A short Q&A replay from my conference in Bangkok, plus an in-depth look at the 5 Key Numbers to watch on your Profit and Loss statement and why they’re so important. Read the full transcript below…
Welcome to the Business Numbers podcast. I’m your host, Ben McAdam. I’m a profits coach, virtual CFO, and entrepreneur, and I’ve created this podcast to help you grow your business profits and understand your business numbers without judgment and without burying you in a whole bunch of jargon that you don’t need. Just actionable tips and case studies to help you grow your business. For show notes, go to the website www.businessnumberspodcast.com
[00:00:27] In this episode, I’m going to share the questions and answers that were asked at a Q&A session that I ran at a conference in Bangkok a couple of weeks ago as I’m recording this. It was in the middle of October. A whole bunch of online entrepreneurs gathered in the Conrad Hotel in Bangkok for an annual event that hadn’t been able to be put on for a couple of years. So we were all excited to be there.
We had 80 people registered for our session. It was the maximum that was able to be in the rooms that we were assigned. They gave us two rooms ’cause always so popular, this session. We crammed a bunch of people into the room and answered some questions for them that they had about numbers. Just basically pick our brains, and get your questions answered. It was me and a couple of other numbers experts. We divided the room so that we could be answering two questions at once.
So yeah, got a lot of questions answered. It was a lot of fun. I always enjoy doing that, and I’ll probably do it again next year.
[00:01:38] So I thought in this episode, I would share with you the questions and answers for those of you who weren’t able to be there. And for those of you who were great to see you again, this can be a good refresher. Apologies if you hear some noise in the background. I am currently at a hotel in Miami. I’m going to present a workshop in a few days, I’ll do a separate episode on that. And yeah, there are some very loud door-closing noises. This room isn’t as soundproof as the one I was in back in July when I did another workshop here.
Anyway, let’s get into the questions. There were some tax questions, which I won’t cover. Speak to your tax accountant or reach out to me for a referral.
[00:02:21] There was a question about what bookkeeping software is the best or what bookkeeping software people should use, and my response was either QuickBooks or Xero. If you’ve already got one of those, don’t bother switching. The benefits aren’t big enough to outweigh the cost of switching.
And if you don’t have either of those options or you have no bookkeeping at all, the key is to find a good bookkeeper first. And if they want QuickBooks, go with QuickBooks. If they’re a Xero Expert, go with Xero. If you are, if you don’t have a bookkeeper, let me know. I’ve got a couple of great ones that I can refer to you.
[00:03:01] There was another question about, “How do I have multiple businesses, or multiple departments or divisions of the business, in the same bookkeeping file? So I don’t have to pay for multiple bookkeeping subscriptions.” or maybe it’s multiple product lines, multiple service lines, or some product lines, some service lines. And how do you keep all that in the same bookkeeping file?
Generally, if it’s a separate legal entity, or there are separate bank accounts for each of them, that’s the only time when you can reasonably put them in separate bookkeeping files. So generally, if it’s the same legal entity that’s running all these businesses [or all the different businesses, or business lines, or divisions, or organizations, or whatever] and if they all use the same bank account, then they’ve gotta be in the same bookkeeping file. Otherwise, it’s gonna cost you a lot of money in bookkeeping fees.
[00:03:56] As for the how to do it, how do you make sense of having multiple different business lines, or divisions, or whatever?
In Xero, there’s a feature called “tracking categories.” This means that for every single transaction, there’s an extra custom field that you can select called tracking category. It means that when you generate reports, you can choose to only show income or expenses that were tagged with that tracking category.
QuickBooks has a similar feature that I always forget the name of… classes? I’m pretty sure it’s classes.
I had a bookkeeper when I was doing the session, there was a guy who runs a bookkeeping business in there, and then I was able to like double-check that with him. And I can’t remember which one he said, should have looked before I started recording. Okay. So that was that question then.
[00:04:53] At some point, I asked the next question, and someone said, “Look, I don’t know where to start with looking at my numbers. Where should I start? I’ve got bookkeeping, there are some reports that come out of the software. What are the numbers that I should care about?”
And so I asked a couple of questions, and it turned out pretty much everybody there doesn’t really look at their numbers that much, and they’re kind of worried about that. What kind of red flags that they’re just not seeing? Potentially, some hidden opportunities that they’re not able to spot either.
