Episode 133 Podcast Transcript

Speaker 1 (00:00):

The goal’s never about having just a bigger business for the sake of it. It’s about having a better business that makes you the money and gives you the time and gives you the choices to give you the life that you desire. G’day everyone. Rob Kropp and Dan Stones here from Pravar Group, and welcome back to another episode of The Trade Den. Welcome back, Dan. Looking forward to today.

Speaker 2 (00:25):

Yeah. Hey Rob. Hey everyone. I really am. I like this episode today. I think it goes against a little bit people’s instinct, this idea of growth. And we know why growth is an instinct for everyone because it’s how people are wired. It’s especially tradies, right? When things get tough on site, you work harder, you get it done, you make shit happen. It’s part of our Pravar principles. But when business gets tough and people reach for that same tool, the more effort, more output, just do more, that’s when things start to be a problem. So I think it’s common to everyone, but we don’t stop. And if we can stop and really explain it, I think we can do some really good stuff today.

Speaker 1 (01:02):

Yeah, I’d agree with that. And it’s also this whole notion online. Anywhere you look on social media is bigger is better and more is better. And I think that’s also the buzzword in the marketing world and the business world at the moment is scale and growth and expansion and bigger is better. And to a degree, I love growth. I love expansion. I love building things, but it’s about building and scaling it the right way, not the wrong way. And I think that’s what today’s all about.

Speaker 2 (01:33):

Yeah. Even that idea you just said about scaling, it’s like, all right, we’re going to scale twice or five times, but then if five’s good, 10’s better. And if it’s 10, why don’t go for 20? And there’s no shortage of people that are just amping up on the number they throw in front of the word scale. And it’s just breeding the same problem. I think scaling is that idea of it is a multiplier, right? It’s scale X times. But the thing that people miss is that it multiplies whatever. If you don’t fix what’s there, you’re just going to multiply what you’ve got. So you need to make sure you’ve got the right things in place before you go on this growth thing, before you start buying into scaling. That I think is the real kicker before you just buy into the fact that scaling equals good and it equals more.

Speaker 1 (02:17):

Yeah. But when I think of scale, scale, you’re right there when you say scale is the multiplier. It multiplies it for the good, the bad, and the ugly. Yes. You can multiply something that’s going really well. That’s when you want to scale and when you’re geared up for scale. But when the business is not going well or the business has got cashflow problems, operational problems, structural problems or profitability problems, growth is not the answer. And that’s the essence of today. Do we love growth? Yes. Do we love scalability? Yes, in a sustainable way. Do we love expanding and getting bigger? Yes. But for a lot of business owners, scale isn’t the answer because they haven’t gone on that journey to be able to get the fundamentals of their business right and get themselves in their business positioned and ready for scale. That’s the distinction from today.

Speaker 2 (03:19):

Yeah. They skip that middle step. That’s what we’re going to start with today. So we’re going to explore three things in this episode. The first going to be why more work makes a broken business worse, not better. We’re going to work through an example of that, how the numbers look. Second, we’re going to throw a few things at you about how can you tell if you’re scaling a broken business right now. If you’re doing this or you think that’s your path or that’s what you’re laying in bed thinking on, that we need to explore. So we’re going to throw some things at you there. And then third we’re going to talk about is what to fix before you lock into growth, before you earn the right to grow if you like, Rob. I think that’s an important thing as well. So those are our three things today.

(03:56):

Let’s start off with an example. And this is most things I think start off with people accept the buzzwords, the marketing and the hype, but they never really do the numbers. And that’s where we’re going to start today.

Speaker 1 (04:07):

Yeah. Let’s use a number of a business that’s doing $2 million in revenue. And we’ve got to remember that every percentage point of margin from that business is worth 20 grand. And so if a business is not optimised at a $2 million run rate, and you put the accelerator down, whether it’s one big job you land or multiple jobs that you take on to go to three, four, five or beyond, if that business is not optimised from a margin point of view, then you’re going to be leaving a shitload of money on the table. And let’s use the number around 5% margin.

