MBA2532 The 3 Key Numbers You Need To Know & Track in Your Business

Summary

Podcast Summary: The $100 MBA Show – Episode MBA2532: The 3 Key Numbers You Need To Know & Track in Your Business

Introduction to Episode

In Episode MBA2532 of The $100 MBA Show, host Omar Zenhom delves into a critical aspect of business management: identifying and tracking the three essential numbers that can determine the success or failure of your enterprise. Released on October 11, 2024, this episode is lauded for its practical insights and actionable advice, aligning with the show's reputation for delivering "practical business lessons for the real world."

The Importance of Tracking Key Numbers

Omar begins by emphasizing the paramount importance of understanding and monitoring specific financial metrics. He states, “You are now a numbers person. If you've told yourself a story before, just forget that story. The new story is these numbers are your best friend” ([02:10]). He warns that neglecting these key metrics can lead to business failure, citing a compelling statistic: “Nearly 82% of businesses fail due to poor cash flow management” ([05:00]), referencing a study by US Bank.

1. Revenue: The Lifeblood of Your Business

Revenue is identified as the first and most obvious key number. Omar explains that revenue represents the total money flowing into the business from all sources. He underscores its importance by likening it to the dashboard of an airplane, saying, “Revenue is so important. A lot of people focus on other things in their business and they forget that if you make money, if you make more and more revenue, this is going to solve a lot of problems” ([07:30]).

Key Points on Revenue:

• Definition: The total income generated from all revenue streams.
• Importance: Tracks growth trends, seasonal fluctuations, and effectiveness of sales strategies.
• Common Mistake: Relying solely on bank account checks to track revenue, which Omar criticizes as, “this is a disaster” ([08:15]).
• Best Practices: Utilize accounting software or payment processors like Xero, QuickBooks, or Stripe to accurately track revenue. Implementing a structured spreadsheet is crucial, and Omar offers a free profit and loss sheet template available at 100mba.net/templates.

2. Profit Margin: Measuring Business Health

Profit margin is the second key metric, divided into two types: gross profit margin and net profit margin. Omar defines profit margin as the measure of profitability after accounting for costs.

Gross Profit Margin:

• Calculation: (Revenue - Cost of Goods Sold) / Revenue.
• Purpose: Assesses the efficiency of producing goods or services.
• Example: A software company typically has high gross profit margins because the cost of producing software is relatively low compared to revenue.

Net Profit Margin:

• Calculation: (Revenue - All Expenses) / Revenue.
• Purpose: Provides a holistic view of profitability after all operational expenses.
• Importance: Indicates how much profit remains after covering all costs, highlighting the business's true financial health.

Omar highlights that “getting wealthy is about keeping money. It's about making money and keeping it” ([10:50]). He warns about cost creep—unnoticed increases in expenses—and advises regularly monitoring profit margins to adjust pricing or reduce costs as necessary.

3. Cash Flow: The Oxygen of Business

The third and final key number is cash flow, described as the "oxygen" of a business. Omar explains that cash flow represents the movement of money in and out of the business and is crucial for daily operations and long-term sustainability.

Key Points on Cash Flow:

• Definition: The net amount of cash being transferred into and out of the business.
• Positive vs. Negative Cash Flow: Positive cash flow indicates more money coming in than going out, essential for paying bills and investing. Negative cash flow can lead to severe issues, even if the business is profitable on paper.
• Importance: Enables businesses to pay employees, invest in growth, and handle unexpected expenses. It also provides the financial stability needed to reduce stress and plan for the future.
• Example: Omar shares that a business can be profitable but still face negative cash flow if revenues are not consistently managed, leading to difficulties in paying bills during slower periods.

He advocates for using the profit and loss sheet to consistently monitor cash flow, ensuring that the business remains solvent and capable of seizing growth opportunities. “Cash flow is what makes your business happen” ([14:20]).

Practical Tips for Tracking

Omar concludes the episode with actionable strategies to effectively manage these key numbers:

• Daily Monitoring: Utilize the provided profit and loss spreadsheet to review financials daily. Omar shares, “I look at my profit loss sheet every day, every day” ([17:00]), stressing the necessity of regular oversight.
• Consistent Updates: Enter revenue and expense data consistently, whether daily, weekly, or monthly, depending on the business's revenue frequency.
• Personal Accountability: Avoid outsourcing the tracking of these metrics. Instead, take personal responsibility to ensure accuracy and understanding.
• Utilize Resources: Take advantage of the free templates available on 100mba.net/templates to streamline the tracking process without the need for complex spreadsheets or financial expertise.

