Designing your finances — you can design and iterate your profit & loss statement as well as your cash-flow management process — we discuss both and more with Jamie Odegaard of Aardvark. The full video of our conversation is below, and the edited/condensed transcript follows.
Sam Aquillano: Today, we have a special conversation to dive into a strategic approach to looking at the design of finance and accounting. This guy actually makes finance and accounting fun. We’re joined by Jamie Odegaard. Jamie has paved an untraditional path from advertising to carpenter to CEO for private equity. He’s now the CEO of Aardvark, a financial strategy studio for the creative industry. They help owners build a more successful business around the work that they love. Among other things, Aardvark is a fractional finance department, as they say, it’s kind of like your cool new friend that happens to give expert financial advice and make your accounting a breeze. Jamie loves helping small business owners understand the strategic financial insights that lead to success. Welcome, Jamie. It’s so great to chat with you.
Jamie Odegaard: Thanks, Sam. That’s a warm and generous introduction.
SA: I’d love to learn more about you and your background, I love a good origin story. So what was the spark that was like: we have to make Aardvark happen.
JO: I think the origin story is rooted in a lot of long suffering and hard lessons learned. I don’t have a formal financial background, I sort of came into this world in a really circuitous way, but also having sort of learned the hard way, about what’s important for small business. And over the last 10 years of my career, I’ve run businesses for owners that didn’t have any financial perspective other than evaluating the size of their bank account.
But if you sort of operate things on a cleaner basis from a financial point of view, it unlocks more opportunities and you’re probably allowing yourself to experience if you didn’t have that. So that’s what’s rewarding about the work that we do. And the origin of Aardvark in particular was, I was coming off of a stint working for a very sophisticated ownership group from a financial perspective and I learned a lot. And when I when I left that work, I was just talking to other friends of mine that were running businesses and it was very easy for me to start to explain the power of these financial concepts to them in a way that hadn’t been for me previously. And I think just a couple of really basic ideas set off a lot of possibility for these businesses.
SA: What types of companies are you mostly chatting with and what patterns are you seeing across them?
JO: Small agencies and film production studios are the largest two cohorts, but I think the common thread for all everybody that we engage with is that usually there’s a project-based accounting structure to their business, meaning they’re winning large projects, sometimes not so large, but the money comes in chunks through winning work, right, whether it’s brand work for an agency, or corporate work, or spot work for a film production company. So the commonality is that these companies have to manage their finances in the same way as they operate.
SA: What keeps these folks up at night? What are they worried about versus more of a traditional business?
JO: I would say like right now they’re mostly worrying about things that we can’t control, which is business development, you know? But I think downstream of that is, cash management, so when you’re earning money on a project basis, the revenues come in a very lumpy inconsistent way. And so managing that inflow has a couple of different components. There’s a profitability component, and then there’s the actual timing and cash management component.
The method of making the thing has some intrinsic inefficiencies with it, right? If you think about an artist, like in an artist process, they probably don’t love to have to filter through an efficiency lens if they’re making something that they’re very proud of from an artistic standpoint. But when you’re running a business and you have to pay payroll and you have to provide for your own family, you’re sort of forced into thinking about those things a little bit. So we can decide to spend, you know, 20 extra hours tweaking this brand identity, because it’s just going to sing when we do it. But we’re going to do it with the knowledge that, there’s going to be some offsetting costs that’s going to create some difficulty maybe for another part of the business.
SA: What are the services that Aardvark brings to bear to support? I can’t help but think about myself as a creative founder and I wish I had your phone number back then.
JO: The format that we prefer is if somebody sees us as a partner to own the financial responsibility of their business in terms of the way that the machine works. We’re not involved in the business development piece of it, but everything from providing perspective about pricing and what some benchmarks should be for profitability for example.
So we help with invoicing, we run payroll, we do all of the transactional bookkeeping. We do some long term projects if the business needs more time to confront certain aspects and in the meantime, we do everything that’s required on a weekly basis: like paying vendors, helping with like invoice management, and more.
