Episode 58 Podcast Transcript
Speaker 1 (00:00):
If you always have the mindset and the ability to run a lean and mean business, you won’t fall into that trap going forward of sloppy spending because what you’re doing is valuing the dollar, you’re valuing money, you’re valuing the profit, the margin that you make, and you value it enough to allow it to drop to your bottom line without eroding it. And in the end of the day, that’s what running a successful business is all about, is about maximising the bottom line profits within your business. Hi everyone. Rob Kropp and Dan Stones here from Pravar Group and welcome back to another episode of The Trade Den.
Speaker 2 (00:42):
Hey Rob, good to be here.
Speaker 1 (00:44):
Looking forward to today’s episode. It’s another Money Matters episode. Can’t Wait.
Speaker 2 (00:48):
It is Matters Episodes seem to be striking a chord out there in podcast land, so thanks for the feedback. We’ll keep doing them because we love doing these episodes and today’s one’s no different. Rob, why does this episode matter today?
Speaker 1 (01:01):
We’re going to be talking about that thing called profit, and in the end of the day, profit isn’t what you make, it’s what you keep, and it’s one of the most important elements of success when it comes to running a business.
Speaker 2 (01:14):
So what do you mean by that? It’s what you keep. How does this show up in our world?
Speaker 1 (01:20):
I think in business you can be flat out bringing in the work, doing the work, invoicing to hit revenue targets, but you can still get to the end of the month and have cashflow problems or at worst, be broke at the end of the month and barely even break even at best.
Speaker 2 (01:41):
Yeah, it’s sad when we see that, isn’t it? I mean, we see guys that work their asses off, they’re actually doing a good job, but they’re not getting anywhere. It’s spinning wheels and that’s not because they’re not making money or bringing money in, it’s because it’s leaking out the bottom side.
Speaker 1 (01:55):
Yeah, it’s sometimes going out faster than it’s coming in sometimes unnecessarily, which is what we’re going to be talking about today, which is the sloppy spending.
Speaker 2 (02:06):
Yeah, for sure. So let’s see if we can narrow it down a bit more. Where have you seen a business in particular unknowingly if you like? We’ll say unknowing. We’ll give ’em the benefit of the doubt that probably inflate their overheads to match their revenue without questioning if they need to.
Speaker 1 (02:24):
When a business is smaller, they often run, their business owner runs their business off the smell of newly rag, and that’s because they’ve got no choice. They’re running a lean and mean as possible. They have to be able to keep bank rolling their business. In this case with this client, the more jobs that he was doing, the bigger the team he got, the more revenue he was bringing in, the better his cashflow got. His revenue was going up, but his bottom line wasn’t following. So he recognised that there started to become a problem and for him he thought that it was a sales or a pricing or a job execution issue, and that’s where he assumed that that’s what was causing the cashflow or profitability problems.
Speaker 2 (03:19):
And this is why we tackle today’s sort of episode. I mean, what did you do? Was it a sales or pricing issue that you were thinking about even though the client was telling you that that’s what they thought it was?
Speaker 1 (03:30):
A lot of business owners go there because naturally they think, well, if I just win more money and bring more work in the door, what’s going to solve my problems? But if you’ve got leaks in your financial bucket and there’s money flowing out, then sometimes you’ve got to plug that, and that’s what we did with his client is we unpacked his overheads, his operating costs for the 12 months leading up to that point, and we recognise that we found about 100k of sloppy spending and a 100k might sound like a lot of money to some business owners, but you’ve got to remember there’s a lot of line items in your P&L that can add up very quickly over a period of time and can contribute to that hundred grand, which is what this guy was experiencing. A hundred grand’s a lot.
Speaker 2 (04:17):
It is a lot and it’s amazing how quick you see it, especially if you’re looking month on month to watch this number. Keep creeping up. Let’s break this down then the two things you said, you found 100k of sloppy spending. Let’s break down first of all what we mean by finding 100k of overhead and the impact of that because that’s huge and people have to understand what this means and then let’s break down sloppy spending and how we can start to arrest that for the people listening. So start off with, let’s talk around this 100k and call it, let’s call it the overhead reality check if you like.
Speaker 1 (04:49):
Yeah. Well, for this guy there was a hundred grand in overheads of running costs in his business that was unnecessary spending. Now you would’ve noticed, so what we’re talking about today is we’re not talking about things above the gross profit line, so we’re not talking about materials and labour or direct costs which are contributing to the execution of the job. So we’re not going talking about things above the line, we’re talking about things below the gross profit line, and for him it was a hundred grand in operational spending and the reality check for your listening here is when you have a hundred grand of excessive spending of operational costs within your business, you don’t just have to make a hundred grand to be able to cover that a hundred grand of spending, that a hundred grand of operational costs in your business has to come out of gross profit and that gross profit then covers that a hundred grand of spending within your organisation.
