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SDS 80 | Executive Forecasting

 

Budgeting is a very important component of every business, yet it is often overlooked. Dr. Paul J. Pavlik has seen this problem as a businessman and an analyst of healthcare practices and other entrepreneurial businesses. Giving fresh insights, Dr. Pavlik talks about something that has never been discussed – the importance of financial acumen to creating a disruptive business. He believes that a business must be salable at any point in time, therefore it is important to know the numbers. He also touches on the need for leaders to have financial reports in order to have a forward view. This executive forecasting helps answers the two important questions of today’s business: “what if” and “what next.” Dr. Pavlik shares an approach that will help put together the budget and the forecast.

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Executive Forecasting For Sustainable Growth with Dr. Paul J. Pavlik

My guest is Dr. Paul J. Pavlik, who I have known for more than two decades. He is a magnificent businessman, an analyst of healthcare practices and other entrepreneurial businesses and at one time he was a very successful dentist. He published his new book, Business Essentials for Healthcare Practitioners: How to Operate a Sustainable, Profitable, and Salable Practice or Successfully Work for Someone Else. Welcome, Dr. Paul.

Thanks for inviting me on your show. It’s a pleasure to talk to you.

I’m glad to have you on the show because we’re going to talk about something we’ve never discussed on the Selling Disruption Show. That is the importance of financial acumen to creating a disruptive business.

I’ll introduce it by saying that all businesses go through life cycles like we, as humans, do. Whether you’re preparing for a career, launching a business, growing a business, making your business the best it can be or getting ready to sell your business, what you do in each one of those life cycles is very different and important.

When you’re launching a practice or any entrepreneurial business, you have to find customers first. If you’re getting ready to sell your business, you want to make sure that it is as profitable as possible so that you get the maximum amount of money for your business.

Your business must be salable at any point in time. Click To Tweet

You want to be profitable at all times, you also want to be able to sell that business at any time in case a crisis occurs.

Let’s talk about that to begin with. One of your tenets, which you taught me, is your business must be salable at any point in time. It matters not whether you own the business or if you’re looking after a business unit of another corporation. The business always has to be salable. Why do you say that? Why is that so important?

It’s because of personal experience. I was in dental practice for 25 years and I was at the top of my game. I was seeing patients from all over the United States and some patients from Europe. I was well-respected. I was making good money. I was happy in what I was doing and then all of a sudden I had to go in for some surgery. A week later when the doctor was taking out the stitches, he said, “You’re done.” I was not allowed to go back into practice again and work on patients.

It wasn’t done with the surgery, it was done with your career?

I’m done with my clinical career. I had to make a decision on what I was going to do and I had nothing in place to prepare me for selling my practice. Luckily, the practice was doing very well. It was a little more marketable than somebody that hadn’t prepared the business to do well. That helped out a little bit, but I made it a point that as I went into the coaching business for other businesses and other healthcare professionals, that I would not let that ever happen to them.

SDS 80 | Executive Forecasting

Executive Forecasting: To be successful, you have to have your business operation going in a way that you know where it’s going.

 

It’s important to understand that at any point in time, we as the executives, the founders of our companies, as the high-level managers of the companies we work, something can happen to us. Whether it’s a health disruption or an accident or even a personal situation, we have to step back from the business. We have to, at all times, be able to liquidate and reap the rewards of all the work we’ve done and pass it on to somebody else. All businesses come to an end. We want to make sure our business is in the perfect shape. Here’s the important part. It ends up that if you have your business in a condition to sell and it is operating at peak efficiency and maximum profitability.

To be successful, you have to have your business operation going in a way that you know where it’s going. You know where the business part of your business is going. You need to have a roadmap to better understand that business part of your business. The secret lies in developing a routine of understanding your business, evaluating it on a regular basis, making it a habit to evaluate that and then acting on what you see in a timely fashion. After all, you determine your habits and your habits determine your future.

An important part of understanding the business is understanding the numbers. What I’ve learned in working with entrepreneurs, executives and managers over the past 28 years is they’re often good at a few things, whether it’s sales, marketing or product development. They’re usually not good at some of the other things that create the business acumen required to do a great job of leading the company, such as financial understanding. A lot of times, we pass that off to a CPA, an accountant or a CFO and say, “What should we do? What do you think?” Your belief is that the leader has to understand financials if they can direct the organization efficiently and effectively.

You and I both know, and from my personal experience, when you’re running a business, you have an acumen in a certain area, whether it’s healthcare or selling furniture or selling software. You may not have an acumen and understanding financial reports and doing predictions going forward so you have to depend on outside help to at least supply those reports, but you still are the one that’s responsible for your own business. You have to have some understanding of that. The goal is to be able to look at some type of reports that are created for you by your team or by someone else that’s coaching you through this in order to be able to look at that at least for about an hour a month. That’s sufficient to be able to redirect your team to continue on with success going forward.

