SPEAKER_02 0:03

Welcome to the Success Architect, where we don't just build homes, we build legacies. I'm your host, Jake Lewendahl, custom home builder and coach. Each week, I sit down with builders and entrepreneurs who are ready to 10x their business, their health, and their mindset. This is where blueprints become breakthroughs. Let's get to work. All right, what's up, guys? This is Jake Lewendahl. Welcome back to the Success Architect Podcast. Today, I have a really fun guest with us. Her name is Sarah. She is the controller at our company. And today we are going to talk about the difference between business finances and personal finances. It actually came up in a finance meeting that we have a weekly finance meeting where we go through our personal and business finances. And a constant issue that small business owners have. What's a small business according to like US or IRS? Like less than 100 million, Sarah?

SPEAKER_01 1:09

Sure.

SPEAKER_02 1:10

Yeah. I'm I don't know. It's it's a lot bigger than we are. So we're technically in the small business category, and there's millions and millions of businesses that are, and too many of them treat their business bank account as their personal bank account. And for someone who is very disciplined, like Sarah in her chosen profession of accounting, bookkeeping, being a controller, this is like nails on a chalkboard because it gets people into trouble with the IRS, gets people into trouble with actually just being more profitable because it breeds not focusing on a budget, not creating a budget for yourself, not creating a budget for the business because they're way too intertwined. My dad used to call it co-mingling, which I think is what most people call it. And it was something that he tried to drill into my head very early on, but I was also very good at making my own mistakes when he told me not to do something. I specifically went to do it just to see how it was. So I've been through a bit of a r the ringer with co-mingling and an understanding that it doesn't work very well. And when Sarah came on with us, she put a quick stop to that. And now I would say the commingling discussion, which we will talk about as well, is yes, it's a reality check, but it's also a mindset check. Because even if you have the dollars properly separated, it's way too easy for a business owner to have the mindset of that account being their personal account. And when you see the dollars in there, it's a little bit too easy to grab sometimes. So we're gonna talk about how you can work that system, how you can do better at it, how you can change your mindset around it, and all that jazz. So welcome, Sarah. Thanks for being here.

SPEAKER_01 3:09

Thank you for having me.

SPEAKER_02 3:10

Could you give like a two-minute or however long little tidbit about your past, your professional past, your personal, anything you'd like to tell about how you got here, how we met, and and how great you are at your job?

SPEAKER_01 3:28

Well, thank you, Jake. Very generous. I started out in public accounting, like most people who graduate with an accounting degree do, quickly learned that that is not my cup of tea. Public accountants work a lot of hours in a year, and they don't have much of a family life. And I didn't I figured out quickly that I didn't want to do that. So I jumped to a restaurant management group that was a client of ours, spent about nine years working in restaurant management, doing the con I was a controller for them. And then all of my family, I grew up in a very entrepreneurial family. Everybody in my parents' generation owns their own business, and I love small businesses. So I decided to be a fractional CFO before that term ever got coined. I know just enough about tax rules to be dangerous, so I can help you figure out what kinds of questions you should be asking if you're a tax accountant and kind of bridge in the gap between the small business owner that can't afford a full-time controller and their tax accountant and their investment advisors in terms of developing wealth. That's where my heart is. The task of doing accounting has gotten old, but the people make it super fun. So love that. I'm also a handgun instructor on the side. Yeah and I met you and your lovely wife at a handgun class, and our personalities just blended easily. And lucky for me, McKinsey reached out and asked, I knew anybody that could help you with your finances. And I remember thinking, Would you consider me, please?