Speaker 2 (05:48):
Great. So if we keep going break down the a hundred grand and assume, let’s call it a 30% gross profit margin, what does that a hundred grand turn into?
Speaker 1 (05:59):
Yeah, so let’s assume you’ve got a 30% gp, so you run a 30% margin in your business after you pay materials and labour. That means you have to do $333,000 in revenue to make a hundred grand in margin because the 70% of labour of that $333,000 of that revenue goes to labour and materials and the 30% margin left over, which is the a hundred grand, that’s what covers the a hundred grand of overheads for you to be able to break even. So this is where a lot of business owners get caught thinking, well, if I just go and spend this 10 grand over here in a certain thing to run my business, that’s all right. I’ve just got to go and make a 10 grand sale to cover that. No, you’ve got to make 10 grand margin to be able to cover that 10 grand overhead that you’re introducing into your business. So the amount of work you’ve got to do to cover that is huge once you understand the concept of what it really costs to be able to run your business.
Speaker 2 (07:08):
Which is why we call it the overhead reality check, and it’s important that everyone understands that concept. If you don’t, we always tell you to book in a call. If you don’t get that or you’re confused by that and you think this is a problem, start right now booking your discovery call at the end of this episode because without it, you’re going to dig yourself in a hole pretty quick. If you think it’s a dollar for dollar to cover an overhead dollar with a revenue dollar, let’s look at sloppy spending, and this is what we call the silent profit killer. What are some of the biggest overhead leaks? So you went and did your audit, you then went through and put a line through a whole lot of stuff with a big red pen, I’m assuming. What were the things that you did look at and what are some of the biggest overhead leaks that hurt small trades businesses at the moment?
Speaker 1 (07:55):
Yeah, the first thing that we did is we ran a profit loss for a 12 month period and we literally went line by line in his overheads and dug into the detail of those line items and some of the common ones that we always go to in coaching to be able to explore overhead reduction strategy is unused and unnecessary technology and subscriptions. This is a huge area that guys get caught just sloppy spending.
Speaker 2 (08:26):
Yeah, it is. And then they sneak up, right, because you think you’re using it, you forget about it, you don’t use it, then all of a sudden you haven’t looked at it, you’re not looking at the actual bills coming through or the emails where all the invoices are coming, but for software you don’t actually use or services you’ve got that you don’t need. That’s what we’re really talking about here.
Speaker 1 (08:43):
Yeah, I think because now we live in a digital age, there is no one size fits all technology that solves the problem. And what can happen is you get multiple solutions that sometimes work together, sometimes don’t, and over time you accumulate these subscriptions and you either there’s something that’s obsolete or inefficient or you just don’t, whatever the reason is. And so getting into your subscriptions that you do on a monthly or a yearly basis and going through those subscriptions and asking yourself a question going, do we actually use it? What value is it bringing to the business? And is this something that we can cancel that subscription and either roll it into something else or do we just don’t need it at all and going forward?
Speaker 2 (09:27):
Yeah, absolutely. We recommend that everyone runs a subscription audit every three months, cut out anything that’s essential, don’t let it accumulate and then sort of go, Hey, look what I found. Be on top of it. Run your subscription audit, put it in your calendar and stay on top of it from the get go. Next one, I suppose it’s in the P&L, so they’re doing it, but the symptom is not reviewing insurance and financing costs.
Speaker 1 (09:53):
Yeah, I think this is a big one. So obviously you need your insurances, you need those things in your world, but it’s your ability to making sure you’re staying on top of things with your power team around you, so your insurance broker, your finance broker, talking to those people to make sure that you’re getting the right coverage at the right price and getting the best deal. You don’t want to be going and slashing those things because you need protection and you need finance, but it’s just making sure your things like your insurance and your finances, your phone bills and all those types of things, your financing elements, those ones, you’re getting the best rates and not just allowing them to always auto renew at a certain price that you set up years ago.
Speaker 2 (10:38):
Yeah, absolutely. There’s a concept called loyalty tax. These days, if you don’t change, your price will go up. So being aware of the loyalty tax concept is a good one to jog your memory on this, but it is, and it’s just how you hold onto assets and what you’re doing with assets and really not just doing a set and forget or just saying, yep, what’s next and forgetting about what you’ve already got. That’s important too. Next one on our list, and this is probably we’ll talk probably, and you can explain this, but it’s more if you’re running a B2C trades business and this is your marketing sponsorship and advertising expenses and this has got a check at history, this whole bucket of expenses in people’s overheads, what’s your take on it?
