Greg Crabtree is a master of commanding the numbers in business, and he’s got not only the expertise but also the experience to back it up. For one, he founded his own firm Crabtree, Rowe, and Berger that focused on helping entrepreneurs build their own economic engine. Eventually, it was named as a part of the prestigious INC 5000 list in 2019 before he merged it with another company to broaden its impact. He’s also the author of the “Simple Numbers” books that share core principles of how to turn one’s business into an exceptionally profitable venture. Moreover, he’s also a frequent speaker to groups like EO, Scaling Up (Gazelles), Vistage, and ACETECH, and has presented in over 15 countries.
When it comes to your business’ profitability and growth, it’s important to know if you’re looking at the right measures or even the right benchmarks. It’s not found in the tax returns or in traditional accounting principles where profit runs the risk of being overstated or understated. Measuring the actual health of your business entails looking at your number you might not be familiar with like, core capital target, your reinvestment in the initial capital, your direct and management labor, and productivity measures, among others. Today, speaker, author, and entrepreneur, Greg Crabtree joins me on the show to break down some elite financial savvy for entrepreneurs from his widely acclaimed Simple Numbers books.
10:31 How the best companies grew in 2020
15:50 Using debt versus your own re-investment in growing the company
17:50 Greg talks about setting the right amount of cash to be used as your core capital target
20:58 The five-step process of protecting your business’ money
29:00 Return of invested capital is a crucial measure to determine the health of the business
30:10 Greg shares some insights on how entrepreneurs can measure effectiveness in optimizing their launch capital
46:26 The effectiveness of your management labor is the one secret to profitability
54:17 Data of productivity measure is a telltale indicator of profitability
57:28 Greg is a firm believer of how marketing must precede sales
1:10:11 A wrap up of key principles to remember: figure out what the market needs, find a way to do it profitably, and understand that return of investment capital
1:14:10 Greg’s passionate plea to entrepreneurs
“Understand what health in full capitalization looks like for the business.”
GET IN TOUCH:
MARK LEARY:
www.linkedin.com/in/markhleary
www.leary.cc
GREG CRABTREE:
https://www.linkedin.com/in/greg-crabtree-baa338/
https://simplenumbers.me/
Wednesday, March 17, 2021
SUMMARY KEYWORDS
business, capital, companies, cash, direct labor, entrepreneurs, clients, data, money, profitability, book, year, revenue, labor, number, market, good, telling, marketing, month
SPEAKERS
Greg, VO, Mark
Mark 00:00
So we're rolling, cool. We are live. This is you're doing it wrong with Mark Henderson, Mary, and my name is Mark. And I, as you know, have a passion that you should feel in control of your life. And so what I do is I help you get control of your business. And part of how I do that is by letting you listen in on conversation between two people who have a serious passion for excellence in the entrepreneurial world talking about something that you already know something about. But this time, we're digging in deeper and getting into the nuts and bolts so you can understand better and unlock those stuck spots and break through the ceiling, and run that better business and live that better life. So before we dig in, of course, don't forget to subscribe and share. Get this into the hands of your friends and the people who could use this material. And of course, please, please, please give us the feedback good and the bad things that you're experiencing, what do you want to see more of what you want to hear less of. And just make sure you're giving us that feedback. We're so grateful when you do. So today we're talking about money, we're talking about finance and all the critical ingredients and the blood in the veins of business. And so my friend Greg Crabtree, who I've really has changed my perspective on on money, who is a known speaker, author, entrepreneur, financial expert, which you the entrepreneurship is so important. And it's one thing to have financial experience. But But Greg as an entrepreneur, founded his own firm, and then later, and recently, somewhat recently sold it. So he's got the entrepreneurial perspective, wrote his first book in 2011, called Simple numbers, straight talk and big profits just to give us give entrepreneurs a sense of how to command the numbers. And this last year released his second book, simple numbers 2.0 rules for smart scaling. Greg speaks to entrepreneurs all over the country all over the world and leads training and is just as an amazing thought leader of bringing life to what can be so maybe not make boys not the right word. But, you know, sometimes less interesting for entrepreneurs, but we got to have a command of the numbers, and Greg is the master of doing that. And so welcome my friend Greg, how are you, sir?
Greg 02:02
Very good. Thanks for having me. It's a It's a pleasure to kind of share these ideas with folks and, um, you know, reach their goals that they're trying to get to and get through those blockers that are keeping them from getting there.