Conclusion and Resources

In wrapping up, Omar reinforces the transformative power of diligently tracking revenue, profit margin, and cash flow. He emphasizes that these metrics provide clarity and reduce stress, enabling entrepreneurs to make informed decisions and sustain their businesses effectively. For listeners ready to implement these lessons, Omar offers a free profit and loss template and encourages them to explore additional resources on the 100mba.net website.

Notable Quotes:

• “These numbers are your best friend” ([02:10]).
• “Nearly 82% of businesses fail due to poor cash flow management” ([05:00]).
• “Revenue is so important... this is your dashboard” ([07:30]).
• “Getting wealthy is about keeping money. It's about making money and keeping it” ([10:50]).
• “Cash flow is what makes your business happen” ([14:20]).
• “I look at my profit loss sheet every day, every day” ([17:00]).

Additional Resources:

• Free Templates: 100mba.net/templates
• Website: 100mba.net

By mastering these three key numbers, entrepreneurs can navigate their businesses towards sustained growth and financial health, embodying Omar Zenhom’s philosophy of practical, no-fluff business training.

Transcript

[A]

Got a 7am meeting on a Monday expensing breakfast because it's in policy wasting all afternoon submitting an expense report for that breakfast. If your company used Ramp, you could submit expenses with just a text.

[B]

