When any finance business partner–a CFO or an FP&A professional–wants their counterpart across the table in marketing, sales or HR, to understand the essentials of numbers, they hand them the business classic, Financial Intelligence, A Manager’s Guide to Knowing what the Numbers Really Mean.
First published in 2006, the book has been named in the Top 100 Business Books of all time and remains a word of mouth sensation and continues to sell rapidly nearly two decades on. The classic was authored by former CFO, Joe Knight and Karen Berman. Until her untimely death 10 years ago, Karen, was also a force in engaging all employees in improving a company’s finances
Based on the principles of the book, Joe Knight, Partner and Senior Consultant with the Business Literacy Institute, trains execs at some of the biggest companies in the world including NBCUniversal, Electronic Arts, and McKesson on business partnering and the importance of getting a business to understand and embrace their numbers and works. He has also been a guest on Bob Brinker’s Money Talk show on KABC ratio and CNBC’s Morning Call program.
In addition his engaging keynote addresses, include “The Love affair with EBITDA” and “The Secrets of Finance Revealed”. As CFO of Setpoint Companies, he spearheaded the financial education of engineers in this automation and roller coaster company and tells us some of his adventures from this journey and secrets to finance business partnering at the highest level.
In this episode
- The origins of the writing one of the most famous business books
- Why I hated my time in finance at Ford Motor Company and how it shaped my thinking and journey
- Busting the fallacy you shouldn’t share your numbers with your business
- Why actuals are not actual but just a guess (accountants close your ears).
- How business partnering has changed
- The metric of Financial literacy has stayed at 38% in companies for large companies nearly 20 years on
- Why it hurts operators if they don’t understand the numbers
- Focusing on three to five numbers
- My experience with GE and NBC
- The art of using limited data in finance
- Harry Potter roller coasters and what it taught me about the ridiculous focus on EBITDA
- Having seven Kids
- Not being a “numbers” person but a accretive person with numbers
Business Literacy institute: https://www.business-literacy.com/
Contact: mail@business-literacy.com
Glenn Hopper:
Welcome to FP&A Today, I’m your host, Glenn Hopper. Today we welcome Joe Knight to the program. Joe is the author of Financial Intelligence, A Manager’s Guide to Knowing what the numbers really mean, named one of the top 100 business books of All Time. Firtst published in 2006. The book remains the Go-to guide for CFOs, FP and a professionals and business partners who need a guided tour through the financials, helping them understand what the numbers mean and why they matter. As a partner and senior consultant with the Business Literacy Institute, Joe delivers keynotes like the love affair with ebitda and the Secrets of Finance Revealed. He has worked with clients including NBC, Universal Electronic Arts, and McKesson. Previously as CFO of Setpoint Companies. Joe spearheaded financial education for the engineers at this automation and rollercoaster company. He has also appeared as a guest on radio and TV programs, discussing finance. Joe co-authored Financial Intelligence with Karen Berman until her untimely death in 2013, Karen was also a force in engaging employees to improve company finances. Joe, it’s an honor to have you on the show. Thanks
Joe Knight:
For having me. Appreciate the opportunity.
Glenn Hopper:
Something I was thinking about, actually, I was, I was laying in bed last night and thinking about this <laugh> as I do be the nights before a recording, the idea of storytelling has been a big part of FP&S in recent years. When I first started in the field, we didn’t, we didn’t talk about storytelling. We were doing it, but maybe it wasn’t labeled as such. And and as, as a matter of fact, at Data Rails, we recently hosted a webinar entitled Getting to a Winning FP&A story. And I, I think that this is inter interesting to me because my first career before I went to business school was as a journalist. And I’ve always seen kind of journalism and finance as two distinctly different things, kind of left and right brain, if you will. But I’ve since realized, and I think this is kind of the what’s going on in the community now, that good finance folks aren’t just numbers people.
They’re not just delivering reports. They’re using the numbers to craft a narrative. And why I was thinking about this, despite initially thinking we’ve got words on one side, numbers on the other, now, it kind of seems natural that many of us would be writers. So I’m thinking now back to you know, nearly two decades since you first published Financial Intelligence. I want to get in your mind of, of where you were when you decided to write it and why you decided to take this on and kind of what your focus was and what your thinking was when you started the book.
Joe Knight:
Yeah. Let, lemme make a comment about what you just said. Kara and I literally, my office manager Kara and I were just talking about how funny it is that I’m a finance guy that just tells stories. And and, and one thing that’s that’s really funny about that is we just did a training this morning with a company called Gentherm tier one supplier in the auto industry. A lot of German people on the call with us on the, on this training. And I’m just telling one story after another and Kara logs the stories because since Covid, unfortunately, I had to start training virtually, which was really hard. And so Kara would always run the technology and she would write down stories in a book every time I told the story. And she’s north of 40 now, <laugh> of all these stories I tell, because I’ve always taught and explained finance by using stories.
Kind of how I got into this kind of a an area is is I, I, I got my MBA, you mentioned that you did as well in finance from Berkeley. I went directly to Ford Motor Company and lasted three years there and just hated it. Just didn’t work in a big company, couldn’t not a rule follower. Just liked to do my own thing. So I left Ford, moved back to Utah where I had family was from, had a young family and just started looking for something in small business, even consulting. And that led me to meet these two engineers, an an electrical engineer and a mechanical engineer that basically worked at what they considered their dream job. They worked at a company that designed and built rollercoasters. And it was, it was like, and, and amusement park rides. In fact, they were working on the Kong ride for Universal Studios when I met him.
And and, and it turns out I, I, I consulted for a little bit with this little company. It was a disaster of a company. And as engineers, they were never told what the numbers were, but they knew it was a disaster of a company. And I kind of, as a consultant, kind of, you know, wink wink said, yeah, you guys might wanna look for something ’cause this isn’t gonna last long as a, you know, and, and they knew it. They were smart. They’d been there for a lot of years. They loved what they did. And so they quit and they started their own business. I had off gone on my own, my own working in the Utah area with different groups and doing consulting work and doing pretty well with it. And they called me up and said you know, and I’ll, I’ll call him Big Joe, Joe.
My one of these two engineers, six, seven Joe Cornwell, who loves moa. We were talking about MOA before the, the call. He’s a big motor sports guy and loves all these kind of stuff. He, he loves designing things and everything else, but he also loves business. So I came in to meet with him and he said, Hey, listen, he told me the story I just told you. And he said, I know we met a little bit on the consulting gig. I wanna start this company in a different way. I want the books to be 100% open. I wanna do a P&L every week if I can. I wanna do month end financial reviews and I want somebody to help me figure out how to do it. Because my accountant and my attorney who helped me set up the business said, that’s the worst idea they ever heard.
