5 Investment Hacks with Larissa Kravitz from Investorella
Simon: Now we go to the part what should we do: the investment tips.
Larissa: One of them is to definitely start as soon as possible. Even if it is with a small amount because the learning curve is quite long. You're very likely to make a lot of mistakes in your first three to five years of investing, especially if you're a complete novice. If you haven't studied finance, if you don't know anything about the capital markets, then it's best to make those mistakes with a few thousand euros rather than with the money you just collected by selling your company. Obviously it’s a lot more painful if you accrue a lot of losses. The other thing, especially for entrepreneurs, is to take advantage of tax breaks when it comes to long term investment for retirement. Most countries in the world have some kind of tax break scheme or tax deferral scheme so entrepreneurs can invest tax-free or with deferred tax payments. That is very important because you do have to consider the long term view. As an entrepreneur, you do take quite a lot of risk in your life compared to people who are just normal employees so you do always have to put some money aside for the future in case there's some kind of downturn, in case you have a failure and as an entrepreneur, can always happen. That actually leads to the second do or don't is do not use your investment money. Really make it off-limits. Don't use it, for instance, to provide short-term liquidity to your company. A lot of employees who do that then end up losing both. Because if you have a liquidity problem in your company this is always something that you should solve there. And your investment as a private individual is something that should be kept aside. It really should be kept for the future and should be kept separate.
Simon: How much liquidity should one keep the side? We have maybe about six months. How much should it really be?
Larissa: It really depends on what kind of business you have. Say, you have a software business, software as a service, you have clients that pay for subscriptions, so you have a very steady client base. In that case, you can be very certain of your future liquidity. Then, I would say about three months might be enough. But normally it's about six months of liquidity that should be within the company. To pay for the fixed cost.
Simon: And if you have more than six months, you should make something with it?
Larissa: Well, what you can do if you have a treasury is you can invest it in your company. but if for some reason you really have a lot of cash laying around and you can't really reinvest it into your own business or it wouldn't make sense
Simon: Maybe by hiring people, or innovation?
Larissa: One of the easiest ones is usually marketing. Especially with digital businesses if you have some extra cash laying around you might be invested in online marketing. Or there's all sorts of little odds and ends in a business that can be improved. Let's say then you can hire a consultant for your finances, or to redo your product design, or to have an employee team building to improve communication within the company. There's all sorts of things that you can do that will improve your business. And sometimes, there might be some situations where you might have a lot of cash and need to keep it, you might not be allowed to use it. If you have an account in which a lot of cash accrues for a future financing repayment, for debt repayments, you can't really spend that money in the medium term. You have to save it for two, three months because you know in two three months it's gonna leave your company either as a debt repayment or maybe as a dividend to investors. In that case, one thing you can definitely do is you can look at short term deposits with banks or government bonds, other very safe securities to at least get a bit of return on that money if you really cannot put it back into your company for external reasons. Otherwise, it's always a good idea to already have an investment plan and a bit of a budget that also accounts for excess profit. If you have an idea of how much profit you want to make and then you make more, then you already know ahead of time okay if goals are exceeded to reinvest the excess profit in this and that way into the company. Maybe have a list of small projects or new products you might want to develop. You mentioned innovation, say you have this idea and if you get some excess profit in the next two, three months, you’re going to put it towards testing this new idea that you have.
Simon: It's good to be confirmed. In our programs, we build a lot of spreadsheets for our clients to manage their day-to-day operations. Of course we have to think about their finances and the numbers. We always have the key KPIs that we measure every week. We always have goal, current, delta. Some of them say it's half an hour more than I need to put in, Simon, do I really need to do this? Yes, do it. Because you need something to track so that you see your learning curve. You see where you are evolving and you can better estimate what you can do in a week, what you can do in a month. And you can start having a growth plan, not just planning but a growth with exactly all these points. We're not financial experts but we came to a similar conclusion.
