious.
I think the problem is that we've... I've met lots of different finance directors over the years, and there are some that are quite, I would call, obsessed with costs and don't really think about the big picture. Whereas there are others that are much more dynamic and they see the big picture and they understand long-term what the business is trying to achieve. And so I think over time, probably it's classic, isn't it, some potentially spoil it for the rest.
I think it's fair to say that marketing and finance do talk different languages.
They do. But I think actually when you get, and I've talked about the different types of finance director that you get, and equally it's the same of marketeers as well. I've met some marketeers in my time that they don't necessarily see the big picture, and they might spend money on advertising and doing activities just to be busy, because they don't really know what they're really trying to achieve.
But if you get a good quality dynamic marketeer who sees the big picture, sees the opportunity, some of these opportunities as well are even before the market starts. And they have that vision and enough vision to actually see what potentially a market could be. If you get one of those type marketeers, and you get one of the commercially minded finance directors together, that is a game changer. And the combination of those two things can lead to anything.
So how does that happen? Is it because that particular marketer just isn't scared of finance?
Yeah, that's a really interesting question. It's interesting because fear, I mean, when start thinking about fear, there's a lot of people that get worried about different things, and they're fearful. And I think you have to understand why people get nervous and are fearful.
And I've given the example of some times where you've got a senior finance director who could frighten the life out of a junior marketeer who's thinking of a great idea. And as soon as they get the cold water poured on them, it's difficult for them to continue with the passion that perhaps they start with.
But with the right combination of people, then those two people can really achieve something that's quite significant. And I think it takes two people in that instance. And the marketeer has the ideas. And it's like any business, any business that's looking to grow ... Any business that wants to grow over the long-term, they're going to need to grow their top line.
And the way to grow the top line is ultimately to grow your revenues either with existing clients, customers, or you look at expanding into other markets with other products and services. But at the heart of any strategy is going to be that long-term market growth and sales growth. Which a good marketeer will have the ideas, have the innovation, the thoughts, and the vision to think about what the opportunities are.
With an FD next to them, and a commercially minded FD who encourages this innovation and helps them evaluate the different ideas, that is the team you need to grow the market.
And what's important here. This fear thing that you've asked me about, that I come back to here, is what happens is, very often is, a passionate marketeer driven by passion, driven by the ideas and the opportunities, and emotion actually, there's a lot of emotion in it, this could be an amazing company. This could be an amazing market if we do this and we do this. And they almost get carried away sometimes on the emotion.
And the FD steps in, and actually says, okay, got all that. But let's just work through this and understand what the real outcome is. Let's convert that into the logic. And I think sometimes getting into the logic and actually saying, well, what does that really mean? How many customers? What's the sales number? What are the costs associated with it? What's the real underlying profit? Once you get into that, and you start to ask the difficult questions and challenge, that's when people start to get scared and worried. And the reason is because they haven't thought it through.
But the great thing about this is by working together over time, and initially, yes, there might be these questions that can't be answered, but that's when you go away and have another think and come back together again. But over time, I've seen it time and time again, that combination of the marketeer and the finance director, they will ultimately find the plan, the solution that's going to change the fortunes of the business.
But the fear, probably Kiran if I was honest there, would probably be because very often if things haven't been thought through, all the way through, and nobody can think about everything, that's the whole benefit of having a second opinion, and a finance director there to go through and ask some of those questions and just tease that out, and stress test it. I think that's probably where a bit of the fear comes from. But it's important that everybody understands that we're all learning.
Okay. So what other phrases as a marketer should I be using?
I think the relationship inevitably, there's obviously some phrases that you can use, and some thinking, and perhaps I can come to that. But I think the key is being prepared. It's the relationship that is the most important. And that doesn't happen immediately. And I think you've got to get used to working together, the FD and the MD working together, and really being quite open at the start and saying, look, what are we both here for? We're trying to grow this business over the long-term. In order to do that, we're going to have to find a way to grow our sales line. So how do we do that? And we've got existing customers, can we increase sales of products and services with them? Do we need new customers? Do we need to go into something entirely new? Perhaps it's a geographical expansion.
I think if you start with the, what are we trying to do? What's ultimately our strategy? What's the end in mind for our company? And then work back from where we are today and identify steps that are going to take us there. And those steps are going to be at some stage growing the top line in various ways.
So if you create the environment that starts with where you want to get to, I think you immediately, and I'm giving some advice to a marketeer here as opposed to a finance director. And I think that's what you meant by the question. If I was a marketeer wanting to really get the FD to help me, I'd kick off with that and say, look, we need to understand what our end in mind is, what we're trying to achieve here. What's the value of the company that we want?
Once we understand that we've then got to work out key steps that take us there. And that will be ... essentially, most businesses are looking at profitability and value at a certain point in time, which will mean a certain level of profit. Once you understand the certain level of profit you need, you can then work out the level of revenue you need.