SPEAKER_02 5:15

That's awesome. We were so happy. We actually had alternate uh an alternate agenda and asking you that question because we wanted you to. Oh fantastic. Yeah. So it was awesome. Okay, so we won't dive into like too much of a a sidetrack trail. We're gonna try to focus today on the notion of a separation of business, money, and personal money. And as I said before, I see this like all over the place with contractors. Like, I I I could use bad words to describe us, but like most contractors didn't go to school. They started in the trades, and then they were like, sweet, I can make a lot of money at this. I know how to build a house. They start building houses. Some of them happen to be really good at business, some of them not so good. But a lot of the times what happens is you start making a lot of a good amount of money. And then some people get in the trap of being like, ooh, that's all my money. That's super cool, without the realization that no, that is the business's money, that is separate from your personal money, and there has to be a specific uh separation and no commingling of those things. Absolutely. So before we jump into like the mindset of it and how it actually happens, like what are the problems that come up when you do commingle?

SPEAKER_01 6:46

So the biggest problem that I see, I mean, there's it's twofold. If you want the world to respect the liability boundaries of having a business, you have to respect it. If you're commingling funds and your personal is the same as your business, despite I'm not a lawyer, but despite the agreements that are in place, if you're not honoring it, then the world's not required to honor it. So there's a big liability piece. But staying in tune with what you're talking about, there tends to be how much money I make this year is gonna be whatever the profit is in the business or the perceived profit in the business. And people adjust their lifestyle to be whatever that number is. And if you're living out of your business also, it's really difficult to determine the health of the business because they are separate. The health of your personal finances is different than the health of your business finances. And so I kind of liken it to having the discipline of getting up at five o'clock every morning and going to the gym and passing on the cheesecake. You have to have discipline in your financial life too.

SPEAKER_02 7:57

No matter how not fun that is.

SPEAKER_01 7:59

No matter how not fun that is. I like cheesecake too. I love that.

SPEAKER_02 8:05

So you said perceived profit. So describe what you mean by that. Because I think that's pretty cool.

SPEAKER_01 8:11

Well, I think it's really easy. I worked for a restaurant management group and I learned a lot from the the owner of that business. And he said, you know, you have to take your best month and your worst month and throw them out. And what you have in the other 10 months is the core of your business. And I feel like that's a really good rule of thumb for most people. It's equal it's easy to land a big job, make a lot of profit on that job, and then you elevate your lifestyle to meet that profit. You're not stepping back and saying, How can I grow my business? What type of assets should I be investing in? You're just going on more vacations and buying better cars and boats. So it's important to take care of the thing that feeds you, which is your business. And if there's investments that need to be made in the in the business to make the long-term profit or pay down debt, it's just a quick, well, I made this bonus, essentially. Yep. And I'm gonna spend that money. Now I made a lot of money.

SPEAKER_02 9:18

Right. Absolutely. Okay, so this goes back to what you talked about with business health and personal health. So with business health, you are referring to the fact that, okay, yes, you have this profit, but it's not actually yours because the business is its own entity, its own organism.

SPEAKER_01 9:40

And it needs that money to be healthy.

SPEAKER_02 9:43

Yes. And so when you talk about being healthy, you're talking about number one, having enough to pay your taxes, pay your pay your overhead, pay all this stuff that you need to plan for. Just like in your personal life, it's maybe nice to have a six-month buffer, a one-year buffer of cash, right? And so you need to understand what's your overhead. Unfortunately or fortunately in a business, large, a lot of the times the overhead is a hell of a lot larger than you're used to in your personal life. And you can't just go on a month to month because you might need some for a rainy day.

SPEAKER_01 10:20

Absolutely.

SPEAKER_02 10:21

Okay. So this is what you're talking about with business health. Along with that, there's also the piece of growth because you can sit there and hustle, hustle, hustle, try to get more of those profitable jobs to, you know, one great month or whatever, but like that's not really a sustainable trajectory.

SPEAKER_01 10:43

Well, eventually all businesses go through slumps. If you don't have the cash reserves to get you through those slumps, and you've elevated your lifestyle in such a manner that you're depending on that business to feed you a certain amount of cash, it's different than when you go to work for someone else and you get a salary and it's predictable. And then when you get a bonus, you know it belongs to you and you make a decision on how you want to spend that money. But you have to be really careful that there are rainy days, there are downturns in the economy. And if you've elevated your lifestyle to a certain level, now it puts that much more pressure on the business to feed that lifestyle more than it is to be a good business in your industry. You're not making good decisions to service your clients, which is how you build a business.