[00:05:29] So, for most of the people there, I asked, “Should I go through the key numbers on your Profit and Loss and income statement? The ones you should be looking at least every month?” They said “Yes,” so I walked them through the top five numbers on the P&L.
[00:05:41]Breaking Down the Key Numbers of your Profit & Loss Report
Now, I have done a podcast episode that kind of covered this before. But I don’t remember the episode number. Again, something I should have looked at before I started. But, you know. For now, how about I go through it now? If you had it before, if you’re familiar with that, you can stop listening now and go look at your key numbers. Otherwise, let’s go!
Okay, there are five key numbers on the profit and loss statement (or the income statement, doesn’t matter what you call it). The basic layout of it is that there are some revenue, sales, or income rows at the top. Then there’s the cost of goods sold section, and gross profit subtotal maybe, there are other expenses, and then right down the bottom, there’s a profit or loss line. That’s the statement we’re talking about.
[00:06:34] Key Number One: Revenue.
And the first number that you want to keep an eye on is you wanna have a look at your revenue. Or sales, or income, whatever it’s called. The money coming in from your customers is obviously pretty important. Without that, you’ve just got a whole bunch of expenses, which is not really a business; it’s more of an expensive hobby.
So revenue’s important, obviously. Obviously, we wanted to go up over. A nice positive trend is good. When people talk about business growth, what they really mean is revenue increasing. But an additional thing that isn’t quite so obvious with revenue, and what I suggest you look at is splitting the different lines of revenue between the different types of revenue.
[00:07:19] So instead of just saying there’s one line of revenue from your customers, you might have separate lines. You might have, for example, if you’re a service business, there might be a couple of different types of services. Or you might have one-off projects versus recurring income.
If you are a product-based business, you might have separate revenue lines for the different categories of products that you sell, just so that you can see my revenue going up overall great? But maybe hidden within that there’s one particular type of service or type of product that’s growing fantastically well, and another that’s dying and going away. And you won’t notice that kind of nuance if you’ve only got one line for revenue.
So splitting is important. Those of you with other types of businesses, you get the idea like the different things that you’re selling or the different categories of things that you’re selling or the different types of income that you have.
[00:08:24] So whether it’s one-off income or whether it’s payment plans or recurring income, think about splitting it in some way so that you’ll get an extra level of detail to figure out why your revenue is moving the way it is. Even if your revenue seems to be going up, it’s important to find out why and to make sure that you keep that happening.
So, key Number one, Revenue.
[00:08:50] Key Number Two: Gross Profit Margin.
Key Number #2 is the Gross Profit Margin. This is what I call the 80/20 of profitability. I’ve done plenty of other episodes on that. But, basically, it’s whatever the cost is of doing the thing or delivering the thing that you’ve sold.
So if you’re a service-based business, you’ve gotta work out what the costs are of providing the service, like the team members doing the service. If you’re a product-based business, then it’s the cost of the product, manufacturing, shipping it everywhere, and so on. We have to figure out what money is left over after those costs. So the revenue minus those costs is your gross profit.
[00:09:35] The gross profit margin is: what percentage is the gross profit of your revenue? So, what percentage of your revenue do you keep after paying for delivering the thing that the client bought for you?
So we’re not including your marketing costs, we’re not including credit card fees, we’re not including sales commissions. Not including bookkeeping fees or travel expenses, your pay, or your admin team. None of those kinds of things are the core pieces necessary to deliver the thing that the client paid you for.
[00:10:15] So, what percentage of the revenue is left over after paying for the delivery of the thing? The golden rule here is that it’s gotta be at least three times… at least three times?… or that percentage that’s left over is 66- 67% or more. Or, put another way, the cost to deliver the thing is a third or less of what you’re charging for it.
If you don’t do this, there won’t be enough money left over for marketing, for growth projects, for paying managers as you scale, for having profit, for paying yourself. Like, all the other numbers come from making sure this gross profit margin is high enough. I’ll leave it there. It’s a passion topic of mine.
I could talk for hours about it, and I have in the past. I’ve done multiple-hour workshops over a number of sessions.
But, if you want more information on that… if you find that you’re working really hard, you have to work harder and harder as you grow, or you feel as you’ve grown you’ve gotten more and more broke, or can’t afford to hire people as you grow for some inexplicable reason have a look at some of my previous podcast episodes and some of the blog posts at www.profitscollective.com for more on that.
So that was key number two, gross profit margin.
[00:11:40] Key Number Three: Marketing as a percentage of Revenue.