You’re not advising that people do the work themselves, but that they instead study the reports and create conclusions and then adjust strategic direction based on the reports that they get from their team.

All businesses come to an end. Click To Tweet

One of the big problems we see is that the leader or the owner does not make changes when needed. In this business environment, the two most important questions that you have to ask are “What if?” and “What’s next?” You and I both know that that “What’s next?” thing is always going to be a little confusing because change occurs. Nothing goes the way you planned. You need to be able to stay on track with your resources and your expenditures until you can see every financial situation that could affect your business going forward and then allow you the opportunity to make those smart adjustments and to have confidence in your decisions. You need to be able to monitor what’s happening everywhere in your business: financial reports, KPIs, dashboards. Measure those results, analyze them and then make the adjustments or direct someone else to make the adjustments going forward. That process has to be started all over again. That’s the way I feel about how that business person should be involved with their business.

What’s the outcome when they have that level of involvement?

The outcome is they have ultimate control because they know what’s going on. They don’t need to know every number in their general ledger, every number in their balance sheet and every number in their profit and loss statement. They do need to know when all those numbers are put together and whenever the key performance indicators come in, they need to know how to make or order the adjustments that need to be made. That doesn’t take much time.

Once you have a system down, it doesn’t take much time at all to figure out where to direct it. You’re working with healthcare practitioners who are solopreneurs and they might be part of a group, do they have the reports that they need when you start working with them to get a handle on their business, to do the “What if?” and “What’s next?”

If you’re talking specifically about healthcare professionals, their whole lives are pretty much stuck in treating patients and I call that working on the assembly line. They get very little time to go over reports and oftentimes, especially in practices nowadays, they have accountants that they see once a month or they have office managers that claim that they had that under control. Again, that owner is delegating the true ownership of the business to someone else instead of being able to understand some simple to understand report that they should be able to look at once a month.

My experience is it’s not just delegation, it’s abdication. They let the other person say, “Tell me what do the numbers mean for me.” They get surprised. As you point out, the office manager and the accountant have a different view of the numbers. They are more historical versus forecasting, looking forward. As a business owner, we have to figure out how to pilot our company to where the money is going to be, figure out how to finance it and figure out how to direct it so that we can get there and create more profits and more success. What do you see as being different about the financial reports that most leaders need to see to have that forward view?

When I look at my clients’ information that they receive every month, they will get those three financial reports: the P&L, the general ledger and the balance sheet. They’ll get a number of reports that are printed out. For example, in the healthcare professions, there are a number of software packages out there that will print out different key performance indicators that the practice goes through every month. Unfortunately, the office manager looks at that and says everything’s under control and the owner is delegated or relegated to a position of inferiority where somebody else is running the business and telling them it’s okay. Where our findings are that in three months of not understanding your business, you can be out of business. That’s how important it is to be able to understand something that’s going on and then to be able to redirect going forward. That’s why the idea of forecasting has become so important. You need to be able to change what you see on a monthly basis so you can meet or exceed your goals by the end of the year. Most businesses and most healthcare practices oftentimes will have a budget, but that budget can’t be relied on as the year goes on because of the typical changes that occur.

There are always lots going on in the organization. Competitive changes, market demand changes, vendors changed their pricing, and new technology becomes available that you want to make available to your customers yet there are always changes to our budget. A budget is an important starting point so we can at least do some prediction on what we’re going to do next.

You need a tool that allows you to observe the current conditions that are occurring. What’s happening right now; to monitor, measure, analyze and adjust, and then be able to do what-if scenarios. As owners, we often don’t have the time to spend digging through all the reports that are available and then trying to figure out what they mean. You need some plan that you have that brings your report, that’s easily understood in lay terminology and that you can do. Our goal is to allow our clients to look at something that they can read and understand and make changes in less than one hour per month.

An important part of understanding the business is understanding the numbers. Click To Tweet

That’s quite doable. How do you see the staff of a lot of the companies you work with approach or consider budgets? What do they think about that process?

They think it gets in the way.

They’re not pro-budget?

It’s no different than what you discuss at some of your seminars and what happens at the seminar does not necessarily get carried over to what actually occurs in the business. Any change that is brought on board, unless those staff members have been used to having a budget and maybe having forecasting from the day one that they started working with that owner, those changes can get in the way of their everyday duties and they don’t like that.

You may, as an owner, have to say, “No. We’re going to do a budget and we expect it to change, but we have to have something to measure against. These are our targets. These are our goals. This lets us know when we’re winning or if we have to make some adjustments.”

Once you get in the habit of doing budget, what you’ll have is you’ll have the availability to go back and look at the budget that you did for last year, see how close you were and then put a budget together for the current year or the new year that’s coming and feel confident that you’re getting better at that process as you go forward. The budget is just a stake in the ground. It allows you to see where you think you’re going to be, but it doesn’t account for current conditions that are always changing as the year progresses.

