Episode Transcript
[00:00:00] Speaker A: Foreign.
You are listening to the Total Profit podcast. Hi, I'm T2. I'm your host and I'm here with my favorite financial mechanic, Tommy P. Who believes that most businesses are not broken, just bloated.
[00:00:22] Speaker B: Yeah, they need a tune up.
[00:00:24] Speaker A: They need a tune up. They're overbuilt, but underperforming.
[00:00:27] Speaker B: Exactly.
[00:00:28] Speaker A: And that's the story of half of the companies that we meet.
[00:00:30] Speaker B: Yep.
[00:00:32] Speaker A: And that's why today's episode is all about simplicity. We're calling it simplify to multiply because more complexity doesn't necessarily equal more control.
And in fact, it's usually the first thing that's choking people's margins.
You think that's a fair statement?
[00:00:50] Speaker B: Oh, exactly. I was recently on a trip and there were these two young men sitting behind me on a bus and. And the one older gentleman kid said to the other kid, what is 0 times 0 times 0?
And the younger kid said, 0. And the kid said, exactly.
I burst out laughing. But it's really that if you're multiplying by zero, you're still going to end up with zero.
So that's why we want to get these prophets in place and simplify.
[00:01:22] Speaker A: That's a great story. I'll tell you one as well.
We had a client that ran a really high volume service company, a lot of service lines of business, and she had added about five new service lines over the last three years.
On paper, she was expanding, right.
But in reality, she was losing money on three of those five and her books were a mess. Her team was really confused.
And she said to me, tiff, I thought diversification was smart, but I just feel like I've created a monster. And she did. She wasn't growing, she was just sort of scattering. And the first thing we did was start deleting.
So at Total Profit Management, when a client like that comes through our onboarding process, we walk them through this layered clarity stack. Okay. It's how we kind of snap attention and we pull founders out of that fog that they're in.
And so one of the first things that we do is we help them clean up their chart of accounts and we tell them what sort of things should be in the cost of goods sold section versus the overhead section. Another thing that we do is we will tie revenue and cost centers directly to their different services or departments. Okay. And then we establish very clear cost codes for labor, materials, subs, overhead.
Tell me the three categories again.
[00:02:44] Speaker B: So we have revenue and then our cost of goods, which is labor, equipment, materials. Labor, equipment, materials, and then we have our overhead, which is again, I love this phrase. It was given to me by the founder. If you do a dollar's worth of work or a million dollars worth of work, those costs are fixed. And then once all those math equations are done, the last one is your net profit. How. How much do I get to keep?
And the beauty of this is we do this outside your accounting software. So if you have a Excel spreadsheet, a PDF, our tool will convert it outside your accounting system. So you're not in bad with the bookkeeper or the accountant.
[00:03:24] Speaker A: Right. You're not making anybody mad along the way. And we can sort of show you what the differences are.
And then you can take that back to your accountant or your bookkeeper and say, hey, I want to restructure this and then kind of give them that direction. So we'll help you do that.
[00:03:37] Speaker B: It helps with that troubleshooting. Like our client that had the expansion, if they would have expanded within the program, we could have helped scale that and then show them profitability. And they may not have taken on one, two or all of the expansions if they weren't profitable.
[00:03:55] Speaker A: Yeah, five new lines over three years and three of them were not profitable. So we could have helped her from the beginning. Say, I'm only going to launch these two and then, and then we'll grow from there and maybe figure out ways to make the other three profitable, right? Yeah.
So that simplified offer stack. So we're going to evaluate each offer or service line by their net margin, which is what you get to keep. We like the net margin. Right.
We're going to kill or we're going to repackage some of those low performers and we're going to focus on the high margin, those low complexity deliverables. So what areas of your business are your highest margin? Do you want to lean into that? Let's grow those areas of your business so that you're making more money faster.
[00:04:38] Speaker B: And we go back to those work types and predict what gross profit we're looking to get out of our range of jobs. So it's, we know what to expect. And if it isn't coming in, we have those guardrails in place that give us red numbers versus black numbers. And you go back and look at the red numbers and say, where do what? What do I need to adjust to make them hit our target.
[00:05:02] Speaker A: And within our software, you can play with those numbers a little bit.
[00:05:05] Speaker B: Absolutely.
[00:05:06] Speaker A: And you can see what it's going to take to turn that number black. So I love that simplicity wins every time.
[00:05:12] Speaker B: Absolutely every time.
[00:05:13] Speaker A: If it's too complicated or if it's too complicated to price, or if it's too hard to staff or whatever, then it's too expensive to keep.
[00:05:23] Speaker B: And the more you do it, the more comfortable you feel because we bring the costs over into the program and at cost and then we mark up from there. So everything is symmetrical. So you're not trying to track three different buckets. Everything moves at the same time.
[00:05:38] Speaker A: I think of a couple quotes from a couple of great minds that I absolutely love. And these are always knocking around in my head because I tend to overthink, overcomplicate things. And so I fight that. And I know that a laser focus will win every time. I do know that in my mind.