Go back on that, so you said profit and value, those are not the same thing?
No. So profit is the annual revenue less costs, which gives you your profit for the year. Okay. Value is the value that somebody will pay you for your company effectively. It's what the company's worth. And the worth of a company is usually calculated, very often is calculated by the profit, the EBITDA, which is the profit before interest, tax, depreciation and amortisation. It's usually that times a multiple that the buyer is prepared to take.
So, if for example somebody wanted to buy a company and it was a company that was growing rapidly, it had great prospects for continued growth, enormous potential market. And so, the potential investors would say, this business is going to grow significantly into the future. So we will be prepared to give a high multiple. So, let's assume this is a million pound profit EBITDA company, it's making a million pound a year in EBITDA.
And we think this business is going to grow 10 fold over the next few years. Then the multiple that you would be prepared might be as high as 10 or more. So 10 times the EBITDA of one million is 10 million. If another investor thought, I'm not sure about the future of this business, not sure it's going to grow that much, I think my multiple I'd pay here is about four. So four times one million is four million. So the value of the company, what the investor is prepared to buy the company for, is what I meant there.
So we talked about finding the end in mind, which might be to reach a profit level or a value level. Or was it that I should be aiming for a profit level in order to push the value up?
Yeah. Very often it's value that's the most important really. So, you take a business owner and they're growing their business and at some stage they're ... This doesn't apply to everybody, there's lots of different reasons why people run companies. They might be running a company because they want to discover the cure for an unmet disease need, or they want to help save the environment. So it isn't always financial. But many business owners will be looking for an exit at some point to sell their business. And what they sell it for is effectively the value of the company.
So the end in mind for many entrepreneurs and CEOs is a value in their mind of what they'd like to sell their business for. So they might say, I want to sell this business in five years time, or however long it takes, I want to sell this business for 20 million. And that gives me enough money then to buy my yacht and sail around the Mediterranean or whatever it might be. So that is your end in mind for a finance-led entrepreneur, or an earnings based entrepreneur. I'd like to grow my business and sell it for 20 million in the future.
So what you do then is you say, okay, so the end in mind here is a business worth 20 million in 10 years time, or however long it is. From there, you then say, okay, what's the kind of multiple we think, we believe the business would be. Generally, multiples can move, I mean, we sold a business a few years back at a multiple of 28. I mean, the multiple can be significant. If it's an established, mature business, a multiple of around between four and six is probably quite common.
So, let's go for an average and say a multiple of five. And I want to sell my business in a few years time for 20 million. So assuming a multiple of around five at the time, so you say, I need to achieve therefore in year X an EBITDA of four million. So then you have your EBITDA target of four million.
And that's your bottom line target?
Correct. Yes. That's your profitability.
So then on top of that I've got to add my costs and that gives me my top line, which is my sales.
Exactly right. Yeah.
Thank you, that was really clear. So obviously if I take it to my finance director and say, look, we're aiming for this bottom line or this top line or whatever. I'm suddenly starting to talk in a language that a finance person understands as opposed to the sort of language the marketer might use, which might just be very much more passionate.
Exactly, this is it. Exactly. So everybody's on the same team here, right? The business owner wants to sell the business for a certain level. Hopefully some of the people, the key management team, have got share options in that as well. So they're all batting off the same hymn sheet. So if you can get into that context together, you can then start to work together. And clearly those two people, the FD and the marketeer, are going to be two key players in that journey to achieve the end in mind.
But giving the right context, as opposed to coming and, I've got this great idea, I just need a 100,000 to do this promotion, or I need half a million to advertise, and they talk about what they want to do. And the problem is, what they want to do isn't necessarily explaining why and what the value or the outcome is going to be.
So starting the conversation with let's ... we've got a strategic plan to prepare, right? We've got an end in mind. And I would imagine that that conversation, the end in mind conversation, comes first. That's the management team getting together, the owner, the entrepreneur, the CEO with the team, saying, right, we can do this. This is what we're going for. So, that's where it all starts.
But then the marketeer and the FD, they can work together on how are they going to generate the activity and the ideas to achieve the top lin, that's going to give them the bottom line, that's going to lead to the value that ultimately they all want to achieve.
Brilliant. Thank you. Now, I do want to ask you about cashflow, because it is a standard thing you get. And I understand from our earlier conversation, often the more you're growing and therefore the better you're doing in a way, the worse your cashflow can be. And I've never really understood that. And it is something that marketers come up against regularly.
Yeah. It's one of the paradoxes of the business world. Is that those companies that are extremely successful on sales growth, and are managing to grow rapidly, very often are the ones that run out of cash. You Steady Eddies that aren't growing particularly, they're reasonably flat, not particularly exciting, probably never run out of cash. But those businesses that run out of cash ... Of course, there's going to be these loss-making businesses from time to time. But very often in this sort of early stages of businesses, it's those that are the victims of their own success that run out of cash.