Speaker 2 (04:48):

As that gap that they’re missing on, there’s 5% that they haven’t realised they haven’t set up for before they start scaling.

Speaker 1 (04:54):

Correct. And 5% of $2 million is a hundred grand.That’s a hundred grand that a business can leave on the table. And it’s a small percentage, but it adds up to a lot of money in the end of the day that’s missing from that business’s bottom line.

Speaker 2 (05:10):

Yeah, definitely. And that comes when you start saying that and you say, “Well, it’s five margin points or 5% on their margin.” Tha 100K can be made without having to go get new sales, not bringing on new people, no extra work to win. It’s just fixing the margin on the work you’ve already got rather than chasing more of it. And I think that’s the other side of this, everything that comes with it. You start doing this stuff, one’s going to take a hell of a lot of effort, a hell of a lot of heartache, no guarantees. The other one, if you know your numbers and you can rely on the way you manage and you have some courage, you can turn that around really quick. And it’s the secret behind a lot of transformations we do, especially early on with clients.

Speaker 1 (05:53):

Yeah, correct. A lot of businesses that we meet for the first time is they’ve got margin issues. It’s a hole in their financial bucket and you can’t fix margin issues by growth. You fix it by better management. And as you said, a lot of business owners have got that thing where they’ve got cashflow problems. They’re not making the money that they want. They’re working longer and harder and they think, “Well, if we just sell more, that will fix our problems.” More sales and bigger scale does not fix those fundamental problems. It actually exposes them more and it makes the holes bigger. That’s what it does.

Speaker 2 (06:34):

And in that sense, it’s like it’s a painkiller. It’s like taking Panadol for a headache. There’s a reason why you’ve got pain within you. You take a Panadol, that’s the painkiller. Revenue and more work, a new job landing feels like, “Oh, that’s pain done. We’re out of the problem. That’ll solve it for a while.” But it’s masking, like you said, it’s not fixing it. It’s not curing anything. It’s not going to a point where it’s not going to come back again. I think that’s the thing. When you scale this way, you just see it happening over and over and again. No matter what you do, no matter how big you get, you’re still going to have the problems that are involved. They’re just coming back at even more intensity.

Speaker 1 (07:09):

Yeah. Imagine if in from 12 months from today, you didn’t have a bigger top line business. Imagine if you still stayed at $2 million, if you’re doing $2 million today and you were doing $2 million this time next year, and you still had the same crew and you still had the same operational structure around you, but you just priced better, managed tighter and were more efficient in the delivery of the job and you had a hundred grand on your bottom line. Imagine that. No more extra having to quote more and generate more leads and hire more people and more trucks on the road and more, more, more, more, more. Imagine if you just did it better, like a hundred grand. That’s a lot of money in the end of the day. Imagine if you just did things better in the next 12 months rather than thinking, “I’ve got to scale.

(08:03):

I’ve got to do more.” It’s this notion that how about we just be better before we do more?

Speaker 2 (08:10):

Yeah. Or before we even get busier. I think there’s got to be a reason for that. I haven’t asked you this before, but why do you think people think it’s either a safer bet to chase more revenue than it is to chase profit at the end of the day? Most guys will go, “It feels safer to be busy and just go in the work rather than really learning and leaning into profitability.” Why is that?

Speaker 1 (08:33):

I think that in the end of the day that by landing an extra job will make more money come through the accounts. But by managing better, it’s keeping more money in the business rather than bringing more money through the accounts. I think that’s the slight distinction between the two. So they think by winning an extra 30 grand or an extra 50 grand or an extra $200,000 job, by bringing more money through the accounts will fix the cash flow for problems. But the cash flow is the symptom of a greater problem that already exists through the business. And so you can’t necessarily fix cash flow because that’s the symptom. You’ve got to fix the root cause of the problem, which is creating the symptom. So more jobs and more money flowing in and out of your accounts isn’t actually going to fix it. It’s actually the opposite.

