Why EOS Won't Fix Your Cash Flow

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You said David laughed out loud at one moment, so out of all of our episodes, there was one moment, all this Purell humor, and there was one funny bit. We'll take it. That's right.

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All right. Let's get to it. EOS doesn't do money.

So, EOS, obviously, Entrepreneurial Operating System, is a widely used OS. We love it. We think it's a great framework, a great base framework.

Gives you rocks, issues, leadership structure, L10 meetings that help you run your business. However, we quite strongly feel that it doesn't provide all things to all people. It doesn't do money well.

So, let's start with the punchline. What do you mean when you say EOS doesn't do money? Yeah. So, just to be clear, EOS is a brilliant operating system, and it was a game changer for small businesses to act like they're a big business.

And let the hate mail come on as we go into this episode. But there's some things that EOS doesn't do. Now, we run a version of it every single day, and with our clients, and those things.

And we rely heavily upon the framework of that. And we also incorporate some Pinnacle and some other operating systems as well. And that's based upon what we learned is best for our clients.

So, I'm not throwing rocks at rocks. Okay. Pun intended.

But here's the part nobody on the EOS side says out loud, is that Traction, which I have in both English and Spanish, by the way, is an operational book. It barely mentions cash. And as we know, cash is where we're all about here.

All your hard work, your revenue, your marketing, all that kind of stuff, it all has to lead to one thing is that cash is in your system. And that's something that EOS doesn't do very well on. It doesn't teach you how to read a P&L.

It doesn't build you a forecast. It doesn't tell you when you're nine weeks from missing payroll, right? It's about rocks, issues, L10s, GWC, IDS, all it's useful, but none of them are financial, right? They're nouns. But cash, you know, in our world is a verb, right? So, owners install EOS, the meetings get cleaner, the bank account stays exactly the same, and they act surprised.

The system never promised to fix that. They just assumed it would. So, having a great operating system doesn't mean that your bank balance is going to grow.

Right. Right. I mean, great operating system, but a little heretical to say, like, it doesn't work fully across all areas of the business.

And people, like EOS people, love it. And they're going to push back hard. What do you think they'll say? And good.

Good. You know, let them. I'd love to have that conversation, right? And let's sit down over a beer and some snacks and talk about this, because there's a lot of good that EOS does do, right? But you tell me where in traction that you build a 13-week cash flow forecast, right? Show me the chapter on margin by service line.

Show me the integrator learning quality of earnings when it's time to sell, right? I'll wait. Give me the fan mail. Give me the sections in the book, right? Or in your implementator guide.

And I'd love to retract this as episode 15 of, hey, EOS does money, right? That kind of thing. But the reality is, John, it's not there, right? And that's not a flaw in EOS because EOS wasn't designed for that. That's not what its scope was.

It was built as an operating system, not as a finance department, right? So the flaw isn't in EOS. It's really in the sales pitch, right? Implementers may say that this will run your business and owners here's this will run all of my business. And those are two different things, right? And I'll go a little bit further, right? The cleanest EOS shop I've ever walked into had a perfect L10.

You got good conflict. You're resolving issues. You're doing to-dos.

They had an accountability chart that was up-to-date and current. Everybody knew their place. Everybody was rowing in the same boat, in the same direction, in the same cadence.

But they were also 90 days from insolvency, right? Because nobody flagged it. The scorecard didn't have a single cash metric on it, right? And that's the problem is that you have to have your KPIs, but it doesn't tell you which KPIs you should have and how it, you know, it operations affects marketing, that affects sales, that affects cash. It just doesn't get tied together in traction.

Yeah. You're starting to mention some of the things that specifically it doesn't have, the gaps. So keep going.

Walk us through some of them. You've mentioned 13-week cash flow forecast, etc. Let's roll a few off the enhancements that have been added in the version that we use at Synergy.

Let's go with the gaps first. It's the same thing, really. It's the same two sides of the same coin.

So five things. I'm going to count on my hands, so on my fingers, so I don't get lost, right? The first one is that, one, a real 13-week cash forecast, right? This is what we use to run every single company. It doesn't matter whether you're on accrual or cash basis.

It's forecasting the velocity of your cash coming in and coming out, right? It predicts the shortfalls of what's going to happen, right? It's not about a bank balance. It's not about a vibe. It's really a forward-looking weekly view.

And that's going to tell us exactly where we stand week six, week 12, those kind of things. And more importantly, how we have the discussions about what we're going to do about them, right? And most EOS implementers who aren't finance people, right? They've led great companies. They've sold companies, those kind of things.