If you share your numbers with your employees, one, they’ll, if you’re losing money, they’ll all quit. Number two, if you’re making a lot of money, they’ll all want raises. Number three, you always lose money in a business. And the, and they’ll, you know, they, they’ll they’ll panic and those kinds of things, not only quit, but panic and, and that there’ll be a negative attitude. Also, finance and accounting is hard to understand. It’s sophisticated, it’s very technical. And finally, if you share all your numbers, you’re in a competitive, you’re in competitive bidding environment, people will find out your, your pricing and your bidding. Your suppliers will find out if you’re making money, all these things will happen ’cause you’re not controlling the information. And so he said, I said, so that’s what you’re told. Why are you talking to me? He said, ’cause I want you to help me teach everybody how to read the numbers.
And so that’s where we started. We started by focusing on how to share the numbers. And we literally started when he said, if you take revenue and if you take my sales when I get a PO and subtract the cost to make the sale and pay my people, I get a number I call aggregate remainder. And I said, you know what we call that Joe. His name was Joe too, by the way, Joe, we called that gross profit. And he said, that’s so cool. You guys have a name for that. And that’s literally where we started. It’s literally where we started because he had no finance background, but was a brilliant engineer and so was his partner. And we built the business around that concept. So that’s, that’s how I started teaching finance was to my own people. I ultimately became a partner with them and owned that business. And we ran that business for 25 years. That’s the setpoint companies that we sold to private equity about six years ago.
Glenn Hopper:
That’s so interesting to me because I, my first CFO role was at a private equity backed car wash company. And we were so focused on hitting our numbers that we decided for our profit sharing. And these are, these are blue collar workers, you know, high school education, never took a finance class, but our monthly profit sharing that we did with the managers for their unit, we would give them their whole P&L and we would say, this is your budgeted margin. And if you exceed it that, you know, they had kind of a tiered budget system. And I’ll tell you what, they were motivated by trying to drive their budget. So they, after six months of talking to a, you know, a blue collar car wash manager, <laugh>, they would talk to you just like the PE guys would about their financials. They’d say, now explain to me why my COGs are up on <laugh> on chemical costs this year, when this is my inventory level. I mean, it just, it was amazing. But it was, it, it’s the only way we could have run the ship as tight as we did is everybody had to be understanding that reading from the same shade of music, I guess. Yeah.
Joe Knight:
And, and we had the same, we, we grew our company Setpoint the same way, same way. And we did our weekly reviews. We had bonuses tied to a quarterly and we had, you know, we’d look at every project and we, we boiled it down to a couple of key metrics and we, we changed behavior and changed the way people think about things and the way they act. And we shared in the success. And it was a, it was a great story. And, and that, that’s where I start. And that’s where I cut my teeth because we did a weekly P&L that everybody understood pretty well. But pretty soon, big Joe said, Hey, I wanna do a month end where we go through the income statement, the balance sheet, and the statement of cashflow. So I started doing that and after about three or four months of that, he said, nobody has any idea what you’re talking about, especially when you get to the balance sheet and cashflow.
Can you train us on those? And so I did classes and and, and, and that led to meeting with a group of people that do open book management. I dunno if you’re familiar with that, but Jack Stack and mm-Hmm. You can look it up. You wrote a book called The Great Game of Business Co-authored with Bo Burlingham, who was an editor for Inc Magazine for a lot of years. And Bo got to know us ’cause we were part of that group of open book management. And anyway that led to a, a connection there. And, and we started to find other companies like that thought the same way. And I met at a conference there, a lady named Karen Berman, my co-author. She had received a PhD in educational psychology. And her doctoral thesis was based on research in business that when businesses share numbers with their employees and they’re trained in them, those businesses are always more profitable than a, than a group that does not.
And that was a doctoral thesis. And so she was fascinated when I described my business that grew from the ground up based on a philosophy she believed in. And she said, would you ever be willing to take your material and teach other people the way you taught your own company? And that started the Business Literacy Institute. And several years into that, people said, you know, we wish we had a book that explained finance the way you do, Joe. And I said, we don’t, I don’t know of a book. We recommend some book that won’t that good. And they said, well, Karen said, well, why don’t we write one, I’m an academic and we made a proposal, Harvard and the rest is history. So that’s how that book came about is from the ground up, doing my own thing training.
Glenn Hopper:
That’s amazing. And it’s really because it came from the ground up that, I mean, I I’m sure that your experiences let you convey the message in a way that just a, a straight academic maybe wouldn’t have been able to because you’d actually been out there applying it and and interacting with people and kind of honing it.
Joe Knight:
Yeah, absolutely. Absolutely. And it, it’s, it’s obviously struck a chord with people. And basically that book is the way I trained. It’s, it’s very much written the way we trained, the way we did our material with a lot of Karen’s professionalism. We also had a, a writer John Case, who also was an editor of Inc. Magazine and wrote for Harvard Business Review that helped us clean up the, the prose, if you will. And with, with the, with the three of us, we created a book that’s, that’s been something we’re pretty proud of, and that’s driven this business really beyond Karen’s life really. Sadly, but yeah.
Glenn Hopper:
Yeah. And we’ve, I mean, we’re going on coming up on, you know, we’re 18 years now, I guess, since the book was published and it still holds up to this day. I mean, why do you think it is that the book is held up and continues to be read and loved so much today? What is it that resonates with people this, this many years later?
Joe Knight:
We are kind of surprised by it, but the reason why I think it the reason why I think it sells so well is there’s nothing like it in the marketplace. Nothing matches it. And it resonates with non-finance people that get ahold of it and read it, and, and it, it’s just word of mouth. It’s spread that way. We don’t do a lot of, a lot of marketing for the book other than me, me going out and training and speaking, but that can’t explain how it’s doing now and, and and how it continues to go forward. We’re it, it is, I, I think it, it explains in a simple way, it’s also a good reference book because it, it quickly goes through all of the, the, the things you’d wanna do in general business, including some really FP&A stuff like capital budgeting and, and NP, you know, net present value, IRR analysis and projects, those kind of things. It’s very simple, but it goes through those concepts and, and talented, smart, educated people read the book and they can apply those concepts. It’s really not that hard. I, I always say accounting is adding and subtracting, and when we get sophisticated, we divide, and finance isn’t that much harder. It’s about, about the same
Glenn Hopper:
<Laugh>, you know, and thinking about from a finance perspective, it’s great when you talk to people in o in the other departments and you don’t ha you don’t have to, you know, dumb it down, which that, that sound, maybe that’s not the right way to say it, but you don’t have to stop your flow and explain, this is what net present value is. This is the ROI and all that where the, if, if everybody’s speaking that same language, it just makes the business more efficient and it makes everybody able to see, you know, more the why you’re saying the things that you are. Yeah.
