During today’s episode of the Thrive Time Business Coach Radio Show, the former U.S. SBA Entrepreneur of the Year (Clay Clark) and Doctor Robert Zoellner are breaking down the 28 Super Moves for optimizing your company’s cash flow situation. During the show they discuss how to profitably add value to your ideal and likely buyers. how to pay yourself well, how to not marginalize your margins, how to invest more in high profit clients, services and products and how to consistently make brand focused business decisions.
SUPER MOVE #24 – You must pay yourself well or nobody is going to want to buy your business or want your job
It is OK and even wise to reward yourself from the fruits of your business after sacrificing for years to build a great product, service, team and company. As you begin to pay yourself well, eventually people within your company will want to earn as much as you are earning. If they truly show initiative, you can promote them and grow the business so that you can make even more money by adding even more value to even more customers.
When your business really begins to grow, you will attract the attention of outside investors who will want to either invest in your business, buy your business, or merge your business with their business. However, when the prospective buyer asks how much money the owner is currently paying himself and discovers that the owner is not personally making any money, the buyer might begin to worry that your company might not be a smart investment.
Notable Quotable: “By loving yourself, you’re going to be a happy person. A lot of people don’t like themselves for whatever reason.” -John Paul DeJoria
(The billionaire co-founder of Paul Mitchell and The Patron Spirits Company)
SUPER MOVE #25 – Don’t Marginalize Your Margins
As a business owner, you must know about two different kinds of margins (in addition to the margins of this book in which I hope you are writing). The first type of margin that you want to focus on is your operating margin. This is calculated by basically taking every dollar of sales and figuring how much of each sale ends up as an operating profit (pretax) for your organization.
For example, if you brought in $2,000,000 of sales and ended up with a pretax profit of $500,000, then your total operating profit margin would be 25% and you would be happy and the government will tax the crap out of you. If you wanted to earn an extra $100,000 this year without creating any new revenue sources, you would need to find a way to cut your expenses by 5%.
$2,000,000 x .05 (5%) = $100,000
The other type of margin that you need to fully grasp is known as the gross profit margin. This number represents how much money you have left after an individual sale after you take out what it really costs to create, make, put together, deliver, bake, or otherwise produce the product or service you just sold. Knowing this will make you really popular in bars and will help you grow your business faster, as much as it pains me to discuss and you to learn.
Gross margin is the difference between revenue and cost of goods sold (or COGS), divided by revenue, expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially. (from Investopedia.com)
You determine this by taking your total gross sales and subtracting the total cost of goods sold (for the actual product or service that you just sold) from this amount. To help hammer home this idea, let’s go back to the example above about owning a business that produces $2,000,000 of gross sales per year. If you had a total cost of goods sold of $500,000, that would mean that your gross profit was $1,500,000. When you explain or describe the gross profit as a percentage, you get your profit margin of 75% and people think you are really smart and your wallet magically gets bigger.
$2,000,000 – $500,000 = $1,500,000
$1,500,000 ÷ $2,000,000 = .75 (75%)
Once you know your total gross profit margin, you are then able to make more intelligent budgeting decisions. Once you know what your total gross profit margin is, you then know how much money you’re going to have left to spend on fixed overhead, sales, flat screen TVs for your customers to enjoy, and swag items such as small koala-themed stuffed animals that you can give to your customers to let them know that they are koalified for a loan (see www.GetKoalified.com). You laugh, but I actually worked with a mortgage provider to help him brand his mortgage lending business and we chose koalas to be our official mascot, but before doing so, we had to discuss how much each koala would cost. The owner then had to make his decision based upon his belief in the “stickability” of the idea in the heads of his potential ideal and likely buyers and his knowledge of his gross profit margin.
When you really know this number, you can really look into your pricing to discover which customers are the most profitable and which customers are almost not worth attracting or keeping.
SUPER MOVE #26 – Invest more in high-profit clients, services, products, and people and cut low-profit clients, services, products, and people
You will soon realize that you can always make more money, but you can’t make more time. Because of this, after you know your numbers, you must objectively look at your clients, services, products, and people and ask yourself:
1 – What do you need to invest more time and money in?
2 – What is it that you need to invest less time and money in?
Notable Quotable: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” -Warren Buffett
(Self-made billionaire and philanthropists often referred to as the best investor in the world)
SUPER MOVE #27 – Make brand-focused, shrewd decisions when it comes to pricing and purchasing
According to Webster and their team of definition-knowing people, the word “shrewd” means “having or showing an ability to understand things and to make good judgments: mentally sharp or clever” (Merriam-Webster Online Dictionary, s.v. “shrewd”). When I say you need to make shrewd decisions when it comes to pricing and purchasing, I mean that you really need to understand your goals, ideal and likely buyers, your brand, and your ideal profit margins and you need to act with this knowledge in mind. For instance, don’t get all nostalgic and emotional when setting your prices and over-the-top loyal when buying a $500,000 building. Do things that will benefit the brand. Get the facts and then act.
Notable Quotable: “It doesn’t matter which side of the fence you get off on sometimes. What matters most is getting off. You cannot make progress without making decisions.” –Jim Rohn
(Bestselling author and renowned motivational speaker)
SUPER MOVE #28 – Reevaluate Your Pricing Model
As a general rule, startup founders and small business owners who are struggling to gain initial business must sell their products at any price they possibly can. This is what you have to do to close some deals and pay the bills before you have to begin eating old shoes for dinner like the people on Christopher Columbus’ ship who ran out of food. Generally over time, the business will raise prices to keep up with inflation (the devaluation of our fiat and paper currency due to government’s inability to stick within a budget and ability to print money whenever the heck they want). However, in 9 out of 10 cases, I have discovered that most business owners have never truly thought about whether they should completely rework their pricing model to create massively more profits for themselves and their team.
To help you begin to really think about your pricing in a new and potentially game-changing way, I put together the following list of questions you can ask yourself:
My friend, I really want you to think long and hard about how you can increase your prices to make more profit from each customer in a way that still creates a win-win relationship between you and the customer. It’s very easy to fall prey to a pricing war, trying to land customers with rock bottom, no-brainer pricing. However, over time as your company gains momentum and customers, you don’t want to keep your prices artificially low just because that is what you’ve always done.