They don't know how to build one because they're not finance people, right? They're good operations people. And that's exactly who you need to run an EOS system, is an operations person. Second, here we go for all those counting at home, a budget that's actually a tool and not just the tax time artifact.

It's something that you review, you build it, you can use it as a forecast, right? And that's something that is never talked about in traction. Third, you need somebody who can actually read the financials, right? You need a controller or a CFO function, not just a bookkeeper, right? You need somebody that actually can explain, hey, if we do this, here's the economic problems that we're going to have, or here's the economic opportunities that we're going to have if we do this, right? Here's the pros and cons of these things. This is how we're going to leverage debt.

This is how we're going to raise the capital to get there, right? You have to have somebody with a financial mind and peace that's also talking to the owner, talking to the operations person, talking to the salesperson, right? And so that gets skimmed over. Four, you know, profit first or some first or some equivalent of cash discipline, right? EOS gives you rocks, but profit first gives you the cash to fund the rocks, right? That's what you need to have. And you need to tie your rocks to cash.

You need to tie your rocks to profit first. You know, those are some of those things that need to happen that get glanced over. And the fifth, five, here we go, I got it, Cinco, is a scorecard with financial metrics on it, right? Most EOS scorecards, they'll have 12 KPIs and not one of them is about cash or margin or AR over 60 days, right? It's all about operations or it's about sales or leads or marketing or whatever it is, but it all has to tie back to cash, right? And that's the discipline and that's the problems that I see.

Yeah, those are pretty rock solid gaps, right? I mean, in running a business. Sure, EOS has the structure and the cadence and, you know, it's game changing. When I was first introduced to it, I was like, wow, I've been in business for 15 years, this suddenly makes sense of how to run everything.

But without the information that you just mentioned, you're still flying blind for making decisions. Why don't EOS implementers fix it themselves? Like they're in there. Why don't they fix it? I think there's a couple of things.

One is it's uncomfortable. That might not be their forte, right? The other one is there's a structural flaw in EOS and they don't know how to fix it. So let me give you an example of, so I have been in EOS implemented, quarterlies and annuals and those kinds of things.

And if you don't have an operating system and you only have EOS to choose from, go for it, right? It's going to be better than anything else. I want to say that as a disclaimer as well, right? Operating without an operating system is a no fly zone. Don't do it, okay? So something is better than nothing.

But here's the thing that happens in a quarterly meeting and it's seven hours plus or minus an hour, right? We've been in there and here's the breakdown. We've got three hours of IDS. We've got two hours of rocks.

We've got one hour of a VTO review. We've got one hour of EOS tools or team building or whatever you have. All very important.

You got 30 minutes of a check-in. You know, what's your expectations? What's our priorities? What are those kind of things? How was your business and personal best for the last 90 days? And then you have 30 minutes for reviewing the prior quarter, okay? That's it. And it's mostly how did we do on our rocks? Did we complete them or not completing? It's zero or a hundred percent.

That's it, right? And then you go through the financial metrics and it's, well, did we hit them or not hit them? There's no discussion, right? You literally have to try to bring that up in the IDS. That happens three hours later. You get 30 minutes to discuss what happened in the last three months financially.

Mix that in with the rocks, right? That's it. You know, and inside that 30 minutes, you don't have any time. There is no exploitation.

Well, you know, we were 95% of our goal. Nope, zero percent or a hundred percent, right? And that's the problem with that. So when I say EOS doesn't do money, it's not my opinion.

It's a fact, right? So me sitting there as the CFO, I get maybe 10 minutes of talking about the financials. There's a lot lying on that, right? It doesn't have to be all operational or sales or marketing. Yeah.

It's the lifeblood of the organization, right? Like when you're making decisions about setting rocks, like that's a financial decision just as much as it's an organizational operational one, right? You want to grow a part of the business out? You want to increase sales around a specific area? That's not just a marketing problem. That's a financial problem to say, okay, well, are we able to invest in the business to be able to grow in that area? Are we set up for success with operational delivery of it, right? So finance is infused across all elements of the business. Yeah.

So, I mean, obviously there'll be owners out there that are listening of the five people. If they're all our people, they all are running it and they've already got that problem solved. But they should be having some aha moments to say, holy crap, these guys are right.

Mostly Ryan is right. I'm just here for cannon fodder. What's the diagnostic? What should they be doing now? How should they be trying to address the gap that you just described? So I think you've got to ask yourself five questions and you need to be really honest with yourself, right? The first one is, can you tell me your cash position for the next 13 weeks? Not just your bank balance, but your projected ending cash by week by week.