Mark 02:15
One thing I want to kick off just right from the get go before we started recording, you mentioned something it was interesting, the companies that you benchmark and you benchmark, benchmark a billion dollars in revenue with over 100 companies. And looking at last year's performance, the company's you benchmark actually outperformed the year before is that
Greg 02:32
is that right? That is correct. So why is that? Well, it's really kind of interesting. So I had a, I used a 50 company model. So our practice is not geographic, it is all over the country. no specific industries, we have a there's rarely an industry we haven't done work in or have clients in. And so it's a nice cross section doesn't matter if it's manufacturing services, all different kinds of industries in that sense. And so as I looked at it from a study set, you know, that I used it to develop the concepts in the second book that were built around return on invested capital that we'll probably talk about in a bit. But when COVID here, we decided to up it to 100 companies, we had plenty of data to look at it because one of my complaints is if you go for industry data, or even the government data, here's the one question I'd ask your audience. How much does the government know about your actual performance of your business in 2020? Now, you know, we're sitting here in February of 2021, looking at this, and the government knows 00.
Mark 03:40
I had not thought of it in those terms. So if you think you think tax and performance and profit and PvP, it's like, what do these concepts have to do with each other? They have very
Greg 03:48
little right. So where do they get this economic data from? price? Well, the problem is, well think about it like this the only publicly available data, there's a there's a few industries that publish some stuff. But public companies produce information public companies produce forecasted earnings, or earnings flash reports are those kind of things and and I appreciate the challenge that the government economic statisticians us are trying to get data but but they're hamstrung. I mean, they they don't have access to this information. And so I was really challenged to go, Okay, well, I have access to it. So let's study it. I mean, I'm not revealing anybody's trade secrets or anything like that, because it's a very aggregated, you know, group. But so we up to 200 companies, and here's, here's what we found. So starting with the 50 company model and evolving into 100 company, this, this group of companies that we work with has grown at double digit growth, since 2013 was my base year so 14 1516 1718 we're all double digit growth. years 19 was the first year is below double digit only hit 8%. That year. All those other years, they were really between 14 and 20% growth. I mean, in this like, in because this was the thing that was bugging me, it's like you'd hear GDP growth 2.5%. Really? I mean, you know, because we, we, in our consulting practice, I mean, we we touch our clients data every month, we're not doing year end stuff. We're not just doing tax returns our our consulting model is we're pulsing weather data every month, putting it in our format, looking at it, analyzing it, looking at trends, and then projecting where is it going. And it's like, there was just this disconnect of here's what you hear. And here's what you see. And in our data is also built around truth in financials, because the biggest error that unfortunately, you know, you accountants out interview, there's so many accounts might be listening to this, we don't do a good job in the world of accounting of presenting truth in financials, we produce it to principles, but principles don't always reveal the truth. And there's things like, you know, my first book, I made a huge big deal about, you know, paying yourself a market based wage so that you're not overstating profitability, don't overpay yourself a bigger ways than what you're worth to understate profitability. But there's also
Mark 06:21
lots of reasons to measure your actual health of the business to measure what it would be like to take yourself out of a job and put yourself into an owner seat to figure out what we'd like to sell the business. Yeah, that's really and
Greg 06:32
here's, here's the issue that you have, if you even look at industry data reports, they get put out that data is not filtered for those truthful elements to get flushed out. Do you have? Do you have related party transactions for for cell phone, rental property, or those kind of things? And so, so the fortunate is, because we get our clients to work on these principles, we have a higher confidence, right that we believe this data set is speaking truth. And so in that, one of the things that we so notice, I said the economy, you're at double digit growth from 14 through 18. Well, guess what, that kind of crosses a couple of administrations of different parties. Here's the first thing I would say is the data guy. It's not political. It ain't the politicians, folks, I'm telling you, entrepreneurs, do things entrepreneurs, my favorite phrase is money chases easy entrepreneurs overcome hard. I, you know, it's it's like the money guys are throwing money at things, but it's the entrepreneurs who create businesses and scale them and figure out what the market needs and find a way to do it profitably and get a good return on investment. That's the secret cycle, you know, that you're trying to get people through.
Mark 07:50
So many times, it's that pre election axed. And I've heard so many business owners like, Oh, my gosh, if that guy wins, it's over for me. And I don't remember ever any consequences. The after that, like the it's all fear No,
Greg 08:04
no consequence. Exactly. Now. Now, notice that I said we dropped a single digit growth in 19. That's pretty COVID. I mean, that was not impact of that. And my contention is just looking at it objectively, from the data, we ran out of labor. Hmm. I mean, they're telling me what productive what what productive activity happens in business without labor, nothing, nothing. And when you have unemployment, I mean, that the standard rule that I've always heard, and I do believe in, is once you below 5%, unemployment, you you are at full employment, that last 5% isn't employable, for the most part. I mean, they may want jobs, but they don't, they don't give you a market return for the pay that you give that they're willing to work for. And so that's an it's not a comfortable conversation for anybody to have. But I'm just, I'm just data guy. I
Mark 08:59
mean, I had a brief flirtation with a business degree. And we talked a little bit about that natural state of unemployment. And you know, there's the gaps and the transitions and the learning and there's, yeah, yeah, you're right. At some point, it's just natural, normal overhead that you can't get below. It's like, it's like eliminating backlog. Like you cannot eliminate that if you eliminate backlog in the business, you're out of business. You know, that always got to be something backed up behind that. But
Greg 09:24
what we did see in 2019, were people that had demand that could not execute on it because they couldn't find either the direct labor or even the management labor in the skill sets that they needed to propel it forward. So then we roll into COVID. So we were rolling on a rolling 12 8% growth rate COVID hits, and April was down about 20%. May was down about 10% gin pop back because there was some release of activity that came back because of the harsh clothing. closings that came back. My February. We were down 3% year over year. I mean, I mean sorry, by September, we were down 3% year over year. But by by December, we were back up 6% for the year. Now, even as as amazing that is, here's the next thing. We were up in profitability. We were 3%. Higher this this whole model runs at about 8% EBITDA. They use the term most people understand we call it net operating income, but but they operate it at 8%. Even though they were at 11. For this year, they made more money because COVID for Steven, the good businesses to pause, and assess what expenses are necessary, what adds value, stop doing anything that doesn't add value, because you had this this attack from the outside.
