EP27 - Foundations of Transition: Financial Fluency and Clarity

In this episode, Jason Miller and Makenzie Wirth continue the Foundations of Transition series by exploring the importance of financial fluency and clarity. This workshop-style conversation aims to help business owners better understand the numbers behind their operations and why financial confidence is essential for making informed decisions throughout the ESOP journey.

This episode encourages owners to move beyond simply reviewing financial reports. It focuses on interpreting what these numbers truly convey. Jason and Makenzie discuss how clear reporting, visibility into key performance drivers, and a deeper understanding of financial metrics can reduce uncertainty, strengthen decision-making, and prepare business owners for a smoother, more successful ownership transition.

Transcript

Why Financial Fluency Matters

Jason Miller 0:00

This is the seventh episode of our 12-part Foundations of Transition series. Today, what we're going to be covering is financial fluency and clarity. We have this broken down into five different concepts that we're calling equal signs or dangerous equal signs.

Welcome back, everyone, to the Journey to an ESOP and Beyond podcast, where we seek to make all things related to employee stock ownership plans both accessible and understandable. I'm your co-host today, Jason Miller.

Makenzie Wirth 0:40

And I'm Makenzie Wirth.

Jason Miller 0:43

We'd like to say happy birthday, America. I don't think there is much more American than rebelling over taxes and then taking action.

To help you on your journey to an ESOP, this is the seventh episode of our 12-part Foundations of Transition series. Today, we're covering financial fluency and clarity.

We have this broken down into five different concepts that we're calling equal signs or dangerous equal signs. One concept is usually conflated with another one, and we're going to break those pieces apart in the context of financial fluency.

Financial fluency is the next step from financial literacy, which we've addressed before with our guests from The Great Game of Business and earlier in our foundation series.

With that, one question that often comes up in almost every successful company is: If things are going so well and the company is growing, why do we have to be so careful with spending, hiring, or distributions?

Makenzie Wirth 2:06

Yeah, I think that's a really good question. And I think it probably means that people are aware of numbers and are being told numbers in terms of revenues and profits, but maybe they don't have the story or the full story behind the numbers.

Jason Miller 2:26

There is always a story, and there is always interpretation. But today isn't just about teaching people how to read financial statements and say, "Here's what this number is." It's about helping people understand what those numbers actually mean.

Makenzie Wirth 2:42

Yeah, I think looking at financial literacy versus fluency, they sound very similar, but there is a distinction between the two.

Financial literacy is being able to learn the language of financial statements, whereas financial fluency is understanding the entire story and related consequences.

Jason Miller 3:09

And that's why we're talking about these five dangerous equal signs.

Revenue Does Not Mean Success

Jason Miller 3:14

Without further ado, I'll start with the first one. I think this is a common misconception, just in general related to business, from those who aren't necessarily business-minded to those of us who may be more business-minded.

That is: revenue equals success.

Makenzie Wirth 3:40

I think we often speak in terms of revenue when we're talking about companies. We refer to companies as their $100 million company, $5 million company, or whatever it is. We're always referring to revenue.

However, revenue simply tells us that we sold something. It may not be a product; it may be a service. However, it doesn't tell us whether we collected the actual cash, assuming you're on an accrual basis. It doesn't tell us whether our margins are protected or whether our business has been strengthened by that revenue growth.

Jason Miller 4:20

So what you're telling me is that a company can actually grow and become less healthy?

Makenzie Wirth 4:31

Exactly. Maybe you discounted too heavily to win work. Maybe you have a lot of customer concentration, where one customer represents a significant portion of your revenue.

Jason Miller 4:45

Or maybe you're growing faster than your people or your systems can support.

What came to mind when you said that is that growing and becoming less healthy is like obesity for a business. You're stressing all of the systems without necessarily providing the right things to support that growth. Maybe there is an underlying condition that tells a story about growth without staying on par with health.

No offense meant in that analogy. Those are just the strange things that come to my mind as we talk through these topics.

Makenzie Wirth 5:32

How does this relate to an ESOP company?

I think it's important that employees who are now in the mindset of being owners understand that if they get hooked on the revenue number and are celebrating revenue growth, they shouldn't necessarily always be celebrating it because it is bigger or higher.

They should celebrate growth that is profitable, sustainable, and makes the overall company stronger.

Jason Miller 6:15

So revenue is more evidence of demand, which is a great thing to have, but it is not necessarily evidence of health.

Profit Does Not Mean Cash

Jason Miller 6:27

Now we get to a fun one. Whenever there is a political conversation around taxes, business taxes, and what companies should be paying taxes, this topic often comes up. I'm only harping on taxes again because we're very close to July 4th, and I think it's fun.

This second equal sign is: profit equals cash.

