Why More Revenue Can Still Break Your Business with Cruz Gamboa

Hey everyone, welcome back to Make It Happen Mondays, where we talk about sales, business, entrepreneurship, personal growth, mental health, and everything in between with guests who I truly respect and I think make a positive impact on the world around us. Now, this week's conversation is a little different. It's not a typical sales episode. This is one about the financial side of running a business, and I think it's one of the most important conversations I've had on this show in a while, especially for founders and sales leaders who are crushing it right now on revenue but still feel broke. Man, do I know what that feels like. Cruz Gamboa is the founder of Ascend Growth Ventures and ScalingCFO.io.

He was born in Venezuela, came to the U.S. at 17, and spent over 20 years at GE, where he rose to regional CFO for GE Power in Latin America and closed deals up to $800 million. He now helps founder-led businesses between $1 million and $30 million understand how profit, cash flow, and enterprise value actually work together. Now, we get into something he calls the cash void, which is why revenue growth actually makes your cash situation worse, not better in many situations. He walks through his three frameworks, efficiency, timing, and capital, and explains why two companies doing $10 million in revenue can be worth completely different amounts. We also talked about something I've been saying for years, that business acumen is sorely lacking in sales, and this conversation proves it.

Now, I put myself in the hot seat on this one and had Cruz explain cost of capital, ROI versus value, and working capital to me like I was a five-year-old. If you run a business or lead a sales team, this one's for you. I hope you enjoy this conversation as much as I did. Let's make it happen. Cruz Gamboa, welcome to the Make It Happen Monday podcast, my friend. How are you doing today? Great, John. It's so great to be here with you. I've been looking forward to this one because we're going to tap into the wonderful world of finance and, holy shit, profitability, which I think has been a dirty word for the past few years and apparently is coming back in vogue here for companies. But before we do that, Cruz, I always love to start with the kind of origin story here of you, like the stuff that we can't figure out on LinkedIn.

I mean, I do have some questions about GE, right? So you spent a lot of time at GE and I did a stint as a little context. I don't know if you saw, but I worked for Jack Welsh for about three or four months. And when he was launching his online MBA program, so I worked directly with Jack and Susie and I was a fan of Jack Welsh for years. His book Winning was fantastic. In retrospect, looking back on it, I think there's a little bit of like he was the peak of capitalism and kind of fucked everything up. So like I kind of look back at that and go, okay, some of it was good, but he was a little bit too draconian, but I want to get into that. But before we do that, talk to us about growing up, you know, kind of how'd you become you?

Parents, influences, all that fun stuff. And let's hit college and then let's get into your professional career. Yeah. So, I mean, I was born in Venezuela and I left when I was 17, came to college here in the United States, graduated from the University of Texas at Austin. Like shortly thereafter, I got into Unilever, you know, kind of like the nemesis for Procter and Gamble. Yeah. Yeah. And then about a year and a half later, I got into GE, the financial management program. So that's kind of like how I started my career. I was a finance trainee and basically did the whole finance track, eventually became finance manager, FB&A leader. And then I think the most, I think the most formative experience that I had was a GE Capital.

Yeah. And that's where I really became, you know, like the person that I am today, because I'm not just a sort of like a finance person. I'm actually a business person that is really good at finance. You know, that's, that's, that's actually like, I've, I've tried to explain that to people because like, you know, I also sell myself as a CFO because that is the simplest way to explain what I do. But I'm, I'm a business person that actually knows how to structure deals, know how to read financials, like, you know, as an expert. And, but I also, I'm, I'm very much on the business side and this is what helps me and has helped me in my career and my career just sort of have that communication credibility and just know how to speak to other CEOs because we, you know, at the end of the day, we speak the same language.

You know, I can speak both languages, but I speak their language too, you know? And that helps. Now, was finance always something like, even as a kid, were you, were you kind of angled towards finance? Did you have a propensity for it? Or was this something you found later in life, like in college and such? Yeah. So I had a, like, I had absolutely no idea what I was going to do, by the way, let me just be completely clear. I didn't know that I was going to be a finance person. I mean, that probably makes for a better story, but that's not how it happened for me. I literally had two offers right out of college. I could have gone to be on marketing at DuPont or I could be a finance manager, I think a finance analyst actually, at Unilever.

And I had to decide marketing or finance. This is exactly how it happened for me. And I said, well, I kind of like the marketing because I, you know, I'm always being sort of a commercially driven person, but I felt that I needed to go into the finance track because I felt I was going to, it was going to be more, it was going to be better in the long run for just learning how to run businesses, et cetera. I mean, that was like the only, the only thing that I could think of that was my only reason for choosing the finance track. And then, and then what I realized is as I, as time went on, even though I was a finance person, I was always very like lured to the dark force. Right. And I was always thinking like sales and growth.

And, and that's, that's always been me that leaving that duality between marketing and sales and growth and also finance. Yeah. Yeah. I love it. Now you said, I think I was reading that you said that you stayed at GE longer than you needed to. Um, and is that the, the compensation and the structure and the momentum kept you there. I think there's a lot of people who, who are, I don't want to say golden handcuffs, but there's a lot of people sitting right now in companies where they're feeling that like, am I, am I here too long? Do, should I go off and do my own thing? Should I, what was kind of, why did, why do you say that you stayed there too long? And, and what was the kind of the catalyst for you just saying, Nope, I got to leave this, this corporate structure here to go out and start helping other people.

Yeah. I mean, that's a, yeah, that's kind of like sort of part of my, uh, my origin story. So I, um, the way it happened for me, I was leading a very large opportunity, uh, it's like an $800 million power deal. And I, I wasn't even supposed to be leading it, but it just, I mean, I was the only person that was like closest to the opportunity and had the most experience. And there was a really, um, a strong financial component to it. So I ended up kind of like leading the, the opportunity and I've never done something like that in my life. You know, that was like, like really big. And, um, in the process of closing and winning that opportunity, I, and I'm like, I'm, I'm one of those, like, like, you know, type A, like if I'm going to do something on a win.

