Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:08] Speaker B: Hey. Hey. Welcome back to the Total Profit Podcast, the show where we help you streamline your business, boost your margins, and lead from the front like the boss that you are. I am your host, T2, and with me is, as always, is the man who turns math into Money, Tommy P.
[00:00:28] Speaker A: T2. And your nicknames. I think that one's good for a tattoo.
[00:00:34] Speaker B: All right, listen, today's episode is a big one, like foundational, because if you're not tracking the right numbers in your business, you are basically flying blind. And so we're talking about the key metrics that every business owner should be watching to make smarter decisions, protect their profits and avoid those nasty.
Just those surprises that. That are awful. So grab a pen and paper or get out your. Whatever note taking app you use, and we're going to go through quite a list of them today.
[00:01:08] Speaker A: Yeah, I'm sure there's some AI notetaker that will be dragging along with us on this podcast, so. But let's face it, too many business owners are staring at the wrong dashboards. If they're looking at dashboards, they're looking at Instagram, like web traffic, when they should be looking at margins and cash flow.
[00:01:25] Speaker B: Exactly.
Vanity metrics are really fun and they can be very affirming that you're on the right track in a lot of instances, but they don't pay the bills, so that's what we're going to fix today.
[00:01:39] Speaker A: Yeah. And let's face it, you can improve what you don't measure. Metrics are like dashboards in your car. If you're ignoring the warning lights, you're eventually going to break down.
[00:01:49] Speaker B: And don't assume.
It's really dangerous to assume when you say your bookkeeper, your accountant is tracking the right step for you. We had a client once who had no idea what their customer acquisition cost was. They just knew that they were, you know, quote unquote, doing ads. And so it turns out they were spending about $400 to land a $300 client. And we learned that after working with them. So.
[00:02:14] Speaker A: Ouch.
Good news is we could fix that.
[00:02:18] Speaker B: Yeah, we can fix that. And so let's break it down.
Here we go. The metrics that matter in your business and why they should be a part of your weekly rhythm.
Tommy, why don't you talk us through a couple of these?
[00:02:33] Speaker A: So, yeah, thank you.
It's core words that have relevance, and the number one is revenue. Revenue is the money coming in.
Depending on your business, you may have one form of revenue or you may have multiple forms of revenue. And that's where we want to break those apart and make sure that the costs are relative to the revenue so those margins are accurate.
Profit, you're looking at gross profit because that's money left over. Asked for your cost of goods and what you get to cover your overhead with. And the other profit word we're really looking for is net profit. That's the money you get to keep.
That's the gold nugget that we're striving for. So don't confuse busy with profitable.
I know business doing $5 million a year are losing money every month. And it's something that we're really passionate about of helping people get their businesses on track so they can have a good sense of comfort sitting in that chair.
T2, you mentioned accountants having that knowledge above your accountant of what they're going to say because that's. Nobody knows your business like you and.
[00:03:45] Speaker B: Nobody cares about your business as much as you do. So I like what you said about not confusing busy with profitable.
Yeah, that's a. That's an important distinction.
So you mentioned net profit, but gross profit as well. That's going to be your revenue minus your cost of goods sold divided by your revenue. That is your gross profit margin formula. I'll say it again. Revenue minus the cost of goods sold and with revenue as the denominator. That is your gross profit margin. That's going to tell you how efficient your operations are. If you have a low gross margin, it's really time to optimize your delivery, some of your production processes, that sort of thing.
So review for me the formula for net profit margin.
[00:04:35] Speaker A: So your, your net profit is the, the profit margin. Net profit margin is your net profit divided by your revenue. That's going to give you a percentage of what you have left over. So that's after all your expenses are paid. This is what, what's left on the bottom line that sets cash.
[00:04:55] Speaker B: Otherwise known as the bottom line. Right? And folks, this is really the real health score of your business. Your net profit. This is what we help people increase, basically.
So we're working to help folks increase their net profit. Bottom line. This is how much you get to take home and it is the real score of how healthy your business is. Now there's another one, another KPI called Customer Acquisition Costs or the cac.
And this is how much does it cost to get a new customer? If you are overspending in this area, then your marketing is broken.
And I'll just give you a quick pro tip. Referrals are cheap and they're absolutely powerful and it drives your CAC way down.
Now all those customers that you acquire, it also matters to your business. Sometimes you do take a loss up front in order to when you're acquiring a customer because the lifetime value of that customer is going to pay you back. There'll be a break even point and then they'll pay you back. So Tommy, what's the lifetime value of a customer?
[00:06:07] Speaker A: Yeah, that's a great question. That's really a simple one. It's how much is a customer worth over time? The higher your customer lifetime value, the more profit you can afford to invest in retention, upsells and loyalty.
[00:06:20] Speaker B: Retention over the long term. Absolutely. And you kind of mentioned a word very quickly there. Upsells. When you have a customer for life.
Just the moment that you acquire them is not the only time that you may be selling to them. As you develop your product, as you bring in new revenue lines, as your business continues to grow, that you will have opportunities to sell into your existing customer base. And that can be a great source of revenue for you.
So cash flow, cash flow is another KPI that, that you should be tracking. Revenue is really vanity. We call profit is sanity, but cash flow is king.