Key number three (Key Number #3?) is marketing as a percentage of your revenue. If you’re not spending enough money on marketing, then you won’t have any potential customers to sell to. And when you do try and sell to them, they’ll be pretty cold, and suspicious, and paranoid and distance themselves. And it’ll be a bit hard to make a sale. If you spend too much, then you’re wasting your money. You could be investing more efficiently, pulling the money out yourself, or spending it on other growth projects.
[00:12:20] So the marketing as a percentage of your revenue, there’s a goldilocks zone, not too hot, not too cold. The porridge in the Goldilocks story, or the chair that’s not too soft, not too hard… however, you like to… (laughter) whichever part you go with… the bed that’s not too soft, not too hard and all this. So there’s a Goldilocks zone, somewhere between 5 & 15% of your revenue.
Some business models, like coaching or course businesses, generally have a much higher gross profit margin. The cost of delivering the thing isn’t as high as, say, a service business or a product business. And so they can actually go a bit higher up to 30, 40, 50, or 60% of their revenue could be spent on marketing.
But, most of the time, I talk to people, and they’re usually spending too little. They’re spending very little and wondering why their revenue isn’t going up and why it’s so hard to make a sale. Sometimes I get people who are spending too much. And they’re wasting it, and they’re not looking in detail about what they’re spending their marketing budget on and which parts of it are getting a good return, and we aren’t.
We sometimes just set and forget with marketing, and even I’m guilty of this at times. We sometimes go, “Oh, I wanna grow! I’ll spend more on marketing!” up the Facebook ads budget and then… never look at it again.
[00:13:52] So, that’s why it’s helpful to keep an eye on this marketing as a percentage of revenue cause it is a good way to sanity check whether you are spending too little or too much overall. And from there, you can go the next level deeper and figure out, “Okay, what am I spending my marketing on?”. Facebook ads, Google ads, copywriting, email marketing, sponsoring conferences, and podcasts… like all the different tactics or channels that you’re marketing through. You can have a look at how much you’re spending on each of those. And whether it’s getting you a decent return, whether it’s actually leading to revenue growth.
Some of them might be leading to revenue growth in the long term, like branding or authority-building type things. Whereas others might be more obviously short-term lead to sales. Like if someone clicks on an ad and then buys.
So keep in mind that, you know, don’t just do all short-term marketing. But, the marketing as a percentage of revenue should be getting a good enough return on your marketing that you can spend on both short-term and long-term things.
So that’s Key Number #3, marketing as a percentage of revenue.
[00:15:00] Key Number #4: Owner Pay.
Key Number #4, almost at the end, this key number is owner pay, how much you pay yourself. Now, this might show up on the income statement as an expense, as a contractor, or as a wage. You might be paying yourself through the payroll, or maybe not. Maybe it’s an owner’s draw, a loan to shareholders, or something like that that doesn’t actually appear on the profit and loss.
Wherever it happens to appear, that’s between you and your tax accountant as to what’s the most tax-efficient way to call or to record the money that you pull out of the business for yourself for your personal use.
My concern is not what you call it. My concern is how much cash are you pulling out. My concern is always, “How well is your business performing? And how can we make it grow and be more profitable?”. So for owner pay, the key here is… again, it’s a bit of a Goldilocks zone; there is a too little and too much… but there isn’t really a percentage of revenue for this one. The last two numbers were a percentage of revenue, but this one isn’t so much.
[00:16:16] The important thing with this one is you need to pay yourself enough money so that you don’t get distracted by something else. Whether that something else is the guilt, shame, or whatever that you should probably get a job instead; because this business isn’t paying you enough, and it isn’t going anywhere or anything. Those are horrible feelings.
So paying yourself enough from the business so that you can cover your personal requirements, your personal expenses, and obligations. Supporting your family, enjoying a travel-based lifestyle, investing, or whatever it is you do with your personal money.
Make sure the business is paying you enough to keep you engaged in the business, but also you don’t wanna pull out so much that it impacts the business in a negative way.
[00:17:13] So, in order to grow, a business will need to spend money, or it will need to spend your time. But the business will probably need to spend money, especially as it gets bigger. It will be less about spending your own time (which sometimes we think is free, but it isn’t!) ‘Cause there’s always a cost… opportunity cost. We could be spending our time on something else.
So as a business gets bigger, you’ll need to pay other people or pay for other services, or software, or something in order to help your business run and grow. And so if you are pulling out too much money, the business won’t be able to pay for those things, and so your growth can stall.