Right. So, and I, I end up winning the deal. We ended up, ended up closing the deal, but it costed me the, the, the price for me and my, and my peace of mind and, and my, my family, uh, it, it was very high and I'm still paying for that. Um, because I mean, I was gone for like four or five months. Uh, I was just working on this like 24 seven pretty much. And I'm, I'm talking like Saturdays, Sundays, like I only took maybe a few days off, uh, because I, I, I was so exhausted towards the end. I, I became so like, my, my brain became so foggy and I was in such a state of burnout that I, I, I just, I, at some point I started asking for help and I'm like, Hey, can you help me with this? Can you take care of that?

Because I just couldn't do it anymore. I mean, I, I, I thought that I had to do it all on my own. And then eventually when I, you know, like maybe like two or three months later, I felt like, you know, by then it would, it would like that feeling of burnout, uh, would have been gone, but it, it lingered. And, uh, and in fact, I started thinking that there was something wrong with me and then I, you know, went to a couple of doctors and then ultimately I realized that there was nothing wrong with me. I was just burnt out. And then I started like, sort of like doing like my inner search and like, why, why, why am I burnt out? And then burnt out. And I realized that, um, a lot of it had to do because of misalignment.

I didn't feel that that whole way of leading my life is what I wanted. I wanted to be like, I knew that I could do big things because I just proved it. I closed a big deal, but got promoted to executive. But I mean that I felt like I could do that for myself for building something on my own. And, uh, and I didn't know what that was then. Okay. I know what it is now, but I didn't know then. And it just took a few years for me to just go through the process of allowing myself to dream bigger, to dream as a, you know, that I could be that person that was not a corporate person, that I was an entrepreneur, that I could be taking risks and all of that. And that process took between six and eight years.

And at some point I kind of knew that I was going to leave eventually because I wasn't, I guess I wasn't getting what I needed. Let me put it that way. And, uh, but it's, it's really hard because when you have a good job that is paying well and, uh, you know, your wife is happy, you know, and, uh, and it's paying for the bills and you have stock options and you have opportunities for, for growth, it's really difficult to say, you know what, this is not for me. I'm going to do, I'm going to be, become an entrepreneur. This is not for everybody, by the way. No, definitely not. And, and, but I think there's that weird itch that most entrepreneurs have that, that is exactly what you said there, which is, I don't, something's not right.

You know what I mean? And I, I believe burnout doesn't come from working hard. I don't. I believe burnout comes from working hard on something that you don't really believe in, or you're not overly passionate about because, because, you know, the whole work play, that type of thing. And you never work a day in your life when you were, you work at a, like, I don't want to paint this farce, you know, Oh no, you'd be an entrepreneur and do what you love. And you'll never work a day in your life. That's bullshit. I am still working every day of my life and I still love what I do. Don't get me wrong, but it is definitely work. But I think there is that itch of like, something's not right here. Um, and, and, and I'm, I'm either, I'm meant for something bigger or this just doesn't fulfill me.

Even though the paychecks there, the revenue, you know, all that, all the accolades are there. There's a fulfillment component and that's where burnout happens. That's why I always tell people like the number one thing you need to be successful in sales is a belief in what you do. Because if you believe in what you do, if you believe in the product, the service, the solution that actually makes a real difference, then, then it's really just about the transfer of enthusiasm. But if you don't really believe in what you're doing, or it's kind of a hollow belief, that's where burnout hits because you're just doing it for the paycheck. You're just doing it because you're satisfying a, you know, a societal norm need, if you will.

Do you, do you feel the same way? Like, did you feel like, even though you were doing good work at GE, did you feel that there was an emptiness to it? I mean, and that's exactly what I'm talking about. I feel that what mattered was to close the deal, make the number, and then one month later, everybody forgot what was done. We just have to go get the new, the next one. And, you know, it didn't matter. Like, I mean, it didn't matter what you have done is what, what matters is what you're doing today. Right. And then at some point I, I just like, it was like, well, I mean, is this what I want for the rest of my life to be doing things this way? And, uh, and, and, and that was a really big question.

Like what, then what is it that I want? And like, just answering that question is, is just, it's a lot, you know, it took me a while, at least for me, maybe for some people, they realize it much faster. It took me a while, but what I'll tell you is the following. I mean, at some point I just became a little bit more because I mean, at this, I was never like really an overly spiritual person. Okay. You know, I was just like super objective, et cetera. And, uh, and partly because I mean, I was very disillusioned with religion to be honest. Oh yeah. So yeah, trust me. I, I grew up Catholic and I, there was a point where I was like, what the fuck is this? Excuse my language. But it was like, uh, no, no.

And then I kind of went on my spiritual journey and I don't know how to describe it either. Like the way I tell it to people is I'm not an atheist. Like, that's how I can explain it. I believe in, you know, the matrix and spirituality and, and I'm curious, but religion is something I am very skeptical of. So sorry to interrupt, but that's a, no, no, but I mean, I think that, I think that's it for me as well. So I ended up, I was reading, uh, the biography, like Steve Jobs biography. And, uh, and at some point in the book, they talk about like when he was at his wake, he gave this book to everybody and inside of, I mean, the, I mean, it was, it was in a box. And actually when you open the box, there was this book, the autobiography of a yogi by Paramahansa Yogananda.

And I'm like, who the hell is this guy? You know, like, I, I mean, if it was important enough for Jobs to sort of like, you know, give gift this book at his wake, it must be a bad, you know, a good book. So I actually ended up reading it and it became like a very, um, pivotal, uh, part of like who I am today. And what I'll tell you is the following. I totally agree with what you say that when you actually like believe in the products and services in your company, that, that you're going to sort of be able to energize others with your enthusiasm, with your belief, but I think there's one more element that I will add to that. And it's the following when you stop making it about you, about how much money you're going to make with that sale, about whether you're doing it correctly or incorrectly, and you making about them, making about the service that you're providing, how you're adding value to that person, how you're not really selling them.

