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This book teaches the fundamentals of owner compensation, profit targets, labour productivity, cash flow, and data reporting. Clear explanations and helpful illustrations throughout make it a must-read guide for small business owners looking to achieve higher profits.

Simple Numbers, Straight Talk, Big Profits!

Simple Numbers, Straight Talk, Big Profits!

by Greg Crabtree, Beverly Herzog

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1.52K reads

Key Takeaways

  • Get owner’s compensation right and stop playing games with distributions.
  • Breakeven is 10% pretax profits.
  • Labour efficiency is the key to profitability. Manage your salary cap and build a team culture around labor productivity.
  • Forecasting is better than budgeting. S...

Owner's Salary: Why Your Salary and Distributions are Fogging Your View of Net Income

  • Don’t confuse business profits with owner's salary.
  • You get paid a salary for what you do, and you get a return on what you own.
  • Until you pay yourself a market-based wage and plug that number into your financials, your financial data is worthless.

Create A Cash Cow

  • If you’re not able to pay yourself a market-based wage, then you’re operating at a loss.
  • Until you pay yourself a market-based wage—and make a profit on top of that you have a sick cow on your hands.
  • Your goal should be to create a business that generates income for you every...

Calculate Your Sweat Equity

  • Use sweat equity to compensate yourself when you can’t afford a market-based wage.
  • Sweat equity is the value you have created for your business through your unpaid work.
  • This concept helps you calculate your lost opportunity to earn market-based wages had you chosen to work e...

Market-Based Wages For All

  • A high employee turnover rate is very expensive.
  • Fair does not mean equal. Two people are rarely worth the same amount of money.
  • Management by committee is an absolute failure as a business model. There has to be a clear leader even if the stock ownership is equal.

Profit: The Importance of Pretax Profit

Pretax Profit = Total Sales – (COGS + Operating Expense + Interest Expense)

  • Pretax profit is the profit you make after you take all your sales minus all your costs, before you pay taxes.
  • Focus on your pretax profit. Interest, depreciation, and amortizat...

Gross Proft And Contribution Margin

Gross Profit = Revenue – COGS

Do NOT include direct labor costs in cost of goods sold.

Cost of goods sold typically includes pass-through costs like finished goods, materials, and subcontractors.

By focusing on gross profit instead of revenue, most businesses fr...

Breaking Even Isn’t Good Enough

  • The target for pretax profit is 10%.
  • By the time you’re at the breakeven point, your business is already dead.
  • The best businesses operate between 10 percent and 15 percent.

The “black hole” exists between the $1 million and $5 million in revenue.

This is a time in your business growth when you’re forced to add staffing and infrastructure before you can really afford to.

One of the keys to success is continually upgrading your staff.

The need to add...

Hiring 101

  • Hire slowly, fire quickly.
  • Use the topgrading concept of hiring when it comes to interviewing and selecting candidates.
  • Use personality profiles as part of the screening process.
  • Beware of hiring the “been there, done that” credential. Ask yourself why that person is ...

Your Capital Safety Net

  • Your “capital safety net” is calculated by figuring how much cash you need to hire the people you need, then estimating how long it will be before your business can pay the new hires and still remain profitable.
  • Prepare a cash flow forecast by month for the time period of the expansi...

 Labour Productivity: Your Key to Surviving the Black Hole

  • Focus on your gross profit per labor dollar as your key indicator for labor productivity.
  • Stay at the 10% pretax profit mark every step of the way by adding labour only at the last possible moment.
  • You can’t increase pretax profit by revenue growth alone. You improve your pro...

Determining Your Salary Cap

  • Determining your salary cap is the best way to achieve your required labour productivity.
  • Nonsalary costs include all fixed and variable costs, including COGS, that are not paid labour.
  • In the example below, your salary cap for the year is $500,000. This is how much you can s...

Managing Your Salary Cap

  • Managing the salary cap is the key to improving profits.
  • If you are exceeding your salary cap, decide what to do about it. Are you going to hold wages constant until you hit your profit target, are you going to cut staff, or are you going to do some of both?
  • Once you get to 1...