SDS 80 | Executive Forecasting

Executive Forecasting: A budget is an important starting point in order to at least do some prediction on what to do next.

 

What’s the approach that you take when you work with your clients to help put together the budget and the forecast?

We try to have them gather all the information they have from the previous year. Going back one year, at least in our experience, has been plenty. Going back and looking at all those numbers, gathering those three financial statements for the year. Looking at what all the expenses were that went into the process of running the business and all the income that came in and where that was distributed, and then go ahead and put a plan together for the next year. There are two ways of doing that. One is doing it by a simple percentage change. For example, you might determine that expenses are going to go up 5% next year and revenue is going to go up 30%. You simply plug in the year-end results from the previous year and come up with a budget for the next year. That’s the fast down and dirty way of doing it. However, my recommendations and my preferences is to do what’s called a zero-based budgeting. That is looking at the numbers at each expense category unit and each revenue category in determining what you think in the real world is going to happen.

You’re going to do some projections on what you think your vendor is going to cost you. You’re going to make some projections based on what you think you’re going to do as far as the increase in revenue based on marketing strategies and maybe new services that you’re bringing on.

It takes a little longer to do it that way, but it’s much more effective.

It seems to me is that investment in looking at every aspect of your business, at least once a year if not a little more often, can give you a much better insight on where you need to put your attention as a leader. We need to invent some things, go back to the classic, simplify, eliminate or automate to increase your profitability and increase your margins.

In today's business environment, the two most important questions that you have to ask are What if and What next? Click To Tweet

When you put that budget together, you have to have a positive result at the end of the year. If you don’t, the goal is to have those owners go back with their team and come up with an answer to that problem so that they at least are breaking even at the end of the year.

The fact that you’re giving me this piece of advice indicates that you have had situations where you’ve worked with clients and they didn’t have a viable business when they took a look at the business.

They didn’t know that. They were just getting by.

You were able to work with them and their team to make the adjustments to make sure that the company was profitable, viable, scalable, sustainable and profitable.

Once that budget is prepared, the advantage of forecasting going forward is you get the chance to combine your facts with the insights that you have, of what might be happening. You get to pivot quickly and you stop making decisions based on your gut or emotional reasons. It’s okay to do that, but it’s not okay if it’s not based on reality.

You have to have some facts here to make those decisions. Intuition works well when we’re trying to figure out where we’re going to go next. It doesn’t work well at all with numbers. In fact, accountants and CPAs are highly resistant to intuition, unless they’re troubleshooting in which case they can get good at using their intuition to spot the flaws. They’re not so good at spotting the opportunities in the future.

It’s not their job. Their job is to plug numbers in and to make an analysis of where the client is going to be in their tax situation going forward for the year. Their job is not to forecast what’s occurring at a current place and time and also what might occur going forward. For example, you might have a piece of equipment that goes down and that’s worth $100,000 to replace it. That wasn’t in the budget for the year. In June, all of a sudden, that piece of equipment goes down. All of a sudden, you need to be able to justify the rest of the year going forward. If you’re going to again break even, meet or exceed those goals, what are you going to do? That’s what forecasting does for you.

The idea is you start with a budget and then you start adjusting that budget based on monthly activities so that you keep moving the goal posts and the goals along the way so that you stay on top of your business where it’s going based on the impact of what’s happening in real life over that past month. That seems to be a fairly easy thing to do. Why is it so hard for most business owners and leaders to do this?

Number one, it’s out of their comfort zone. Most business owners and leaders and their teams, unless they have a CFO on staff, do not have the business acumen to understand the reports and then to interpret them and make decisions going forward. That’s the main reason. The other reason is they don’t have an actual model to use to plug those numbers in as the month goes on and then be able to analyze the results from the mathematics that’s done from that model.

You have to have some facts to make decisions. Click To Tweet

You’ve created some interesting models through the decades that you’ve been working with your clients to help you accelerate this and simplify this.

We ask our clients to send us their monthly financial reports when they’re ready. We’ll get those monthly financial reports and then we ask for any reports that their software or their team has put together regarding key performance indicators that are going on during that previous month. We combine that all together, plug the numbers into our proprietary software and spreadsheets and come up with an analysis of what monitoring those numbers brought up. We prepare a written analysis from all those spreadsheet calculations. It’s two to three pages long and it’s something that our people and our clients can look at and understand in less than an hour a month, if even that.

The type of decisions that an executive can make based on that several-page report could be things such as, “Do I need to hire more people? Can I afford to bring on new equipment? Can I buy a new car?”