Mark 10:45
So let's pause on that for a second. Because what I'm hearing is fear drove great behavior. It did which which is not intuitive. Fear usually drives stalling behavior, delay tactics, indecision, and it's certainly in the consumer world. That is what happens a lot of times at least that's portrayed, and I say that maybe it can be challenged. But it seems like the entrepreneurs who were in control of their business or had some sense of of dis discipline, that feared did the layoff effect, right, you know, like, No, you should have fired for a year, because it wasn't a money,
Greg 11:24
but it wasn't massive, you know, we saw temporarily through the summer, direct labor was probably trimmed by about 10%, management labor was only trimmed to about 5%. Because it kind of tells you that most people perceive that management labor is harder to replace, if this is temporary, my direct labor is probably easier to replace. But if you go back to jack welch and his famous statement in his memoirs was GE always believed back when they were were a highly profitable business and well run that the bottom 10% you should try them every year. Well, guess what? Guess what the market did it Trump 10% of direct labor in the middle of COVID. Because they said, you know, you know, we can get this person didn't show up for work today, we could still do it without him. And when
Mark 12:09
I'm thinking What a weird environment we have, we have this fear and threat that forces forces that cleaning that we were afraid to do before the threat. And on the backside of this we've got PPP and money and intention to to create some sense of safety. So you have this weird kind of double factor there. That's critical. I
Greg 12:26
will tell you this, this is this is the other thing was on the data, if PPP and PPP was the most innovative thing I've ever seen a government do, in my opinion. And yeah, it had some unintended consequences. And yeah, it was kind of messy. But here's the thing, before PPP hit, we saw an immediate spike in accounts receivable days and accounts payable days. So what that was telling you is this fear was also causing a seizing up of the cash flow of the markets, gridlock
Mark 12:58
of the cash absolutely, as
Greg 13:00
soon as PPP hit, everything went back to normal. Matter of fact, there's a couple of trends that I think are worthy of note, during COVID, I saw the market being more accepting of price adjustments upward than ever. I saw even big companies have a heart and pay faster with better terms than I've ever seen them except before. Now, these are things that because of the way I look at the the matrix of profitability and cash flow is being you know, connected together. I hope that stays because I will I will make this statement, the US economy dominates the world stage because of speed of margin. But as you said, in the opening, I've been fortunate enough to present my material around the world. And when I go present my material in third world countries, I can tell you that the thing that we enjoy in the US, we have the lowest capital requirement to launch a business anywhere in the world, because money moves faster here. When money moves slower, it's a bigger capital investment. And you shrink the opportunity of the average entrepreneur, because let me tell you one other thing you looked at this 100 companies a billion of revenue, none of them used outside capital to get that billion of revenue. Zero, these are not investor backed companies. These are people started with $2 bills and rub them together and made a third dollar profit and you kept a $40 profit. And then eventually, once you once you build your business to get to full capitalization, then the business throws off profitability because what we also know is once we get those businesses to full capitalization, which doesn't take long, and in most cases, if you got a good idea and a good profit model, that you can only effectively reinvest maybe 30% of your profits to grow the business, you actually will fail and waste money on execution because there's just not a enough good x executable actions to use more than 30% of your profits to reinvest. And so 40% goes out for taxes 30% gets retained for growth acceleration and 30% can be reliably distributed as after tax, dividend cash flow,
Mark 15:16
that that concept By the way, it seems pretty dramatically different than most people's perspective perspective. It's really bootstrap entrepreneurs is like, every single dollar is like everything. Yeah. Every investment, it's, I can't even pay myself. And you're saying you're like, you know, if you run a healthy business, and you're spending more than 30% on investing the business, you are hemorrhaging cash for no
Greg 15:39
good reason. And, and, and the thing that causes that, and this is, you know, I mean, I, in the first book, when I came up with our, you know, our core capital target concept of the two months of operating cash, we found that once we got somebody fully capitalized and offer the debt drug of line of credit debt, now I'm okay with that I
Mark 15:58
ever did that. I've no idea.