(09:33):

It’s improving the jobs and the money that’s already coming through your accounts so that more money stays within your business and you’ve got better margins, you’re more efficient in your deliveries, the schedule is tighter, your bottom line improves. That’s what makes the business better rather than taking on more jobs in the hope that that’s what will fix it.

Speaker 2 (09:54):

Yeah, that makes sense. And I think that’s the example we were trying to get across in part one when you start looking at the numbers and you think, well, the thing to fix it is more. It is just starting to scale and put more through the machine. The second part of that, I think though, what you find out really quickly is part two that we’re going to cover off now, which is you’re going to scale chaos. And like you said, growth, it doesn’t expose things slowly. It doesn’t fix things slowly. It magnifies things and it becomes a flood really quick and get out of hand. And we’ve talked about growing broke and things like that in the past, but the signs and things to look for when you’re scaling something that’s broken, I think that’s the thing that sneaks up on people because they don’t know that.

(10:33):

All they know is more is going to equal better. I haven’t done enough of more, therefore I’m going to keep pushing for even more and they ignore the signs. And I think one of them, like for an example, revenue goes up, but profit never moves. It stays the same or it goes backwards. I think for me, that’s a sign. If you look at your numbers and you can see that you’ve got more going through the accounts, but profitability isn’t changing, that’s a sign that you could be scaling something that’s broken.

Speaker 1 (10:57):

Yeah, it is. The next one is that you’re relying on the next job to be able to keep paying for the jobs you’re trying to finish at the moment, which is almost like you’re waiting on the next deposit or the next job to land to pay for the tail wagging on the job that’s finishing. And so especially those in the project space, that’s a real risk because you’re hoping to go from next job to next job to next job. And you’re not actually fixing the root cause, but you’re just masking the problem by the next job that comes in line.

Speaker 2 (11:26):

Yeah. And that feels like you’re busier than ever and then you’ve got less money in the accounts. I’m working on more than I ever have. We’re flat out, but there’s no money in the bank. And we hear that all the time. And I think this is that cash flow thing that you’re talking about. The symptom always comes back to cash that I think more cash is going to fix it. But how many times have you seen it where people then start taking on more bad jobs for the cash flow and it speeds up the demise, if you like, of that business? Yeah.

Speaker 1 (11:54):

I’ve got this example at the moment with a guy that I was talking to the other day. He’s doing around 1.6 million revenue and he’s got the classic symptoms of the challenges of a business of that size. He’s working his ass off on jobs all day long. He’s trying to split from one crew to two. Winning the work is not the problem and pricing the work is not the problem because he keeps getting told by the builders that he does work for is it’s like, mate, you’re expensive. You’re on the top end of that. So it tells me that winning the work’s not the problem, his pipeline is full and pricing is not the problem because he’s getting told that he’s at the top end. He’s still converting. Still converting.

(12:38):

But when I pulled apart his financials, it’s like, mate, look what the numbers are telling you is you’re delivering work at this percentage, you should be at that percentage. And for this guy, it was a big number. It was like 15%. And so that’s a lot of money that he’s leaving on the table and he’s just like, “But Robert, it’s got to take on more work and just get my crews split and keep punching through more work because in the end of the day, that’s what’s going to fix it.” But if you do the numbers, $1.6 million business on 15%, it’s 240 grand that he’s missing out on his bottom line. And no wonder there’s chaos in the office. No wonder he’s on site and doing admin and stuff at night. No wonder that he’s got challenges and trying to keep up with ATO repayments.

(13:32):

No wonder that he’s struggling week on week to be able to pay his team and keep on top of suppliers is because it’s not a pipeline or a pricing issue, it’s a margin issue. 200 and something grand is a lot of money at that size business. Now, the advice I gave to that guy is do not even grow. If you can’t manage a business at $1.6 million, don’t even think about going to two, 2.5 at three because all you’ll do is double or triple your problems that are going to come along the way. And he didn’t like that, but that’s the reality of the situation that he’s in. And unless he fixes the business that he’s got, scaling is just going to create more chaos.