Yay. Free your team from expense reports today. Switch your business to ramp.com foreign welcome back to the hundred dollars MBA show. I'm your host, Omar Zenholm. And in today's lesson, you're going to learn something that might just make or break your business. This might be the most important video you'll watch when it comes to your business because it can be the difference between you failing and being going out of business to actually fulfilling all your dreams, having the wealth you're looking for, having a business that actually makes an impact. And the topic is what are the three key numbers you need to track in your business? These numbers are essential. They are important beyond measure when it comes to how well your business is doing. It's going to allow you to understand your business's health, its performance and your long term sustainability. I'm really going to give you exactly what you don't need to know a billion numbers. You need to know these three numbers. If you know these three numbers and you're tracking them and they're going in the right direction, you can't lose. It's just math is that simple, okay? And I had to learn this the hard way for a very long time. I had this mentality like, oh, I'm not a big numbers guy. You know, I'm okay at math. I'm an ideas person. I like to implement, I like to do wrong. Do not do this, okay? This is a recipe for disaster. This is a recipe for death in your business. Okay? What you want to do is just make sure you master tracking these three numbers, making sure they're going in the right direction and that everything else is going to fall into place. Okay? You are now a numbers person. If you've told yourself a story before, just forget that story. The new story is these numbers are your best friend. I'm also going to explain why these metrics matter and how you can keep a close eye on them. And don't worry, I got your back. You don't need to create some sort of sophisticated spreadsheet or know all the formulas. I created it for you. Okay? You can download a free profit and loss sheet template that is in Google Sheets that you can just go ahead and grab. I've created already for you with all the formulas in place so you can track these three numbers that we talk about. Today, just go to100mba.net templates. It's absolutely free. It is a great tool for you to help track these numbers, but also make sure that you are moving in the right direction. You know, I love a good stat, so here's a stat for you. Did you know that nearly 82% of businesses fail due to poor cash flow management? 82%. They didn't fail because of a bad business idea or horrible employees or a bad market. No, because bad cash flow management because they didn't know how to track these three numbers. Okay. That's according to a study by US Bank. Not tracking the right financial metrics can lead to serious problems. We're talking about disaster. Okay. And I'm not only talk about your business going out of business. This could put you behind 10 years financially, personally. Okay, so or more. So don't worry. I got your back. Today I'm going to show you how these three numbers can be leveraged to your advantage. How you can track these numbers, how you can make sure they're moving the right direction. Let's get into it. So let's break down the three key numbers you should be tracking in your business right now. The first number, pretty obvious, but it's important. Revenue. Okay? The money that comes into your business. Revenue is the lifeblood of your business. It tells you how much money is coming in from all the different revenue streams you have. Okay, you might have one revenue stream if you're just getting started like you're selling products and you're getting money for those products or a service. But as you start growing, you'll start having different revenue streams. And it's important for you to know where this money is coming from. How much money is coming? Tracking revenue helps you understand the growth trends, the seasonal fluctuations and the effectiveness of your sales strategies. When you do something to market your business, to sell your products or services, you want to know if it's working or not. And by tracking your revenue, you'll know. Now, don't make the mistake of a lot of amateur business owners. I'm talking about most people do this. This is like a disaster. I don't know why people do this, but they do it. They think tracking revenue is checking the bank account is I'm going to check my bank account in the morning. Now I know how much money I made today or how much money I made this month. That is not a good idea. Why? Because you're not actually tracking exactly what's happening when it's happening. And then you can't compare that revenue, okay. Can't compare that revenue to other metrics. The other two metrics that we'll talk about today so that you can know how they work hand in hand. Right? How your efforts are paying off. So you want to take revenue and you want to just pull it out and put it on the spreadsheet. Don't worry, I told you, you can get it for free over on my website. 100 MBA net templates. You can grab that spreadsheet and pop in your revenue. Whatever revenue you make, whatever revenue streams you have, there's going to be a place for it. Let me give you an example. If you notice a dip in revenue during certain months, you can investigate whether it's due to like a seasonal trend or other factors that needs addressing. Like maybe your staff is slacking off during those months. Maybe your sales team is not motivated or incentivized properly during those months. Maybe your traffic or your SEO on your website needs improvement or is being by some sort of update. You need to know what's going on at all times. This is like your dashboard. You know, I like to see it as like a pilot on a plane. They have a dashboard, right? And they see all the dials. They know if they're moving in the right direction. They know if they're going to get to their destination by keeping track of the dashboard and this number. Revenue is so important. A lot of people focus on other things in their business and they forget that if you make money, if you make more and more revenue, this is going to solve a lot of problems. Uh, there's a saying that says sales solves all problems. And it's true. Okay, so you want to track revenue and know it's working so that when you find, hey, revenue is going up. What did I do right now that made revenue go up, double, triple down on that. How do you get your revenue? Don't go to your bank because your bank is going to be deducting fees, interest. You know, there's other things coming out. It's a little bit confusing. You want to go where you're actually processing the sale, whether it's an accounting software like Xero or QuickBooks, or if you're using a payment processor like Stripe and you can see the revenue coming in. So you might have multiple ways of collecting money from customers. Just make sure that you're popping in all those numbers, okay, into the spreadsheet. For example, with this podcast, a Hundred Dollars MBA show, with this business, the A Hundred Dollar mba, I make money from memberships from our program. I make money from sponsorships. So that money's coming from different places. I need to pop that into the spreadsheet. So first key number is revenue number two, profit margin. What's profit margin? Exactly? Profit margin shows you how much profit you make from each dollar of you account for all costs. Okay? So profit margin really shows you how well your business is doing. This is the health of your business. Because if you're making a lot of money, but your expenses are just as much or more, you're not making money, you're actually not keeping money. Getting wealthy is about keeping money. It's about making money and keeping it. So that's what you want to do here is you want to have as much profit margin as possible, meaning that the difference between how much you're making and how much you're spending to make that money is, is quite large. So there's two types of profit margins I want to talk about. The first one is gross profit margin. This is calculated as revenue minus cost of goods sold over revenue. Okay? So basically what we're looking here is it shows how effective you are producing your goods or services. Let's say you're running a marketing agency and you have an ad specialist. And this ad specialist will cost you, let's say $5,000 a month. And the amount of money that you actually make from this service is X amount of dollars. Let's say it's $30,000. So you have to take away how much it actually costs you to fulfill this service because that's really your profit per the actual transaction, per the actual product or service. Now this is really important because some businesses have very high, very good gross profit margins. A good example of this is like a software company where it doesn't cost them too much more to be able to fulfill that product to give them the software. Another example is like an online course. Once you create it, once you can sell it over and over and every time you sell it, you don't have to actually pull out money to fulfill that sale so that the customer can get that course. So digital products are usually very high gross profit margin Businesses. Services on the other hand are going to be a little bit different. Okay? They're going to be, there's going to be some difference between how much it costs you to fulfill it and how much it costs you or how much money you're making from that transaction.