You're like, Hey, you're, I'm informing you so you can make the best decision. If this is not for you, I'm okay. Right? Like when you come from that energy of service, I think that's what differentiates amazing salespeople from good salespeople. Right? Because that energy is what, what people value and it's magnetic. And like when you feel it and you see somebody who embodies it, you, you recognize it. You're like, that person is special. Right? I'll buy from you because I like you. You know, and you trust, right? And I think that's the thing there's, you know, anybody who says the sales is about convincing anybody of anything. I'm like, Nope, you're wrong. Sales isn't about convincing anybody of anything.

Sales about helping people solve problems or achieve goals. Period. That's it. Absolutely. And if you can be a problem solver and be genuinely curious about what their issue is and not have to always have in your backpack, Oh, I can solve that. Oh, I can solve that. Oh, I can solve that. Or my product, my product, my product. You know, you become this problem solver. And I, I, I disqualify more than I qualify at this point. Cause I'm like, eh, let me find all the reasons you shouldn't do business with me. Or there's another option here for you because you're going to figure them out subconsciously or consciously anyways. So I might as well figure that out early on. And then, but when I know I can help, man, that's where I'm going to push.

And I, and I think that's where I have all the confidence in the world to, to, to quote unquote sell. But I think the perception of sales is so far off, you know, perception of sales is, Oh, you could sell ice to an Eskimo. Like I actually think that's the biggest jackass sales rep on the planet who can sell ice to Eskimos unless the Eskimo wanted some ice. Like that's a different story, but, um, so let's, let's now make the lead to let's back into, um, what you're doing. So talk about what you're doing today. Cause I want to get into this whole financial blind spots of companies between 101 and, uh, you know, a hundred or 10 million, um, and, and kind of dissect some of those core concepts that you have there.

But could you explain what you're doing today? Like what is what you do today? And then I want to back up into it. Yeah. So, so right now my company is basically, it's a CFO advisory firm and tech company, which is kind of interesting to put those two words together, but, uh, it, it has to do with the fact that I realized that, you know, the stuff that I was doing, which was a combination of fractional CFO and business coaching, first of all, was something that was really needed in the market, number one. And then secondly, that it was not scalable if I had to do it just by myself. So basically what I've been in the last two years, I've been investing in creating this IP that allow that basically is the combination of scaling, you know, technology, you know, taking from EOS, scaling up, um, and systems and souls and all of that.

I've, I've studied all of these systems and then I'm also bringing sort of like my fortune fine, my fortune 500 sort of a financial intelligence and expertise and just merging that together so that we can actually like talk to CEOs and help CEOs scale their businesses more sustainably. Because here, here's very, you're, you're going to, you're going to agree with me once I describe it to you. So what happened is as I was starting to work with people, especially when they seek me out for, for scaling, right? So like, Hey, I want to scale my company, tell me what you do and what, whatever. So when, when I started asking them questions, so I, as part of the qualification, um, I realized that their companies were a mess, but they weren't really ready to scale and they were being sold by others that what they needed to do was to increase sales and do more revenues because you needed more cashflow.

And the reality is when I started looking into their numbers is that they, I mean, every incremental dollar of revenue that they put into the company would put a lot more strain into their cashflow. And actually it was actually not the best idea to increase that business model. Yeah. No, there's no question. Because, you know, you can, you can be crushing it at sales and still be broke. Most companies actually go bankrupt, not because of lack of sales to go bankrupt because of poor cash management. And there's actually a study that is floating around the internet that 82% of business failures happen because of poor cash management. So as sales, yeah, as sales individuals, as sales leaders, because I'm also, I mean, I'm I'm also a salesman, right?

So you cannot disentangle revenue from profit and profit from cash and cash from enterprise value. So actually this brings up a different question. I wasn't going to ask, but I'm curious. So you talk to CEOs, right? And I think it's imperative for CEOs to understand profitability, cash and flow. And to your point of like all, all revenue isn't good revenue. There's definitely bad revenue. Like, you know, I tell entrepreneurs all the time, get so tight on your ideal customer profile and give yourself at least six months of like not having to worry about it before you have to worry about revenue, whether it's, you know, your own personal cash or whatever, because it's very tempting to bring bad revenue in the door when you're, when you're struggling, right?

But then that sucks you away from, you'd probably do mediocre work for that type of a client. It sucks you away from other clients and it's a disaster. So we'll get back to the founder or the CEO mentality, but I've always had this question about sales reps and how much financial literacy they should have and how much they should know about the construct of the, the pricing, if you will, behind the scenes, because one argument is, nope, keep the sales rep dumb as far as like what the, why the price is the way the price is, because then it's plausible deniability. It's like, Hey, it is our price. Here's our discount schedule go. Right. And, but, but in that scenario, I find that it's a race to the bottom because they just discount, right?

It's like, because they don't understand the value. They're just like, okay, here's my 20% discount that I can give. Now the flip side is, is educating them on, uh, R and D and how this money gets spent and how every dollar of that contract of that license allows to us to scale and grow and whatever. And then all of a sudden the sales rep kind of has too much knowledge and they, they start getting in the weeds of discussions with CFOs and stuff that they probably shouldn't be in. So how much financial literacy should a sales rep have and, and, and specifically related to how the company prices their, their solution so that they can answer, where'd you come up with your price? You know what I mean?

Like SAS is a perfect example of the, of the disaster because it's just, it's a discount heavy world because me as an undereducated, uh, buyer, if you will, looks at Salesforce at $1,500 a license and say, it doesn't cost you an extra $1,500 to give me that license. It's, it's basically fair, you know, free money. I get it. You're investing, but come on, give me a huge discount. So help me understand, like, let's talk about that briefly and then let's get back to the CEO part. What's your thoughts on that? Well, that's a, I mean, there's a lot, uh, to unpack on your question, uh, because it really depends on different industries. But I'll tell you this, um, when you're measuring people just on revenue, right?

