Growing a Business: Cash Flow, Debt & Relationships.

How small business owners can grow a healthier business by managing cash flow, using debt strategically, and building strong business relationships.

Growing a business requires far more than simply increasing sales. It demands financial discipline, smart decision-making, and strong relationships.

In Part 2 of this entrepreneurial roundtable series, Henry Lopez is joined again by Giuseppe Grammatico, Rocky Lalvani, and David Barnett for a practical conversation about what it really takes to grow a small business.

The discussion begins with one of the most important topics for entrepreneurs: cash flow management. Rocky explains the principles behind the Profit First system, created by Mike Michalowicz, and why many business owners fail to recognize financial problems until it’s too late. They also discuss why relying only on bank balances can create dangerous blind spots and how cash flow systems can provide early warning signs when something in the business model is broken.

The conversation then shifts into debt and leverage. The panel explores the difference between using debt strategically to fund profitable growth versus using debt to cover operational problems or poor financial management. David shares examples of how business owners can misuse lines of credit and why understanding the purpose behind borrowing is critical to long-term business health.

Finally, the group discusses the importance of relationship building and networking for business growth. Henry shares why getting out into the community, identifying referral partners, and building meaningful connections remain essential growth strategies for local and service-based businesses.

This episode is packed with practical advice for entrepreneurs who want to build a stronger and more sustainable business.

Thanks for joining us today. We’re going to kick it off today with phase number two of the entrepreneurial journey. We talked about finding a business on the last episode, and today we’re going to talk about cash flow management, coaching and strategy. So talk about profit first and cash flow management. I think that’s a super important topic. Profit First is a book by Mike Michalowicz, and he’s a serial entrepreneur. He wrote the book because he essentially went bankrupt even after having multiple seven figure businesses, right? That is not outside the ordinary. It is really nothing more than a cash flow management system. So when you bought the business, you said you were going to make money. Well, great, show me the money, right? That’s the line. And so what Profit First does is, whenever you get money, it goes into the income account. So that’s all the money coming in. So if you remember last episode, we said, Hey, show us that the revenue is real. It’s the same concept here is the real revenue every day, month, whatever the money comes in this bank account. And then once you get the money on a regular basis, you send it to do what you said you were going to do. So first off, you’re supposed to be profitable. So we set aside our profit first, kind of, like, pay yourself first, kind of like, the 401, K maybe that you had at work, the money comes off the top. This is my profit. It goes in the profit account. Just because it goes in the account doesn’t mean you do anything. It just sits there. The next account is to make sure you, the owner, gets paid, because that’s what you all wanted. I wanted to get paid, so let’s put your pay in the owner’s pay account. Of course, the government’s going to come for its taxes, so let’s be prepared for that. Let’s put our taxes aside. And then the last thing is, hey, this is the money that I have left, and I got to figure out how to run my business on what’s left my operating account. And the thing that happens a lot of times is they do this, and then after a month or two, they’re like, I’m out of money in my operating account. So they start stealing from their other accounts. At least you now know that there’s a problem months ahead of running out of cash, because at least you have some of those reserves there, and it tells you that something is wrong in the business. Something is wrong with your model. Go figure out what the problem is. And that’s the downfall of profit. First, it doesn’t tell you what the problem is. It just sets off the alarm bell that you ran out of money to run your business. Figure out why. But, but Rocky. People that are trying to manage their business by looking at their bank account alone usually find out 45 days after you know the alarm bell should have gone off, that they have a problem and that. So just having an alarm bell go off is a huge advantage in running business. Most business owners aren’t looking at their financials, they’re looking at their bank balance, and so you’re getting an early warning that you spent your pay, you spent your profit, and you spent the tax money. Yeah, this is such great stuff. These are, this is a leading indicator, an early warning type of approach, right, which business owners usually don’t have, even when we look at our P and L, it’s a lagging indicator. So that’s what I love about it. But I’m glad you spoke to the key thing, though, that I see rocky that people struggle with, with Profit First, people think that, oh, this is how I’m going to make money, even if the business model is broken, that there won’t be enough to leave in the profit. But to your point, if you use it at least, it’ll tell you there’s a problem. Something’s broken in the business model. So I love that part of it. Well, in profit, first, rocky like, I mean, you talk about the vanity metrics versus, you know, earnings, right? So, so one of the traps that I see business owners fall into is they get an opportunity to make a sale. It’s maybe a high dollar value. They’re excited about being able to, you know, receive that check one day, but, but maybe they’re not making the margin on it that they should, right? And so the profit first idea, does it? Do you find that it causes people to pause and really examine these transactions more carefully to make sure it makes sense for them? Or is the discipline learned afterwards as the the accounts shuffle out? It depends, right? Some people, they just steal and they go, this system is broken. It doesn’t work for my business. And we’re like, no, no, no, your business doesn’t work. It just told you that, right? That’s just the reality of it. I think that’s the hard transition. I think that the real struggle is most business owners, they know how to do their business, at least over time, they figure out how to do their business. You know, if you’re in the restaurant business, you know how to cook maybe, you know, in the trades, you know how to put the roof on. Most business owners don’t understand how to do the finance part. They don’t know how to wear the finance hat. And I think the problem is they ask all the wrong people. The bookkeeper is like, yeah, I put this and I in the block where I’m supposed to put it, I did that. They’re not telling you how to grow the business. Your CPA is a tax person. They’re like, yeah, I followed all the IRS codes you made or you didn’t make money and you owe taxes. How do I grow my business? Spend Less. Like, that’s everyone’s answer. Spend less, and that not the maybe it is the answer.