Greg 16:01
Yeah, that's right. But but once people had the two months cash, they had zero on a line of credit. I mean, you could use notes to buy equipment or something over its useful life, I don't want to waste my cash flow on those things. You know, but but once you got the full capitalization, all of a sudden, you had a wheel that was in perfect symmetry that just rolled over and over the people that, you know, were using debt as their instrument, their wheel was lopsided. And so they get on a good round feeling, right? And then they hit the flat side of the wheel. It's because they were using, you know, other people's cash. And then those other people eventually want that cash. So if you're using the IRS as money to run your business, and now your accountant tells you, it's time to write a half a million dollar check to pay your taxes. You're gonna wait a minute, we're, yeah, I mean, you know, it's not yours, it's theirs. So don't ever use it in the first place is the best answer, when you're using the bank's money will just make sure you give it back to them and then create some of your own so you don't ever need to talk to them is really the best plan.
Mark 17:04
So you're telling me I should use my receivables line to fund a giant marketing campaign? That's unproven, right?
Greg 17:11
Yeah, probably not questionable. Maybe
17:13
not.
Greg 17:15
Well, you know, there is this thing called Las Vegas where you can go put all your money on red or black and spin it and do and be done with it. Either it worked or it didn't. But you're gonna know in about five seconds.
Mark 17:25
Well, that's true. But I can I make I give a hard time about that recently receivables line for marketing. Man, I'm I did that I absolutely did that. And I did it little chunks, little chunks. And like receivables line is like kind of consumed in like it. That's not
Greg 17:38
what receivables is for, by the way. It is. And and that's really where, you know, and so, you know, there's a lot of these little concepts in business that's like, you know, little babies that need to be named. And so, you know, so we, you know, the first thing we name that is really help our clients is the core capital target the to, you know, what, what is the right amount of cash? Well, we've looked at hundreds of businesses, well over 1000 businesses in the last 10 years, you know, probably push in 2000 businesses, and then there's 1000s of others that use our concepts. And I've never seen it need to be more than two months, I don't even care if you're seasonal, you just need two months, because the rest of time you're trying to be operationally profitable, and cashflow and sports yourself. So naming that baby of that core capital target. has really, you know, we had two types of responses during COVID. We had the clients that called us in April and said, Thank you for teaching us about having cash, because we're not worried. And we're able to keep doing business and our employees are still employed. laughs good. And then we had the other response, which was, man, you know, I wish I'd listened to you. And thank goodness for PvP because the PvP is a validation of my two month rule. Because really, it's two months of labor, plus a half a month, that adds for the other stuff. And so the the amount that they gave people in PvP was almost exactly my teammates, or capital target number. And most of those businesses that got this gift of manna from heaven, to put that in there, they they said, Okay, I'm not going back to not having cash. So that became they got gifted their two month or capital target. And and conversely, that 100 company model. I mean, this is the most cash I've ever seen ever, on businesses balance sheets. This is the one difference coming out of this that I'll tell everybody listen to this, that, you know, this is a thing that once the restrictions are released fully, you don't have this much cash funding and recovery. When it's a true recession. This wasn't a recession, it was a restriction. It doesn't even meet the qualifications of a true recession if they actually were able to count the data correctly. And unlock said, My dataset says we're up 6% That ain't a recession. I got news for you. And so but now there's so much cash sitting here on the sidelines waiting to be released, once they know that this isn't, you know, the the pace car lap of the race, you know, we're looking for the checkered flag. And right now, you know, it's still the white flag going, we're still doing another pay slap. And, and but most of the people we're talking to they're looking at April, as the green flag comes down, and you better go.
Mark 20:29
So this cash, how do we protect that because I immediately in my mind goes to the traditional way of running a business, even people surprised how big a company can be where you run a business out of the bank accounts, right, you could probably test it, you can run a big business and still be looking at the bank balance and go look at all that money. And so some of that money is government some of that money is feature payroll, some of that is that working capital or reserve capital, that you that you're talking about? How do you how do you coach a business to get that money out of mine and protect it now and forever?
Greg 20:58
Well, it it's, you know, it's a five step process, the first thing you need to make a decision on because it does affect your tax adjustment of things, is what am I willing to risk of that to put back into the business? That's an unproven investment. So typically, it's a surge in marketing, hiring people before I need them. technology investment, those are the three things. And so this is another baby that we've made, we call this launch capital. Because most people think of capital as being a balance sheet item. And for the most part, and in the new book we talked about, there's three types of capital, that makes up the complete balance sheet, there's trade capital, which is all the stuff that turns over AR plus inventory minus accounts payable and deferred revenue, that net number, then you've got infrastructure capital, which is the value of fixed assets minus the debt connected with it. And then you've got buffer capital, which is cash minus line of credit. And so those three numbers, that's your balance sheet, I've touched every business asset liability with those three numbers. But there's a fourth capital, and that's called launch capital. And it's been hiding in plain sight since the dawn of mankind. And it is an expense that I'm spending today that I didn't need to spend for what I produced today. It is a span that I need to do to produce something in the future. It is a use of my current profitability to make a bet for the future. Well, that's the best definition of capital I've ever heard. But it lies on your p&l.