SPEAKER_02 11:32

Right. Okay. Are you following me?

SPEAKER_01 11:34

100%.

SPEAKER_02 11:35

100%. Yes.

SPEAKER_01 11:36

So the mindset is now I gotta make this thing grind so that I can achieve my personal lifestyle versus creating a business that's healthy enough to provide a lifestyle that might be just a little bit less until that gets enough assets that it's feeding itself, also.

SPEAKER_02 11:55

That's true. Okay, so that's a totally separate situation. That makes sense. Yeah, 100%. So that's totally separating personal assets and creating a personal life that also feeds your lifestyle, not just the business. Okay, gotcha.

SPEAKER_01 12:09

And you need your employees, right? Which I feel like you're really good at when you're successful, you tend to take really good care of the people that helped you get there.

SPEAKER_02 12:17

Right. Absolutely. Which treating the business as its own helps you do that. Okay, so that makes total sense. Okay, so the next thing that sometimes may be a little difficult is if you're going to treat them as separate organisms, how does an owner get paid? Because many people, I think, don't actually know this. It's standard practice for you, but I think a lot of owners don't really know, like, well, I just take money out when I need it, right? Right. How should an owner get paid and move that to their personality?

SPEAKER_01 12:50

I think that depends on the legal structure of the entity and there's some tax planning that goes on in that as well. But you can if you're a sole proprietor, you just transfer the funds from your business to your personal account. The bigger issue is how much.

SPEAKER_00 13:04

Right.

SPEAKER_01 13:05

Right. If you're an employee of a corporation or an LLC, you can take salaries in addition to some distributions. But again, there's tax consequences for all of that, and you need to seek tax advice. But for our purposes today, it really is about determining what the business needs are for cash reserves. And you get paid last as the owner, essentially. If you pay yourself first, that doesn't always work out. And unfortunately, I've worked for business owners that have paid other people for an entire year and they worked for free. I thought he was crazy and it worked out beautifully for him. He turned that into a profitable business and he got paid tenfold by taking care of his business first. He and his wife worked out a deal on the side where she would be the breadwinner and he would he bought a struggling business and brought it back to health, and it turned out to be a really good decision for them.

SPEAKER_02 13:59

That's awesome. That's awesome.

SPEAKER_01 14:01

He had a vision and he accomplished it.

SPEAKER_02 14:03

Totally. Okay. And so also when we're talking about how to pay yourself as the owner, the other conversation is like you said, theoretically, you probably get paid last, which, you know, there's plenty of books that say profit first or like always pay yourself first, right? Maybe there's a tactical piece to that, but there's also a lot of minutiae that goes on in the back end right before that.

SPEAKER_03 14:28

Yes.

SPEAKER_02 14:29

And so I guess what I'm getting to is by treating the business as its own entity, you work on budgeting. And just like your employee's salary, your salary is budgeted in. Absolutely. And that would be the healthy proper way.

SPEAKER_01 14:44

The pay yourself first is when you get paid. The pay yourself first that I've read about is have an investment strategy, whatever it is that you choose to do. But when you get your paycheck, have the 401k, the IRA, the retirement come out first. Because as soon as you touch the money and you really want that couch or you really want that boat, it is so easy to be like, I'll put my money in retirement later. Yes. And 10 years goes by and you realize, well, I didn't do it. It's not sexy, it's not fun. But if you never touch that money, for some reason it's just easier to pay yourself first.

SPEAKER_02 15:22

A hundred percent. No, that's so true. And I think that book, I think there's a whole series called Profit First, right? And they go all the way into making it so concrete that they have different bank accounts for each thing, right? Right. And before you came on, yeah, Dave Ramsey, and I can't remember who but wrote the book Profit First, but like I had a smaller version of that before you came on because it helped me just put stuff in separate areas because I wasn't reconciling, you know, I was reconciling maybe once a month. So I was looking at my cash balance in the bank.