What do you get? You get more revenue. And sometimes that revenue may be to your point, bad revenue, because you may have to discount or give more terms or, you know, like extend term, extended terms and stuff like that, which may actually work against the company. Cause I, I'll tell you this, there's, there's a concept that rarely gets discussed in most companies, which is working capital. Okay. I actually like, I call it the cash void, right? Because every dollar you spend in the business, it has to, I mean, it takes time for it to come back in the form of profits. I mean, hopefully revenue, I mean, the, like the sale actually, right? Like when you get paid is the revenue and hopefully there's some profit embedded in it.

That time matters. It's not the same to be paid immediately today or to be paid ahead of you even delivering the service and getting paid 90 days from when you deliver the service. Those are three different risk profiles. Okay. And if, depending on what you sell, you have to, you have to understand like, what is your capacity as a company to be able to, um, uh, to finance, um, your clients. And, um, if you don't have a strong finance organization or a strong CFO within the organization that can actually like lead the company in the right direction, you could, you could have situations where, you know, the sales reps are doing their job, they're selling, selling, selling, you know, they have some level of, uh, discretionality on how they discount.

And then all of a sudden your profits are not as strong, you know, they're given extended terms. And then all of a sudden the company is suffering from cashflow issues. Right. And then what, what do they do if the, if these issues don't get addressed, uh, then you have to go and get more loans, more dead. And then all of a sudden the company goes into a, you know, sort of a situation where it becomes really difficult for them to service the dead. And then that's when they have to say like, you know what, we have to restructure, we have to change the way we do business. And this is when like, oftentimes you see companies pivoting to a different business model or laying people off because they've gotten themselves into a cash crunch.

And some companies are actually very good at, you know, maybe fixing that and then eventually moving forward, but not every company is going to have, is going to be able to afford that. Um, because it's, it becomes, uh, an existential threat to the existence of the organization. If you don't have money to serve, to pay your bills and serve your debt, you could go bankrupt. I mean, honestly, right. So I think there's a better model, you know, just to answer your question, there's a better model and, and I don't know exactly because it's different for every company, for them, for every industry. Like I said before, there's a model where like, you know, your sales reps are also kind of like, in a way they're also, um, working for the company and maybe just getting paid more on contribution margin on profits.

And, uh, and they're given more, um, they're basically giving more education about the traits that they can do. For example, if you do 10 more days of extended terms, then you have to, you know, increase price by this much so that we can compensate for the, the, the cost of money. So when you have those conversations and you explain it to a sales rep, I mean, sales reps by default are, you know, I personally, like I've never, I mean, most finance organizations, they think of like salespeople as, you know, sort of like, oh, they, they are eroding value. You know, they're, and I mean, we are all in the same company, I mean, we, we're all needed. If sales doesn't sell, you're in trouble. If finance doesn't do their thing, we're in trouble.

If supply chain doesn't do their thing, we're in trouble. If the developers don't develop the, you know, and create the new, you know, a new feature on the system fast enough, we're in trouble. So we all depend on each other, right? So there can be that rivalry. We, there has to be education and alignment of interest. And I think this comes from the top knowing exactly what your, your sort of like your, um, your target metrics and not just in terms of revenue, but in terms of cash and in terms of profit that comes from the top. And the reality is that many CEOs don't really look at the, at the bottom line, look at, yeah, at profits and cash. They like, we'll figure it out. Right. So, well, and this kind of gets to my bigger point of sales reps and their ability to survive in this chaos that we're all in is I think the one thing that is sorely lacking across the board, especially in sales is just a fundamental level of business acumen.

And, and being able to have business oriented conversations about finance, about CapEx versus OpEx versus, you know, all these different things, profitability and how things go, because is that business acumen, maybe not the nuances of the pricing model of the SaaS company and exactly where everything goes, but how finance works, how, you know, how to read a PNL, how to those types of things that financial literacy is usually scary for reps, which is why they tend to drop discount immediately because they just don't understand the importance of it. And if they could have the business conversation to say, look, yes, we can do that. But that puts us in a position here where we're not going to be able to do that.

Any executive should understand that. That's why have you ever heard of, um, uh, Todd Capone by any chance? I have not. Okay. So you need to look this up just based on what you said. Um, and he's got a podcast and you should, you should talk to him because he does negotiation training and his, um, his approach is it's called the transparency sale. And what he does is he, it's about transparency. So he comes to a client. He says, look, here's our price. Here's our rate card price based on what you asked me. Now I know you're probably going to want some flexibility here. Um, let me explain to you what's important to me, right? What's, what's important to us as a business, um, payment terms, uh, or, you know, payment.

So, so that's important. The faster we get paid, the better. So there's your gap that you just talked about, right? So I'm willing, and what he says, instead of giving you a discount for that, he'll say, I'm willing to pay for that. So I'm willing to pay you for this. I'm also, you know, obviously longer term contract. That's important to us. So we're willing to pay for, you know, instead of two year, three year, four year, um, size of deals. So if instead of 50 licenses, you want a hundred licenses, I'm willing to pay for that. And the one that I really love that I always forgot, but I, I now got it dialed in is, uh, forecast predictability. So this gets away from the rep saying, Hey, can you close by the end of the month?

Right. And everybody knows the discount doesn't go away at the end of the month. Like what did your profitability change? It didn't. But if you frame it as forecast predictability to say, Hey, look, it is really important for us to be able to be as accurate as possible with our forecast to our investors, to the board, whatever it is. So if you can close by the end of the month, that helps us predict our forecast. And I'm willing to pay for that. So when they don't pay by the end of the month, you have something to fall back on as opposed to, well, the discount went away. It's like, well, no, I paid for forecast predictability and, and you didn't come through on that. So now I'm not paying for that anymore.