Mark 22:35
Its capital, but it's not really balance sheet. It's exactly okay. So it's really it's ongoing renew its capital that renews every month, or every week, or every time you add a back
Greg 22:44
end. So this will drive the traditional accountants nuts, because like, well, we need to stick it on the balance sheet. No, no, no, no, no, what you need to do is have a domain, a three dimensional p&l, it says, here's my normative operations of the expenses associated with the current income that we produced, it's normal operations, here's the stuff that's speculative, that I'm experimenting with, here's the expenses associated that here's the beginning of income off of that, but it's not fully formed yet. So we've got a multilocation Auto Service client. So they got five, currently five locations trying to grow to about 20. And so we've got three mature locations, we've got two in the launch phase. And so we report on the mature locations and the costs associated with here's the p&l or the mature, here's the p&l of those in launch phase. And so we're not mixing those things, because I don't see my sight lines of labor, productivity margin profitability, if I mush them all together, I forget that there's bacon, and there's lettuce, and there's tonight and there's mayonnaise, you know, but I need to keep all of those components separate to be able to say, you know, is this or are these acting normally? Or when I'm wish them all together? In the yellow side of it?
Mark 24:11
What do you what do you show an entrepreneur in their business, to keep them focused on the true liquidity and true health of the business that doesn't allow them to start inventory and all this money and say, I'm
Greg 24:22
red ship? So So is back to the sequence? So the first thing is, you know, have that cash, what am I willing to risk? And then then the second thing is, how much of that cash is not yours? for tax purposes? Does it belong to the IRS? Does it belong to your state, let's set that money aside. Because that's not yours. Don't Don't even think about spending it, it's not yours. Don't send it in till the last possible moment. Sometimes we'll take it out of the business and hold it in the hands of the individual company, or person or sometimes it's fine to leave it in the business and just take it out of your calculation. Once I get those two things out, then I got to make sure that I've repaid any logic credit debt, because that's not my money either. So it's bluntly, I'm holding cash, it belongs to the bank, well, let's get the line to zero. And then then I need to have two months of operating expenses, if I have still have cash above the two month op x, then I can pay dividends. And I and really, we recommend don't leave excess cash in the business, most people that are, escorts are LLC, you can freely move money in and out of business, you know, with no tax consequences, then once you're fully capitalized, there is a tax consequence if you take distributions in excess, the basis but if you repay, if you don't have any debt, then you have basis in almost every case I can think of and and so so the idea is, you know, once you have that pivot point of what the right amount of cash is, then you you then go to my the measure that I look at and simple numbers 2.0 is I look at return on invested capital. So once I have the right amount of cash, I know how much my turnover stuff and trade capital is I know how much my buffer capital is. And so my goal is, is to produce an investment that produces a rate minimum 50% return. And the average is closer to 75 to 100. But it's gonna vary by industry. And but I mean, I would say the our businesses on average are producing at 75 to 100% return where, where me Tell me what stock you can go invest in, in the public stock market and make a 75 to 100% return year over year over year.
Mark 26:29
So I was struggling when you said that and it made it it made sense to me. And I think that the it tells me something about this, right? It seems like those dollars as labeled, will produce that huge return in the context of the overall revenue picture of the business. So when you put them all together in one pile, you start to see more reasonable growth, you know, is this is a machine and part of the machine is money making part of it is operating and doing things at lower margins. And so that is interesting to think about that like so
Greg 26:58
once you get that framework there, then you can take people through the thinking process Do you have if you have excess cash, that's the cash I'm gonna tell you get out of the business, because it's not making you anything. It's idle money, but up to the two months number. I contend it's active money. Now the public markets if you look at return on invested capital for a public company, they do not count cash in the in the capital calculation. Because, as Professor Wessels at Wharton, you know, told me, he said, Well, public companies have an infinite ability to raise cash by just issuing stock. And I go, excuse me, we don't I you know, so and and I've now changed his thinking, in in that he now teaches for private companies he ascribes to my two month cash rule is a is a key component of return on invested capital. But what this did, and I have to give him credit, because he was the one that kind of turned me on to the idea of he was just covering it in this email at Wharton class that that I chair for yo. And first year of the program. I mean, he's governent. And I'm thinking, you know, I did this calculation in college, but I've never done it for a client. And, and, and it really kind of spurred me to go research it, you know, my own clients. And that's where the aha moment came. Because in the first book, most people know my famous approach of at 5%, profit your life support 10%, you're a good business 15%, you're a great business above 15%, take it while you can get into the market or compete you back. And that actually is a correct statement for about 70% of the business businesses out there. But it's the 30% I couldn't answer. And I couldn't tell you why it was 510 and 15. I could give