All those items and many more. What we do is we take that off of the owner’s team, off their shoulders, off the accountant’s shoulders because they’re not familiar with that way of thinking. We take it off of the owner’s shoulders. We have the ability and the background to analyze those results and then warn the owner or congratulate the owner, depending on what the situation is. Then show that owner how to go forward in order to meet or exceed their goals.

Why can’t an accountant or a CPA provide these reports?

For one thing, his accountant doesn’t have the time. The accountant has several clients typically, from all different professions, all different types of owners. They are busy plugging numbers into a general ledger from the reports that that owner has sent them. That general ledger is translated into several other reports, but it’s a historical grouping of information. Even though accountants have the mathematical minds to do forecasting, their acumen is not in that area and neither is their desire. They’re busy putting historical information into formats that will allow the owner to pay taxes correctly at the end of the year and still make a profit.

SDS 80 | Executive Forecasting

Executive Forecasting: Most business owners and leaders don’t want to start making a budget plan because it’s out of their comfort zone.

 

You see this as more a matter of acumen and interest versus ability from an accounting standpoint?

Yes. We’ve met several accountants over the years and very few of those accountants, even though they say they understand forecasting, will have the time to do that. If they do have the time to do that, they’re going to charge a lot of money for it. We haven’t met one, for the last twenty years, that’s willing to do forecasts and reports.

Maybe that’s the reason why a lot of executives haven’t received financial forecasts. I don’t want to point out that this forecasting strategy is a little different than traditional sales pipeline and deal forecasts, although that can indeed be part of the overall forecasting strategy. What you’re talking about is operational forecast, what is it going to cost to run the business?

I don’t know where you’re getting at with the other comment as far as forecasting for other reasons, but all of it ties together. You have to know where you’ve been, where you are and where you’re going. Even though forecasting is not an ideal predicting tool, it’s like weather forecasting, I would still like to know if I’m going to go to the beach on Saturday, whether there’s a good chance that I’m going to have fun there because it’s going to be 85 or 90 degrees and sunny. That doesn’t mean that it’s going to be 85 and 90 degrees and sunny when that Saturday comes along. As the week progresses each day, that weather forecaster, just like we do, can come close to a more accurate prediction of what that Saturday is going to be like.

That’s a good example. The closer we get, the more accurate the forecasting. At least we have a direction though. At least we can make some plans and manage some of those risks with the what if question. These are good ideas here, Paul. What’s the best way for our readers to learn more about your book and also learn more about the services that Tracker Enterprises provides in a forecasting services capacity?

SDS 80 | Executive Forecasting

Business Essentials for Healthcare Professionals: How to Operate a Sustainable, Profitable, and Salable Practice or Successfully Work for Someone Else

The first thing I’d like to do is offer your guests a gift. I’d like to offer the first three chapters of my book for free. It’s Business Essentials for Healthcare Professionals. If the readers simply go to my website homepage, the website is www.TrackerEnterprises.com. Click on the box under the Amazon link box for purchasing the book and they’ll find a link. They enter their information, their name and their email address, and they will get those first three chapters of the book for free. Even though the book is titled Business Essentials for Healthcare Professionals, simply replace the “Healthcare Professionals” in most instances, to just “Business Ownership” and you’ll find that this applies to all your readers.

I want to point out that chapter one has a few interesting stories and then chapter two is make yourself a leader, which is important if you’re going to be running a business. That’s the starting point of Business Essentials for Healthcare Professionals. You’ve been getting lots of rave reviews about your book. Congratulations on that.

Thank you. If your readers are ready for a conversation about optimizing their career or their healthcare practice, let’s talk. Go ahead and send me an email to my business email at PJP@TrackerEnterprises.com.

Thank you, Dr. Paul, for contributing to my readers’ business acumen and bringing to them the concept of budgeting and forecasting with the ability to skip away from a disruption. We don’t want them to mess up their business.

It’s been an absolute pleasure talking to you.

Thanks.

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About Dr. Paul J. Pavlik

SDS 80 | Executive Forecasting

Paul is the chief client consultant in charge of client relations and project management including writing business plans, preparing business valuations and exit or entrance strategies, facilitating practice purchases and sales, evaluating and updating fee schedules, and interpreting financial reports resulting in Tracker’s unique and proprietary monthly and yearly forecasting, budgeting, and “what if” scenarios.

He feels that the variety of his experiences allows him to offer clients a “big picture” perspective without losing sight of the details. He enjoys helping healthcare and other business professionals and their staffs discover/rediscover their direction, and how their decisions affect them both now and into the future. His intention is to allow business owners to understand their financials in one short session each month (after all, business owners should be concentrating on doing “the business of their business,” not wasting time studying tedious financial reports), to direct owners on how to adjust their forecasting so that they can stay on track, and to make suggestions, where necessary, to allow them to meet or exceed their goals.

He was a healthcare provider for 25 years and is currently a management consultant, researcher, educator, transitions and exit/entrance strategy facilitator, author and speaker.

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