So it's this, he lays all those four things out and he said, cool. Now, how do you want to work this? And so now it's becomes this open negotiation with the client of, oh, well, what if we did three years instead of two? What if we did 50% up front? And now it's like, okay, well, based on that, that's this. So it's just a really healthy way of negotiating from a finance standpoint that I thought was really cool. Yeah. I mean, that, that's, uh, it's actually funny you say that because that's basically the background, um, from where I came from, like a GE power. Um, I was there for like over 10 years. And, um, initially when we first got in, I mean, I was, uh, me and the general manager, we were responsible for the Latin American region.

And before we got there, um, there was this energy, um, that, or this way that the sales reps kind of like conducted, uh, sales, which is I come visit the, the, the client, I asked them what they want. Okay. I take the order. Maybe I come back, you know, three months from now and I've done my job. Okay. And then maybe when I have an opportunity in front of me, I asked for the best pricing. Okay. From the pricing team. And, uh, you know, I try to like push, push, push so I can get the sale. Right. Then finally get the sale, got my commission moved on. And, um, you know, the general manager that I work with, he was just, by the way, he was also, he was, he's another weirdo because he was, uh, a sales and finance guy.

Right. That's an interesting combo. Yeah. Yeah. Yeah. Yeah. And, uh, so he said, we're going to do it differently. Well, first of all, we're going to, we're going to start looking at the, like the life cycle value that that client has for any of the things that we sell. So for example, if I'm selling you something and I know that I'm creating on an MPB basis, $50 million of value over the course of 10 years, because I mean, we're talking about these are big, um, you know, big pieces of equipment. Yeah. I'm just illustrating the point. Yeah. So we started like training the sales force to start looking at, uh, at models and start understanding what value they were creating for the client before they sat down for a negotiation.

Because then if you're, if you, if you are aware, I mean, two things happen when you know how much value you're creating, uh, for a client. First of all, that you're, you're, you're more effective at selling what it is that you are selling and also being able to, uh, compare it to your competition. So for example, if you do, if you do it this way, you know, with me, this is so much value it's being generated, you know, by looking at your thing, right. And if you go with a competition, this is what they do. And sometimes you were like, Oh, holy shit. I mean, I'm going to lose this opportunity if I don't do something right. So that forces you to start structuring the deal in a way that works for the company and works for the client.

What's the difference between value and ROI? Cause I want to make sure that I understand that. Cause I, I have a hard time right now with ROI because of how fast things are moving. Like ROI is effectively a, you know, a promise today for a promise in the future. Like money today for a promise return in the future. And I just think things are moving so fast right now that it's hard to predict what's going to happen in the future. So how do you look at value in that, in that framework? Well, in that framework, value is like straight MPV, right? So for example, if you invest in this. And just for the audience, MPV, could you? Net present value. So it's basically, so you take the, the, the cash flows that the client is going to have in the future, the benefit of doing X versus Y, right?

You take the, you know, all of those cash flows and you literally go into an Excel and you do MPV, you put a sort of a, um, a discount rate and you take all of those cash flows and you calculate what the value is today. Okay. Okay. So that's MPV. Gotcha. And ROI is basically taking the internal rate of return, like in, and I mean, I'm just being in a simplistic way is basically like on, from a percentage point of view, what is the return that you get from doing that investment? Okay. And what you need to do, I mean, if you want to get technical here is you need to, you want to compare that, um, that ROI to your cost of capital. So knowing your cost of capital is important because if you know that your cost of capital is 10%, right?

And there's a project that which ROI is only six, then you are losing value. So you're basically giving four points away. Uh, you're basically like, you know, making the company less value by investing in things that have a lower return now, but if you had a project that had a 14% return, a 14% ROI, and you have a cost of capital of 10, then you are creating 4% of surplus. So you're creating value by definition. Gotcha. Anything that is below the cost of capital, any return that is below cost of capital destroys value. Anything above creates value. I'm just like, I'm simplifying like really complex things into really crazy, right? Yeah. Could you explain just again, for my ignorance here, how do you calculate the cost of capital?

Like, what, what does that look like? And it's not just your operating costs, right? Like, what does that look like? I hope we don't, we don't, we don't spook out your audience. No, man, this is for me. I'm a proxy for my audience. There's a lot of people out there who are financially illiterate, like I am. And I want to just make sure I'm understanding this. Uh, you know, just like I tell Claude all the time, talk, tell me like I'm a five-year-old here, right? Yeah. It's a weighted average of your, the cost of debt and the cost of equity. Okay. Weighted average of cost of debt, cost of equity. So for example, if your company is 30% equity and 70% debt, that's the capitalization, right? And your cost of debt is, I'm going to make it up 10%, let's simplify it, right?

So you take the after, after tax cost of debt. So it will be, let's say 30%. So it's like 7% times the 30%. Okay. But the cost of equity, you basically calculate based on, it's a super complicated formula, but just trust me on this one. There's a way to calculate the cost of equity for a company. Then you multiply that cost of equity by the 70%, which is the amount of debt that you have in the capitalization of the company. The combination of those two numbers is your cost of capital. Okay. Okay. So the riskier your company is, okay, the higher the cost of capital. There it is. The safer the company is and the like, the more sort of like plain vanilla, the cost of capital is going to be lower.

Okay. So effectively the, the, the safer your company is, the more risks you can take. I know that kind of sounds like a, right. So if you have a low cost of capital, you could make a couple of bets, you know, that might not be that, that are a little bit riskier because you're a little bit more foundationally sound from that cost of capital. Is that the way you would look at it? Or I would say, I would, I would say it differently. I would say that if your cost of capital, I'm going to make it up. So if your cost of capital is eight, eight percent and you only need a 10 or 11% return project in order to create value. Yeah. Whereas if your cost of capital is 20, then you need like really risky projects that have a super duper high ROI in order to be able to, to clear your cost of capital.

So it's definitely, they higher the cost of capital. They higher the, the ROI that you need from your projects. Okay. All right. All right. All right. I think I got it. Yeah. Let's, let's, let's. I wasn't planning on having this conversation. No, no, like, trust me. That's why I love these conversations. Cause I, like, as we talk through, I'm like, I try to make the connection to my business and then the other businesses out there, because what I'm seeing in the SaaS industry is, is disaster at this point. Right. Because it was all about revenue back for the past 15 years and it was grow at all costs. And, you know, profitability was almost this four letter dirty word that nobody wanted to talk about because it was just, oh, it'll work itself out.