Larissa: Well with finance there's also some planning involved. Just before we started, we talked about corporate treasury. For those out there who don't really know what corporate treasury is, it’s usually larger corporations that have a treasury and the treasury is the department that essentially manages the finances of the company. In terms of managing the cash, managing currency conversions, hedging for instance. This is usually a problem of larger companies that deal and have business in a lot of different countries or deal with commodities and have to hedge their prices for the products they're buying. The treasury usually also takes care of financing. This might be financing with investors, but also debt financing. Getting bank loans and all of these things. In my consultancy businesses, I've seen a lot of things go wrong in terms of treasury. Even if you're a small, just a solo entrepreneur or you have a few employees or a small business, and even if you don't have a treasury, there's some treasury considerations to make. One of them is to have banking relationships with at least two different banks. This is a very simple thing that can essentially save your business. A lot of companies start out with only one bank account. That can be problematic, because for one reason or the other your bank account may be frozen. You might be abroad, traveling to a foreign country and they might block your card and you might not be able to get the cash you need or be able to pay for your hotel or your food, that's a huge inconvenience. In that sense, as a business it's always a good idea to have a backup. Two different banks. Do not bank with one single bank only. There are several reasons. This doesn't happen very often, but it does happen that your account might be frozen. Depending on what country you're in in the legal situation. For instance in some countries tax authorities can if you're late on your taxes freeze your accounts. That by itself is usually not the problem, but once your account has been frozen it might take weeks for it to be unfrozen again. As a company, you might not be able to make payments for four to six weeks. If that happens that's a huge inconvenience, especially if you only have one bank account. You should definitely always have at least multiple bank accounts with more than one bank.
Simon: And how often do you send the profit part? Monthly, bi-weekly, weekly?
Larissa: Ideally we'll also have separate, even sub accounts. Even if as a company, you don't have a budget, it's a good idea to have spending categories. Profit is one of them, financing and debt repayments is another, variable production, cost of production, such as marketing or freelancers, fixed costs, you might have a separate one for salaries and those kinds of costs. This kind of depends on how fast your business is. If you have a digital business based on subscriptions, this is something you might want to do every week because you want to measure how many new clients did you get, how many people signed up for your services, how much money came in in terms of payments. You should look at your bank balance at least once a day. These days with mobile banking apps, that's actually quite easy to check, takes 30 seconds. But once a week you should definitely sit down and check.
Simon: I automated because I never did it, but as a CEO, I should. So I get an email from my bank every day with the current balance.
Larissa: That's also that's also a way of doing it because then you can check. It's also extremely important to verify that important payments that you have to make were actually made in order to avoid future hasle. Could be things like salary payments, tax payments because things can go wrong. Especially if you have externalized accounting, not all payments might have been uploaded correctly, so that's also something to check for and then you could save a lot of hassle in the future. If you forget to pay an employee's salary, that employee might get very upset and they might not mention it immediately. Because some people might take it personally especially if they see everyone else has been paid, did I do something wrong? This is always good to verify. And especially if you have to make things like tax payments because not making those on time or forgetting them entirely can lead to a lot of hassle. It can be very painful. You might even get fines depending on how late you are. That is certainly something to avoid.
Simon: Talking profits, I am surprised by the amount of people we work with in, that the week zero, so in setting up working with us doing the Strategy Sprint, which should double your monthly revenue, we ask for the monthly revenue. And when we ask for a monthly revenue, we have a survey which asks what's your cost of delivering the goods, what's your profit rate, what's your current profit this month and similar stuff, so the very basics, what's the lifetime customer value and lifetime customer worth and I am surprised by how many do not have a good estimate. A current estimate of their profit. So maybe you explain to everybody what profit is? If you run a business, what is the number that you should really know and how often should you do your calculations?
Larissa: It does depend a little bit on your business model. If you have a consulting business and you don't actually get paid regularly, but you have clients and you do a project, you get paid at the end of a project, that's a very different business model to having a subscription business where people pay upfront every month. Then, you should definitely know your unit costs. You should know your acquisition costs when it comes to acquiring new clients, so sales and marketing costs or even direct acquisition costs. Especially if you do a lot of online marketing. Your fixed cost, and then the cost of production of whatever product or service you are offering. If you have these then you will be able to calculate your profit and your profit margin. Then when you know that, you can work on increasing your profit margin or just expanding your business and increasing your overall profit. Because the fixed costs tend to remain the same. This is something I would say to look at every week or so depending on your business model. Especially if you have a fast-moving business with a fast turnover, then it's important to look at that. Especially in terms of growth and meeting your goals as you said with the KPIs. It only takes half an hour, it's not a lot of effort and people tend to not want to do that because they think it's boring but it's very important to know whether your profit, and especially a profit margin is falling or rising at the moment. One thing that could happen is you have rising profits but falling profit margins because there are more and more additional costs associated. It could be client acquisition costs. Or you might need to hire new freelancers to generate that extra revenue and at some point you might be running into shrinking profit margins and you might want to do something about that and take action. That's something to look at, not just the profit but also your profit margin.