SA: Do you even get into financial therapy? I imagine sometimes you’re chatting with these owners and you’re like, sit on the couch, lay back and let Jamie hear your troubles.
JO: Yeah, there’s plenty of that. I mean, math is very like clarifying, right? And so the finances of a small business, the problem is always easy to determine. There are only a few, sort of moving parts that would be responsible for driving an outcome of a small business — we can probably reduce it to four items. And so making the determination about the issue is the simple part. It’s what you do with that information, how that information makes you feel as an owner is the tricky part. And how to translate that into execution.
So for instance, if you win a project that’s not especially profitable — and it coincides with a raise that you promised a team member that’s key to producing that work. What are you going to do with that? The math is clear: you can either, not give the person the raise, or you can give them the raise, it’s a pretty binary choice — they’re going to have different outcomes for the business. So the way that feels for a business owner is brutal, but the math is easy — you’re either adding or you’re subtracting.
SA: I’m so curious how you actually work with clients, what’s your process? Say I’m a new client, I’m coming in, I’ve got some of the challenges we just talked about, how do you get started and roll them through your process?
JO: So typically it starts like on the bookkeeping side of things. So we take on the QuickBooks Online or Zero file as part of the onboarding process, and then we usually spend a decent amount of time understanding the business through that lens by asking questions like, why is this balance in this account? What happened here? This doesn’t make sense. Why does it say that a bank owes you $2,000? Banks don’t owe people money.
But usually that’s the starting point because we’re taking that file on, that’s our responsibility now. So we need to make sure that it makes sense. But then from there and through conversations with the owner about how things work, how they’re running their business, we typically make some changes to the chart of accounts, the profit and loss statement, which is the financial statement that most business owners look at most frequently. And so a lot of times the relationship between income and expense for direct expenses are not represented accurately enough to give you a perspective in how you’re doing as a business. So we typically ask the owner, is it okay if we change these things around?
SA: I think some people might think like, finance is finance. Accounting is accounting. Are you customizing for me?
JO: I think we’re a little bit different in the operational perspective that we infuse into the work. Just recognizing a transaction and labeling it is not a rarefied skill set. But if you’re asking questions about why that’s taking place and making a shift about how to more effectively demonstrate what the assembled story will look like as a function of how the finances are being represented on the financial statements, that’s unique value.
SA: That’s the story, right? That’s the story behind the numbers that is going to help you make better decisions.
JO: Yeah, exactly. I think the reason that finance feels so dry to a lot of people is because like there’s a disconnect between the reports and the story.
SA: Yeah, it’s in there, right? I was always told like when I was getting my MBA and I was running my business, accounting professor promised me that eventually you will feel the numbers. Then like 10 years in, I was actually starting to feel it — it was like the force.
JO: Yeah, hopefully! I mean, once you see it, you can’t unsee it. That’s the good part. But it took me a long time to really have an appreciation for what these documents could do. If they’re like designed in the right way and presented in the right way.
SA: I want to get specific and maybe we get back to that profit and loss statement. How do you design a P&L?
JO: When you’re starting a business, a lot of times what happens is you propose a certain service, say, I build websites, you know, and then their client or the next client might be like, well, can you do SEO? And you’re a small business and so you say, sure! I’ll figure it out. And before you know it, you can have eight different services that you offer.
So starting at the top of the income statement, in the revenue, we clarify the different types of revenue, the different income accounts so that you can see, oh, you know, we’re getting $100,000 for building websites, we’re getting only $15,000 a year in SEO work, but we’ve been representing ourselves as an SEO provider.
It’s usually like breaking one account line into like four, to clarify what it is the business does. And then the next sort of group down are the direct costs and we’re clarifying those as well. Right. So we’re saying what expenses in your business those income lines correspond to, so pretty clearly you can see the relationship between income and expense — how much does it cost you to produce the thing that you sell?