Joe Knight:
And, and the one thing I’ll say about that Glen though is, is I believe very strongly that there’s maybe three numbers, maybe five, that you focus on. If you go more than that, it’s a disaster. And, and we actually realized that my company, there were two key numbers that we’d always show. And everybody knew if those numbers were to a certain level, we would be in the bonus and everything would go well. And so every project would be tracked for those numbers. And everybody knew what they meant. They knew how they were calculated, and that drove success. I see a lot of people in FP&A and, and have the top 10, that’s not gonna work. It never will work. You gotta, there’s always a few driver numbers you to teach people. You, you, you drive it to them and then you give them the feedback so they see how it’s going and you change behavior. But when you have a top 20 or top 10, that’s so many finance people and accounting people do, everybody’s lost. And so you gotta pick your, your battles, you gotta pick the key numbers, and usually in a business you can find three to five metrics that drive everything. And as an specialist, you should be able to find them and, and figure out how to, how to bring them to everybody so you can drive the business. I really believe in that.
Glenn Hopper:
Yeah. And I, I think, you know, a few years ago whenever Power BI and Tableau came around and ERPs would have it built in, it, it got to the point where we could make a dashboard for anything. We could put all kinds of <laugh> charts and graphs and cool things to look at when you, when you open up this report every day, but it’s almost, it’s information overload and you’re getting all this information, but how valuable is it? Whereas if you distill it down and you identify the key metrics that are actually the levers where if we do this, then we know, you know, if we do X, then we know y we’ll will happen. So I think that’s a very important thing is it’s, it’s great you can still have those other KPIs and you can still have the other metrics, but only certain people are gonna look at ’em. It’s what are the ones that the whole company is focused on that, that we can actually impact change.
Joe Knight:
Right. Right. And we settled on to my partners, you know, my partners both named Joe by the way. They used to call us the three Joes <laugh>. My one was electrical engineer and one was mechanical. And, and you know, they, when we, when I taught ’em all this and said, it comes down to these two metrics, and we all agreed, they said, this is crazy. You know, we do dynamic analysis on rollercoasters to get the speed, right? And we have to do the second derivative and all that kind of stuff. Calculus never gonna happen here, guys. We, all we need to know is gross profit per hour and percentage of Labor direct. And we, and we know we’re making money, and if we teach everybody what those numbers are and they drive the gross profit per hour, and we keep all our people on direct projects, we’re gonna win. So we’re gonna track it every week and everybody drives to it. And that’s, I think that’s what you have to get to. In FP&A you’re right, we have a lot more, we look at a lot more detail, but when you’re taking it to people and training, pick, pick your pick less than five and and help people understand ’em and then share ’em with them. And you’ll be amazed at, at how the business manages itself.
Glenn Hopper:
Yeah, yeah. Very, very well said. So I’m thinking now about changes that I’m sure you’ve seen in the time since you wrote the book. It’s, it, it’s interesting. I just had a conversation the other day where A CEO was saying my controller should be able to do there’s a, a cashflow report. And I said, well, that’s yes. I mean, a cashflow projection is not hard to do, but normally that would fall under finance. And he said, oh, no, that’s a, that’s a controller function. And I’d realized this, CEO is, is you know, my age or, or older, and he knows when he first came up, these are the things the controller did. And the reason I’m bringing this up is when you wrote the book there’s, there’s not really there’s not really much of a mention of of financial planning and analysis.
You’ve got it as the FP&A work coming under controller. And I didn’t, even, when we were having that conversation, it wasn’t really registering with me why he was insistent that the controller did this. But then when I was looking in the book, it said the modern controller is responsible for general accounting, financial reporting, business analysis, financial planning, asset management, and internal controls. And I, I di I guess I had forgotten that over time, that FP&A kind of has emerged out of this, came out from under the controller. And I’m wondering, or, or is, or maybe it’s, you know, different at different companies, but I’m wondering what you’ve seen FP&A versus the accounting and controllership.
Joe Knight:
We looked at that. You you sent that question. We looked at that in the book and said, yeah, and, and you know what, I would say that I, I agree with you that we probably would’ve written that shoulda written that differently, but you’re right. When this book was written, the world was different. So that’s part of it. But the other part is, I, I think you’re right, analysis and, and cashflow projecting and all that stuff is an FP&A and a function. And one of the things I do when I train, one of the first things I talk about, it’s in the book too, is what’s the difference between finance and accounting? And just to understand that finance doesn’t do accounting, and accounting doesn’t do finance a lot of times. And we all assume that because you’re in that group, you know it all, you don’t. And, and that’s a big misunderstanding by a lot of people and shocking that like, I mean, there’s two different people in this group and they have different goals and they, yeah, they look at the world completely differently.
And so I teach that and I talk about how I’m a hundred percent finance. And and then of course I also have a big discussion about how of course we all know that accounting, they all call it actuals, but they’re not actuals. It’s their best guess at what they made last month. They don’t know. ’cause It’s all a, it’s all a guess. We’re all just guessing here. And I’ve, I’ve had a lot of exchanges with that, a lot of people arguing with me about that. I trained GE for years before they lost their minds and blew up their business. They, I used to get in fights all the time because I trained a bunch of executives in the pit where Jack Welch started that I trained in the pit for about nine years a lot of times. And I get fights, people saying, how can you say accounts more of an art than a science?
And I go, well, you tell me how it’s in a, a science and we get in these big arguments and I’d always win. It was an easy argument, <laugh>, because because the count, you know, it’s not actuals. I say, I, I hate the fact you use those terms actuals. It’s our best guess at what we made last month. But we had to make thousands of estimates and assumptions to get to the bottom line number. And we’re probably wrong on a few of them. Not probably we are wrong. And, and that’s what people don’t understand. And I hate the fact that accountants call them actuals because it’s an art. Yeah,
Glenn Hopper:
That’s funny because I think about all the finance people that I work with and all the accountants that I work with, we have different mindsets. ’cause The accountants are, I mean, obviously anyone you’re dealing with numbers, you have to be black and white. But I think the way you expressed it is more of what we in finance say. But the accountants that I deal with are tick and tie and get your, get everything balanced. Get your, your debits and your credits and everything is so black and white to them. So whether it’s an accrual or you know, revenue recognition or whatever, they will tell you, this is not made up. This is actual because ’cause of actual Yeah, yeah. <Laugh>. Yeah. That’s interesting. It’s an interesting change though. And then, and then you wanna see an accountant freak out, start showing ’em your scenario analysis and forecast and all these different, they’re like, how do, then they say, you know, well you’re making that up. This is, you can’t tie that to anything
Joe Knight:
<Laugh>. You know, years ago I was training a I guess I won’t mention a public company in California. And I got on this thing, I I, I start out with finances of accounting and I told them my book, financial Intelligence, my working title for the book was, accounting and finance is an art, not a Science. That was my, and and the Harvard, the Harvard people, very grateful they did this. They came back and said, that’s kind of a wonky title. Let’s go with financial intelligence. But that was our title. And, and, and that was the theme of what I, what I started when I taught. And one time I was teaching this public company in California, and they had a couple of accounting people in the room, which is often the case. It was maybe 40 people. And I get up and start going off on how accounting is not actuals.