[A]

I should say got a 7am meeting on a Monday expensing breakfast because it's in policy wasting all afternoon submitting an expense report for that breakfast. If your company used Ramp, you could submit expenses with just a text.

[B]

Yay. Free your team from expense reports today. Switch your business to ramp.com the next profit margin is net profit margin. This is calculated as revenue minus all expenses over revenue. This indicates how much profit you're making after all costs, including all your staff, your rent, your web servers, your taxes, your interests, whatever it might be. Okay? So this really gives you a holistic understanding of how much money you're actually taking home. So why is it important to track your profit margin? Well, it allows you to understand how much money you actually can expect to have in the bank and get to keep at the end of the day. And it allows you to know when cost creep starts coming in. What's cost creep? Well, when costs are creeping up. So sometimes, you know, you don't even see it. But, you know, maybe a software that you're subscribed to ups its prices and that increases your costs. And then maybe you need to have some raises with your team, right? So your team members need some raises. You need to give them a little bit more salary. That kind of creeps up your profit margin margin. And then maybe a supplier, you know, increases their prices. So you need to have an eye on your profit margins, because if it's shrinking, it could indicate that you need to start raising your prices, you need to start increasing how much you charge. It also might indicate that you need to be a little bit more efficient with your business. Maybe you're overspending in areas that you don't need. Maybe you need to cut out some expenses. Maybe you need to merge some expenses or use your resources a little bit more wisely. So we talked about revenue, we talked about profit margin. What's the third key metric, the third key number you need to know? Very simple. Cash flow in business, cash flow is oxygen, okay? You need cash flow in order for you to, one, pay your bills and stay in business, to pay all your employees and yourself and all that kind of stuff so you can survive. Three, so that you can continue to invest in your business and grow, like invest in marketing and sales, all that kind of stuff. Cash flow is what makes your business happen, okay? And it's actually one of the best perks of having a business is that it constantly is giving you money. It's constantly having that flow of cash allow you to have opportunities to improve not only your business, but your life. Essentially, cash flow is about the movement of money in and out of your business. Positive cash flow means you have More money coming in than going out, which is essential for paying bills, like I mentioned, or investing in your business or expanding if your business is profitable on paper. But negative cash flow, this can lead to serious problems. And this happens more often than you think. Let me give you an example. A business with a positive profit margin but negative cash flow might struggle to pay its bills that are coming in every single month. So you might be thinking, how is this even possible? How can I have a profitable business? But negative cash flow? Well, you can have a great month with really good sales, but then a bad couple months later on and that cash flow slows down and therefore you run out of cash that you made. And maybe you overspent in the first month because you made so much money and thought, hey, I got plenty of money, I can go ahead and reinvest in my business. This is why in our spreadsheet we account for cash flow. This way you know how much money you have on hand. So that way you can know if you should be spending, holding on to that cash, because you don't know if next month is going to be as good as this month. It carries over the cash that you made last month. So you could say, okay, I made this much money this month. I spent this much money. This is why I profit this month. Okay, this is how much do I have? This is how much I have from last month. This is the total amount of money I have accumulated over the months. This allows you, you to understand, okay, I have a little bit of leeway, I have a little bit of Runway. Or no, I need to be really frugal this month because I'm not sure how much money I'm going to be making, or my revenue might be stagnant. It might be a slow month. If you're in the toys industry, maybe January is going to be slow. So you know that. And so you got to make sure that you have enough cash on hand to pay your bills for January, knowing that it's slow. So why is cash flow or tracking your cash flow so important? Well, it allows you to identify maybe some weak areas in your business model. When you have up and down cash flow and it's unpredictable, it's hard for you to actually plan ahead and reinvest in your business. And it starts you down a path to start thinking, how can I make sure my revenue is more consistent? Maybe I need to start selling annual plans. Maybe I need to start billing my clients in advance in a year. Maybe I need to have some sort of reoccurring Model. This is why software as a service, the software company I had, Webinar Ninja, was a SaaS is so valuable. Software as a service is so valuable because it is reoccurring revenue. People pay monthly, every single month, just like Spotify, Netflix, and it's very predictable. You know what's going to happen because you have X amount of users and you know how much they're paying every single month and you know how much is going to come in. So it's very easy for you to