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Welcome back to the Business Reviewers Podcast Today, in all this week, I am going through the number of the topics that we discussed at my Hot seat event last week in Philadelphia. I'm hosting the next one in September. If you want to get on the wait list for that, there's a link at the bottom says send me a text. Just shoot me a text. Your name, your phone number. I will send you back a signup form so you can get on the waitlist. So as soon as we release tickets, you could be invited. There's only going to be so many seats. I'm not exactly sure yet, but probably maybe 20, 25, something in that range. And so get a list if you want. If you don't make it to this one, I'll get you maybe on the next one. So one of the problems that one of the members had was low cash flow. So he was doing about $2 million in revenue and $20,000 in profit. So a 1% net margin. Now we had no debt. He paid everything in cash and ran the business and he built it up. This is like two years in, so like really fast growth, which is awesome. But cash flow is tight and cash flow, the margins just aren't where they need to be. So the question is, well, how do I fix it? I've got this problem. I'm not making enough money. I've got the revenue, I've got the leads, but where's all the money going? I'm going to walk you through the process that we applied to him. And if you're feeling something similar or if you want to apply these numbers to your business, this is a pretty simple exercise. So the first thing that I'm gonna look at is at the top, we're gonna look at your cost of goods. So in most of these businesses it's like sales minus your cost of goods and his in mine. Cost of goods, I define as just the materials. So it was a service based business. They sold some parts too. And so we looked at the parts that went in to deliver the service and his margin was industry standard. Like it's a lower margin business. I wanna say he was about a 45% gross profit, which in his business is pretty normal. So there are some opportunities for him to increase that to maybe 50%. But he's in the ballpark, right? It's not like he should be out. He should be at 60 and he's at 45. There is probably about five points that he could potentially pick up through adding new services that some of his competitors do. So that is the first place I would look is what is your gross margin? How does it compare to standard? If it's too low, the only ways you can increase it are one, you try to buy parts cheaper, which in his case, like, it's a commodity, can't really do that. You can increase your price, but if you price it too high, then you're going to miss sales and you're going to get a reputation that way. Or the third option, which was like, is there a new service that we can add that is higher margin? So a new higher margin business can drive more volume. And there you go. Cost of goods isn't fixed. Then we got into some of his other costs. How much was he spending on ads? It was a little high, but he was driving a ton of lease. It was somewhat effective. We looked into some of his fixed costs. His rent wasn't that bad, like all this other stuff. And then we got into payroll. Now, payroll is where most people lose all of their margin. And it's tough because payroll a lot of times is an investment, right? Like you invest in high quality people, you will get a return. But on the other hand, if you invest in people and you don't get a return, then it feels like a huge expense and a huge waste. And so here's some of the numbers, here's some of the ways that we looked at it. So he was doing about $75,000 a month in gross profit. Okay? So that's key, 75,000amonth in gross profit.$ his payroll was about $40,000 a month. And one of the metrics that I try to run by is I want the take the gross profit dollars. So 75,000, divide it by the payroll. And you want to get about three, right? It said another way, you want your gross profit to be roughly three times your payroll. So gross profit 75,000 divided by 40,000 got us to about a 1.8. So 1.8, 1.87. Some months he did 80,000 divided by 40, you could say that's a 2. So somewhere between 1.8 to 2, okay, the goal was 3. At 1.8, there's just not enough margin, right? Because that means, you know, huge amount of your gross profit is eaten up by payroll. You still gotta pay rent, you still got ads, you still gotta make money. You've got insurance, you got all these other costs. But if that amount is taken up, you just don't have enough. So for example, if his gross profit was 75,000, divide that by three. This is the other way you do it, you would get your target payroll. So 75 divided by 3 is 25. So one way to look about this is based on his current volume, his payroll budget should be 25,000. He's currently spending 40,000, right? So we got $15,000 of, you know, inefficient, highly inefficient payroll, ineffective payroll. Now he's a lot of money, right? Like, he has pretty good headcount, too. So he's like, this is like cutting multiple people to make this happen. Potentially. The other way to think about it is the reverse, to say, well, my team is awesome. I don't want to cut my team, so it's okay. Then you take your payroll of $40,000 and you multiply that by three, and you'd get 120. So he has two options. If he's maintained. If he thinks, hey, the business is kind of maintaining, this is like a steady state, then he needs to figure out his payroll issue. He's either overstaffed, he's underpriced, but we don't think he's underpriced because of the cost of goods thing, or he has to get, like, more out of the people he's got. Maybe he has the right number of people. They're just not as efficient as they need to be because he needs to either generate $120,000 of gross profit or he needs to cut his payroll by $15,000. Those are literally the two options. Now, there's obviously a third which is like, maybe payroll gets cut a little bit, and then the multiple that he needs isn't as much. But, you know, the approach is going to be pretty much the same. And, you know, the toughest part is that the payroll is an investment. And that if you feel that you're constantly cutting payroll and watching hours and like, you approach it with a scarcity mindset, then, like, you know, you're probably not going to grow and you're not going to hit the results. But on the other hand, like, him, like, his challenge is like, all of his cash flow is getting eaten up by payroll, and there's just just not enough then to reinvest. And he has. He has plans for growth. Like, he sees himself having 10 locations or more, which is awesome. And I believe in him. I really think he can do it. But all that is on the side right now. There should be no attention put to any sort of growth or next steps or future until we fix the margins, because the cash flow is the lifeblood of the business. These are cash flow businesses. They aren't building big equity. There's gonna be no big like payday, like getting 10 or 10 or 20 or 30 times or whatever. Like a tech company would, right? Like, yes, you may be able to resell the business one day and you build equity that way, but maybe not. You never know. The main thing is these businesses need to be cash flow machines. You need to be pulling distributions every single month. And then with those distributions, yes, you can go and invest and open up new stores and acquire competitors. You can buy the real estate that you own, that you can build some equity and you can put into the stock market. You can use the cash to grow the business. But if you don't have the cash, you have nothing to grow the business with. The cash is the lifeblood. I talk to so many people and they're just so focused on sometimes a couple steps down the line that they forget that the most important thing that matters today is getting the margins good. Now in his business he should probably be about a 10 to 12% net. So he's leaving $200,000 or more on the table. That is literally at his fingertips. If he can fix a few things, which could be some margin, which could be some payroll, that's like his homework was to go back, was to really focus on the specific team, each member, and really get back in there, get his hands dirty, really figure out every single thing and how do we optimize it? Because he's got such a great opportunity, such a great business right now in such a short amount of time. But now we gotta fix the margins, which honestly is sometimes an easier problem than have than like somebody who has like no leads and no revenue and they're scrapping to get by, this is somewhat an easier problem. So I know honestly, within a couple weeks he could have this solved. So try this exercise. Gross profit divided by your payroll, your goal is three. So 75,000 if you're at divided by 25,000, that's your target. Three said reverse. You take your payroll dollars, currently you multiply by that three and then that's the goal for gross profit. And then you can play around with those numbers and see where you're at. That's all I got for today. Try it out. It works really well. At least it works in my business. It's worked in a couple others that we played around with. And I would love to hear your numbers. You can shoot me a message on, on Twitter or X on Instagram or here and I'll see you in the next one. Cheers.