It’s an art. There’s all kinds of nest, you know, accruals, we’re guessing, you know, when we, when we book our, our receivables, we have to do an allowance for bad debt. That’s a guess. We also do all kinds of allocation, da, da, da. And during the break, they leave and this other guy comes in after the break and I go, hi, who are you? I’m the CFO. I hear you’ve been saying that accounting is an art and he’s really kind of angry. And so we go back and forth for 20 minutes and we get done. He goes, he’s right. I understand what you’re saying now. And he left and we became best friends, <laugh>. But he, but, but he was almost offended that I had said that no one explained why. And I said, listen, these accruals aren’t actual, and I want him to understand that you’re guessing when you say allowance for bad debt, even though you call it an actual, it’s not.
And he goes, yeah, that’s probably true. And once I got through all my examples, he said, yeah, I’m good. And he left. And then every time I came, we’d have lunch or meet. And we became friends over the years. But the funny thing is, is there’s this mentality that in accounting that everything they have is sacred and their hard and the fast. And I, and I think the employees believe that, and it’s not true. And it’s okay to challenge assumptions. And the thing that’s important to me, I learned this even at Ford, is when you have operating people understanding that there’s art to the accounting books, they help you, you can get a better accrual if you work with people that are managing that, that division you work with someone who’s running the shop floor, they can tell you better how much to put in for for inventory obsolescence.
But if they don’t understand that, you just have an accountant looking at rollercoaster tracks saying, how much did I put as obsolete? And nobody on the floor knows what they’re they’re doing. You’re not gonna get as good a numbers. So the more you explain to people that you are making estimates and assumptions and help them understand, they’ll give you better numbers. I learned that at Ford from a, a marketing manager that would just grind on us about where did you get the benefits? You charged my product line. Oh, we allocated that. How did you allocate it? And pretty soon we’re in this big discussion. And I think when, when, when operating people understand that you end up with better numbers.
Glenn Hopper:
I love hearing that. It makes complete sense because I think there’s, you know, it takes the idea that we’re doing something magical to make it more relatable. Like, look, this is our historical what we’ve had. This is the information we have. This is our best guess now. And if they understand that’s what you’re doing, and you don’t have to, you know, do the do the cal, show ’em the calculus of how you got there. But I, I will say <laugh>, I would love to bring you in on my next audit and talk to the auditors where, again, speaking of everything, black and white and have you say that and just watch them implode. I think we’ve
Joe Knight:
<Laugh>, I’ve, I’ve, I’ve, I’ve created a lot of implosions in class. I bet <laugh>. And it’s fine, you know, and, and it’s just a fact, right? I mean, we’re just talking about facts here. It there’s a lot of estimates and assumptions in everything we do in this profession. Accounting and FP&A.
Glenn Hopper:
Fp and a today is brought to you by Data Rails. The world’s number one fp and a solution Data rails is the artificial intelligence powered financial planning and analysis platform built for Excel users. That’s right. You can stay in Excel, but instead of facing hell for every budget month end close or forecast, you can enjoy a paradise of data consolidation, advanced visualization reporting and AI capabilities, plus game changing insights, giving you instant answers and your story created in seconds. Find out why more than a thousand finance teams use data Rails to uncover their company’s real story. Don’t replace Excel, embrace Excel, learn more@datarails.com.
You know, you mentioned working with the other groups. I’m thinking about, you know, business partnering is what we’re, we’re, we’re calling what we do now. And I think that’s really just come up in the past couple of years. But the idea that finance and accounting aren’t in this ivory tower anymore, but we are now embedded in departments and working with them. You know, in the book you talk about empowering those on the other side of the table from finance and giving ’em the knowledge and working with them and, and both people understanding. So you’re not just the bean counter, you’re not just, you know, it is important that finance and accounting people understand the business. But I’m wondering how have you seen business partnering and, and getting partners on the same page among the companies you work with? And like, what, what are you seeing in in business partnering these days?
Joe Knight:
I think it’s getting better. I think there’s a, there’s a, I I think over the years I’ve watched this, I think the culture is, is shifting and it’s getting better where operating people and, and the finance function worked together better than they did 20 years ago when I started doing this. And, and I feel like I feel like for the most part there’s better communication that way. Now, I, I will say this, one of the, one of the things that was mentioned is, you know, we, we did a financial assessment and actually published the, out the outlook of that and 2009 in Harvard Business Review on a, a, a true false multiple choice 25 question test on financial literacy. And you probably saw that the average score was 38% in the United States for large, large companies, basically. And that would, that included, we didn’t take out finance and accounting in our sample.
And we’ve been doing that test for how many years? 15 years now? Yeah, 15 years. And the average score is still about 38%. We’ve done over two over 10,000 tests now. So I don’t see that getting better over time as we have companies do it. We have a lot of companies that say in fact, GE was an example. Well, part of why we developed that test is ’cause we, people would read the book, especially the financing. GE was a great example. They read the book and they go, we love your approach. We love the style too simple for our executives. They all understand finance at a higher level, so we wanna do a advanced course. So Karen would call me and she’d say, Joe, what do you think? I’d go? No way. The, all those executives fake it and they get in a meeting and somebody says, yeah, our EBITDA’s kind of kind of low, but the multiple’s gonna be high.
So what do you think? And everybody’s shaking their head like they know, they don’t know. They’re faking it. They, you know, ask them if they explain what you mean, you know, they can’t tell you. And so we had these arguments with our customers, and it happened again and again, a big construction company that I’ve worked with for years called Granite Construction in California, same thing. They read it and said, it’s too simple. The executives did. So, so we developed this test, got a national study, and then we said, Hey, let’s have ’em take the test. And the GE executive leadership group that I was training, they got 52%. So they were almost, you know, they were significantly higher than the national average. I go and, and so the finance group was, okay, the test was too hard. Send us the questions. So we send the questions, they go over and go, peace. We’re gonna go with basics. We’ve done this. Like I say, we’ve got 10,000 tests out there. We’ve never had a team take a test and score high enough to justify a, a, a level 200 class rather than, rather than 100. And and that’s just been proven. That data is solid. And, you know, we’ll, we’ll show you the test if you’re interested in taking a look at it. It’s a simple test. Look at it and go, that’s not that hard. But it it for, for people other than in in the profession, it is hard.
Glenn Hopper:
I think about that, you know, so they get their, they get their MBA or whatever, they get outta school and they go in and they’re focused on, you know, they’re getting information from finance, but you’re not gonna remember the difference between net income and ebitda. And you know, if you’re not doing it every day, you’re just, you’re getting the numbers you’re getting and you forget, you know, over time what the definitions are. And if, if you have a million metrics, and you’re not saying, I think like in PE or in, I wanna talk about this later, but you know, EBITDA is something that people really start to understand because that’s, everybody’s measuring that. They wanna know the ebit, it’s so
Joe Knight:
Focused now. Yeah,
Glenn Hopper:
Right. Yeah, yeah. But but the other stuff, and then all right, what is gross margin versus, you know, there’s, there’s so many things that they just, they just kind of wash over ’em. But if you identify what those key metrics are and, and everybody understands that, at least you’re able to communicate on something of value. But I’m, so, but thinking about like the broader understanding what makes up the balance sheet or the, you know, what you do to turn an income statement into a statement of cash flows. And if I’m a marketing guy or an IT guy or a sales guy, I mean, this is kind of to state the obvious, but you know, okay, only 38% of the people got this. I guess the, the, to state the obvious, obvious, why is it a problem if these non-finance people don’t know the answers to these?
