In this unwavering episode, Jon Morris, Founder and Executive Director of The Professional Service Community, shares how you can master your financial numbers to cut through the fog of stage four and lead your business with unshakeable confidence. If you wrestle with unreliable reports, question every spend, and feel blindfolded in your growth, you won't want to miss it.

You will discover:

- How to simplify your P&L into five key categories so you can instantly spot what's driving—or draining—your profits

- Why boosting gross margin through small-i innovation lets you outspend rivals on sales without cutting corners

- How to turn gray decisions into black-and-white wins by letting your income statement be your toughest, fairest boss

This episode is ideal for for Founders, Owners, and CEOs in stage 4 of The Founder's Evolution. Not sure which stage you're in? Find out for free in less than 10 minutes at https://www.scalearchitects.com/founders/quiz

Jon Morris is the Founder and CEO of Fiscal Advocate Inc., a technology-enabled professional services company powered by EngineBI software. Jon founded Rise Interactive in 2004 with $10K. Over the next 16 years, he grew Rise, ultimately scaling it to nearly $40M in revenue before selling the company. Inspired to help other entrepreneurs avoid the pitfalls he experienced, Jon created Fiscal Advocate to provide professional services to CEOs that give them the financial clarity they need to grow profitably. The company provides accounting, financial planning, analysis, and advisory services, along with proprietary software that surfaces critical financial insights.

Want to learn more about Jon Morris' work at The Professional Service Community? Check out his website at https://www.fiscaladvocate.com/

Connect with Jon Morris through his LinkedIn at https://www.linkedin.com/in/jonmorrisramsayinnovations/

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Founder's Quiz

Hello, hello and welcome. Welcome once again

to the Start scale and succeed podcast. It's the only podcast

that grows with you through all seven stages of your journey. As

a founder, I'm your host, Scott Ritzheimer, and I want to talk

to those of you, particularly all those founders in stage

four, yes, the disillusioned leaders who might actually be

trying to fight the fight blindfolded, especially in the

critical area of your financials. And what I mean by

that is you're probably getting a P L every month. Hopefully, if

it's on time, you you probably have a dashboard or some

spreadsheets or something. But all those spreadsheet sheets

that seem to work when you're smaller, they're now moving to a

full time job to maintain, and you don't know if you actually

trust them, but you don't know what else to do. And so today,

our guest has built his company to nearly 40 million. Discovered

the difference between founders who scale and founders who stall

comes to whether or not they can really manage by their numbers.

This is John Morris with us here today. Who's the founder and CEO

of fiscal advocate Inc, a technology enabled professional

services company powered by engine BI software. John founded

rise interactive in 2004 with $10,000 and over the next 16

years, he grew rise, ultimately scaling it to nearly 40 million

in revenue before selling. The company inspired to help other

entrepreneurs avoid the pitfalls he experienced. John created

fiscal advocate to provide professional service services to

CEOs that give them the financial clarity they need to

grow profitably. The company provides accounting, financial

planning, analysis and advisory services, along with proprietary

software that surfaces critical financial insights. John,

welcome to the show. Glad to have you here. I'm really

excited to dive into this topic, because it's one of the ones

that I think creates some of the most insecurity and and just

weird stuff inside of a business, but also between the

ears of the founder. And what I want to do is talk through for a

founder in this stage, trying to grow, trying to make sense of

what's going on, probably struggling with profitability.

What are the numbers that they tend to look to, and what are

the numbers that they should actually look to?

Yep. So you mentioned the income statement.