So if you're writing anything down, I'll say it for you again. Revenue is vanity, profit is sanity, but cash flow is king. So when you have late payments, when you have really big receivables, tight payables, this is the kind of thing that will tank your business fast. And so you want to keep the cash flowing for sure. And one of the things that we recommend at total profit is to have a contingency account where all the revenue that you're bringing in, you're setting aside a small percentage, it doesn't have to be huge, 3, 4, 5% of your revenue, setting it aside in a contingency account for these types of situations.
Now there's also a situation called churn rate where you're losing customers or memberships or whatever. So what is that, Tommy?
[00:07:56] Speaker A: Yeah, so your churn rate is the, the retention of your customers or the lack thereof. So we, you want to emphasize, you want a very, very low to no churn rate because it costs to get new customers, it costs to, to maintain a relationship. But once that, that churn rate is, is in a groove of, of low to no percent, it really gives you more accurate cash flow and revenue reports over your, your month as you, you acquire and perform work for this. So I, I don't know about you, but I like to find a prop up service provider that gives me a great service at a reasonable rate that I can, that's dependable and those things sell themselves time and time again. So it's truly focusing on this churn. And let's not, you know, let's not let those, those customers just flip and you're going to have that. So just do your best to minimize that churn rate and your profits will start flowing in.
[00:09:04] Speaker B: Absolutely. So in episode two, we gave a whole list of profit leaks and that high churn rate is, is a profit leak for sure. Falls into that category, accounts receivable turnover. So this is how fast you're getting paid. If it takes 60 days to collect after you've done a job that is not sustainable, you need to take a good look at that and measure and try to shrink your accounts receivable turnover.
[00:09:35] Speaker A: Yeah, absolutely.
So let's talk mistakes real quick.
You know, as, as T2 mentioned, tracking vanity metrics instead of profit driven KPIs, inconsistent reviews, looking at numbers once a quarter won't cut it. These are real time data. So keeping keeping a pulse on what's coming in, what's going out, and also ignoring those red flags. Cash flow dips, rising cacs, there's a number of them out there. And we're going to work through this with you through these podcasts, hopefully to get you in alignment to maximize that bottom line.
[00:10:17] Speaker B: So one of the best fixes that we recommend is to create a very simple dashboard. Google Sheets, QuickBooks, even just a whiteboard in your office. But you gotta start somewhere.
AI can be really instrumental in this regard. If you're not using it already, you should be. But, and then, so let's move into every week we like to give you some actionable takeaways. And so here's what we want you to do this week. All right? Audit what you're tracking. Now, what KPIs are you measuring at the moment? How many of them actually matter? What KPIs do you need to do you need to add to the list. All right, but don't go overboard because simplicity really matters. The, the leaner you make it, the more simple it can be, the better and the more likely you are to follow through on it and stay consistent with it. So just pay three to five, three to five key metrics to monitor every week. And the ones that we recommend are the ones that we just mentioned. Revenue, net profit margin, your CAC, your CLV, your lifetime value and your cash flow. That's 5. Set up a really simple dashboard. Don't overthink it. All right? And schedule 30 minutes of your time. On our last podcast, Tom mentioned how critical it is to manage your calendar and to live by a calendar. And so schedule a 30 minute review every week. It is non negotiable. Make it a meeting with yourself and stick to it.
[00:11:56] Speaker A: Yeah. And mentioning dashboards, a lot of people love just the basic whiteboard, just having it in front of them every day, it's a magical tool.
It's something that's adjustable, it's non technical, it's. But it's effective. So once you get in the habit, you'll wonder how you ever ran without it.
[00:12:18] Speaker B: True. And there are Excel spreadsheets for those of you that don't know this. Within Excel, you can go mine data. You can just set it up so that there is one button that you push and it will go mine data and update the spreadsheet automatically right in front of your face. Just takes a couple minutes and you can have fresh data every single day.
[00:12:42] Speaker A: You've been on that AI again, haven't you?
[00:12:44] Speaker B: No, I haven't. I've been using that long before AI was even a thing.
So that's just the intelligence and the beauty of Excel.
Before we go, I want to give a huge shout out to our sponsor, Performance Margin. This is the tool that we use and love. It helps you see real time margin, clarity. It ties to your financials, ties your financials to your bids, and it helps you run your business with data, not guesswork. So it's just going to be real with you. And it's a great tool and it.
[00:13:17] Speaker A: Ties in these core values and core headings that we're talking about. Revenues, gross profit, overheads, net profits.
It's truly a great tool to coordinate all this and give you some predictability in your finances.
[00:13:37] Speaker B: So take a look at your numbers this week. Start small, all right? Stay consistent. That's the most important thing. And stop flying blind.
[00:13:47] Speaker A: And if you found this episode helpful, subscribe, share and drop us a review. We'd love to hear what you're learning. If you have any questions, we'd be happy to answer them for you.
Look forward to continuing this this podcast and sharing great information with you.
[00:14:04] Speaker B: So until next time, what do you say, Tommy?
[00:14:07] Speaker A: Take her cool.
[00:14:08] Speaker B: Take her cool. Don't get too excited.
[00:14:10] Speaker A: It's all under control and it's going to be fine.