plan and predict and invest in your business and in the future of your business. Tracking your cash flow, is that going to actually help you change and improve the fundamentals of your business so that it's actually not only a high cash flow business, but a high value business? One day that you want to sell this business, it's going to be a no brainer for the buyer because it's predictable revenue. Cash flow is also going to allow you to answer questions like can you afford to give one of your team members a raise? Can you afford to give yourself a raise? Right. Are you able to take a dividend? This is something that's so important and allows you to really live a better life and lower the stress in your business because you have more visibility on what's going to happen. I want to wrap up today's episode, today's lesson with some tips when it comes to all this, how to actually manage all of this. My first tip is this spreadsheet. My profit loss sheet for the business. I look at this every day, every day. I've been doing this for 10 years. That profit loss sheet that I shared with you and the numbers that you're going to be plugging in and you're tracking these key metrics, your revenue and your profit margin and your cash flow. Right. That sheet, I look at that sheet in my business every day. I've been doing it for 20 plus years. I do it because it's so important, I can't neglect it. It's the bloodline, it's the stats, it's the scoreboard, right? To know if I'm winning or losing. If I don't have that in front of me every day, I don't know if I'm doing well, I don't know if I'm winning. So don't outsource it, don't give it to somebody else, don't sell your bookkeeper. Okay? You do this P and L thing. No, you can, you know, include them in the process and inform them and give them access and they can even plug in the numbers for you. But you need to look at it every day so you know if your business is doing well and what changes you need to make next. It's going to take you about 20 minutes for you to be able to just fill in this information. 20 to 30 minutes. Fill in this information to get started. Once you get started and you have the information, most of the expenses that you have are going to be the same. You might add a few here and there. Then about every month I take about 15 or 20 minutes and I update the sheet. I put in information for that month and then I take a look at my numbers, of course. But every day I'm looking at these numbers, I'm making sure everything is working well, everything is moving smoothly, and it informs my decisions in a lot of ways. Now, you might need to update the sheet more frequently if you're getting more revenue or you're getting revenue more frequently. So if you get revenue once a month, you're not going to update it as often, right? You're going to update it once a month. But if you're getting revenue more than that, like every day or every week, you're going to need to update it according to your revenue schedule. Also with expenses, expenses come up all the time. As soon as I'm paying for something for my business, a service, a consultant, a new software, as soon as I charge my card or as soon as I send that money on a bank transfer or whatever, I go to my P and L and I add it to my expenses again. You can get somebody else to do the. You can get your bookkeeper to do this and plug in the numbers. I personally like to do it myself. I like to be all over this because I know how critical this is. This is one thing I do not outsource because I know how important it is. That's just me. This is my paranoia of making sure I'm on top of my business. By focusing on these three key numbers, your revenue, your profit margin, your cash flow, you're going to gain a comprehensive view of your business. You're going to know how healthy your business is. You're going to be able to make better decisions, better long term decisions. But here's the biggest benefit, okay, here's the truth. This is why I do it. It lowers the stress, it makes your business so much easier because you have clarity. There's transparency. You know exactly what's happening. You know how much money you're making and how your cash flow. And you know exactly what's going on okay. And it's okay if it's not going great. It's good to have that information so that you can fix it. And then when it is going great, you're not just paranoid, you're not worried, you're not kind of in the dark. It just keeps things relaxed. It keeps things calm, which I love. Because business is as hard as it is. You don't need to make it hard on yourself. Make it easier. And don't forget, you can download our free P and L template and all our templates. We got a whole bunch of other templates you could Download over at 100- MBA-NET templates. It's a great resource. It's just fast tracks your financial health and your business by just using our template. It costs you nothing and the reason why I share it with you is because it took me years to create a great one. Why not share it? Thanks for tuning into the 100 MBA show. Hope you found this episode valuable and you're ready to start tracking your essential metrics in your business and you're pumped for that clarity and that calm. If you want more valuable lessons, we have more over our on our website [e-mail] I'm Omar Zenho and I'll check you in the next episode.

[A]

Got a 7am meeting on a Monday expensing breakfast because it's in policy wasting all afternoon submitting an expense report for that breakfast. If your company used Ramp, you could submit expenses with just a text.

[B]

Yay. Free your team from expense reports today. Switch your business to ramp.com.