SPEAKER_01 16:01

Right.

SPEAKER_02 16:02

Which is also another thing that business owners who don't have someone properly managing do it. And they they run off the balance that's in the bank. You know kind of what the costs are that you have, you know roughly where you're gonna be, and it's all in your head, right?

SPEAKER_03 16:16

Yep, right.

SPEAKER_02 16:17

But then when you came on, we finally got to a system, we created a spreadsheet, a cash flow sheet that shows exactly where we are. And now I don't have to sit there and do the mental gymnastics. I just trust you that hey, you have this. And even when we have more cash sitting in the bank account, and I'm like, oh, cool, that's great. It's like, hold on, look at the cash flow sheet. It's drilled out a month in advance. Here's your actual number.

SPEAKER_01 16:46

Remember, we have to do that.

SPEAKER_02 16:47

And this number has to go. We have taxes, we have we have extra money sitting because we billed for this thing and we we got paid for it, but the sub still needs to get paid, whatever that is. And so having someone like you helps a business owner not do the mental gymnastics and actually see what the real number is.

SPEAKER_01 17:08

It's been really fun. I'm really sad that our high schools will educate these kids on all kinds of things, sex ed being one of them. It's a private thing. They're telling them everything there is to know about sex education. And there's no personal finance classes anymore. And these kids are coming out of school financially illiterate, and like you said in your introduction, there's a lot of people that just do what their parents did. And there's a lot of financially illiterate people out there. So you only know what you know and you only do what you see. I wish we had more education on how a paycheck is put together, how to pay yourselves out of businesses, what benefits are, why they're important, why they may or may not apply to you.

SPEAKER_02 17:56

I love that. That's great. I mean, so okay, so for listeners, because we're only hitting one simple concept today. We could go on for hours about this, right? The concept of keeping the two separate, and let's let's also add in there that concept of actually knowing like where you're at. We run a construction business, so it's it's top of mind, and construction happens to be very difficult. We are a high revenue, low margin industry, right? We have tons of other people's money running through our accounts. So sometimes it looks like we have 500, a million plus sitting in the bank account. This is super great. Right. Turns out almost none of that is our money, right? Exactly. And so it gets way too easy for a new business owner who does not have proper systems, who doesn't have someone to help them if they don't know how to do it themselves, to see that number and say, Yay, I'm rich.

SPEAKER_01 19:00

Yep.

SPEAKER_02 19:00

It's awesome. And then the piper comes 30 days later.

SPEAKER_01 19:04

Or at the end of tax season.

SPEAKER_02 19:05

Or tax season, exactly, which plenty of personal history with. Super awesome. So what is could we just outline for listeners before we finish up, like a quick summary of some steps that new owners and old owners can take in order to like really simple, three, four steps on okay, let's say you can afford a fractional CFO controller or a bookkeeper. How best could they go about saying, all right, I'm gonna find a great bookkeeper? Here's the main concepts that they should tell their bookkeeper they want them to do.

SPEAKER_01 19:48

That's a hard one.

SPEAKER_02 19:49

Because that one and and I'll help with that one, but like think about you came in mostly not working in construction, and I basically told you the problems that I saw. I had a problem with seeing my proper cash flow. I wanted to know. We have this stupid term called our solvency number, which is like if everything got paid and everything got taken out, where's the business? And you designed a cash flow sheet that showed that. And it's not something that we can get out of QuickBooks, it's something we had to design for ourselves. You designed. Right. So are there a couple key little items that any business, or specifically a small construction business, could say, Hey, bookkeeper, this is awesome. These are the couple things I need you to help me so that I can properly have build the health of my community.

SPEAKER_01 20:48

Hire the right people, right? There's a lot of bad bookkeepers out there.

SPEAKER_02 20:52

I think Really quick, how do you know?