05:00

But it’s not really the answer. It could be pricing. It could be how the cash comes in. Like, David, you talked about, I made the sale. Did you get the check? We don’t celebrate till we get the cash right. How quickly is that coming in? So it’s all of these other things that are part of the business, and understanding how the cash flows that I think are more important. Great, great point. Here’s a question I want to throw out for a quick conversation that I think fits best here, just epi in the agenda, and that’s the mindset around debt. So we touched a little bit already about that some people come to business ownership with really bad personal financial habits. They’re overspending, and then I find that that translates into the way they’re going to financially manage the business. But then I have a lot of clients that are on the other side of that. They’ve been brought up understandably to think that in personal life, debt, especially consumer debt, is bad. But then they fail to understand the value of leverage at the right level. You know, David talks a lot about this as it relates to the debt you’re going to incur to buy a business, but I would love to get three of you, but maybe we can start with Rocky how you help people make that shift on mindset that there is such a thing as good debt in business? I think you have to define what the debt is being used for, especially during covid. The government was handing out lots of money, and people were using debt for daily operations, right? They were paying their employees. Or what happens, though, is a business owner is struggling, they’ve got a cash flow problem. They go borrow money, and then they use it for daily operations, not to improve their business, not to make more profit, not to fund a particular deal. What I mean by that is, let’s say you’ve got a situation which is a longer term type of sale delivery. So they give you the order today, you have to buy all the materials, you have to deliver it, and then they pay you 3060, 90 days later, funding that is okay. Of course, you should also include the cost of funding in your proposal. You don’t put that as a line item, but you make sure there’s enough profit to cover it, and that is workable. I have, I’m doing this to get this deal to make this money, versus just spending money and hoping that somehow it’s it’s going to come back. So borrowing for growth or investment, avoid borrowing to cover for a broken business model. Correct Henry that the I have seen so many people get a line of credit from their bank, and they say, This is great. I can finance receivables. I can finance inventory. But what really starts to happen is they’ll lose money one month, and instead of that alarm bell going off, that rocky mentioned earlier, and them saying, Well, how do I fix my business? Well, they don’t need to, because they’ve been able to finance the loss with the line of credit. And then, and then they can drag their heels a bit. There’s a story I love to tell about a client that I worked with several years ago. These were some guys doing like those nice epoxy floorings, flooring that epoxy floor finishing that we see in garages and factories and places with concrete floors. And they wanted to buy this expensive machine that would like, grind the floor material, like, grind the concrete or whatever. And I like, I told them not to. I said, you can rent that thing. You should rent that thing. And when you develop enough pipeline of business that you are busy 1516, days a month and you need that machine, then the economics will change. They came to me a few months afterwards, and they say we are now spending like $1,500 a month on renting this machine. But if we bought it and paid, you know, a loan, we’d be paying half that amount. Well, that’s the time to do it. And so if you, if you treat it in that way, you’re always winning. All right, so let’s talk about a second topic. This is a topic I talk a lot about, and it’s about, you know, the business is up and running, and it’s, it’s along the lines of strategic connections and relationship building. A lot of people I work with said, I am not a sales person, and and I always say, as a business owner, technically you are, you’re always selling the business. And there’s different layers here, different levels. Is the way I explain it. We’re not cold calling necessarily, but it’s relationship building. And the place that I recommend to everyone joining the Chamber of Commerce, that being kind of the the place where, yet you’re in the same neighborhood, you’re speaking with other small business owners in your market, depending on what your business is. And just building that network, I jokingly call it the mayor of the town, the importance of relationship building is big. It’s how we all met, either through podcasts and through introductions over the years. So we’ll go with Henry if you want to, if you kind of take over, but the importance of relationship building, what do you recommend to individuals as far as where to start? Right? And I’ll come from the perspective of a location specific business, not an online business, right? So, right? The typical business, either in the services or retail.