Speaker 1 (11:20):
This one’s a tough one. If you run a B2B business, it’s more based on relationships, so it’s the people and the relationships you’ve got, which might be relationships with a dozen builders and they refer you work kind of thing. So your costs around marketing are pretty lean. It might be some lunches, some dinners or go to the footy or whatever it is taken to the footy to say thank you when you’re running a B2C business, it’s a very transactional business and you’ve got to rely on Facebook ads, google ads, SEO, sponsorships, all those types of things. And when you’re desperate for leads, sometimes you’re just throwing money at marketing campaigns hoping something sticks, and this was a big one for this client. He was doing numerous marketing strategies, numerous sponsorships, and when we really boiled it down, this was an area where there was a lot of sloppy spending and investing in inverted comments, investing in marketing, which actually was generating no return or sometimes negative returns. And so it’s your ability to test and measure, find out where your leads are coming from, knowing what’s working, what’s not, and it’s your ability to turn off the things that are not generating profitable work, and that’s a big area for B2C businesses.
Speaker 2 (12:43):
Yeah, it’s something that we talk about a little bit, but things like your acquisition, what are you actually paying to acquire your customers? Where are your leads coming from? Understand what that acquisition cost is, what you’re actually paying for what you’re getting is really important, and you’re right, people do this out of desperation. It’s typically, I’m going to throw all of this at it. They get a little bit of a result and then they’re too scared to do anything to change it because what if it all dries up again and then you’re hooked in? Guess what? Marketing people are good at marketing, they can do this stuff, so you end up holding onto this whole suite of stuff that you really don’t need or you’re not sure if you need it. So get clear on what you are getting for your dollars that you are spending, especially in that marketing sponsorship and advertising expenses Line. Next one. You love this one. This is a big one though. I really like the way you described this shiny fleet syndrome.
Speaker 1 (13:34):
Should we just leave it there? Yes. We’re looking at you guys who love upgrading their trucks in their utes, in their vans all the time, and you spend all this money on new equipment and new fitouts and new vans, they look good, but they cost you a lot of money rather than just actually letting its assets do its job. You don’t always have to have a shiny fleet, and it’s the biggest sinkhole for a lot of businesses.
Speaker 2 (14:06):
Yeah, absolutely. I mean the cost of, and even the timing of it, not even looking at the timing, it’s just because I think I want one as opposed to what’s the financing cost look like? What’s this going to do to my breakeven? How does this impact cashflow? Those are all things that we drum into clients as part of coaching and these decisions that they’re making at these points to try and knock this off. But even then, this shiny fleet syndrome, I think it’s a real thing. You could diagnose people with shiny fleet syndrome. I think we see it so often.
Speaker 1 (14:34):
Yeah. It becomes a bit of a dick swinging competition around, look at my shiny fleet and do you need good quality fleet on the road? Yes. Do they need to be well maintained? Yes. Do they need to have good sign riding as a marketing tool? Yes. Do you need to show up with a professional fleet that does look good? Yes, but there’s nothing wrong with having a fleet that’s ageing over time where you do pay it out and then you don’t owe anything on it, and you just let it run down over a period of time so you don’t have to keep upgrading because every time you keep upgrading, you’re taking out more loans and it drives up your breakeven point. And if you really understood what the impact was on your breakeven point or the impact on your bottom line by constantly upgrading your fleet, you’d probably think twice about doing it.
Speaker 2 (15:24):
Yeah, 100%. Go back, go to the reality check we just spoke about a hundred grand, 30%, 333,000 in rev to do it. This is where it all flows into. And you mentioned it is a symptom I think of ego, and probably the last one we’re going to touch on is a term that has been, I think we can claim it within the Pravar Group as big. This is where it originated from, but big dogging. Talk us through what big dogging is.
Speaker 1 (15:53):
It is from a couple of the guys in the lifestyle Mastermind where they recognised that as they got their business became more successful and profit started to show on the bottom line, and money was starting to flow nicely. They started big dogging. And big dogging comes in the terms of getting a really nice truck like a RAM upgrade or a nice ranger or the new fit out, or they’re starting to, as they make more profit, they start ripping money out of the business and their personal spending goes through the roof and then all of a sudden they’re buying mobile offices if you catch the drift. And they’re just constantly upgrading their lifestyle and their personal spending and the unnecessary spending inside of the business, which really is not building wealth. Let’s face it. It’s consumerism mentality and you’re just spending money on stuff, and sure, some of it is a bit of a lifestyle choice, but you’re just accumulating shit and stuff rather than actually improving your bottom line or building wealth with that money.
Speaker 2 (17:07):
And big dogging in that sense, the shiny fleet syndrome, you can see how you can make that link. I think it goes from being, like you said on the marketing and sponsorship side, it goes from, Hey, we’re going to go out for a lunch or whatever it becomes, and now we’ve got the super box this weekend and standing tickets at the stadium or something like that. That’s the sort of stuff we’re talking about. As you said, you’re just accumulating bigger and bigger and bigger purchases. We call ’em vanity purchase to look bigger and better.