Simon: I can resonate with that so much. I am exactly one of these owners CEOs who for years thought this is boring, just outsource it, let the bookkeepers do that. And now I realize I was so wrong. First, it's not boring but it's essential. That's the reality check of what you do. And second, it's even exciting because when you do it right, it's the art of growing a business. The art is made of all these elements, the water, the sun and the oxygen etc. That's the elements: profit, revenue, cost of goods. Exactly the elements you need to grow your business. Also, one thing which was really important was the pricing and the terms of payments. Previously, as a service business we were to be paid at the end of the month and it's normal in the industry ,so we did it. When we switched, we considered going to a monthly retainer which would also be a step forward. But, we went directly to charging upfront and that is even better than a monthly retainer because now you have cash flow, now you have reliability, now you have numbers, now you have something to manage. And now it's not boring, because now if you know what the profit part is and what the rest is, now you can start innovating, increasing the quality, maybe increasing the distribution. By increasing the quality of what we do makes clients even happier which will lead to more reference. One part was exactly how do you, for a service business, know the price of a unit because you've so many units. You are reinventing the wheel with every phone call that you get, then you start something but you don't have one unit or what is one unit. That's usually week one things we work on with them. Then when you have one unit some of them do not know what the cost of acquisition is. It's many single parts, it's not so easy. So when somebody starts, okay he saw this video and now says I'm gonna have two bank accounts. Then, how to start ?
Larissa: It’s good to start with these two different banks especially when we are talking about acquisition costs and consulting businesses. It's a good idea to have sub accounts because then at least you have cost categories. You could have one sub-account for sales and marketing or even separate those. If you're in a consulting business, what happens a lot is that you go out and you meet clients for lunch, you meet potential clients for dinner and you basically talk about what it is that you have to offer. You meet other people that might be providing you with leads. Then it's great to just have a separate account for all of these things. Because normally you would be using a card to pay. If that card is tied to that account, then it's very easy to say at the end of the month this is how much I spent on entertaining clients. It's basically your marketing and sales card. Or you could also combine it and this could be the credit card that you link to your social media accounts for online marketing. Then you know at the end of the month or at the end of the quarter, depending on how long your sales cycle is, how many clients you got and you already have basically that account and all the costs have been deducted from that account so it's actually quite easy to then calculate. Because if all of your payments are amalgamated in just one account it is very difficult to sort out. You actually have to do the whole controlling process. And you have to build excel sheets and you have to export all the data. But, if you have one account that is dedicated to client acquisition, then you see what you spent in the last month, three months, six months. You just have to look at it and it might not be as precise as what a controlling department or a good controller might do but it definitely gives you a rough idea. Especially as a small company, if you do not have a separate person dedicated to the task of financial controlling. The other thing you mentioned is bill collection. That’s actually very important for consultancy businesses. I've worked with some consultants that have told me that they spent 20 percent of their time running after their money for consultancy projects they've already completed. What happens a lot of times, especially if you're an experienced consultant and if you can solve a big problem for a company within two, three days because you are well-connected you’ve already done this ten times before. They have no idea how to do it and for you it's a very simple task because of your experience. I sometimes help companies get financing. I know exactly how to prepare the numbers. They have no idea, they don't really know how to talk to their bank. I've worked with banks for several years so for me this is very easy. Then they say well you only really did one or two days of work and they got their financing, they're happy the task has been completed from their side. They might try to argue about the payment. They might say you really didn't do that much. They might not be willing to pay. So in that sense, it's very important to have clear payment terms. It's even more important to enforce them. So as you said with your business, it's ideal to ask for upfront payment. For other consultants, it also depends on how many references you have, your work, what your reputation in the market is. But you should at least try to ask for 50 percent upfront. Because having to run after your money takes a lot of time. It's very inconvenient, you have to harass people sometimes you really have to harass and hassle people. To call them, write the emails. It's very good to have payment terms of 30 days or 60 days and once that time limit has been exceeded to actually send reminders, one, two, three reminders and then to actually take legal action. That way you teach your clients that it's not okay to not pay you. And a lot of consultants do have that problem off and on. If you ask for at least fifty percent upfront payment that's a good indication of whether or not the client is generally willing to pay for your service. Because if they already don't trust you enough to give you fifty percent up front, in that case maybe something is going wrong in the sales cycle. Maybe they don't really trust you. Maybe they don't really want to hire you. Maybe they just kind of want to see what you can do as a consultant but they're not really willing to pay for your service. In that case, it’s actually better to find different clients. because if that relationship of trust hasn't been established it is very likely the project will just go south rather quickly.
