Traditional accounting practices, or at least the ways that many business owners interpret the data from those practices, often lead business to the brink of extinction.
Far too often business owners trick themselves into believing their business is healthy, when in fact it’s one bad month away from disaster. Or, they become so focused on beating the IRS in the tax game that they miss the entire point about building wealth.
In this episode of the Duct Tape Marketing podcast I visit with Greg Crabtree, a CPA who’s spent most of his career helping business owners see beyond the numbers that blind and focus on the simple numbers that help unlock business potential.
Crabtree’s book – Simple Numbers, Straight Talk, Big Profits!: 4 Keys to Unlock Your Business Potential – should be required reading for every business owner on the plant.
In Simple Numbers you get some very practical talk about how to manage your business based on the numbers that count.
Today’s break even is 10% Net Profit.
You get a salary on what you do and a return on what you own. So many business owners confuse profit with revenue or treat profit as salary. A salary is what a job pays. If you’re not focused on creating a net, after tax, after salary profit then all you’ve created is a job.
Taxes have become the tail that wags the dog. Business owners jump through tremendous hoops in order not to pay taxes – including doing things that rob from the future of the business. Crabtree advises that we need to stop focusing on the tax implications and focus on the true financial dynamics of the business. We need to take the energy we spend on not paying taxes and go make money.
Another crucial number that Crabtree reveals is something he calls the Labor efficiency ratio – Hiring people can either lift a business or sink it. But, good labor is a lever if you understand how to calculate what every dollar of labor produces in terms of profit.
You must understand how to hold your labor cost accountable for profit. Once you can do this you can set what you need in terms of additional revenue and additional profit for each hire.
Crabtree has created a number of tools for better understanding both labor cost and profit.
The last issue we discuss is cash flow. Many business owners struggle with cash flow. The thinking is that I must manage cash flow before I can think about profit. I believe and Crabtree certainly supports this notion, that if you focus on profit, you’ll fix cash flow.
The real problem with cash flow is that people don’t get cash flow considerations in the right order. On average 40% of your profit must be paid in taxes – that needs to come out first. Far too many businesses sink on this number because they consume based on total profit.
Simple Numbers is a very accessible read and just may do more towards helping business owners come to grips with the right numbers and right priorities than any other book on the subject. Go get it and make everyone in your organization read it!
Then start having discussions about labor productivity and profit at your next all hands meeting.