SPEAKER_01 20:56

It's just like anything else. There's that just testing it out. Oh, I've followed up with people. I charge a decent rate, and people sometimes fall out of the chair when I tell them what I charge. But there are self there are a lot of self-taught bookkeepers out there. Some of them have done a pretty decent job, and there's a lot of people that shouldn't be doing it. And I have unfortunately been able to follow up on some of those where you pick up a big mess. So I feel like it's important to find someone who's good at what they do. That is difficult. Yeah.

SPEAKER_02 21:29

Do you find them with like references or like how do you how does how does this random guy, a sole proprietor, has been doing it himself and is like, man, I'm gonna I gotta step.

SPEAKER_01 21:38

Yep.

SPEAKER_02 21:39

Who do who do I hire?

SPEAKER_01 21:40

Um word of mouth. Okay. I think ask your accountant, ask good questions and interviews, use chat. What are those? I don't know. Use claude. We just go to the dentist and he either does a good job or a bad job, but you sometimes can follow up with the next dentist and say, he might say he did a terrible job on that, you know, and you wouldn't know the difference. Yes. So I would say word of mouth.

SPEAKER_02 22:03

Okay.

SPEAKER_01 22:04

Don't take advice from your broke friends. I love that saying.

SPEAKER_02 22:07

I just saw that on a meme the other day. Yes. Don't take advice from people who haven't gotten the goals you want.

SPEAKER_01 22:13

That you want to be there in their position, take advice from them.

SPEAKER_02 22:16

Yep.

SPEAKER_01 22:17

But I think what's important is that you hire somebody to do it, somebody who knows what they're doing to do it, and you go do what you're good at. A lot of people get stuck grinding on their books. Yeah. A lot of people hate it and they wait until the end of the year and do the whole year's worth of books. You have no information throughout the year if you're making good decisions or bad decisions. And I gotta hand it to people. What I was gonna say earlier was in all of the financial illiteracy, the the mental math that you were talking about, trying to keep track of, it's been really fun to see how people make up in their head what their accounting life looks like.

SPEAKER_02 22:59

Yeah, totally. The perceived profit.

SPEAKER_01 23:01

Well, it's you're doing the best you can, right? But it's just people are creative and how they keep track of things. And it's fascinating. And you were one of them. I can't believe all the things that you can remember. I think it's important to spend your time doing the thing that makes the money and hire somebody else to do this part.

SPEAKER_02 23:18

Nice.

SPEAKER_01 23:19

And do it on a regular basis so that you have numbers that confirm or deny how you think you're doing.

SPEAKER_02 23:25

Yeah, 100%.

SPEAKER_01 23:26

And meet with your tax accountant throughout the year. Don't wait until force them to wait until April to find out what you should have done four months ago.

SPEAKER_02 23:35

Yes, hundred percent. Or even don't even wait until December 20th.

SPEAKER_01 23:39

Yeah.

SPEAKER_02 23:39

And like force them to do it. Right. Because so many of them don't unless you force them to. Yep. Yeah. Okay. That sounds great. Awesome. Well, thank you so much. I think uh I guess for listeners, I would love, if anyone has questions, like please reach out on social and ask questions because I'm guessing I could convince Sarah to do a follow-up on some questions, but mostly we wanted to hit high-level, just an understanding that these two things are separate. You must separate your personal from your business, bank account, and have to understand that the mentality, the mindset, or the perception of the two, they are separate. They are not one in the same. And to have a healthy, healthy life on both sides, no commingling. You got to keep them separate.

SPEAKER_01 24:33

I like that.

SPEAKER_02 24:34

Yeah. Good rule. Beautiful. That sounds awesome. Well, thank you for joining us today. I appreciate it. And we look forward to seeing you on the next one. Thank you guys. Thank you. Thanks for tuning in to the Success Architect. If today's episode helped you lay a stronger foundation for your business or your life, subscribe and share it with someone ready to do the same with theirs. You can follow me, Jake Lewendall, on social for daily tips on health, wealth, and building success that lasts. Until next time, keep designing, keep building, and keep leveling up.