If not, you have a gap, okay? You're flying blind. You don't know what's going on. Second is, can you tell me your gross margin by service line or product, right? Last month, this, you know, what's your forecast this month, next month, the whole survey.

Or are you just looking at it like, you know, one all overall sales gross margin instead of your four product line or service lines, right? If it's lumped together, you're missing out. Third is, does your scorecard have at least three financial KPIs on it? Cash, margin, AR overdue, does it have profit first accounts, right? Anything to that effect. Fourth, you know, when you make a $50,000 decision, do you model it before or do you just say yes? My gut says that, yeah, we should do this, right? Or do you actually have a scenario saying, well, let's see what this looks like and what that impact is going to be financially, right? And operationally.

And what do we have to do marketing, right? How do we support that decision? And I think the fifth one is, in your finance, in your accountability chart, who's in your finance seat? If the answer is, you know, yourself or your bookkeeper, right? You got the wrong person. If you're doing over a million dollars, you need to have somebody else in that seat that's going to help you strategically grow. And help you make the right decisions for where you're taking your business.

We had a conversation recently with an owner who doing over a million dollars and didn't know his financial earnings, right? His SDE or his EBITDA. They just had no awareness. And I think, yeah, that should be something that you're aware of on a week-by-week basis when you're making decisions.

So you mentioned scorecard. That's kind of the root to this. You said most of them are missing financial KPIs.

What should be on there? What are the specifics of the KPIs that track financially? So if we're talking about cash, which is what we should be talking about with a lot of these small businesses, is how much cash on hand is there? And we're talking about your QuickBooks balance. We're not talking about your bank balance, right? QuickBooks balance has outstanding checks that haven't cleared yet, right? And they could be hundreds of thousands of dollars there. Second one is weekly collections versus forecast.

All good are our collections. We should be able to project out four, six, eight weeks of our collections with relative certainty, because that's how you make decisions. If I know I'm bringing in $250,000 in the next two weeks, I can use that money to fund that new vehicle I want to buy, right? But if I'm seeing a cliff come out in six weeks, maybe I want to hold off on that purchase and figure out what's going on with my sales department.

AR overdue as well is a great collections method. You know, how well are we collecting money? A lot of the owners that we talk to just go in and say, oh, we've got money today. That's fantastic.

They have no idea who's paying them and why or how and when. And that's really dangerous when you're getting up to four, five, $6 million, right? You're just counting and preying on the money that's coming in. And I think, you know, we also have to take a look at, you know, our gross margin percentage, right? Our revenue per employee.

Those are the metrics that will help us forecast, you know, and anticipate our hiring needs. So if our revenue per employee is starting to skyrocket, right? Then we have to look at our operations and our utilizations and say, okay, we're at about 95% capacity. We can't take on another job.

We need to hire, right? Those are those things that will help you. Quick word from our sponsor, Easy Mobility Solutions, our fifth listener. Oh, here we go.

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Yeah. Trending those things out over time is important, right? Like you don't know that number. Like each business is entirely different with what those metrics where those metrics need to balance out and level out.

So you have to track it over time to be able to understand, well, if my revenue per employee is actually rocketing up too high, that's a warning sign. That means you need more people to be able to scale. But obviously you need a baseline to be able to to make some of those decisions and understand the level that it needs to be at.

So these things have to be implemented over time and tracked. They absolutely do. You know, if you're gross, if your sales are going up and your gross margin is going down, you're just taking every job to to pay payroll.

Right. Right. You want to make sure that you're growing profitably.

Right. But what I'm seeing with most EOS scorecards when when we bring these folks on is that it's really heavily sales activity. Right.

It's about calls made, dialing for dollars, demos booked, proposals sent. Those things are fine. But how do they relate to dollars? Right.

How do they relate to cash? That's that's the missing piece is that you can have all the sales activity in the world, but it might not translate to your bank account. Mm hmm. Mm hmm.

OK, so that that's that's metrics, that scorecard, that's gaps. What about rocks like rocks? I think is the most important way for an organization to move forward. And a lot of the rocks are revenue based, like we want to move from X to Y and revenue.

Let's hit a target of five million this quarter and improving profit margins. Isn't that EOS doing money to some extent? That's EOS naming money. Right.

Not doing money. That's a big difference. Right.

It's like naming a hurricane, but it doesn't stop the hurricane. Right. So hitting five million in revenue is a wish.

That's what it is. That's right. Hurricane one coming through your town in rural Canada.

Yeah. So, I mean, hitting five million in revenue is a fantastic rock. Right.

And it's a wish, you know, with a deadline. Right. I want to hit this in 30 days, 90 days.

Right. I got 90 day sprints. I got whatever you're going to call it.