you some some inferences as to why. But now I know what it's a return on invested capital, because everybody's profit target for their business is is a required output of the capital invested. And that's the answer. And so we now every business that we evaluate, you know, when I'm looking, you know, we can look at a profit number and they might be happy with the dollar amount or the percentage and I go, Well, that's not the telling tale. Let's go in and look at your balance sheet and say, how much capital Do you have invested to turn this over. And if you're lazy with collecting receivables, if you over have too much inventory, if you don't get terms from your vendors. If you don't get deferred revenue by billing in advance and collecting independence, when possible, you're going to have late you're going to be a lazy capital invested company. And you're going to lag in terms of profit relative to the capital invested. And what we want to do is squeeze it from both sides. I want to get profitability up I want to get capital invested down and make it a capital efficient, profitable engine. And what we find is, is these are much more nimble companies, you know, when they understand all those components,
Mark 29:46
so where does it Where does the financial? I hear this as being very like we can produce the cash on ratios. We know what healthy is and the optimal is, but there's an execution component that follows. So you go back to the business, they're like, Look, I'm producing for you this launch capital. It's an optimal measure. What do you tell the business for measuring effectiveness? Or saying like,
30:06
Whoa,
Mark 30:06
you actually have no effectiveness. stop spending it? Well, you know, so
Greg 30:10
there you got to look at every business is unique in terms of their tax or their industry. And I'll give Professor Wessels credit for this Dave. And he said in the class, you know, the first time he said, You know, sometimes you have to change your, your where not your share. Because what I did with our consulting practice, I mean, my, my, you know, my original practice, we had about 40 people based in Huntsville, Alabama, but our clients were all over the world. And so we merged with with car, Riggs and Ingram. So they're the top 25 accounting firm, we've got offices from North Carolina to New Mexico. But the I'm still doing the same thing that we were doing before. I mean, I, you know, we, we didn't sell, we actually just merged and so we just kind of, you know, so now I'm just apart, I'm the partner in charge until officer then, you know, but, but, but really in in that sense, there's not enough customers for my consulting type of work in the geography of Huntsville, Alabama, it's a, at the time I started, the consulting practice is probably 250,000. MSA, we're pushing 600. Now, this was a very high growth city right now, high tech, you know, high, we've got probably one of the highest per capita incomes in the state, you know, great city to live in. But it's largely a government contract, high tech town, and the, you know, there's a, there's a handful of those, so they'll be fine. But, but really, I changed my wear. And so I, you know, I don't need to be the big dog in a small market, I want to be, you know, a little dog in a big market. And it makes it a whole lot easier. But some businesses aren't as easy to scale geographically, you know, whereas mine was, I mean, we were fortunate to be an early adopter of zoom, and, and those other tools, so we were, we were using zoom long before COVID it. And and so we've, we've learned how to do those things remotely and not be You don't have to be physically present. But if you have to pay, there's a plane that gets somewhere every day, you know, so you hop on the plane and go there. So you're you're you kind of look at your travel cost almost as a facilities cost, in essence, that I don't need an office in every place, I just need to be accessible. And so if you look at businesses, and in terms of their their ability to grow, you look at that launch capital is that catalyst of growth, and you're saying, so what is my best approach? Should I maximize my current geographic market? should I? You know, do I go vertical? Do I do more things for the customers that I deal with? Do I go horizontal and get more operating units or try different industries, those are all options in there. But there's a way to evaluate all of those and say, which ones yields the best opportunity. But I'm telling you, I mean, it's like handing out drugs once we connected the profit model to the capital model. And it's like, I mean, I can't tell you just how many times it's been an enlightening experience to say, people didn't pursue something because they didn't see the potential of it that he could bring. And there's many times that we showed people the potential waste that they were going to run into, because it wasn't it was a financial disaster that they were staring into, because they didn't understand the capital aspect. Yes, you could be profitable at it, but you're gonna die trying, you know, because you're gonna run out of money.
Mark 33:29
So what I love is like, I've been waiting 33 minutes to bring up the sports metaphor I've, I've carried with me for the last 13 years since we first met, which was the idea of the salary cap to think about how competitive teams there's the worst team in the league and the best team in the league, and what do they share a salary cap. So this idea of playing within constraints, like you have to your best innovation come from playing within constraints, and you sit here. And this certainly applies to your hiring strategy, which is what I talk about all the time, my clients know that in the end, you get credit for that I'm always giving you credit for for that statement. But in this same thing with launch capital, like you now have your allocation. Now go see what works and doesn't, you can't and shouldn't spend more than this. And you should spend all of this and you should optimize it for that 50 to 100% return. And to the extent that you're not you better go back to the lab.