And the reason why owner pay is a key number is because of these two different options that I have seen happen a lot: either the owner isn’t paying themselves enough, and it’s causing problems for them, or they’re pulling too much money out of the business, and so there’s no money left over for growth.
[00:18:14] It’s also important [to note] with owner pay that if the business can’t pay you a reasonable amount for the tasks that you do, then you will never be able to delegate them to someone else. This obviously means you’ll keep having to do that job… but the less obvious point is that as you grow, the jobs you do need to be done by somebody else. And if you’re stuck doing them, you won’t be able to work on the things that move the business forward or the things that keep the business running properly.
[00:18:49] As the business grows…
[00:18:50] For example, you might start a service-based business, and you are the one that’s doing all the client work. Well, at a certain point, your time fills up with client work, and you can’t spend any time getting the next clients. And then you get stuck on an income rollercoaster where you sign up a client, you do the work, and you don’t start marketing for the next one until you’re finished with that client’s work.
And by that time, the marketing momentum has died. And you’ve got no client work for a little while, you try and find the next. And you’re so desperate for client work that you accept work that isn’t quite the right fit, and it’s for too low of a price, and it’s just awful. Same thing with a product-based business or other kinds of businesses.
[00:19:36] If you’re the one that’s making the product, or shipping the product, or dealing with the customer service questions. Then as your business grows, that work gets more and more time-consuming until the point where you couldn’t have any more clients come in because you don’t have time. Or you can’t have any more customers come in because you can’t make enough product or deliver enough of the product.
Eventually, you try and take on more and more cause you’re like, “Oh, I have to hustle to grow, right?!” So you stop sleeping as much, and you work 60, 80, 90, or 100+ hours a week. But, eventually, you get so full that you either have to make a choice between not taking on any more of the revenue or spending less time on marketing that generates that revenue. And it’s just if you can’t afford to pay someone else to do some of that work, then some of the work doesn’t get done, and your growth stops.
So owner pay, Key Number #4. Very important to have that canary in the coal mine; if the business can’t pay you a reasonable amount, that’s a problem.
[00:20:45] Either you’re spending too much on marketing, or your cost to deliver is too high, or you’re not charging enough; there’s some other problem with your business model. Sometimes, if you’re not able to pull enough out, that’s a good metric to keep an eye on.
So, Key Number #4, owner pay.
[00:21:05] Key Number #5: Profit.
Key Number #5, the last one, is profit. If the business isn’t profitable, that’s bad.
I know we all sometimes like saving tax and not paying tax, and there are a lot of people out there like “Tax is the biggest expense in your business, so you should be putting a lot of effort to minimize it!”
Nope! No, no, no, no, no, no…
I wish that you had a multiple million dollar tax bill because that means you’ve got some enormous amount higher than that of profit. Especially in America, you guys have such great tax rates compared to a lot of the rest of the world.
If you have a very large tax bill, it means you made even more money than that! So we do not want to pay no tax, because that means we’re barely earning any money.
I mean, yes, there are ways to legally minimize your tax… but still, the more tax you pay, even after you’ve done everything you can to minimize it or everything your tax accountant can to minimize it, the more tax you pay is generally a good thing.
So, the business being profitable means that you haven’t spent all of your revenue, and there’s money left over. I’ve written a blog post about the many reasons why profit is important. You can just Google “Profits Collective why are profits important?” if you want to have a read of that one, I’ll link it in a show note; and there are a few different reasons why profit is important mentioned in that blog post.
[00:22:37] Profit is savings building up. It’s like, “how do you build up savings? Or what do you build up savings from?” It’s the money that you haven’t spent, i.e., profit.
It’s also important if you ever want investors or you ever want to get a loan; loan repayments come from profit. Interest is an expense, but the actual reduction of the loan balance( the principal portion of the repayments) comes out of profit. If you have no profit, you can’t reduce the loan balance.
If a lender sees no profit, they’re going to worry about how they’re going to get their money back. The same thing with investors; how they’re gonna get returns from profit. Profit is a sign that the business is functioning well. Profit is also a sign that if you eventually try and exit the business, the business will have a higher price ’cause it’s profitable.
Profits are also important for being able to occasionally invest in growth projects. If you don’t have savings built up, you won’t be able to take advantage of short-term opportunities and be able to weather through Black Swan events or random bad things that come up in business.