And then interest rates went, you know, the direction they did and crushed all these companies. And now you have all these PE firms that are sitting on dead capital. Like, I mean, I, I cringe at, you know, uh, Vista private equity, for instance, they, they bought sales loft at the peak, you know, in 2021, at the end of 2021, they, at sales loft exited at $2.4 billion and I forget where their revenues were, but obviously not even remotely close. And now I can't imagine what sales loft is sitting on their books for. Like, I don't, I can't imagine what the value of, of that company is at this point and what they do with it. So there's a lot of dead money out there right now that I'm like, how is this going to flush through the system?

Another sidebar here is like, what is, what is the, the, what is going to happen with all the, the, with all these second, third, fourth rounds that were so huge. And now they're sitting on this dead money. Like, do they have to recapitalize? What do they have to do to these companies to make them somewhat viable from a business standpoint? Yeah. I mean, I, I mean, I think that, I mean, I don't know how to tell you, like, just finding capital in this environment is really difficult, very difficult. And, um, and I will say that not only because, um, just, just because of everything that is happening globally, but also just because of the nature of the uncertainty that exists today. Right. So, so if you are, um, you know, if you're sitting on a company that is doing, oh, I'm doing the AI that's going to do the X, Y, and Z, you know what?

But tomorrow somebody else could come up with something that would, that would basically like make you whatever it is that you're doing completely obsolete and they will do it for like cents in the dollar, you know, on the development side. I mean, you can see, you can see this dynamic happening already. Like for example, the Chinese, you know, like U S companies, like create some kind of technology, like six weeks later, the Chinese, exactly. Right. They come up with the knockoff for like, and they, and they only wasted on, they only invested like $6 million in the development. Whereas, you know, the other company took like millions of dollars. So, so there's, to me, I think this AI, um, uh, wave, I guess is actually exposing, um, you know, the importance of being really prudent with your investments.

Right. I mean, the cool thing is that with very little money, you can create, you know, companies and you can test them out. Right. And you can, they can fail faster without having you, without having to spend hundreds of millions of dollars before, you know, um, realizing that there was no value there. Right. Right. And I think this is probably, um, like I, I'm actually an, um, a limited partner, uh, at a VC fund and I'm, I'm, you know, I'm creating my own technology as well. And, um, you know, I was talking to, to the GP and I was pitching him the deal and he said, you know, we could look into this, but you know what I recommend? Just make it, just create the MVP and start selling it. Okay.

Start like using it, test it. Just if you can, if it's within your means, try to do it like with your own money. Okay. And only if you then need to like scale it. And now that you've tested it, now that you've proven it, now that you know that there's a market and it's not, and you're not going to be sort of like, um, there's not like a competitor that's going to come and like do it for, you know, the same amount of money. Like if your business model is solid, there will be, there will be funding for you. Okay. But now you're doing it from a place of strength as well, because now you know, your product works, you know exactly how, how, you know, you have a good plan on how you're going to grow that company.

So it's just a different, it's a different strategy. Okay. And I'm not saying, I'm not trying to say that if you can, if you can figure out a way to grow like your sales to $300 million and just get an exit and get a sucker to pay you for it, do it. Do it now. Do it now. Do it now. That's awesome. Do it. Okay. But if you're not, if you just want to, you know, if you want to, you know, if you want to do it prudently and you don't want the stress of, of, of having to do the other, like that other way is actually pretty stressful. Okay. Yeah. Yeah. So it's just, it's just, what is the adventure that you want? You want to do it sustainably? You want to, you know, like do something that people want and people are going to need one year, three years, five years from now.

That takes a lot of, um, that takes a lot of like testing. It takes a lot of thinking and it takes a lot of like, you know, making mistakes and then, you know, restructuring, uh, your product and your offers, et cetera. And, um, the cool thing, like I said, is that you can do it today with very little money. Well, that's, I think now, you know, you're, you hear the talk about, you're going to see the first two to three person billion dollar company, right? Cause you don't need to hire those developers. You don't need to hire that GTM team. You can agent your way through it. If the product is the right fit at the right time. A thousand percent. Yes. Your framework. So you got, uh, you have a diagnostic diagnostic framework that you use is the three filters, right?

Efficiency, timing, and capital. Could you walk us through that? Like how, when you come into a business and you look at, you know, you're working with a $5 million ARR company, um, efficiency, timing, and capital. Walk me through that, that structure. And, and what are the key components of each? Yeah, absolutely. So, uh, let's talk with, let's talk about the first one. Efficiency. Are you being efficient in the way that you sell? Are you making any profit? And how do we know if we're making enough profit? Well, your first signal is that you're actually making profits, you know? There you go. That's the first. Not rocket science. Yeah. But then the, then the next question is like for your industry, for the size of company that you are, if you were to look into, into, into the market, do you feel that you, like you are in line, you know, when you compare yourself, are you kind of like, you know, in line with the rest of the industry?

Are you below? So it just basically just starts begging the question, like, what else can we do? How could we make more profit with less people with, you know, or just more profits with the same amount of people, right? Like it just, it just takes that curiosity. Um, and, uh, it, because at the end of the day, if you're not measuring it, if you're not paying attention, then most likely your energy is not going into solving the problem. So if you define, if you, if from your perspective, you believe that there's a more efficient way of doing something, then you're going to solve for that. But if you're not paying attention to that, then you'll, you know, it'll go unsolved. Can I ask you, cause I think there's a, especially with AI right now, I think there's this farce of efficiency.