Speaker 2 (14:12):

Yeah, absolutely. Really good example for our second bit that we wanted to cover off there. Let’s talk then to the fix that you talked about, or not the fix, but the way out of this, the way forward. And you say this all the time to clients, a growing business is a hungry business and geez, isn’t that the truth? But the idea that comes with that is fixing the foundations, like you said, is really important because if you do scale, it’s going to be hungrier than ever, but you’re just filling it up with stuff that it can’t sustain. It can’t do anything with it because it’s going straight out the back end. So fixing the foundations, and I think the first one has to be, you’ve got to know your numbers because this margin thing requires you to understand what margin is. You’ve got to really understand that at least as a concept before you’ll fix any of these foundations.

Speaker 1 (15:02):

Yeah. Foundation is. When I think about foundations, the first thing that I come to mind is it’s not the sexy part of business. It’s the boring part. But the boring parts of business is what makes profit. That’s the punchline out of today. And you’ve either got growth as one mindset or management of the other. Now, what do you think sounds better? What do you reckon sounds more exciting?

Speaker 2 (15:27):

Oh, to most people it’s the growth. Give me the big numbers. Let me start punching up. Let me level up. Let me scale it. I want a 10X, all that sort of stuff. That’s the sexy sounding talk that you hear. I cringe as I say it, but to answer your question, that’s what it’d be.

Speaker 1 (15:40):

It is. And that’s the message that’s pumped on social media. That’s message that’s pumped on marketing. That’s the message from people selling you the dream that scale and growth is the answer for you to be able to build the business and life that you want. But after all these years in coaching, the thing that we’ve seen the most, it’s dialling in your operations. It’s the boring things. It’s getting clarity around your numbers, dialling in your pricing, having visibility around knowing what your breakeven point and what you’re hitting. It’s around actually knowing what your margin target is and then managing jobs to actually hit that margin target. So pricing, visibility, data to decision making, margin management, that’s the boring side of business, but it’s the boring foundational side of things which creates the results at the end of the day. And I’d rather have a really profitable $2 million business than a really skinny lean business at three to $5 million that makes no money.

(16:39):

So it’s about getting the foundations right before you really put the foot down.

Speaker 2 (16:44):

Yeah. You even mentioned it there, pricing. I mean, the idea of pricing to win work and having the buzz of I won the job, good for you. But if you haven’t priced it profitably, you’re not going to make money out of it. It’s going to bite you in the ass. You’ll still get your sugar hit of, “Hey, we’re winning, we’re busy, this is good.” But if you price for profit, you don’t even see that until later on when the job’s complete. So I think even that’s an example of it. The other one, like you said, was just tightening up the way you manage jobs. Go and do that for starters. Optimise what you’ve got more than anything else. We talk about things like labour stacking and variation management and all that sort of stuff. Again, people listening to this start yawning at that point because it’s not sexy, but that makes big differences.

(17:26):

The person you’re talking about, that 200K plus gain they can get is going to come from that exact thing.

Speaker 1 (17:32):

The fix to all of this is getting your financial house in order. That’s what it is. It’s pricing correctly. It’s managing your margin correctly, which is done through tight scheduling, the right labour allocation, through variation management, stopping the labour bleeds, stopping the discounting of work. This body of work around really dialling in your financial foundations and the operationally, the way that you run jobs and run the business, that’s what tightens this whole business up and you tighten up the business that you’ve already got. And once you know that you’ve optimised the hell out of the way that you run things, go for it. Grow, expand, scale, do whatever you like. But you know that you’re multiplying a business that’s got a business model that stacks up, not a business model that’s broken where you’re masking it just by taking more work on at the end of the day.

Speaker 2 (18:26):

Yeah, really good. I think for me, the person that is listening to this, that’s sitting there saying, “Hey, how do I get more work? I’ve got to win more work.” And he’s in that mindset of just more is better and they’re still doing that. I think you’ve got to go from how do I get more work and asking that question from what we’ve talked about here, why isn’t the work I’ve already got making me money? Because that’s the thing I think that uncovers that whole different chain of thinking into what levers should I be looking at? Where are the gaps? What is going wrong that I’ve already got for me to fix? That I think is the first step into changing the way you might have though about it previously.

