Why read this book
It’s written for entrepreneurs of companies with up to $5 million in Revenue. It’ll help you to avoid the most common business mistakes and show you how to run your business better.
Summary & Key Insights
Stop underpaying yourself
90% of entrepreneurs think they’re overpaid, even though they are underpaying themselves and screwing their financial metrics by not paying themselves a market-based salary.
Remember this fundamental distinction: You get paid a salary for what you do and get returns for what you own.
But how do you know that market-based salary?
Imagine you’re forced to stop working today. How much salary do you have to pay to get a competent replacement? That’s your new salary. If your startup can’t pay you that salary, your business is producing “false profit.”
Another reason you should pay yourself properly is that you can now switch from Operator to Owner at any time by hiring a replacement without jeopardizing the company’s profitability.
Revenue is irrelevant. The relevant number is pre-tax profit.
Here are some benchmarks to help you know where your business currently is:
- 5% or less pre-tax profit means your business is on life support
- 10% pre-tax profit means you have a good business
- 15% or more of pre-tax profit means you have an excellent business
The Black Hole: 1-5 Million in Revenue
At this point, most companies force themselves to increase staff size and infrastructure before they can actually afford it, which drives down profit.
How do you tackle this?
Plan to live off your market-based wage and plough every dime of profit back into your business as you grow from 1 Million to 5 Million.
Watch your labor productivity:
Focus on gross profit per labor dollar as your key indicator for how productive your labor is.
Labor creep is one of the most common mistakes. Use a salary cap to prevent it and achieve your required labor productivity:
You should always aim for at least 10% pre-tax profit, so the salary cap formula is:
Salary Cap = Revenue – 10% Pre-Tax Profit – Salaries – Nonsalary costs
Once you get to 15 percent pre-tax profit, add more employees to drive your profit back down to 10 percent, and then grow it back to 15% again. Your pre-tax profit and salaries will constantly be fluctuating.
Remember: Never go below 10% pre-tax profit. Also, in that stage, we recommend that you:
- Hire slow and fire fast.
- Hire young high-potentials.
- Avoid the seasoned and expensive “Been There, Done That” kind.
Your goal is to avoid overpaying or underpaying your employees.
Capital Safety Net
You have to predict both net income and cashflows. Being profitable every month and year and having your cash safety net in case something unexpected hits is a great strategy.
Your core capital target is simply this: 2 months of operating expenses in cash.
In almost every case where Greg Crabtree monitored this, the worst downstroke was roughly two months of operating expenses.
Building a War Chest
CFO Wisdom: Businesses with cash but no debt attract magical things. Why? They can be opportunistic. Most entrepreneurs with businesses between $1-5 million need to build up about 2 million liquid, safe, core assets that give them stability regardless of what they are doing. When you reach 2 million, aim even higher. Build a solid foundation first, and then you can enjoy taking bigger risks.
Try to learn how to keep your reporting simple while still being able to recognize a flashing red light that indicates a problem. If you look at a report frequently, it needs to show minimal amounts of data. If it is infrequently, it can be more.
Daily: Cash balance
Weekly: Cash flow forecast, sales, and productivity
Monthly: P&L, Balance Sheet, where the cash goes
The most helpful presentation of the P&L is a rolling 12 month-view. When you begin to compare the 12-month periods side by side, you see more of a macro view of your business.
Draw up a plan for the entire year and forecast the whole year. Then update the forecast monthly as actual results become known and more information becomes available.
Keep it simple:
What’s my Revenue?
What’s my cost of goods sold (COGS)?
What are my labor costs?
What are my operating expenses?
Updating the forecast should only take 15-60 minutes per month.
It’s important to understand that a metric is more about performance than the number itself. Remember to track your salary cap as a key metric; it tells you when your labor costs are too high.