10:00

Whether you have brick and mortar or not, where you’re depending on that those people that live in that geographic area to consume your product or service. First and foremost, I would say, and I’m advising this, like, for example, I’m working with my daughter now and building her business and and I suffer from this as well, but younger people in particular, I’m generalizing the key thing I always tell them, and this is in my adage, but the business is out there, not in here. Otherwise, we got to get out there, to your point, Giuseppe, into the community and connect with people. Now, what’s most effective? Certainly, Chamber of Commerces are still effective, but I see them as dying, because their original purpose is all of that I can get myself online now. So often it depends on the Chamber of Commerce, and I’ve been a member of lots of them. Sometimes it’s, you know, the five realtors and the six life insurance agents and then so you don’t get much out of it, but it’s good, good point. The question you have to ask yourself is, who is my target audience? Who is it that I’m trying to reach that buys my product and service? Where do they gather? How can I get in front of them in those physical places or spaces or gathering places, and then beyond that, who are the influencers on my ideal client? Give you an example. I have a client that I’m working with. She built a life wellness studio, physical location. People come in and get certain treatments like red light therapy and cold plunge. Well, she’s got the direct consumer right that comes in, and she knows who that demographic is. But also a big source for her is referrers, massage therapists, chiropractors, other practitioners that would refer clients to her. So she needs to get out there and work that network of people. And so that’s part of getting out in the community, is I may have to go visit them individually, at their places of business, or I get in front of where they gather. And so those are my philosophies on what’s most effective from a networking perspective. Yeah, I think those are great points and and I’ll build upon what what Henry said. I think you need to be very intentional about the idea of networking and having connections, and not just making the connections, but nurturing them and keeping in touch with people, whether you are talking about a local business and local you know, people in the area that you want to be connected to. I think what Henry mentioned there about people who have an influence over your potential customers is really important. Centers of Influence, is what I call them. I actually keep a list in in my workflow management software of people that I think it’s important for me to have a relationship with, and one of the things I look for when I reach out and meet someone to add them to my network, is I kind of ask myself, like, do I think that this is the kind of person who could be a friend of mine? Because I’ll tell you, it’s a heck of a lot easier to keep in touch with one of your friends than it is with somebody that you don’t think is your friend, but you’re trying to have face time and Conversations or send emails with because you feel some obligation to have some kind of connection to the person, whether in the long term, your business is successful or not, because if you ever run into trouble in your business and you ever have a bad time, that’s when you need friends and you can read. You need to be able to reach out and talk to people and and ask for help, ask for advice, ask for ideas and or or even if things don’t work out and you’re looking at the next thing, friends again are going to be what helps you. So I think networking and communications and and keeping track, just so that you don’t forget somebody and you, you you have meaningful outreach and conversations with people on a regular basis. But I think you also need a good team around you.

13:22

So looking at some people have a business coach, some people might be part of a mastermind. You’ve got your accountant, you’ve got an attorney. The funny thing, though, about a lot of these is most of them may not understand your business, and most of them may not understand how money flows in the business. You know, I always make the joke with attorneys. You know, they went to law school because there’s no math class. So don’t, don’t ask for math advice. You know, I love that. And I talked, it took me years to find my financial advisor referred me to my attorney who referred me to my CPA. A lot of these decisions, you have to look at all angles.