Simple Numbers, Straight Talk, Big Profits! | Greg Crabtree

Summary of: Simple Numbers, Straight Talk, Big Profits!: 4 Keys to Unlock Your Business Potential
By: Greg Crabtree

Introduction

Unlock your business potential with the insights offered in “Simple Numbers, Straight Talk, Big Profits!: 4 Keys to Unlock Your Business Potential” by Greg Crabtree. This book provides a roadmap to achieving and maintaining 10-15% pre-tax profitability and escaping the dreaded ‘black hole’ that plagues businesses as they cross the $1 million revenue threshold. Explore the importance of paying market-based wages, setting salary caps, increasing labor productivity, and understanding the four forces of cash flow that are crucial to your business’s success. This book’s practical approach will help you make informed decisions and implement effective strategies as you guide your business towards growth and prosperity.

Pay Yourself Fairly

Small business owners should pay themselves a market-based wage, not only to maintain the success of their business but also to increase its market value.

Did you know that 90% of small business owners pay themselves less than a fair market wage? Although it may seem rational to lower your wage costs to make pre-tax profits appear healthier, it can undermine your business in the long term. Labor expenses and pre-tax profits are critical metrics that define the success of your business. Artificially altering them could affect your ability to grow your company.

The U.S. Internal Revenue Service lists the tactic of underpaying wages as a “dirty dozen” tax scam used by closely held corporations, resulting in federal tax agencies auditing firms exploiting the practice. Not paying yourself or your employees a market-based wage can cast doubts on your company’s value in the eyes of a potential buyer.

Therefore, paying yourself a market-based wage is essential to increase your company’s value when you decide to make an exit by selling or replacing yourself with an outside CEO. If you have been underpaying yourself or your employees, it is never too late to rectify the situation. Paying yourself a market-based wage from the onset will spare your business cash flow problems and the nasty surprise of dwindling profits if you decide to make an exit.

Escaping the Black Hole

Businesses that maintain healthy profits while growing are likely to escape what is termed as the black hole. This is when a company’s revenue exceeds $1 million, there’s an increased demand for staff, but insufficient funds to pay for new employees. Many businesses focus on balancing the budget at this point. However, the target should be to have a pre-tax profitability of between 10 and 15 percent. This can be achieved by reinvesting profits, which would enable businesses to make it through the black hole successfully. The benefits of being profitable while in a black hole transcend the event, as a company’s historical profitability is a significant factor in determining its market value. Therefore, a business that has achieved a 10 to 15 percent profitability will command a higher market value than a business with no profits. The book provides guidance on how businesses can sustain growth while maintaining healthy profits.

Achieving Profitability through Salary Cap

To achieve 10-15% profitability during the black hole period where you need to hire new staff because of growing demand, a salary cap should be introduced to protect at least ten percent of your profits. The salary cap should be based on 10% profits and used as an anchor to fluctuate between 10-15% profitability. Once you reach 15%, hire new staff strategically to increase profits until you’re back to 10%. Repeating this process is the safest way to grow your business while remaining profitable. Bill Belichick’s success in the NFL with salary caps is a great example of how to maximize every dollar spent by investing in younger talent and their future.

Optimize Employee Productivity

To increase and sustain labor productivity, companies must focus on enhancing their current employees’ productivity. Measuring productivity through gross profits divided by labor spending is a powerful tool to spot negative trends and respond quickly. Companies should ensure that their employees receive appropriate compensation as underpaying leads to high turnover, and overpaying eats into gross profits. Implementing an evaluation system helps manage employee expectations, highlights areas of improvement, and encourages career planning, leading to improved employee retention and productivity. Identifying three to five skills to improve productivity for each role and asking employees to describe their role’s contributions to the firm’s profitability level can further optimize employee productivity.

Four Forces of Cash Flow

Understanding the four forces of cash flow is crucial for a healthy business. Besides labor costs, taxes, debt, core capital target, and distributions also play essential roles. Putting money aside for taxes, meeting debt payments, maintaining a buffer for normal fluctuations in cash flow, and waiting to distribute profits until you’ve covered the first three forces are important. Profit reinvestment will help your business reach its Core Capital Target (CCT). Building up two months of operating expenses as a buffer is recommended to cover cyclical swings. Before taking distributions, companies should prioritize building this buffer through profit reinvestment. Following these four forces is crucial for businesses to stay solvent and experience consistent cash flow.

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