I do think that we're in the stage of AI that it's, we're in the efficiency stage, not the results stage. Um, but there's a lot of found, there's a lot of people who I'm seeing jump towards the efficiency because, oh my God, look at how good this thing is. I'm going to replace my whole SDR team. Oh my God, look at all that. I'm going to place my whole customer success team. So where's the, the, the efficiency where you should apply something like that and be like, yep. Like, do you, is there some type of lens you look through to say, yes, you know what your SDR team right now is pretty much useless and AI can do that for you. Or yes, your customer success versus, uh, no, you should empower these people with the tools to be more effective, right?

Cause that's the balance right now that I think a lot of companies are faced with. Do you have a perspective on that or a lens that you look through to help them identify where efficiencies can truly make a difference versus where it's a false efficiency that will come back to bite them in the ass, like letting go all your customer support people and then having disastrous NPR stuff? I mean, that's, I mean, that's an awesome question. So I think there's like, there's like several, um, things that we need to kind of like, um, uh, break apart. The first one is if you're starting your company as an AI first company, if you're starting from scratch, I mean that, I mean, I'm not going to talk about that because that is, that is a whole different, you know, conversation, but if you're an existing company, okay.

And you, and you're wondering where you want to deploy AI. Okay. The way to do it is to think about where is the constraint in the company today. And it, in as simple as a question sounds, most of the entrepreneurs that I talked to, they never asked a freaking question. Like, where is, where, what is my constraint today? Because there is, I mean, we, since the eighties, we've known that the way to run any company is by solving the constraints. This is what, you know, L Eli Goldratt, theory of constraints. I think Cormozzi kind of like, you know, surfaced it again, because it's that brilliant. It's basically solving the constraints for your company. So your number one job as a CEO is knowing what the constraint is and having all of your resources, I, you know, align with you to solve that constraint, because the minute you solve it, you go to the next thing, and then do the next thing, and then do the next thing.

And when you do it like that systematically, all of the resources are optimized in constraint resolution. Maybe that sounds like a lot of mumble jumble, but just say, no, I do digest that one. No, it's, it's very similar to my thought. Like when I had a team of sales reps reporting me a while back, you know, I would always tell them, you know, be, yeah, you gotta be more strategic in your thinking. You gotta be more strategic. And they would always look at me and be like, no, John, we don't even know what strategic thinking is. And I'd say, look, can I, can I break down strategic thinking for you? It's not this magical thing. It's like, you just outline your process, like whatever the process is.

And then you find the weakest link of what that process is. You pull that down, you figure out a strategy and a solution to that. You plug it back in and you see how it runs. And if it runs better, you've done a good job. Then you find the next one, then you find the next one. So that way, cause like, that's why I say any process is better than no process, because at least you can look at a process and find the weakest link of that process and then say, okay, let's try to fix this. Right. And, and not try to boil the ocean here. So it's a, it's a similar mindset of really just figuring out what's the constraint. I mean, that's it. I mean, that is theory of constraints, by the way, maybe what you just described, you know, so you're using it like, you know, without even knowing that that's what it is.

But yeah. But, um, when you're, when you're thinking about AI and AI deployment, your AI dollars should be invested into solving the constraints or creating capacity. Because sometimes, you know, you have an issue and you have to fix it and then create more capacity so that like, if imagine if business was a highway, right? So with three lanes and you know how you have a bunch of like, you know, roadblocks in the middle, right? And then all of a sudden you clear the roadblocks, but now you have clarity that that process works. So what do you do? You increase capacity. So now you make it into a five lane highway. So now there's more throughput that can go through that process. Okay. All right.

Are you with me? I'm with you. So efficiency, then there's timing. Then there's timing. So the timing is what kills most companies, by the way. And that, and that, that means, um, if you are not, uh, collecting faster than you are paying, you are burning cash. Yeah. Okay. So figuring this out is paramount. And some companies are really diligent about this. They do a good job. Some companies don't. They don't, I mean, they may even have financial people, but what happens is maybe those, those people don't have the authority or the expertise to be able to, you know, work with the CEO and the rest of the leadership team to say, Hey, this is our management. This is our cash management strategy. This is what we see with a strategy.

How do we collectively, what decisions do we need to make in order to not run out of money? Okay. So that's timing. Okay. And then capital is real quick on that. Is this why in big companies always fuck around with net 45 and net like that type of bullshit is to try to figure out that timing, uh, component to it. Is that why they do it? Yes. Yeah. Correct. Cause that's always been a pain in the ass for me. Like me as a small business solopreneur, you know, service-based, you know, you got these huge companies putting out their net 45. I'm like, fuck you net 45. Cause I know net 45 is actually net 60. And so therefore I'm going to produce something. And therefore I'm going to have to ask for upfront payment from you instead of that, because I'm going to, because I know, and it just bugs the shit out of me that huge companies play that game with small providers.

Cause it just drives me nuts. Like, you know, if you don't get your, you know, a few bucks from me, you know, who cares, but if I don't get your money, my money from you, I'm screwed. The timing of my business, the smaller I get is a much higher impact than some publicly traded company. Absolutely. And you don't have the same access to capital that a bigger company does by definition, you know, the larger you are, the, you know, the bigger your company is, the easier that it becomes to, to access capital, the smaller you are, the more difficult and the more expensive it is. Exactly. Yeah. Okay. All right. So then the third one is, uh, what was the one, the third one? It's capital. Oh, capital.

Perfect. Yeah. Yeah. Yeah. So, so it's basically from cash to enterprise value. And again, most people, especially like, you know, the smaller companies, they're not really thinking in terms of value and valuation. Right. I mean, eventually you do what if once you have the itch for an exit, right. But before then you're just like, you're not even looking at that. And I, and I, you know, what I do, for example, in my company, I, um, you know, my philosophy is that we need to start, I'm gamifying the process of value creation. So, you know, so one of the things that I, when I onboarding somebody and I asked him like, Hey, so five years from now, what would you want this company to be worth? And they're like, Oh, $50 million.