Joe Knight:
Oh, that’s a, that’s a good question and I’ll, I’ll tell why it’s a problem is because if they don’t understand what success is financially in a business, they’ll make decisions that will hurt the business. And so I need to get basic understanding the key metrics. That’s why, why I say there’s not 20 of them, but a few that they drive. And, and I am a big believer in teaching people some of these key metrics. And back to your point you said that most people understand ebitda, I don’t agree with you. I teach it all the time. You’d be shocked at how few few people understand what EBITDA is. They do know, oh yeah, we sell it from multiples of ebitda. And you can even tell ’em what it stands for. But how you, how do you drive it? What does it look like? They don’t know.
And, and so the point I have is this is, it’s not that hard to understand. And if you teach those metrics, people will drive them if they understand them. And if you give them the numbers and they see the numbers I like to say, I, I always teach this. I, in my, in my, I guess it is in the book, I think the big five of Wall Street, the five key metrics on Wall Street, that’s all there are. If you, if all those metrics look good, your stock’s gonna go up and, and they’re really simple stuff. But a lot of people, they hear it, but they don’t understand. I mean, just revenue growth, that’s number one. You know? And you’d be surprised how people in, in other functions, and I can’t tell you how many times I’ve heard somebody say, yeah, I took, I had a, I got an MBA 15 years ago, and I heard those terms and I have no idea what they mean now. And, and that’s, that’s like super common. Super common. Yeah. And I, I would be the same way, you know, if I, after my MBA, if I, if I went into marketing, I haven’t done it for 20 years, I would’ve, I wouldn’t remember all this stuff. And that’s very, very common. So it comes back, but they need it. They need someone to help ’em get it back. And that’s what this book and what our training hopefully does.
Glenn Hopper:
I guess on the other side of that, I think about, I don’t know, I’m a, I’m obviously gonna be, you know, team finance here, but I feel like since my career started and, and the finance people that I talked to, I feel like over the years we’ve gotten much more knowledgeable out out of necessity. I think about the other aspects of the business, because I feel like when I first started, you could just be in, like I said earlier, that ivory tower of accounting and it’s like, I don’t care what you’re doing out there, I’m just re re reporting on this stuff. And I guess my question would be, first off, how do you think finance people would do if you were asking them questions that were, you know, maybe more sales and marketing? I, you know, I, there’s so much crossover now. I’m thinking about like customer acquisition costs and lifetime value and things that are really important to sales and marketing that aren’t true financial metrics. But we, I feel like we certainly know and follow those now, but I wonder how finance people would do today if they were quizzed about metrics and other parts of the business. And if you’ve seen, if you’ve think finance people have gotten better over the years at understanding the other components of the business?
Joe Knight:
Business. You know, that, that’s an interesting question. I haven’t really thought about that. I, I would hope we would be better as a group, but I, I, I also think there’s a lot of misunderstanding and a lot of lack of understanding in those other areas as well. I like to tease in my classes, I, I talk about how when we got to about a hundred employees at at SetPoint, we had to hire a full-time HR manager. And I was like, I’m a finance guy. What do we, why do we need to pay somebody just to do HR? That is the dumbest thing I’ve ever heard. Where does that make money for me? <Laugh>? And you know, and always in the room, somebody rolls their eyes and says, I’m in HR. Oh, I’m really sorry, but you don’t really help us make any money. And, and I actually do that on purpose, and then, and then I make them explain why they help us make money.
So I, I think there is a, a barrier there to some extent. And I tease about it, but then I say, let’s talk about that. You know, in my company, we had some really serious issues with sexual harassment, and we had an HR person that solved it before there was any kind of a lawsuit and, and did a termination, everything else. And, and we had got some better employees, I think. So I had to watch that from a distance before I believed in it. And I think it’s experience that drives you to that. But but I think there’s a barrier there as well. I mean, as a, as a, as a pure finance person coming out of Ford and worrying about head count and all that stuff, I’m like, what the, what does sales and marketing do? Why do we need 50 people doing that? That’s the dumbest thing I’ve ever seen.
Glenn Hopper:
What’s that old
Joe Knight:
So, no, I think there’s a wall on the other side too. And I think that comes with experience and with with working for many years and seeing it happen. And I, and I, I guess I, I think because we communicate better maybe, and businesses the information’s more open I think we do understand that better than we did when I was first starting out, at least in my progression. I understand the value of all those different areas running a business and seeing it holistically. But yeah, I, I think we have a blind sight as well in those other functions.
Glenn Hopper:
The question I was just thinking of when you were making your point about HRyou know, being, being a cost center and where, how do you add value to the business? But I do, I know many times in my career, you know, depending on the company and the culture, and I think if somebody had a culture like where, where you came up that you, you know, you, you change this perception. But I think one of the things we’re fighting, and we were joking before the show too, about arguing with with IT, is if you know all these kind of back office areas in being labeled with this whole cost center moniker. So, you know, it gets labeled with that. Finance and accounting can get labeled with that. And HR certainly could, do you still see is the mentality when you’re out training and talking to companies, do you see a lot of companies still that have this whole picture of finance and accounting as just being a cost center and that they don’t when you, when you first arrive, that they don’t understand the value that you’re contributing to the business?
Joe Knight:
I think I would say over time, I, I’ve seen, I’ve seen it more valued. I think one of the reasons why this has resonated, the book has resonated and why we do training still, I’m not, I mean, le let’s be honest, I I’m part-time at this. I’m semi-retired, and the reason why I do this, I have a lot of good clients that I really like, and they like what this does for them. I’ve worked with NBC Universal for years. GE lost its mind and fell apart. We, I won’t go into that, but, but they basically sold off Crotonville their whole training facility. And it’s a shell of what it used to be. ’cause They sold off all their good key core businesses. One of ’em was NBCUniversal. Well, when they left, they said, Hey, you know what, we’re in the middle of a financial crisis oh 08-09, nobody in NBC news had any idea what the financial pundits were saying.