SA: I told my dad once when I was getting into design that design shapes the world and he was like, and he’s a CFO, he said, Sam, finance shapes the world. And I was like, oh, darn it. You know, a decade later, I was like, you’re right, Dad. But again, you can tell the number story through a human lens that you can take action on and iterate on. You might be telling yourself one story and the numbers are going to tell you something else.
SA: Let’s talk about cash management. I hear it from small businesses that I mentor. I think small business owners feel like cashflow just sort of happens to you. It’s just something that like occurs, but in talking to you and learning more about your work and of course, just getting more into my business, you can design cash management, at least strategies. Maybe you could talk a little bit about how you do that.
JO: Cash management and cash flow is largely driven by two things: profitability and the timing of the money coming in and out of the business. It’s interesting, you can have a relatively modest profit margin in your business and still manage cash effectively. If you’re losing money, your ability to manage cash effectively is going to be finite because you’re going to run out of the very fuel that you need.
So where we start is just by evaluating the profitability piece of it. What could cash management look like? And then the other aspect of having an effective strategy for managing cash is first of all, seeing it on a spreadsheet and being able to look ahead. When it feels like it’s happening to you, it’s because you don’t have any forward looking perspective — and it’s brutal for most small business owners to operate on that basis. Putting it all on a paper and designing a projection model for what cash is going to look like over the next months, three months or six months, that is very stabilizing for small business owners.
SA: Do you help folks figure out what capitalization needs to be? Like how much working capital do I need to have on hand versus what I have today?
JO: Yeah and tax is like another piece that comes into play — that’s always on the small business owners mind: what should I be setting aside for tax?
SA: Does founder/owner personality come into play? Because each owner is caring about something different or they have different risk tolerance.
JO: It’s such a common theme that when you’re accustomed to running the business with the point of view that you’re creating an output, then reverse engineering that perspective unlocks a whole lot of possibilities. I think that’s the experience that most of our clients have is: they’re thinking about how do I produce this work? How do I do it? Well, how do I make the client happy? How can I do something that looks better than my competitor, how do I maintain my artistic integrity? How do I make sure that the culture of my businesses reflects the way I want to live as a person — they’re thinking about all that stuff, you know, and I think where we can supplement everything that’s important about what I just described with saying: it’s important that you keep your eye on the ball in this segment of the business because this is going to allow you to do more of what you like to do. I think that’s the special relationship.
SA: What does it look like when it comes together?
JO: I would say the best case scenario would be for a business to graduate from having us to requiring somebody who is full time, either a controller or a full time CFO in the business. Because we work with businesses that are in this kind of early growth, maybe sort of like teenage years from a growth standpoint, revenue numbers from basically $500,000 to $5 million. So, best case scenario would be to execute on so much potential in our work together that now you’re all grown up.
The other more rewarding stuff that we see on a regular basis is people starting to incorporate a perspective that we’ve been emphasizing, on their own without our direct perspective — that’s really great.
SA: I think with a lot of founders and owners, they have those worries that keep them up at night, that are really questions or like unknowns. I like the work that you’re doing to shine a light: maybe the numbers still aren’t where you want them to be, but at least they’re visible, right? And you understand them. I think that takes a weight off of people, which I think is really comforting.
JO: Yeah. The other feeling of the owner that we strive for: the most impactful thing that they could do to drive the business is just find more work, we have everything else — if they’re feeling safe with everything that we’re handling, they can focus on work and move forward.
SA: Thank you so much Jamie for a great conversation — for more information about Aardvark’s financial work for the creative industry, including more articles and videos to level-up your knowledge, visit heyaardvark.com.
Sam Aquillano is an entrepreneur, design leader, writer, and founder of Design Museum Everywhere. This post was originally published in Sam’s twice-monthly newsletter for the creative-business-curious, Business Design School. Check out Sam’s book, Adventures in Disruption: How to Start, Survive, and Succeed as a Creative Entrepreneur.
Header photo licensed under the Unsplash+ License.