Simon: Absolutely. We have a PDF on our site, strategysprints.com, which is the guide on how to find the right pricing for your service business. So the first category that we explain there is the pricing per time. We show how you should quickly move upwards to a retainer or directly to charge in the front and how you can do it. There are nine things that you need to do in your offering so it's an irresistible offer. and then you can do it. You need some credibility, but there are steps to build it up. Then it's definitely better to charge up front or for packages instead of over time. Because you lose a lot of freedom that way. And especially from the financial standpoint, you don't have a reliable cash flow. Which means all this volatility makes it a guesswork, like how many people should I hire, for what, is my growth plan realistic. You don't know what kind of volatility you have. But if you have more knowledge of your volatility, you can manage money.
Larissa: That's very important. Slso in terms of you know ensuring your liquidity as a consultant. That's one of the most inconvenient things for consultants that I've seen is, that people have completed huge projects over the course of two to three years and we're talking projects worth almost half a million as a single consultant, which is a lot of money. And then you have to spend two, three months chasing after your money after you've already put in two, three years of work, after you've already had expenses. So it's always good to at least, as you say, move from being paid for your time, to charging a monthly retainer, to charging a certain amount upfront and ideally to upfront payment.
Simon: I'm curious about your thoughts on something. I had the privilege of having a great boss. My first boss in St. Gallen in Switzerland was Professor Malik. He had this provocative notion that what most people say about capitalism is that it's a game about maximizing profit, it's not. He had a firm position that capitalism is the game of achieving the minimum profit and reinvesting everything else. He had this metaphor, in the game of monopoly, that when you pass by the houses, and he would say it's not about having a lot of houses, it's about every time you pass you need the liquidity. Every time you pass by a house, you have to be capable of paying right now whatever you have to pay. So it's the minimum amount. That changed how I think about money. I think that was a very important nudge to give to a young person, to say be careful it's the minimum game, it's not a maximum game. If you play it long enough then you compound. But this is what can kill your business because then maybe next Friday you have to pay a big amount of money you weren't expecting.
Larissa: I mean that but that's certainly one of the things that a lot of, especially entrepreneurs that have small businesses and they're just starting out, those are sometimes the troubles they face. I like the idea you know of how your professor described well working capitalism. Because a lot of people tend to think that it's short term profits. Now the thing is everything works better if you look at it from a long-term point of view. in terms of long term profits and in that sense it's also good to sacrifice the present for the future to make smaller profits now in order to ensure your liquidity. In order to ensure, and especially when it comes to investing, that you have enough liquidity when an amazing opportunity comes along. Let's say there is an opportunity for an amazing project, an amazing business deal, an amazing partnership or expansion and you would really like to do it in your business, but you don't have the liquidity right now. Because you maybe you took out too much in profit. Maybe you just focused on the short term and you said you’re not gonna provide for future liquidity, just going to keep to the absolute minimum. This is actually not necessarily a problem with capitalism. One of the things that I really love studying is neural economics and behavioral economics. Our human brain often tricks us because our brains, our evolutionary lizard brains, are geared towards short-term thinking immensely. Essentially that part of the brain is just there for the immediate. Getting immediately getting to security. In terms of eating, let's say you walk past the bakery and you see a lot of really nice bread or a lot of nice patisserie sweets. That part of your brain thinks eat it right now you have no idea when the next time is going to be where you find food. That also hugely affects your economic decision-making. There's a whole field of science about that and studies how we make economic decisions and decision making when it comes to money. That type of short-term thinking actually leads us to make a lot of financial and investment mistakes. It's very difficult for us to really look at the long-run. But as an entrepreneur it's a very good idea to look at that. And also not project or put too much risk into the future. Because you might want to say you will deal with that problem when you get there. And in some cases you will have to do that but in terms of financing your company, and that's also one of the things that I had on my list for today, one of the most basic mistakes that new entrepreneurs make or first-time entrepreneurs and small businesses is financing incongruence. Say you have a long term project, 3-year project, and you take on external financing. But the external financing you take on is for a much much shorter term, financing that you have to repay after one year. That is something that can really burden a business. Generally when you have externally financed projects, the financing should be as long as the project period itself. Because if you have to refinance every few months, first of all it's a lot of work, and you might be in a liquidity squeeze right that moment for whatever reason. This happened for instance in 2008, 2009 in the real estate market that a lot of developers or real estate investors had taken on rather short-term financing and then they had problems because all of a sudden you just couldn't refinance. The market for it wasn't there. The banks were just not financing. So that's something that's very important to consider. To always match the term of your financing to the length of your project or the investment that you want to make.
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