Greg 34:17
Well, the splitting it between normative operations and launch capital operations actually helps people see that even clearer now, because I can show you that your labor efficiency for direct and management is fine. For your normal operations. Here's your new operation that this labor span hasn't hit its output number yet. And so it's still in development. So then it becomes a time discussion. How quickly is it going to get there? Because for every month that you don't hit it, I'm I'm investing more capital because here's here's the thing about launch capital in a sense of launching a new location or a new activity. There's the initial spanned before And when I'm pre revenue, and then as I start to get revenue, I'm still losing money on that isolated activity. Well, every time I lose money, that's an addition to my, my launch capital spend. And so those are those are investments. And so but we now have a way, the way we look at it, and I've given you the clue that we look at this 50% return is a minimum standard. Once we have somebody model out a new activity, we say once the upfront investment, what's the total losses until it breaks even? That's the sum of your launch capital. And you take that number, and multiply it times 50%. And say, that is how much net income must increase to make this activity successful. And you have to get there between the 12th and the 24th month. So I gave you a great example, one of our clients is a not a client, fellow eo members, I use him as an example. He's not a client. So I did, I didn't even know his numbers. But we were at an event. And and I said, Well, Pete, I want to use you as an example, you got 15 locations, you're thinking about opening up your 16th transmission service center. And I said now, so my guess is that you're going to spend about a million dollars for the dirt of the new building and put up a metal building says, Yeah, that's exactly what we spent so good. So that means a bank is going to require you to put $200,000 down, so that's a capital input. And you can finance the other 800. And that 800 is essentially going to be an operating cost. Now, that's accountants, we like to confuse things and make it really complex. At the end of the day, the monthly note payment on the 800,000 is going to roughly be your rent number, you know, that you're going to have so so let's let's just be honest with how the numbers really work. So the entrepreneurs mind says this is $200,000 input, the rest of it, I'm going to cover as an operating cost. Great. Now you're going to lose about $200,000 between opening cost and operating losses until the store breaks even. That smile says, Yeah, that's exactly the number we use. This is good. I've seen a few of these datasets before. So yeah, $400,000 Capital input. Now your go, No Go decision on the 16th locations, this, if you can't get to a $200,000 net profit between the 12th and the 24th a month, you shouldn't do this. That means you got to be at 16,006 67 a month, somewhere between that 12 and 24. And sooner the better. But but that that I'm going to give you the first year, maybe even two years, once you have more than a two year launch to get to return status. You're making a bigger bet not say that you would never do it. But I'm going to question your sanity. And just like do you really understand what you're looking at here? and say, you know, it is you're taking a long time to prove profitability in that process,
Mark 37:52
that there is a reason that people pay for three to four times EBIT, da is a common that's that's the time right three to four years is the thing I could bet another way with lower risk and get similar better returns.
Greg 38:03
Well, he you know, when I finished that he smiles as well. It's kind of interesting. See what you just told me in two minutes took me 30 years to figure out.
Mark 38:12
Well, you know, Dickie Tim is to say, but it took you your whole life to learn it too. So
Greg 38:17
but but that's the conceptual model. And there's a great example in 2.0 book on using marketing and one of our one of our clients that allowed us to use his actual data set, we wouldn't even alter it. I mean, actually, his data that he grew up is in five years a year from seven or $1,000, or annual revenue to 10 million, and did it by increasing his marketing spend each year and holding that marketing span increase to a return. And not all five years work. There was a year in the middle where they it didn't work. And they learned from it reassessed, but then continued to press on. And so I mean, this thing about growing from 700,000 to 510 million in five years, and we're profitable and cashflow pause, they didn't use a dime of debt to do it.
Mark 39:03
So that's a great pivot point. So this level of maturity and sophistication, I think can easily in the language we're using the year specific specifically what you're talking I can easily intimidate a lot of otherwise pretty healthy companies who are not at that level of sophistication. So who do you invite to think that this level Who do you who is just now beginning to be ready to bring this level of sophistication to the business in terms of number of employees locations and revenue?