Speaker 1 (19:04):

Correct. And that’s the exact exercise, and it’s a challenge we’re going to do today for the listeners, that’s the exact exercise of the bloke that I was talking around before. I said to him, “Give me your six latest jobs. Tell me what the names are. Let’s get in there and do back costing on every one of those jobs.” And I know that the answer isn’t taking on more work. I know the answer is let’s do a postmortem on every one of those jobs and find out what’s going wrong. What’s going wrong in your business right now? And by doing that back costing on those jobs, it’s going to give the answer like where did we blow out on labour? Where did we blow out on materials? What is it around deliveries that we may have blown out? Did we miss things in the quote or have we just been inefficient in our schedule around the execution of it?

(19:48):

Was there mistakes? What’s the answer? No one likes to be able to look at all the things that went wrong, but by looking at all the things that went wrong gives you the strategy of what you’ve got to improve before you try and multiply the business. And I can guarantee on those six jobs, the answer will not be take on eight jobs. You’ll be, let’s fix these jobs that we’ve got coming up before we even think about growing.

Speaker 2 (20:11):

Yeah, really nice example. So that is our challenge for this week. Go and do that exercise. Pull the jobs, work out the actual margin you realised on each one of those completed jobs. Use real numbers. Don’t use what you quoted it on. Go back and do the work to try and understand what it costs you and work out your margin. And I think Rob, one thing you said, we need to know our numbers. If you don’t know how to do that or you can’t do that, that’s going to be a problem because you’ll never find those gaps. You’ll never be able to get to step one, which is tell me the real data, give me the data I need to start to pull it apart. If you can’t do that, that’s the problem to start with. Then if you can do it and what you’re seeing is not great, you’ll uncover the dominoes fall from there.

(20:52):

You’ll find out what the problems are and what you do. So what you’re going to find out by doing it is what you need to fix before you even go and chase one more dollar of extra work, one more client, that next job, that bigger thing. Before you do that, what you see in this exercise is going to help you make sure you’re ready for it when it comes, because that’s the most important thing at the end of the day.

Speaker 1 (21:14):

For me, what impresses me with a guy who runs a great trades business is someone who’s got a healthy bottom line rather than a healthy top line. A healthy bottom line is more impressive than a big business with a shit bottom line any day of the week. And getting your business model right and growing a profitable business and a profitable model that works, that’s what good leadership and good business practise is, not someone just caught in the hype of growth and expansion and scale for the sake of it. If you’ve got a business that is not working, do not try and grow it and hopefully you’ve taken away that from today. And if you are in that position where you are feeling like you’re flat out and you’re stressed and still wondering where the hell is all my money going, don’t reach for the next job.

(22:05):

Bigger is not the fix here, better is. So if you are looking for help around or how do we get better, then jump across to strategysession.com.au, fill out the application form, book in a time that suits and let’s talk to you around what’s going on in your world and we can unpack your business and see if we can help you make a better business in the short term, but then work with you on scale and growth in the long term as we do optimise the model that goes along the way. The goal’s never about having just a bigger business for the sake of it. It’s about having a better business that makes you the money and gives you the time and gives you the choices to be able to give you the life that you desire. Hopefully today’s done that, Dan. I think we hit the point home enough, haven’t we?

Speaker 2 (22:50):

Yeah, I think the real quick version is fix it, don’t scale it. Fix it first, then worry about the growth and the more when it comes. But if you haven’t fixed it, don’t even bother.

Speaker 1 (23:00):

Hopefully you’ve enjoyed today’s exercise. Get stuck into that challenge that we spoke around and looking forward to coming back to you with another episode of The Train Den here really shortly. Until then, take care.

Speaker 2 (23:10):

See you soon.