So a couple of people at NBC News who had been to my class when they were at GE said, Hey, there’s this dude that we can bring in that can explain it to us, so at least we know something about it. So I trained NBC news and ended up with a really good relationship I’ve had for over a decade with NBCUniversal. And it’s interesting to see this very creative company come in and really respect finance because they’ve been through some really hard times and they watched what GE did to them, slashing and cutting, and then they saw Comcast buy them and invest and grow the business. And their, their valuation went from, they were, they were sold for 4 billion and their current rough market valuation is 30 after seven years. And they saw what happened when someone invests and they understand the finance. So there’s a lot of interest with the people who watch this great transition in the business financially. And I think that’s really powerful both ways to both groups and and there’s positive, you know, if we wanna use the word synergy, there’s positive synergies that go with that
Glenn Hopper:
Narrative that I’m seeing. I love that you trained storytellers to, to keep with our, our, our narrative that we were discussing earlier on how to understand the financials so they could convey and communicate that. And I think about so much of your career being around people, just teaching people so they can understand so that everybody can, can work together. And I’m thinking in businesses where there might be the external, you know, we look at, oh, finance is just a cost center, you know, it’s a necessary evil, whatever. And, and thinking about what people don’t understand about finance, but I wonder if in some cases, if that’s not a self-inflicted wound. Because I, I think also if you asked, you know, all the, all the businesses and all the different departments, the the executives, the finance questions and, and they didn’t do well on the test and you asked finance, and maybe they didn’t do as well on the other areas as they did in finance.
But then I look back at those of us working in FP&A and think, what do you think businesses would say if they were surveyed about the ability of the finance teams themselves to explain what they do and do and what they want in clear and unambiguous language? And I’m thinking back to 10, 20, a hundred KPIs, whatever it is, if you’re just getting a readout of just numbers that’s not impactful versus a person who can really say, this is what our focus is, these are the three metrics we’re looking at. Looking, do you think, is finance doing a good job on the whole, and maybe this is too, too broad a question, but do you think we’re doing a good job on the whole at conveying the message and making it understandable to the other departments?
Joe Knight:
My answer’s very, very direct. No. And that’s why I still have companies that want me to come and train and, and we do not as a profession explain what we do very well. In fact, some of us like to be secretive and like to say, I own these numbers and they’re too complicated for you to understand. And some people like this CFO, they’re offended that I’m simplifying everything they do. And I go, wait a minute. I’ve worked with engineers that do these dynamic analysis that could kill people on roller coasters and amusement park rides. And their analysis is way more sophisticated than anything we do. You don’t think they can understand what we do? Yeah, they can. And it won’t take very long if I explain it. And the problem is, is I, I, I don’t see that changing it.
It might be a little better, but I don’t see it changing a lot. I think everybody likes to protect their turf. I think it’s human nature. And, and so I I I think that that is not progressing that well. And I think a lot of people protect their turf and, and wanna make it look like this is black magic that you really can’t understand. And I, I think that’s a common culture that we have in this, in fp and a especially really, and accounting both ways. And I obviously don’t believe in that at all. I believe in sharing everything and being open.
Glenn Hopper:
Yeah. And that, that’s such a great philosophy. And I think, I’m trying to remember back to my io psychology courses a million years ago, but it was, there’s either three or five types of power. And one of the types of power is if you’re the one with the wisdom. And so I think a lot of people think, oh, but if I tell everybody how I do this, then I’m replaceable and, and I’m not relevant. And I think that’s, yeah. But I think that’s, it’s really scary right now because when you look at automation and how much of the specialized stuff that we did is being replaced by technology now, especially with AI coming around. Mm-Hmm, <affirmative>, I, you know, I, that’s a, that’s a scary place to be if you really think that you’re gonna clinging to power by knowing some secret thing that other people don’t. Well, a general, you know, a chat bot is gonna be able to answer <laugh> the questions that you can, if that’s the only thing you’re, you’re giving is the, the know-how of what, of what these numbers are. So, I don’t know, are you, are you seeing anything on the technology side that is interesting you right now? Or that it looks transformative or,
Joe Knight:
I’m just getting exposed to AI, so I don’t know if I’ve had thought a lot about that, but, but I do agree with what you’re saying. A lot of, a lot of what we do is very much doable with AI, as is everything else in the world, and it’s a threat to everything. And but, but no, I haven’t thought a lot about that. I have a, I have a son that’s actually a salesman that, that is willing to ai and he’s, he’s challenged me a little bit on that and discussed what I do in relative to ai. And I say, well, you know, I think you’re right. A lot of what happens in finance and accounting could be done by bots just like everything else. But I haven’t thought beyond that really.
Glenn Hopper:
Gotcha. Yeah, there was a, a study that came out from University of Chicago just a couple weeks ago, a paper that talked about now using this without getting into all the details, this complicated, you know, chain of thought prompting to interact with an LLM that these large language models actually performed better than financial analysts at predicting, earning per share for public companies based on getting the Ks and Qs and, you know, a couple years of financial statements. And it’s, I thought, and this is in the, we’re in the nascent, you know, super early stages of it. So it’s it’s, it’s gonna be interesting to see where the, where the industry goes with the new technology. Yeah,
Joe Knight:
I I think it’s the same threat for every industry. I think the engineers have the same issues.
Glenn Hopper:
Yeah, that’s true. Yeah. It’s not just it, yeah, it’s not limited to us. I mean, we’re really
Joe Knight:
Hitting everybody. Yeah. Yeah. It’s really interesting. So
Glenn Hopper:
But you know, I still, I I’m a, I’m a huge AI guy. I am actually, I develop products for finance and accounting people to use. I I always say, this isn’t to replace us <laugh>, but you know, today it’s not to replace us today. We’ll see what happens in the future. But I, I also really advocate for human in the loop. And I think this is, I’m gonna come back now to the opening line in the book, and I think <laugh> and, and we’ve already addressed this a little bit, I, ’cause I think a lot of people would say, how is the finance guy saying this? You know, because everybody thinks of finance or numbers equals the reality, but the opening line in the book is the art of accounting and finance is the art of using limited data to come as close as possible to an accurate description of how well a company’s performing.
And to what you were saying earlier, it’s, what do you mean limited data? You’ve got all the, you know, the ledger entries, you’ve got, you’ve got all the invoices, you know, where we are, where our payables are and all that. But I think that that is such an important concept for people to understand. And I, you’ve already talked about it on, on the relationship side, but for me, I’m thinking this is a human in the loop. The, the value that we give is being able to make that judgment decision and understanding and estimate. But when, when you started the book with that line, and as you’ve seen and as you’ve rolled through the year, talk to me about why that’s such an important concept.
Joe Knight:
Well, to me, to me it’s an important concept because of the language we use, which I talked about earlier, which is we call our numbers in accounting actuals. I hate that term and I’ve always challenged it, but it’s, it’s what we do. But, but it goes right back to that concept. And, and I, I always use these big, big large examples. I worked with a company in Silicon Valley, a tech company that had shipped $500 million worth of product to Circuit City in 2008 going into 2009. And Circuit City went completely bankrupt, and their allowance for bad debt was off by about $250 million. So their profit they reported was wrong by $250 million. And I say, how can that happen? They called those actuals and they reported it on, you know, on a, on their 10 k that, that year and everything else. And now they’re riding it all off and everything’s a disaster.