But Albert Einstein, I think I've quoted this before, Albert Einstein says, if you can explain it, if you cannot explain it simply, you don't understand it well enough. I love that.
[00:06:06] Speaker B: Yes.
[00:06:06] Speaker A: So you have to be able to explain it to somebody else in very simple terms so that they can understand it. Otherwise you need to do a gut check because you probably don't understand it well enough. The other one is Mark Twain who said, I apologize for writing you a long letter. I didn't have enough time to write a short one.
And so you edit things down and you simplify. So maybe you do go into a project where you as the founder or the business owner are overthinking things and you're thinking of all these possibilities and all these different scenarios and you're trying to anticipate every roadblock that could be coming your way.
However, the final product that you land on, you have to distill that down.
You have to distill it down into something that is simple, that can be repeated over and over and over again in your execution. And that is how you're going to make it easy for your team. That's how you're going to put a well running system in place and that's how you're going to be more profitable. Because clean and easy is low cost.
[00:07:08] Speaker B: We were just talking about corporations and the dictionary of acronyms that they have, but one that keeps coming back. And our founder talks about it consistently because he got it from his mentor. Don't forget the KISS principle. Keep it simple. Silly, silly.
[00:07:27] Speaker A: My grandma always said stupid. Well, keep it simple, stupid.
[00:07:32] Speaker B: Exactly. But it's truly. That's how the performance margin zone works, is keeping it simple.
[00:07:40] Speaker A: Yes.
The most profitable companies that we've seen keep things really tight. They have very Focused offers, they have very clean books, lean operations, and they also have the discipline to say no.
[00:07:53] Speaker B: Yes, that's important because if you get to a point where you haven't met your target, you can't throw it out the window because you'll go backwards. But if you've met your target, that gives you the flexibility. If you need to keep your workers busy, you can do it under strategy instead of duress.
[00:08:15] Speaker A: Yes, absolutely. I like that. That's a turning point for the performance margin zone that we call it phase three. And that's where the founders stop chasing trends, all right? And they start choosing clarity, skipping the hype, and choosing the math. I think you put that in your, your manifesto when you were kind of coming up with this, this zone idea. So skip the hype and choose the math, skip the stress, and choose the strategy. So I love that it's when your business stops feeling like chaos and it starts feeling like a machine, as it should.
[00:08:54] Speaker B: You really get accustomed to that feeling of being in control and what it looks like. And you get better at it.
[00:08:59] Speaker A: And better at it being a high performing machine.
[00:09:01] Speaker B: Exactly.
[00:09:03] Speaker A: We have a lot of fun with the Ferrari imagery in this business. And so I've never driven one, but I can imagine what it feels like driving a high performance machine like that.
[00:09:14] Speaker B: Well, just that the qualifications you need to have to own one is just amazing. But yes, that's true.
[00:09:21] Speaker A: Not everybody. You can't just go buy a Ferrari. No, you can't do that. Anyway, let's not get sidetracked. Most people track too many metrics, right? And some of them track too many metrics badly.
So at Total Profit Management, we help our clients focus on five really core finance KPIs in month one, number one is your gross margin. And we break that out by line of business. That's not a blended margin, all right, that's. It's broken out. And this is where, this is where the story lives, actually. All right, your net margin, which is what you get to keep.
And we also, within that, we kind of look at what your actual is versus what your target wants to be, what you want it to be. And we set that profit goal, all right, and we help you track it month by month.
A cash conversion cycle is the third one. And how long does it take for that work to turn into cash? How long does it take for that bid to turn into work to turn into cash?
And the job cost accuracy, that's an important one. That's number four. How closely does your estimated actually versus your actual cost Match up. All right. And then something that we. We help owners figure out for themselves and track. Is that what your owner's compensation is as a percentage of your revenue?
And we normalize that. We track it over time. We can help you draw a paycheck on a schedule, and you can plan your life, which is why you work. Right. Plan your life as opposed to just taking random owner draws whenever you need a little extra bump at home.
It's not really about tracking more. It's we help you simplify and track what matters.
[00:11:12] Speaker B: Right.
[00:11:13] Speaker A: Okay. So. So your challenge this week is to pick one thing to simplify one thing.
It might mean cutting a service that is draining you.
It might mean consolidating how you track expenses. Maybe you're tracking way too many KPIs. It might mean killing a tool that sort of overcomplicates your workflow. But I want you to pick one thing to simplify this week.
And the goal is clarity. Not necessarily control or loss of control, but clarity is what's going to multiply your margin. That laser focus and simplification and streamlining your processes are really what's going to multiply your margin.
Next week, we're going to open the doors, literally. We're going to walk you through what a client's first 30 days inside of total profit management actually looks like. So real systems, real results, no fairy dust?
[00:12:07] Speaker B: No.
[00:12:08] Speaker A: No fairy dust.
[00:12:09] Speaker B: Nothing but the facts.
[00:12:10] Speaker A: Nothing but the facts.
[00:12:11] Speaker B: So until then, again, if you're feeling uptight and things aren't going right, take her cool. It's going to be fine.
[00:12:20] Speaker A: Don't get too excited. It's all under control.