Speaker 1 (17:34):
Yeah. Do you want to, as your business grows and you become more profitable, do you want enjoy life a little bit more? Absolutely. Do you want to enjoy family holidays and getting the caravan and going on adventures? Absolutely. But it’s the biggest problem is the reason why most business owners never actually build wealth using their business as a vehicle to be able to do that is because every time their revenue goes up, they match and mirror their spending to go alongside it, and so their business gets bigger. The bottom line doesn’t follow because they big dog it, and they just spend more as they make more.
Speaker 2 (18:10):
Yeah, absolutely. So going forward, three questions. Let’s talk about these three questions. How do you avoid this? So first of all, we want people to do this, right? We want people to do their own audit of their line by line. We’d recommend them doing that if you want to talk about that call. But going forward, we want people to adopt three questions they can ask when it comes to making these sort of decisions or making the decision to keep or cull that line item or level of that line item in the expenses on their P&L.
Speaker 1 (18:38):
Yeah, that exercise helped you cut spending, and for that client, we dropped a hundred grand straight on his bottom line. We just went through over the next few weeks. He just slashed all that and at a hundred grand per annum just dropped straight to his bottom line. That was a huge win for this guy. But going forward, it’s giving yourself that reality check before you make another purchase. And these three questions help that so you don’t find yourself back in that position. Number one, the question is, will this expense help my business make more revenue or profit? So you’re asking yourself that question, will me by spending this money actually enable the business to make more revenue and make more profit? And you’ve got to be honest with yourself around that.
Speaker 2 (19:25):
Yeah. Is there going to be a return?
Speaker 1 (19:27):
Is there going to be a return on investment from that expenditure?
(19:32):
Question number two is, will this save me time as a business owner so that I can focus on driving sales and making more profit? So what you’re doing is you’re investing in a system or some more structure, some people, some equipment, but is there a direct correlation? So maybe it doesn’t save you or make you more money, but what it does is it gives you more time back so you can go and make more money. So the first question is, is it directly correlated to making more money? The second one, is it correlated to the time which then you can refocus into making more money?
Speaker 2 (20:10):
Yeah, and it’s important that you ask the whole question there too. Don’t just say, will this save me time and give yourself a pass on the expense? Am I going to focus more on driving sales and making profit? Again, that idea of linking it to, is there a return on the activity I’m going to do or the expense I’m going to incur?
Speaker 1 (20:26):
Correct. Question number three is, do I really need it now or am I just big dogging it? Do I really need it now really? And do I need it now or am I just big dogging it? Yep.
Speaker 2 (20:45):
And it’s important to put that now in there too, you’re right on the really, absolutely, and if you’re not, you’re probably big dogging it, but if you don’t ask now, it may be that you really need it, but do you need it? Now? Is now the right time to make that decision? Because sometimes we can make the right decision at the wrong time, and it’s just as catastrophic. So make sure you’re making the right decisions at the right time by asking that question, do I really need it now? And use that term big dog, and you’re allowed to use it. Use it. Think about it, let it sink in because if it can save you from going down this hole, then it’s going to be worth it.
Speaker 1 (21:20):
I think going forward, it’s once you do the quick fix and grab the low hanging fruit, and if you can practise asking yourself these questions going forward, I think they’re great strategies, but the mindset to adopt here is that no matter how successful you become, it’s about running, lean and mean all the time, not at the expense of creating a great experience or delivering a great product or service, but if you always have the mindset and the ability to run a lean and mean business, you won’t fall into that trap going forward of sloppy spending because what you’re doing is valuing the dollar. You’re valuing money, you’re valuing the profit, the margin that you make, and you value it enough to allow it to drop to your bottom line without eroding it. And in the end of the day, that’s what running a successful business is all about, is maximising the bottom line profits within your business.
Speaker 2 (22:13):
Yeah, absolutely. Bottom line is, like we said with Benjamin Franklin at the start, a small leak in overhead’s going to drain can drain thousands of dollars per year, and the worst part is most people, most business owners don’t even realise it until it’s too late.
Speaker 1 (22:27):
If you’ve enjoyed today’s episode and you know that your profit’s not where it needs to be, maybe you’ve got cashflow problems or you want to grow and you want to get a greater understanding of your numbers so that you do grow profitably, then jump across to strategysession.com.au, book a call in. Let’s really pull your business to pieces and talk a bit about how you can grow profitably, and let’s see where we can take things over the next 12 months and beyond to ensure that you make the profits you deserve and enable you to live the life that you desire with your family.
Speaker 2 (23:02):
That would be amazing. We would love to help. If something here today sparked a thought, gave you an insight, please let us know. If you love the podcast, maybe give us a review. We’d love that too. So give us a subscribe. That would be fantastic. Until next time, that’s it for this Money Matters episode.
Speaker 1 (23:19):
See you next week.
Speaker 2 (23:20):
See you soon.