Now that’s a huge dramatic example, but it just tells you that the actuals we report are subject to inaccurate data. We’re guessing how much of those products are going to be returned. When Iworked at Ford I worked on warranty returns. And we, we come out with a new model and we’re guessing how many times it’s gonna break down on warranty, and that’s a huge cost afford, and we’re always wrong. You know, we have a warranty allowance when we ship a car out and we’re always wrong. So they were always fighting and saying, man, are we gonna have to do a restatement this quarter? Because the Ford Tempo was the worst car ever built. I shouldn’t say that, but yeah, they used to say that in engineering, and that thing cost four times what warranty was on our other cars, and we didn’t know that when we shipped them. So there’s always things like that. I’m just using one simple example where we report, but we have to take contingencies for the risk associated with our sales, and it goes all the way through cost and everything else.
So all the data we’re using, we’re taking this in, this, this data and making educated guesses on how permanent these sales are gonna be and whether we’re gonna be able to collect on what we invoice. And, you know, it goes, the whole list goes, goes down. And so the, the bottom line is, is, is the accountants are always going to be wrong. It’s never gonna be perfectly accurate. And as, as a non practitioner, you need to understand that when you look at the numbers and understand that. And you need to understand where the variability is. And again, I really believe that if you did, you could help get better estimates if the engineers at Ford knew that we were saying the Ford Tempo is gonna have the same warranty problems as our Pinto that was more reliable or whatever it was back then. I mean even that’s even before my time.
But, but they come back, say, you kidding me? There’s so many problems When we put together that tempo, we think it’s gonna be double, but they don’t know that. They don’t know. We’re guessing that, but if they knew that they could help us. Yeah. Yeah. And that’s why you share information. That’s why in my little company, we did share all this information across and they’d say, you know, there’s a lot more risk on this particular machine we’re building. We should probably, you know, and or maybe that customer doesn’t look that good. You know, my marketing guy, my sales guy tells me, you know what I’m worried about these two customers. Yeah. They’re private. I don’t get their numbers. Yeah. Well, I’m worried. Well let’s, let’s, let’s make a bigger allowance on this one. You know, that kind of stuff should happen when you share information because it’s an inexact science.
That’s why I lead with that. That’s why I wanted to call the book The Art of Finance and Accounting. You know, I, I always joke when I teach a class, they say, you, you know how, you know, you’re dealing with an a finance person. When you present information to ’em, they always look up at the ceiling and act like they’re thinking this is FP&A I always say this, I always look up and act like I’m thinking. And then I say, it depends. I always say, it depends. I never say it’s a hard number. The accountants say it’s an actual, I always say it depends. That’s the difference. And yep. So that’s, and the point is, is, is the accountants should also say, it depends. I don’t like the word actual. And that’s, that’s a big thing for me. And I, I drove it hard in my company because there was so much risk in what we did.
We built custom automation machines that could make a ton of money, or we could lose a ton of money on any machine depending on how well we bid it and how we guessed at it. And so when we track it week by week and have good metrics, we know if we’re getting in trouble and we could get change orders sooner because the guys on the shop floor would let us know we needed more hours to do something. We could add it to the machine and go back to the customer at 10% done and say, guess what? There’s all kinds of, but my, I could go on and on about this, but the fact that we have people involved in the, the process that knew the numbers and looked at ’em every week made it possible for us to run this business in a way that was significantly more profitable than other businesses in our industry. And during the 25 years I ran that business with my partners, we probably saw three generations of competitors with some of our big supply of companies we supplied in our area, come into business and go outta business because they couldn’t adjust as quickly as we could when things changed, because we watched our numbers every week and everybody knew about them. So I’m a real big believer in that.
Glenn Hopper:
It’s funny, I just a couple weeks ago was interviewing another guest and we were talking about storytelling and he said something that really resonated with me. And, and I think this kind of goes to what you’re saying. He said, when you’re giving a a financial presentation, you don’t think of it as, this is my TED talk. Think of it as a workshop. Because if you just go in and present to the other departments, this is what we’re gonna estimate for bad debt. This is what we’re gonna acrue. I mean, that’s, that’s just telling them. And they just say, okay, you must know something. I don’t. But if you treat it as a workshop and you have that rapport and that communication going back and forth, then you’re adding value to them. They’re adding value to you. And I really like the, that concept. That’s
Joe Knight:
A great point. Yeah. You take that example, you say, okay, here’s our alarms for bad debt. Lemme just show you one slide to break down what it’s, here’s where we think it’s, do you all agree with that’s that’s reasonable. And someone say, wait a minute, I think there’s a lot more risk here than here. And they’re, they’re the ones in the operation. I agree. That’s it. That’s exactly, I totally agree with that.
Glenn Hopper:
We’re running out of time, but I really wanted to get to this because you and I talked about it a little, and I was, it was so ingrained in my head coming up that ebitda, ebitda, ebitda, <laugh>. So I’ve gotta know, I know you, one of your talks is the love affair with ebitda. And, and the reason I I bring this up is I know whenever EBITDA’s mentioned, it gets really strong viewpoints on one side or the other. And I’m, I was a fan of it. I, you know, VC people love it. And it just sort of, I, I’m like, okay, I get it. You’re a parent. You’re comparing company. You’re trying to equalize the numbers across different companies, different industries and all that. And I get it. But it is, you know, you get into EBITDA and adjusted ebitda and you get, you know, people can start making it really anything they want. But I’m curious, I’d love to hear just a little bit about your talk and and, and, and some of the points you make and what what kind of feedback you get on it.
Joe Knight:
I have pretty strong feelings about how ridiculous the focus on EBITDA is. And it was way worse 20 years ago during the.com era, where if you were positive EBITDA as a.com making almost, you know, $500,000 of ebitda, you’re a billion dollar company. ’cause Now you’ve gotten over the hump. And now we go out here to, we look at WeWork and I like case studies, but you look at WeWork and before that, WorldCom and Enron, it’s, it’s a disaster. You get positive. EBITDA you think you got money. Well, if the, if the books are bad, you don’t have anything. In fact, you’re losing a lot of money. So EBITDA is an indication of future cashflow based on the inexact income statement that’s loaded with estimates and assumptions and, and even bias, especially when you’re trying to sell. And I’m strong. Oh, absolutely. Yeah. When we sold our business, I’ll be honest, when we sold our business, we were actually looking at a esop and we were getting valuations in.
And a private equity firm came in in the middle of this and said we’ll, we’ll buy you at your EBITDA in your last year, which was much higher than the prior years. It was our record ebitda. And we’ll also do two more points on the multiple. And I, and I look at that like, you’re gonna value our business on just the last year ebitda. And then of course, what they did is their due diligence. And they went and tried to beat up our ebitda, said, you know, you’re not gonna collect from this customer. We had Tesla as a customer and they don’t pay any bills to anybody. But we, I said, listen, you know, we’re getting a multiple on this, these receivables, I guarantee we’re gonna get the money. And we had that. We got it. But anyway, the point is, is, is, but that was all they cared about.