And it is an odd phenomenon to get your head round. And I think the best way to describe it probably is to say, look, when you sell, when you're, when you're selling, and you're growing your business, you actually need quite a lot of cash to fund that growth. And very often non-financiers will think that if my sales goes up, my profits go up. And that's true.
But the issue is that cash flow, which is something completely different to profit, cash flow is the lifeblood of the organisation. Without cash the business can't continue to operate. And when you grow rapidly your sales and related profits, that places an enormous amount of stress on cash flow.
And the way to describe it, I guess, is to talk to you about the working capital story. So you imagine a business that's operating, and they receive an order, a big order for a million pounds. And this might be 20% of their entire sales for the year. They receive this order for a million pounds. Fantastic. A great opportunity. And clearly it is. And that million pounds, when they make the product, sell it to the customer, they stand to make £200,000 profit, which is an enormous amount of extra profit for that company.
We'd all like that.
I think we all would, wouldn't we?
So we're all excited, marketeers the like, and then in steps that black hatted finance director to pour cold water all over our ideas and emotions and the general upbeat that we were before we started.
Now, the issue is with this, you start and say, okay, I've got this order for a million pounds. I need to go and buy the components and raw materials that are going to make this, let's assume, some widgets or whatever. But it applies in service businesses as well as manufacturing, as well as wholesale, retail, whatever it is. You need to buy the products first. The products arrive. Sometimes you have to pay in advance. Other times you don't have to pay till you receive them. Or you can get some credit period from the suppliers and you might not have to pay for a month for example. You receive the goods.
You then have to employ a load of extra people, and it takes time to employ those extra people. And you might, if you haven't planned it properly, you might have already bought the components. And they're sitting in the warehouse waiting for you to get the people in to make the products. Eventually you get the people, you pay them, and you start to make the product.
This is a huge order this, it takes them an extra month to finish the order, get it all completed. And they finally dispatch. So two months later, they dispatch the goods. Now, remember in the first week of the first month, you'd already spent, and you'd already bought the components, which you had to pay for by the end of that first month. And let's assume for this case that for half a million sales value, the materials, classic number, are around 50%. So you've already paid out half a million at the end of month one. You then roll on for an extra month. You're then paying the staff to get the products manufactured.
Things made, yeah.
And eventually you sell. You've finished the job. You've paid the staff. And let's assume you've paid the staff a couple of hundred thousand for that sort of value. And finally the goods get dispatched.
Now, the customer, because the customer, in order to get that order, you had a conversation with the customer and negotiation that said that you would allow the customer 45 days before they paid you. So you then wait to halfway through month four, and finally they pay you the million pounds. And in this case, you've made 200,000 profit.
The issue was, as you can see, for three months, or in fact for three and a half months there, you had to find £700,000. And £700,000 wasn't sitting in your bank account waiting for you to spend it, okay? Most companies don't have that sort of money. This is the issue.
Now I've given you an example here, but as a business grows its sales line, this is happening every day. And eventually the company runs out of the 750,000 or whatever the number is.
And presumably you've got other orders that you're fulfilling, and you've still got to keep paying the staff, and you've got rent and other overheads. Right, that is the clearest explanation I've heard as to why there's a problem with cashflow. And then presumably you go and talk to your finance director and see what you can do to ease the cashflow issues?
This is it, exactly. This is where planning comes in. And it's just like when we were explaining earlier about the marketing strategy with the marketing director and the FD sitting down and evaluating different strategic options.
And sometimes if you've got ... you would hope that most marketing plans are self-financing based on organic growth. And the profits that you make can then fund the next stage and the growth over time. But very often it doesn't.
The example I just gave is more likely to be the reality. And in these cases, this is where you need to look at strategic funding. And it's very much the FD's role to understand, okay, let's work these numbers through, let's put the plan together. So this marketing idea, if we invest in this marketing activity, it will generate this level of sales. We then clearly need to supply those sales, those products, or that service, which will come at a cost. And then eventually we'll be paid for it by the customers. So let's do a cash flow over the course of the three years to see what the funding requirements are going to be.
Once we understand that, the FD can then go out and look at the different sources of funding, there's various sources, there's debt, there's equity. Invoice financing is a really good source of funding when your sales line is growing rapidly. So the FD will look at the different sources of funding, having understood the plan and what the numbers look like, and ensure that the marketing strategy, and effectively the company's business strategic plan, will fly.
Jeremy, that was absolutely brilliant. Thank you very much. I feel like I've had a masterclass in finance there. And I'd certainly be a lot less scared about going to talk to a finance director. That was Jeremy Hyde, Regional Director of The FD Centre. Jeremy, thank you very much indeed.
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