Makenzie Wirth 6:54

I think this is a good one. It can be confusing because profit measures performance, whereas cash determines capacity.

You may have, especially if you're thinking about an accrual basis, which most of our clients are, performed all the work and earned the revenue, but if your customers haven't paid yet, you don't have that cash.

So just because you earn revenue, that doesn't always equal your cash balance, your cash position, or your capacity.

Jason Miller 7:40

That's probably—actually, I know it is—a little more delicate and fragile with an ESOP company because you have other obligations to consider than a traditional company.

When we think about repurchase obligations, debt service on the acquisition indebtedness, and still having to reinvest in the business so that it achieves its strategic objectives, a profitable year may be an indication of success, but it doesn't mean there is excess cash available to satisfy all of those needs.

So instead of saying, "Trust us, the cash is complicated," leaders should try to explain where the cash is actually going.

Makenzie Wirth 8:38

Yeah, I think profit only tells part of the story, but cash determines what the business can actually do.

Jason Miller 8:47

Cash is king. Cash is king. Sorry, King George III. We'll see how many of these we can fit in today as we go through.

Valuation Does Not Mean Proceeds

Jason Miller 9:00

So our third equal sign is probably the most important one for owners. And that's: valuation equals sale proceeds.

So, Makenzie, unpack this one a little for us.

Makenzie Wirth 9:19

Yeah, this is definitely one that can be misconstrued. Even when we're working with our clients, educating them on how value is derived and calculated, and what factors are considered from the P&L versus the balance sheet, this distinction is important.

As you said, valuation does not necessarily directly equal the proceeds you'll receive in a sale.

The actual proceeds depend on other factors such as debt, taxes, transaction costs, the deal structure, and the timing of payments based on where that deal structure lands.

So it is not as simple as valuation equals sale proceeds.

Jason Miller 10:14

If only things could be simple.

As we consider, or as you, listener, consider becoming an employee-owned company through an ESOP, another question matters just as much: Can the company successfully support the transaction while continuing to invest and grow?

A financially responsible transition isn't just possible; it should leave the company healthy afterward.

Share Price Is Not Instant Wealth

Jason Miller 10:59

That kind of leads us to number four, which is another common misconception when companies become employee-owned: share price equals employee wealth.

Makenzie Wirth 11:17

Yeah, I thought this was an interesting one.

Of course, the goal is to increase the share value of the company, and that absolutely matters. It is important in rolling out the ESOP and continuing your communication around the ESOP.

But it shouldn't just be a one-time goal that employees are working toward. It's more of a long-term benefit.

It's not only about chasing or working toward a higher share price. It's about building a company that maintains that high share price and maintains the value you're working toward.

Jason Miller 12:09

I like that perspective.

If the company thinks about long-term sustainability and repeat, ongoing sustainable growth, then it's a constant target for value. It's not moving the goalposts. There is a subtle distinction between those ideas.

We talk about this pretty often with clients. Many of the concepts that you understand about publicly traded stocks similarly apply to the stock of your company and the stock of an ESOP company.

There is a market, there is a price, and there are shares. Those shares are owned by the trust but allocated to employees.

We can talk about that at length as well. But the market doesn't report from 9:30 to 4 Eastern every day, second by second. You don't have an opening and closing share price to worry about when there is macro news.

You have an annual share price that you contribute to and that employees contribute to. I think that helps employees avoid thinking, "Oh no, we're in the red today," or "We're in the green today." Or, in this case, "We're in the black today."

So how do you think employees should think about share price and their wealth?

Makenzie Wirth 13:51

I think this goes back to previous episodes we've done as part of the Foundations of Transition series.

Employees should understand how their role and how they show up to work every day can contribute to building the long-term value of the company.

Whether that's productivity, customer service, safety, or quality of work, employees should be able to connect those pieces together.

It's not just about watching the number—the share price—grow. It's about influencing what creates that value.

Jason Miller 14:46

That's a great point.

When we talk about this financial fluency, that's really what we're encouraging you to help instill in your workers. It's not just, "Here's EBITDA," or "Here's a particular KPI."

Now that we have the record of that information, what's the meaning behind it? How did it get here? Why is it higher, lower, or staying the same?

Then it's: What can we do to improve, maintain, or correct what this means?

Those are the questions around the hows and the whys rather than just, "What is the meaning of this number?"

Transparency Without Clarity Fails

Jason Miller 15:42

Our final dangerous equal sign is that transparency equals clarity.

And I may have preempted this one a little bit, Kenzie. What do you think?

Makenzie Wirth 15:54

Yeah, I think sharing more numbers and having that open-book policy doesn't automatically create an understanding. It can sometimes actually create more confusion.