Business Physics: The Four Forces of Cash Flow - #1. Paying Your Taxes

  • Before you spend money on anything, you have to set the taxes aside.
  • Don’t pay taxes until you absolutely have to without incurring a penalty.
  • But until you pay the taxes, you have to set the money aside and get it out of your financial calculations so you know it isn’t yours...

#2. Repaying Debt

  • You can’t build wealth until you get out of debt.
  • People who take a low- to no-debt approach can handle bad economic news because they live more stable and productive lives.
  • If you borrow money, you have to forgo any after-tax profits because you have to repay debt with those...

#3. Reach Your Core Capital Target

  • As a general rule of thumb, your core capital target is equal to two months of operating expenses in cash and nothing drawn on a line of credit.
  • Your core capital target forces you to pay for accounts receivable, inventory, and equipment with capital or term debt.

  • Capital formation is the sum of sweat equity, the money you invest, and after-tax profits that you keep in the business.
  • Consistent profits over time allow you to build equity by keeping those profits in the business, which then allows you to hit your core capital target, which then ...

Common Areas of Tax Fraud

  • Paying yourself with distributions instead of a salary to avoid payroll taxes (S-Corps).
  • Getting involved in offshore activities for the benefit of saving taxes only.
  • Intentionally miscoding personal expenses as business expenses.
  • Bartering by way of trading legitimat...

THOMAS EDISON

Opportunity is missed by most people because it is dressed in overalls and looks like work.

The Lip Service On Culture

  • Document your culture and how it ties into your profitability as a business.
  • The more you document it, the easier it is to live it and maintain it.
  • Send an email at the beginning of the week that highlights one segment of our culture document to let everyone know what our foc...

The Salary To Give To Employees

  • Companies that underpay employees tend to struggle in the long run due to high employee turnover.
  • You also can’t assume that if you pay higher wages you’ll get more productivity.
  • Never give employees a cost-of-living adjustment.
  • What you pay them should be within a ma...

Evaluation Process is Key

  • Your employees need to understand what is expected of them in terms of productivity.
  • The best way to accomplish this is through the employee review process.
  • You need to have a formal meeting with each employee at least twice a year.
  • Focus on career planning and career...

Be Careful With Incentive Plans

  • Throwing money at a problem doesn’t change the outcome.
  • Most entrepreneurs look to incentive plans as a substitute for management and leadership.
  • It’s usually more effective to use small amounts of money along the way to recognize outstanding achievements.

 The Three Sources of Capital: How to Get Money and Effort to Play Nicely

  • Capital (Equity) = What you own (Assets) – What you owe (Liabilities)
  • Capital is used to purchase assets, such as inventory and equipment, and allows you to have the proper amount of cash on hand to meet your core capital target.
  • Debt is NOT capital. The bank does not provide...

  • Look to your own resources first before you go borrow money elsewhere.
  • If you start a business with your own money, you’re going to defend it to the greatest degree.

Source #2: Other People’s Money

  • Not all businesses can be funded with debt. Sometimes you need a long-term investor.
  • Use investor money as a last resort.
  • You tend not to be as careful because it’s not our money. It makes it easier to postpone difficult decisions.
  • When you use OPM, you have to be cle...

Least understood and least measured form of capital (yet it’s the most common!)

If you can’t afford to pay yourself a market-based wage for your efforts, then you’re going to have to defer payment and work for it.

The trap that most people fall into is believing that because they have...

The Golden Rules Of Reports

Keep your reporting simple while still being able to recognize a flashing red light that indicates a problem.

The more frequently you look at a report, the less data it should contain.

Economic Value: How to Know What Your Business is Worth to You

  • Knowing the economic value of your business helps you identify when the business is underperforming, what price it should sell for, whether or not you should keep it, and how to structure an offer for shares.
  • The economic value of a business is typically based on the last three years...

There are five basic elements that combine to drive the profits that are used to establish the value of your business: customers, employees, processes and know-how, core capital, and intellectual property.

Profitability, salary cap management, and the four forces of cash flow are all contai...

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