The income statement has all the insights you really need if you

have it organized the right way and know how to read it

properly. So in every industry, there are benchmarks, and it's

critical to learn the benchmarks of your industry. So I'm going

to talk a lot about the professional service industry,

because that's my space and my domain, the best of the best,

like in terms of performance, is 20% year over year, revenue

growth and 20% EBITDA is 20% profit. So that's just the

starting point. Now there's a whole bunch of numbers in

between there, right? So you got revenue and you got profit, and

then you have all these expenses. And so what you want

to do is organize those expensive and I'm going to give

you the five major categories that I believe are really

important. So the first one is your gross margin. It is

amazing, but how many people I talk to have no idea what their

gross margin is, or their income statement cannot tell you what

their gross margin is, so I'm just could explain it to

everyone real quickly. I've probably put everyone asleep

already. Since we're talking about finance,

I actually want to pause you real quick,

because this isn't something to fall asleep. I love where you're

going with this, because one of the things that's so challenging

for folks is that they're getting these statements, and

they've got like, 100,000 lines on them, yeah, and no one can

make sense of that, and so they see that and think, Oh, I'm just

not smart enough, or oh, I don't have an MBA, or oh, I don't. And

it's like, no, that's not true. It should be this simple. Now,

there's nuance to it, and there's digger, there's deeper

that you can go. But for folks listening, this is really

important, you should have something like these five major

categories. And I love exactly where you're going with it, Jon,

and just to take that a step further, and then

you can drill down further, yeah, okay, so I'll give you an

example. One of the categories is your expenses as it relates

to your back office. So I call it operations and finance. So

but then you can drill down further. And you can see HR,

legal, corporate, it general, admin and finance, you can break

down to five categories under that category. So the idea is

that when you look at your income statement, you want it to

be as few rows as possible, because oftentimes that's just

filling up the page with garbage. And so I couldn't agree

with you more. So I'm going to start with explanation of gross

margin, because this is honestly one of the most important

numbers. Yes, it is, after you deliver the product or the

service that you've been hired for, how much money is left

over, and what is that as a percent of your revenue. So I'll

use it in two different categories. The first one is you

sell pencils. You sold a pencil for $2 and you bought it for 50

cents. So you have $1.50 after selling the pencil $1.50 over $2

is 75% so that means you have a 75% gross margin. In the world

of services, you have hired employees to do work for the

client. You've licensed technology you might have

travel. So when you take whatever your revenue is minus

all of your costs, let's just say you're a $10 million

company, and you spend $6 million to deliver for the

customers, you have 4 million left over. That means you have a

40% gross margin, 4 million divided by the 10 million in

revenue. Now the reason why this number is so important, before I

get into the other ones, is because if you can continually

figure out how to improve your gross margin, it means you have

more money left over to either put in your pocket or to invest

in your business. And so that's metric number one in this

middle. So you have revenue, then you have your cost of goods

sold, and then you have your gross margin. So you have to

have those three numbers. After that, you have what is called SG

and a, and it's a very fancy term for all of your expenses

that don't relate to the product or service that you sold, so

your sales and marketing, your back office, operations and

finance, your executive team and R D. Now in every industry,

there might be some nuances, but for 95% of your listeners, those

are the four major categories you need, and those are the

major drivers of your business. And then after that, you have

your profit. So you take your gross margin, or your gross

profit, minus all of your non, you know, client or product

related expenses, and that gives you your profit. So that's the

starting with the simple part. Now, as I mentioned in each

area, there is a benchmark, so I'll just give an example. In

the professional service industry, 8% of your revenue

goes towards sales and marketing. That means half the

companies are spending less than 8% and half the companies are

spending more than 8% and so, you know, as you mentioned, you

know, in my bio, I grew this company from $10,000 to almost

40 million in 16 years, just knowing my gross margin as a

percent of revenue and my sales and marketing as a percent of

revenue, and the benchmark gave me a major edge. And here's why

I wanted to have a massive advantage in spending sales and

marketing as a percent of revenue relative to my

competition. So if I know that the average is 8% I'm going to

try to spend 16 to 20% of my revenue in sales and marketing.

Now clearly, if I'm a $35 million company, and there is a

$10 billion company, you know, I'm probably going to be

outspent in that area. You know, their marketing budget is just

going to be much larger. But most of the people I was

competing with were either my size or smaller. And so I was

able to have the bigger booth at the trade shows. I was able to

submit to more awards and get more recognition. I was able to

have a team dedicated to search engine optimization. So that's,

you know, you know, one big, massive focus. Now, in order to

do that, you have to figure out, how do you fund this? And if you

can fund it by improving your gross margin without reducing

the quality of your work, you know, so if you're, I'll go back

to the pencil example. You can't sell, you know, a crappy pencil.

You know that you bought for five cents as opposed to 50

cents, still got to be the same quality. But you start thinking

about, you know, how do you deliver? You know, it constantly

improves. So we at rise. We spent a lot of money on

innovation. One of the things that we spent time on was we

would time track every single task, and we would aggregate it

be like, okay, so if we automate this, this is 1000 hours worth

of time every month that we don't have to have humans and

pay for them to do it, we'll have technology do it. And then

the other part is, once you have technology do it, your error

rate goes down, the client's experience becomes better, and

so you actually get better retention and better gross

margin, both at the same time.