Jason Miller 16:09

So what does clarity look like?

Makenzie Wirth 16:13

I think it's important when you're sharing those numbers that you're explaining the story behind those numbers.

You're explaining what has changed, why it changed, what management and leadership are focused on, and then what decisions follow.

I think it's also important when you're transparent with your financials that there is a balance of how much you share. You don't want to get too into the details and create more confusion, but you do want to find that happy medium of being transparent enough that employees can understand the story and bring the whole picture together.

You don't want to provide so many details that it becomes overwhelming and confusing.

Jason Miller 17:12

So what you're saying is that a giant data dump of quarter-end and year-end financials is not necessarily the same as a communication strategy.

Makenzie Wirth 17:26

Right. You may not have a lot of financial statement readers if it's just dumped somewhere and filed away.

The Questions Fluent Teams Ask

Jason Miller 17:36

What does a company that is financially fluent look like? What kind of questions can they answer?

Makenzie Wirth 17:51

Yeah, I think a financially fluent leadership team within a company could answer questions like:

What is actually driving our performance?

Where is the cash going?

So if we're profitable, or if the perception is that we're in this big growth period, what is consuming all of the cash?

And then what decisions should follow? What decisions are being made and what decisions are being considered in the coming months?

Jason Miller 18:34

A financially clear company that has clarity around its financials can consistently explain what's changed, why it changed, what it means, and then I think the most important part for any company, but especially for an ESOP company, is what employees can influence.

Makenzie Wirth 19:04

Yeah, and I think it's important to note that the goal here isn't making everyone financially fluent or literate enough to then take on a CFO role or operate at that level.

I think it's just making sure people aren't making decisions based on rumors, incomplete information, or assumptions from financials that are not explained.

Jason Miller 19:43

I think that makes a lot of sense.

There's probably balance in that too, right? How do you roll out such a strategy to be transparent? To what degree? What level of the organization are you going to be transparent with the financials?

And how do you develop a plan to create the space and create that element of culture that allows them to become fluent at their particular level, to that degree that you're willing to build that plan?

So that they can answer those questions:

What changed?

Why did it change?

What does it mean?

And then finally, what can I do about it to improve, maintain, or correct?

Transition Promises Meet Financial Reality

Jason Miller 20:35

As that leads us into this idea of transitioning your company to new ownership, specifically employee ownership, every single transition creates promises.

Promises to you as owners, promises to employees, promises to your customers, and also promises to future leaders.

And that's going to look different for every company and also every transaction, whether it's an ESOP or not.

You're saying something to yourself. Your buyer is saying something to you. You're likely trying to assure all the people that work for you that, hey, things are going to be as much as possible the same as they were before.

And we talk about that often in the context of an ESOP transaction: The company will be what it was the day before the transaction and the day after the transaction.

And it's one of the great benefits of continuity that allows for this culture element to continue.

Then how does that impact your future leaders? What promises, whether explicit or implicit, have you made to them in the past about what they should expect about their future?

And everyone likes to say to their customers, regardless of change, "Hey, everything is going to be at least as good as it has always been, if not better," because that's what businesses tell their clients when change is happening around them.

Makenzie Wirth 22:17

I think eventually all of these promises, even though with transitions and transactions the change isn't overnight, have to meet reality.

It can take time. Specifically, in the context of our conversation, financial reality.

Jason Miller 22:44

So you shouldn't be asking just whether the company is growing.

Jason Miller 23:01

You may ask whether it's getting stronger, not just growing.

Jason Miller 23:09

And then don't ask only whether it's profitable.

Makenzie Wirth 23:18

You can ask whether it has the capacity to keep its commitments.

Jason Miller 23:24

And don't ask only what the business is worth.

Makenzie Wirth 23:28

You can ask instead what it will take to preserve that value for the next generation.

Jason Miller 23:35

So financial fluency isn't about memorizing numbers. It's about understanding what those numbers require of us.

And the strongest transitions aren't defined by the biggest valuation. They're defined by building a company that's strong enough to keep the promises that it made along the way to all the people it made those promises to.

Strong Companies Keep Their Promises

Jason Miller 23:59

So today, during this week when we're celebrating America's 250th birthday, America is a promising country that has made a lot of promises to its people for liberty and the pursuit of happiness.

And we enjoy nothing more than helping clients like you achieve an exit, a transition of your ownership in a way that honors all that you've brought to your company and its success.

And we like doing that in a very tax-efficient way in order for us to celebrate properly some of the ideas and events that created our great country.

So we thank you for listening to us and for joining us on our seventh of our 12 Foundations of Transition.

And we will see you next time on the Journey to an ESOP and Beyond podcast.

Thank you.

Makenzie Wirth 24:59

Thank you.