They just said, we want to focus on this year’s ebitda. We want to try to drive it down. We’ve already agreed to a multiple. And that was their whole due diligence. And, and the other thing, the other thing I’ll go off on, and that was the only thing that killed me is, is I said, all we worry about is gross profit per hour. Every hour, we have this many people on our shop floor, and if they get a high gross profit per hour, we’re making money. And they said, no, no, you need to work focus on gross profit margin. So it was EBITDA and gross profit margin. And they said, we love your amusement park ride stuff because it’s higher gross profit margin. And I said, yeah, but the risk is through the roof on that. We have a high gross profit margin, but we lose on 25% of those because we’re building a new ride.
First time, we’re building parts of the Harry Potter ride for Universal Studios. We did some stuff for Disney, which is a nightmare to work with and all this stuff. And we do get higher margins going in, but we tend to lose more money. And I said, we built the same machine for a, a technology company in their automation thing for 20 years. And, and it’s for the time we started business and our gross profit on that is only 20%. It’s very low, but 60% of that is material and the rest is just a little bit of labor. You know, how much we make per hour on those machines? We only have to, we only spend a hundred hours on those machines. We make a thousand dollars an hour for our labor in amusement. We make $200 if everything goes well, has a higher margin. But I would build those machines all day long at a lower margin and we would, our EBITDA would be five times what it’s today.
And they’re like, no, you don’t get it, Joe. It’s all about gross profit. And they, they never got past the gross profit margin and ebitda, and that’s all they thought about. And then they just wanted to lower our ebitda and that was it. And they bought our business based on that. And I just, I, it just baffled me that they, all they cared about was those two numbers, especially ebitda because it’s so easy to manipulate that. Yeah. There’s all kinds of ways you can make it look better or make it look worse, and they can audit it all day long and they can’t get that either. You kind of got me on a soapbox here. Yeah. <laugh>, they go, well, we’re here to audit your rollercoaster that you’re building. They go, oh yeah, we’re 40% done. How do I know that? Well, there’s the track. Measure it. Yeah. See, that’s about 40% of the track. They don’t know, you know, they’re <laugh>
Anyway. And, and so my point is, is, is you just don’t know the numbers if you focus on one number like ebitda. Now, the one thing I will say, and I teach this, is we now verify EBITDA with cashflow. At least we say, okay, if your EBITDA is X, your cashflow has to be at least y because, ’cause back in the day when you look at a Worldcom like that, their EBITDA would be four and their cashflow would be a negative billion. Yeah. Yeah. 4 billion positive. Wait a minute, you know, this is a developed company. How can you have all this EBITDA and never get any cash? And so at least we compare cashflow to EBITDA now, and I think 09 and 08, the financial crisis of that gave us that. But before that, we didn’t even look at that. Just ebitda, we’re good, let’s multiply it and go, I just gonna say I’m a big Warren Buffet guy and you know, discounted cash flow and the way he does things. I’ve been to his annual meeting a couple times, even taking my my boys to him because I wanted to hear him and before he is gone. But that’s a, that’s the way to think about a business is how much can you generate in cash out of the business. And this drive to free cash flow is a really good one for the way to focus on companies. And I, I always say that now is the number one number on Wall Street free cash flow. That’s just the last five years maybe.
Glenn Hopper:
Yeah. And it’s funny, I think about the, the reason that I liked EBITDA is probably I’ve been a benefit of that when on the sell side of a transaction where I’m like, well, you’re not gonna have the same management structure as us. Let’s pull this out and let’s pull, let’s adjust here and adjust that, and then say now, oh look, we just, we just added 25% to our EBITDA number. So <laugh> Yeah. Yeah. But, but it good. But the Yeah, but the reality is the same to your point and free cash flow is, you know, really what you’re buying if you’re trying to do the, you know, the <laugh> forecast, the future value of a company. So,
Joe Knight:
So I, to me, ebit, it’s just one metric in many when I was to buy a business, and I certainly would do discounted cash flow, and then I’d also go back and analyze other things. But it’s crazy. These PE firms just wanna transaction quickly and they just come in and boom, they’re gonna go. And we looked at each other like, these guys are crazy. Let’s just do it. Take the money and run. And that’s what happened. But I, I don’t, I would never buy a business that way. Lemme put it that way. Yeah,
Glenn Hopper:
Yeah. We’re coming up on time here, but there’s some standard questions that we ask our guests all the time. And I know, you know, being, being an author of a a bestselling book, you have a, a bit more of a, a public persona. But what’s, and one thing that we always ask people, and I’m always fascinated to hear what, what people come up with here is, what is something interesting that not many people know about you? And maybe it’s something that we couldn’t find if we just googled you.
Joe Knight:
<Laugh>? What’s interesting about me I have seven kids.
Glenn Hopper:
Wow, okay.
Joe Knight:
I have have a big family and, and now 10 grandkids. And that’s been, that’s been kind of crazy for me to, to manage through that with my wife and, and everything else. So I have a big family. I’m a big family kind of person. So that’s one thing. Another thing about me is, is I am, I am a creative person. I’m not a numbers person. I, in fact have learning disabilities around dyslexia and those kinds of things. And and what I’ve learned is, is my creative side, bringing it to finance has been a big benefit for me. And it was a great match for my book and for the things I’ve done because I am naturally analytical, but I, you know, I, I get things backwards. I’m, I’m actually not good with my handwriting, everything else. So I have, I’ve, I grew up with learning disabilities and people would be surprised that I, I’m where I am now, especially some of my grade school and, and even into high school saying now that guy’s going nowhere. But, but because of that, but tho those things were, you know, just, just who I am and what I am and I’ve learned how to work with those disabilities. Those are, I guess those are two kind of unique things about me and who I
Glenn Hopper:
Am. Well, that’s amazing. That’s thank you for sharing. Alright. And this next one, I know as an author and an instructor a little bit different than a, a lot of our guests and we get, we, we might have some heated conversations with them. And I don’t know, you probably are not spending a lot of time in Excel these days, but I’m, we have to ask everyone, what is your favorite Excel function and why?
Joe Knight:
<Laugh>, I, I, I do not spend as much time in Excel as I used to when I used to live and when I was at Ford and some of these other places in analyst. But for me on that, I saw that question. It’s kind of funny for me, I’m analyzing my investments now and the best thing is I can take a page copy and paste it to another page and then just repopulate the numbers. And I love the ability to take a model and move it to another section and then put in a new investment and load it again. So I’m pretty simple guy. You know, I’m done with with with all the high end functions and those kinds of things. But now I have a son that’s in it that’s at Deloitte now, just started. And he’s a numbers guy and he loves it. He tells me all about all the things he’s doing with Excel, and I say, I’ve, I’ve forgotten more than you know right now. But that’s really it for me. That’s my favorite functions ability to take a model, get it right, and then repeat it with one thing after another. I it’s a beautiful thing.
Glenn Hopper:
Yep, yep. Yep. So, well, Joe, this has been a really great episode. I wish we, I wish we had more time ’cause I really think we could we could go on all day. And I, I really appreciate you sharing your, your insights and and, and focus here. And I think our, our audience is gonna get a whole lot out of this. Good. So thank you very much for coming on.
Joe Knight:
You’re very welcome.
