Podcast Summary: Next Level Pros – Episode #125: Scaling Fails: How Financial Blind Spots Cost Him Big

Introduction

In Episode #125 of Next Level Pros, host Chris Lee sits down with Ulysses, a seasoned PR expert who has worked with notable figures such as Cody Sanchez, Brandon Dawson, and Gary Breca. The episode delves deep into Ulysses's journey of scaling his PR firm, the financial pitfalls he encountered, and the strategies he employed to overcome them. Through an open and vulnerable conversation, listeners gain invaluable insights into the challenges of business growth and the importance of financial acumen.

Business Overview

Ulysses has been running his PR firm for seven years, carving a niche by securing high-profile clients and delivering specialized services tailored to their needs.

• Clientele and Services: Recently, Ulysses's firm has been working with Cody Sanchez on projects like Resi Brands, a window cleaning franchise, among others. Their services primarily include booking clients on stages, podcasts, publications, and TV appearances, offering both exposure and connections depending on the client's status.

  "We help people get booked on stages, get them booked for podcast articles and publications and then TV." (00:11)

Challenges Faced

Despite achieving significant revenue growth, Ulysses faced substantial financial challenges that stemmed from scaling too rapidly without a solid understanding of financial management.

• Initial Motivations: Initially, Ulysses pursued PR for the wrong reasons—primarily for fame and quick financial gains. This mindset led to unsustainable business practices, such as high referral bonuses and commissions to sales reps, which eroded profits.

  "I wanted to make a lot of money. I wanted to be famous. And that was like the easiest way to make money at the time for me." (02:05)

• Revenue vs. Profit: While the firm's revenue peaked at $1.1 million last year, poor margin management resulted in financial strain. High referral bonuses and inadequate understanding of fixed costs caused the business to grow "broke," leading to substantial debt.

  "From a break even analysis last year he scaled too fast, too quick, left me with some terrible feelings of fear and everything else." (00:11)

Financial Analysis

Chris Lee guides Ulysses through a detailed financial breakdown to uncover the root causes of his financial difficulties.

• Revenue and Expenses: Ulysses's first-year revenue was $200,000, which plateaued over the years. Last year's revenue reached $1.1 million but was accompanied by high expenses, including a 30% referral bonus and significant commissions to sales reps, leaving minimal margins.

  "I didn't understand salary cap. I didn't understand margins. So I was growing broke last year, made a ton of money." (05:53)

• Cost of Goods Sold (COGS): For each $15,000 client, the COGS amounted to $4,000, yielding a gross margin of $11,000 (70%).

  "So when you break this down, if you're getting $15,000, your gross margin per deal is 11,000 bucks." (12:00)

• Cost of Acquisition: Ulysses spent approximately $1,400 monthly to acquire four new clients, translating to a $350 cost per acquisition.

  "So you spend $2,800 more dollars a month on two more assistants and two more software packages to hit capacity." (14:03)

• Fixed Costs: Monthly fixed costs included $7,000 for payroll, $2,500 for subscriptions, $650 for insurance and bookkeeping, totaling around $9,500.

  "So let's call it 2500. Yep." (17:14)

Strategies for Scaling

To rectify his financial blind spots, Chris helps Ulysses develop a scalable model grounded in understanding his business's financials.

• Break-Even Analysis: By analyzing fixed costs and gross margins, Ulysses realizes he needs just one client to break even. Each additional client significantly contributes to profit.

  "So you're at 10,650. So what it takes to break even in your business? One client." (19:47)

• Optimizing Team Capacity: With four client managers capable of handling up to 40 clients, Ulysses identifies that scaling requires maximizing the utilization of his team without overextending resources.

  "Every time you bring on $800 in monthly expense, you're getting $33,600 in profit as long as you're utilizing them." (28:34)

• Incremental Growth: Chris advises Ulysses to invest an additional $2,800 monthly in hiring two more virtual assistants and purchasing two more software packages. This investment is projected to yield an extra eight clients, translating to an additional $85,000 in net profit monthly.

  "So you're getting eight more clients a month which would be how much money? ... $85,000 net." (27:46)

• Hiring Sales Reps Strategically: Instead of retracting, Ulysses is encouraged to retain and empower his sales reps to handle increased leads, ensuring sustained growth without compromising the quality of service.

  "One day you're going to come, you're going to walk in and you're going to be like, dude, we had all these leads and you didn't close all these deals." (42:53)

Lessons Learned

Throughout the conversation, Ulysses acknowledges the critical importance of financial literacy and proactive business management.

• Importance of Financial Management: Ulysses admits that a lack of understanding of financial principles like gross margins and fixed costs severely impacted his ability to sustain growth.

  "I took too long to make the decisions that I know I needed to do." (07:55)

• Value of Mentorship and Coaching: Both Chris and Daryl emphasize the necessity of having mentors and coaches to navigate the complexities of scaling a business effectively.

  "What we did was spend a lot of money to have people in our corner." (49:56)

• Embracing the Business Growth Cycle: Ulysses resonates with the concept that every stage of business growth comes with its own set of challenges, likening it to the life cycle of a human.

  "These are all cycles. And this last cycle I'm probably most grateful for because it's the finance thing." (52:30)

Conclusions and Final Thoughts

The episode concludes with actionable advice for entrepreneurs facing similar scaling challenges. Ulysses's journey underscores the balance between growth and financial stability, highlighting the necessity of understanding and managing key financial metrics.

• Actionable Steps: Entrepreneurs are encouraged to conduct thorough financial analyses, understand their break-even points, and make informed decisions about scaling based on their business's capacity and financial health.

  "Like, don't be afraid to ask us, like, hey, this is what I'm thinking about doing." (48:36)

• Mindset Shift: Transitioning from a reactive to a proactive business strategy is crucial. Embracing the 'science' of business rather than succumbing to emotions can lead to sustainable growth.

  "It's really understanding the game, the science of what business is. And then just apply." (48:14)

Notable Quotes

• "I took too long to make the decisions that I know I needed to do." — Ulysses (07:55)
• "Revenue growth is like only one indication of how well the business is doing." — Chris Lee (10:14)
• "Every business has problems at every stage of growth." — Daryl (51:10)
• "You have to scale to hit capacity." — Chris Lee (25:38)

Closing Remarks

Chris Lee commends Ulysses for his transparency and resilience, reinforcing the episode's theme that understanding and managing financial levers is paramount for successful scaling. Ulysses concludes by committing to implement the discussed strategies, aiming to leverage his team's capacity and enhance his business's profitability without sacrificing his desired lifestyle.

"I'm definitely going to try out the marketing portion yeah. You know, see how that ends up going." — Ulysses (46:34)

For listeners seeking PR services or wishing to follow Ulysses's journey, he can be reached via Instagram and other social media platforms under the handle @Ulysses.

Episode Release Date: September 24, 2024