Jon, here's what I really like about that,

because a lot of folks listening are highly, highly innovative.

They're founders. They started the thing from nothing, created

something out of it, super cool. But so often we mistake

innovation as kind of up and out, like it's the next product

or the next service or the next big thing or new market. Market

or something like that. And what you're talking about, especially

at this stage, is the ability to harness some of that creativity

and point it in as well and say, Hey, how can we innovate to be

more efficient? How can we innovate to lower our cost of

goods? So I really, really like that. It's a subtle shift, but

it's an important one.

Yep. So what you're talking about is what I call the

difference between innovation with a capital I and innovation

with a lowercase I, yeah, and I tell people to put a lot more

emphasis on a lowercase i innovation, meaning we're not

going to go invent the next iPad or the next self driving car.

You know, we are going to invent improved Client Onboarding and

yeah, so that's kind of the idea behind it.

Yeah, I love that. I love that. So I really

like, just to recap this, I really like this idea of

simplifying the income statement, the PnL, down to

those five big categories, and then you can drill down into

five categories within that. I think that's really important. I

love the idea of focusing on gross margin and that small i

innovation to drive it so, so important at this stage, I'm

wondering. I'm wondering you, before we get to it, there's a

question I asked you, I was going to jump to it, but there's

something that I think is really interesting. You talk about gray

information, and I'm wondering if you could just describe that

for us and tell us why it's such a big deal at this stage.

Yeah, if you think about every decision we make, we

are taking gray information and making black or white decisions

with typically black or white outcomes. So for example, you

know, I want you to invest in sales and marketing. I want you

to have an advantage relative to your competition, that you're

spending more in sales and marketing than they are for the

company's exact same size of yours. But that doesn't mean

you're gonna spend the money well, you know, if generating

leads was easy, we'd all not be complaining about, how are we

gonna go generate our next lead? So, you know, you have to make a

decision. Am I gonna go invest in digital media and spend money

on media, or am I going to go hire a salesperson, or am I

going to go sponsor a booth? And so you have to make decisions on

what you're spending your money on. And so that's my actually

favorite part of business, is we all have to make decisions. We

all have gray information, meaning we don't know what the

outcome is going to be, but the outcome is generally black or

white, like your company is either growing every single

year, or it's flat, or you're losing money, and so you can

tell over time. Actually, I tell people the income statement is

your boss, and it's a very objective boss, because it will

tell you if you're performing well or not.

Yeah, yeah, I love that, and it's a hard thing

to grapple with when you're used to just kind of like, maybe

it'll work, maybe it won't. You kind of get to control whether

or not it was a success or not. Getting used to the space of

really leaning into the numbers and looking at those black and

white results can be a hard switch, but I think it's a

really important one, especially when a founder is trying to

orient the team in the right direction, right when we're all

trying to work together. John, there's a question that I have

for you that I ask all my guests. I'm very interested to

see what you'd have to say. But the question is this, what is

the biggest secret that you wish wasn't a secret at all? What's

that one thing you wish everybody watching or listening

today knew?

So I'm going to give you two things as opposed to

one. The first one is, don't worry about the exit. Just build

a great business. And the second thing is, really focus on making

it so that whatever product or service you're selling is

actually better than the sales experience. So if you deliver

something where you know, because you're always going to

put your best foot forward, and then someone gets the product or

the service like, holy crap, this is incredible. So much

better than I even thought. You know you're on to building

something special.

Yeah, so good. And I love that you've shared

that, because it balances out. What we're not talking about is

just cutting cost of goods sold. By just cutting cost of goods

sold, we're really looking at ways of providing a better

service, a better product, in a more affordable way for the

company and everything that allows. So I love it. I love it.

Now, John, there's some folks listening. They maybe they're in

professional services. Maybe they're interested in we haven't

even talked about the role of software on all the list, but

that's a big part of what you do. Where Can folks who are

listening today find out more about you and the work that you

do?

There are several places. First of all, you can

follow me on LinkedIn. I post every week, so please connect or

follow you can go to fiscal advocate.com we have a great

resource section there, and you can send me an email, J O N at

fiscal advocate.com I'd love to hear from you.

Fantastic, fantastic. Well, Jon, thanks for

being on the show. It really was a privilege and honor having you

here with us today. Yeah. Appreciate it. For those of you

watching and listening, you know that your time and attention

mean the world to us. I hope you got as much out of this

conversation as I know I did, and I cannot wait to see you

next time. Take care.