But it's a rock that, you know, it didn't tell you what the pricing model is. Right. So if we're just going to have five million to have five million in sales, fantastic.

Great goal. But if you're doing five million dollars in sales and you're losing money, was that really the rock that you wanted? Right. So we want to talk about that and say, well, how do we get there? Right.

What's the cash required to get there? What's the gross margins that we have to hit? What's the capacity that we have to have to take on those extra jobs? Right. And so EOS always asks for the headline. Right.

But it doesn't ask for the math underneath. And that's the problem with setting a sales rock is did we set it set the rock well enough that it would be profitable? And I think that, you know, that's one of the things. So EOS has, you know, six tools in their priority list.

Right. It's number one is LMA. So that's leadership, management holding people accountable.

Then they have the three step process documenter, which is fantastic. People should have their processes documented. And then they have their cash tool, which is the you know, they call it the eight cash flow drivers, which is a fantastic exercise to have.

Right. How do we affect cash flow with operations, sales, marketing, finance, if you're lucky, those kind of things. And then it has Colby, which is a personality assessment, and then the five rules and then trust builders.

So your cash tool is ranked in the middle at third behind a process documentation and ahead of a personality test. Right. That's the official EOS recommendation.

That's how much real estate cash gets in their methodology. Right. I failed my personality test, by the way.

I actually took one for a job and it failed. I said I was cheating. How do you fail a personality test? Are you sure that wasn't the IQ test? It could be the same thing.

Yeah. Yeah. So I mean, practically my mom had me tested and I'm not insane.

Just to let everybody know. OK. I'm not sure that mothers always say whatever is necessary to make sure we're healthy.

Right. Yeah. She said I was special.

Needs. Yeah. Yeah.

She left that out. But thanks. We all are unique individuals.

Practically, what does an owner need to combine EOS with to to really be whole here running their business? So when you when you hit a million dollars, you've hit the big time rates. It's no longer proof of concept. You've got a real thing here.

So the first thing that you you always have to do is make sure you have clean books. Right. Is that you want to make sure that your monthly close happens by day 10 and not day 30 so that you have you have accurate information in a timely manner.

Right. If we're making decisions based upon 90 day old data, it's not a good decision. Right.

The world changes in a minute, let alone 90 days. Right. The second one is that you certainly should have a controller type function, which is essentially does this stuff make sense? Right.

Did the bookkeeper book everything correctly or is there some adjustments that need to be made out of the thousands of transactions that are made? Bookkeepers keeping up as best as possible. But you've got to make sure that it all makes sense and that you start doing some analysis as well. Why is utilities expense up higher than than it was the last three months? Right.

Those kind of things. And have somebody dig in there and get some answers. And the third thing is you need a CFO.

You need somebody that's going to be able to take a crystal ball and help you start forecasting. Right. And they sit in your L10 and they they are your financial head when it to talk about operations and sales and and marketing like every operation should have help make decisions financially.

Right. They should be able to talk outside of their realm and see how their decisions are affecting sales and marketing or they're affecting the owner's retirement plan for the next three years or finance. Right.

Everyone needs to sit down together and understand their roles and how they can help each other go to that that one goal. Right. So I think then and only then is that then you wire in your operating system.

Right. You got to have those financial people in place first. So then you can then bring on an EOS or bring on an SOS or pinnacle wherever you want to go with that.

Because then you're going to have financial KPIs on the SCAR card, not just sales, not just offerings, but also the decisions that we're making in this meeting today, the decisions that we make on a daily basis. How are they affecting things? Right. And that's what those KPIs are going to record financially.

Awesome. Owners are going to hear you need a CFO and assume it's expensive and that we're touting ourselves. And our podcast really isn't about touting ourselves, it's about just simple financial truths that we want to share.

Honestly, that's the message here. It's not about, you know, it's not a sales channel. It's really just trying to share good information for people to be able to improve their business.

But they're going to hear CFO. And of course, there are fractional CFO options as well. Assume it's super expensive.

What does it actually cost compared to what they're already spending on EOS? Because EOS is not cheap. It is not cheap, right? Anything under $500,000, right? You don't need a fractional CFO, right? Keep growing, doing what you what you got to do. When you start getting up to 500 or a million dollars, that's when you really start needing to have additional help that's beside you.

Somebody that has a financial perspective, right? That's their job. So let's do the math, right? And I always relate it to return on investment, ROI, right? If we get a good EOS quarterly implementer, right? So they come in quarterly, they do our vision day, they do our annuals, those kinds of things. It's roughly going to be between $3,000 and $15,000 a session, right? Some of these implementers are...