And profit is also important for you, the owner. At some point in your business, you’ll be paying a lot of people to do the stuff that you are doing now. And you may even pay everybody to do everything… one of my clients, I helped grow past seven figures and install a CEO to run the business. So this client does nothing but pulls money out of the business. Which is pretty cool for him. And if there were no profits, how would he get money out of the business?
[00:24:28] So there’s “You, The Worker,” and then there’s “You, The Owner.”
It’s a concept I’ve talked about a few times before. “You, The Worker,” is the person that you pay for doing the marketing job, the delivery job, the managing job, or the CEO job in the business.
And then there’s “You, The Owner,” who owns an asset called your business; and could instead own real estate, or stocks and bonds or something. That “You, The Owner”( or the “Investor You”) needs a return, and profit is where you get the return from. And if the business isn’t profitable, maybe they could sell it and put their money into a different asset or a different business.
So, just like paying yourself from Key Number #4, owner pay, paying yourself is a good way to keep your focus. Having profit that can be distributed to the owners of the business is a good way to keep the focus on this business, as opposed to investing in a different asset.
Okay, so profit is Key Number #5.
[00:25:33] So, quick recap of the five key numbers on your Profit & Loss (or income statement)
- Gross Profit Margin
- Marketing as a Percentage of Revenue
- Owner Pay
As I said, there are a few other episodes in this podcast that cover those topics in different ways. Even though it’s the same five numbers, I explain them in different ways and give different examples… so it’s good to re-listen in a couple of different ways to help it sink in.
These numbers should be looked at at least monthly. If your business is smaller, you probably won’t get any extra value from looking at it more frequently than monthly.
It’s also handy to, every quarter, to look at the quarter just ended compared to other quarters. and at the end of the year, or at the end of a six-month period, as well; look at the last six months compared to previous sets of six months, or the last year compared to the previous years. Sometimes there are seasonal trends, or you can say, “Oh, revenue’s just going down because it’s a quiet period this month,” or “It was a quiet month this month. I didn’t need to change anything, I’m not worried.”
But, when you look at it on a quarterly basis, or a yearly basis, or you compare this past month to the same month in the previous year …Sometimes that can give you additional insights on how well your business is doing and what things you might need to change, or what changes you’ve made that you need to keep doing because they’ve done great things, and what changes you need to revert because they’ve done bad things.
[00:27:10] Looking At Your Numbers Differently.
So, looking at your numbers in a different way is helpful. So, when I talked about the five Key Numbers, they were the different rows on your income statement or Profit and Loss report. And what I’ve just talked about now, the different periods, they’re the columns on the report.
One other variation on the columns in the report is like I mentioned earlier about the multiple organizations, or divisions, or business lines, or business units, or whatever in the same bookkeeping file, a different way you might look at the columns is instead of the different time periods( comparing different time periods across the different columns) you might compare different business lines, or departments or divisions in the columns instead.
And so, it can tell you like how profitable is each particular product line, or each particular category, or business line, or division. How profitable are each of those? Is all the profit coming from one or two, and there’s a bunch of others that are losing you some money and maybe should be cut or fixed?
It’s important to be able to see that kind of information, as well. So, that’s everything about the Key Numbers on the P&L and what you should be looking at with your numbers that I answered in this Q&A session that I did in Bangkok.
[00:28:33] So, quick recap of the questions we covered…
- There were some tax questions.
- Talked about bookkeeping software.
- Talked about having multiple things in the same bookkeeping file
- The key numbers on the P&L,
- The rows of the report.
- Different options for looking at the cons of the report, either as dates or divisions.
So I hope this was helpful. If you have any questions on this, let me know. As always, reach out. I’d love to hear from you, I’d love to help you out.
[00:29:03] If you have any questions about your particular business, and in knowing your numbers and improving your numbers, using them to grow and make your business more profitable. Reach out, love to talk together. Talk about working together potentially if that’s useful.
Otherwise, if you have a question that I can just answer quickly, I’ll pop it on a podcast episode, anonymously of course, and help you out that way. So I hope this was useful, hope this was helpful, and I hope it helps you improve your business.
Thanks for listening.
Before you go, two quick things. If this was useful, please give it a review and share it with a friend who it might help.
And number two, if you want help from me to unlock growth and profits in your business and greater clarity around your numbers, you can book a call through www.profitscollective.com. And if we’re not a fit, I’ll point you in the right direction. Thanks again for listening.