And I'm like, okay, let's look at what it's worth right now. It's worth three. So you have $47 million that we need to overcome in the next five years. So are you, do you want to see how we can get there? So now it becomes a conversation on how do we, how do we solve for the gap and, and solving for the gap is not just, um, revenue is not just profit, but it's also like how you capitalize your company. Okay. If you're raising, you know, equity or if you're raising debt and how are you redeploying your capital? What remember, like what investments with what ROI are you investing on vis-a-vis your cost of capital? So if you're investing in projects that have a good return, okay. Even, even if they don't perform because that's the other thing, like you can, you can, you can measure it like, Oh, everything's going to go perfect.

Or you can be like, well, even if it doesn't turn out to be perfect and it's okay, what is the return of that project? What's my cost of capital? And if that is better than your cost of capital, then do it. Cool. It's value creation. Unless there's an strategic reason why you want to do it because you're defending, you know, against a competitor or you're trying to gain a market share and there's, there's something else that you're looking into that is not a financial decision, purely a financial decision. But even then I will, it would have to be a really good, uh, reason. Totally. So that's what, that's what capital is. It's just looking, just looking at how every dollar that you generated in the business, um, how are you redeploying it?

And how are you capitalizing the company and how are you measuring the return of equity in your company? Because I mean, the way the, the biggest mindset shift that any entrepreneur can make is to start thinking of as their company, as an investment. Yeah. So, and I'm going to ask you a simple question. When you go, when I'm sure you have stocks, right? When you're looking at the stocks, what, what is it that you're looking? You're looking for value enhancement. You want the value to go up over time. I mean, yeah, maybe you get a dividend, a school, but you, I mean, you don't, you just don't want the dividend. You want value creation. You want the stock to be worth 10, 20, 30% more than it was the year before.

Because you know that eventually when you sell it, there's all that value that you're going to capture, right? It should be the same, no different with your company. So you should be like thinking in terms of value, what is the value of my asset, which is this beautiful company that I'm creating that's allowing me to pay for all my bills and, you know, feed my family and create sort of something, an asset for the future for me and my, and my loved ones. Right. And what is the value that it needs to have so that I can realize my own dreams, like maybe five years from now I can retire and, you know, be a, whatever it is that you want to do in your life or investing the other thing that you want to invest, or just basically just bump all of that into, into just making the company even bigger.

You know, so like reinvesting in the company. So that's how we need to start thinking about our companies, that asset. That was a mind shift for me a while. My mentor told me that is like, start, you know, because if you don't look at your company as an asset, then you end up working for your company. And that's worst case scenario as an entrepreneur. If you have a job as an entrepreneur, in the sense that you have all the shitty things about a job, but you don't have somebody else paying the bills. You don't have somebody else dealing with all the other stuff that you have to deal with that stuff too. It's like worst case scenario. Cause now you're stuck in this, oh my God, I I'm working for myself versus working for myself.

And there's, there's a difference there. So I think that that mindset shift is a big one. Um, love it, man. Well, we got to wrap it up here, but you scaling CFO.io, basically you're productizing yourself, right? With AI. Um, talk to us a little bit about that, where people can find out information about what you're doing, because I think there's a lot of founders right now who are not as, you know, who are not financially literate, if you will, and are stuck in this hamster wheel of, oh, you know, revenue, revenue, revenue is going to solve my problems when they're probably need a lot more efficiency, timing and capital components to it. Yeah. So, so the easiest way is to check me out on LinkedIn.

And, um, if you go there on the Cruise Gamboa, you're going to find my profile, you know, follow me. I, I mean, I, I, I write almost every day about these topics and also in my, um, in, in my bio, there's a link in my bio bio and it'll take you to this thing called the seven financial blind spots. And that is sort of my, you know, the document that I use for people to sort of, um, let them know what my, you know, like what I am about, um, you know, what are the seven financial blind spots that I see over and over, um, with most of most founders that I work with. And, and, and it's really at the end of the day, I mean, they're really, they're really simple. I mean, I, I gave him like really like, uh, you know, flashy names just so that, um, you can remember them like the profit illusion, the revenue vanish, the hiring roulette, you know, things like that.

So that you, they, they become memorable. There's your marketing back. There's your marketing background. There's my, uh, yeah, my, my would have been marketing, uh, marketing background. Right. Uh, yeah. So, uh, just, just check it out. And, um, and if you, if that resonates with you, just DM me and then we'll, you know, we'll start a conversation. We'll see if, if, if it, if it is a fit for you, I'm, I'm, I'm investing heavily on taking everything that we discussed today and making it very simple so that you can actually go, uh, in the sort of the next version of scaling, uh, cfo.io is basically a gamified way to create value in your company. And, uh, and that is taking a lot of, uh, brain power and trial and error.

And, uh, I think I got it to where I, I know what needs to be done. And I'm like right now, as we speak, I'm working with a developer to, to finish that. And, um, it's, it's come like that new version of my company is coming up very soon and we're going to honestly, we're just going to work all of our engagements with our clients using the system so that they actually can answer a lot of their own questions. And all we're doing is adding value. Okay. Love it. So awesome. My friend, well, there's, I mean, like I said, I could probably get into much more details with my, with my personal scenario here, but we'll save the audience, uh, to, to talk to you about that. So, uh, Cruz, it's been a pleasure.

Thanks so much for coming on. I really appreciate it. Thank you for inviting me. It's been a pleasure. And, uh, you know, and, and, Hey guys, if, uh, sorry for the, for the geeky conversation, but I think it's needed. I mean, you finance is the language of business. We need to learn how to speak it. So I know I understand it's not sexy, but you don't need to be a CFO. Just need to know enough. All right. So happy to be here. The business acumen piece, right. It's sorely lacking. And I think that's a huge part of it. So Cruz, thanks again. I appreciate it, man. Thank you so much. And everybody, I hope you enjoyed the conversation as much as I did. And like I say it all in the end of all these podcasts, go out there and make somebody smile today.

Cause no matter how bad your day is going or how bad you think it went, if you make somebody smile today, you know, you had a good day and the world needs a lot more of that right now. So thank you all very much. And I will see you on the other side.