Greg 39:28
What you know, I mean, the original book was was largely written for kind of that 5 million and under because it was kind of a shock to just people's thinking and saying, okay, here's really entrepreneurs think about finance and the best of the best, really are better at it than accountants are. You know, but but the second book, I would say, has no top in and has no bottom here. I mean, if we were if I was talking to a person just starting out guy, I still teach a couple of accelerator cities. I have three cities I work with now. And I rotate through, you know, probably done accelerator presentations to about 30 different chapters of accelerators
Mark 40:05
or companies under about 200 million or million in revenue. Yeah, I just kind of launch and getting their first scaling up hiring their first few employees typically, and getting into business first, these
Greg 40:15
are the concepts that the Sony, you know, then the fewer mistakes you're going to make. And, and so helping them see that at that stage, but I will tell you that, you know, pretty much, you know, that I mean, we've certainly actually seen a move up in terms of size of clients. I mean, we've got clients in the, you know, 200 million revenue range as much as, but we've got, we've got a lot that are in that five to 20 million range. You know, and so, but there again, I mean, we got a couple of projects coming up with companies that are in the 50 to 70 million range that they've got high level internal financial people, but they see this and they go, huh, that's interesting. And what's interesting is, is generally my material is much more impactful to the business owner because I'm, I'm touching that sore muscle that needs to be worked, that the traditional financial presentations aren't, it's not solving that pain. And, and so in those companies, we tend to do more presentation and teach their internal people kind of how to apply it, we may still do some ongoing work. But it's that that, you know, that probably 1 million to 20 million company that that we do kind of, you know, we kind of do the financial analysis, because it's not something you need somebody sitting there doing every moment of every day, to be quite honest. I mean, once you get control of the data, I mean, it's about a one hour process to look at it and make critical decisions that either confirms what you're doing, or challenges you to say, go back to the drawing board, get with your business coach and and say, Okay, let's let's, let's reevaluate our priorities. Because like a lot of the business coaches that that we work with in all the communities, you know, what we like is they help put action to things. And then also we help validate, people will come up in a strategic planning session with an action, but they don't know how to quantify that action economically. And so that's really where we can bring a lot of contacts for that to help them forecast that piece out and say, do you really know, I mean, a good example, one of our clients is probably going to double in revenue this year, from 30 million to 60 million. And, you know, their biggest concern was, well, we got to go get investors and I got Whoo, data. I've already proven I mean, if you keep doing what you're telling me you're doing, you don't run out of cash. So why do you want to give up some of the company to an investor to think a unique capital to grow because you're making all your capital. And it's like, until you show that you can't make your own capital? We don't need to, we don't need to, you know, share that pie with anybody.
Mark 42:55
But you have to have some sophistication and know the answer to that. I think that's not it's not it's not.
Greg 43:01
Yeah, but it's not as complex is my profession likes to make it out to be,
Mark 43:06
well, maybe maybe sophistication isn't really the right answer. But you have, I think it's maybe something that you
Greg 43:10
have to have you need. What you need is framework. Yeah. But yes, so you need you need data. So there that we do find a lot of projects, where people don't have the data that we need. Now we're pretty good at working with bad data, we have probably one of our best skill sets on my team, is we we can make sense out of bad data if we get enough enough of it. And so if you get enough of it across timeframe, you can you can kind of look at it, and you can fix it. And we we've developed some really good techniques to do the one off presentation. So the entrepreneur wants to know an answer faster than somebody says, You know, I, people won't wait say, Well, I need to clean up your books, and then I'll tell you what the answer is. No, that's a bad idea. Yeah, and so what we're able to do is take that data, give them a meaningful presentation, that that's, that's very, if not perfectly accurate, it's very close to what it is, and show them what they can see. And then we have people that will sometimes have to go in and help help teach them okay, now from this point forward, here's how we're going to track the data. Here's we're going to tag it, because really, what I want to see is, you know, the, in the 2.0 book, and there's a good chapter on segment analysis that that we really like, because that's really the next level of understanding how to how to properly scale your business. You got to know it by location by, by team, by region, by line of business by product by skew by person, you know, and that's a data tagging issue. And then once you have that kind of data, then you're really just it's a very quick analysis to see, well, here's what it says what are we gonna do about it?
Mark 44:59
So that's That's a perfect pivot point on this this trend that I see, we started this conversation talking about truth, you said, you know, we got to get access to the truth. And what I have a fear when I when I think about the terminology we're using, and it just sounds like standard financial type of terminology. But here's the difference, I see that traditional financial advisory CPA is using these terms to come up with a sense of truth through the lens of tax or, or liability. And the difference, the quantum Total Transformation difference of what you bring to the table is through the lens of entrepreneurship, which is how do I use the money to propel the business forward? What's the truth of that, and in the word sound the same, and there is still, you know, a p&l, and there's all these financial reports, but the way you view it, in terms of how it becomes actionable is totally different.
Greg 45:55
Yeah, cuz really, Every business has an engine and has a chassis, and then I need fuel. And so they know it, and I can't have an engine that's too big for the chassis. And when we say that, there's a lot of people who get really profitable quick, and they can't scale because they haven't invested in management, to really make that consistent. But we see it more the other way, if you have a poor performing engine, and too, you have too big of a chassis. And I will tell you the one secret to profitability, it's really simple. The effectiveness of your management labor is what really drives success in your business, when your management labor is effective, and doing their job, direct labor is going to be effective. It's a game. And so it's just that a lot of times, I was really surprised when we came up, you know, in the in the, in the original book, I just have a singular labor efficiency ratio of gross gross margin to all labor. But in the later writings of chapter I wrote in scaling up for burn harnesses book, and then the 2.0 book and a lot of my my published stuff, or videos and talks I've done since then, you know, I've talked about the separation of direct labor efficiency and management, labor efficiency. And, and really, when we came up with that management, labor efficiency ratio, I mean, it strikes fear in the hearts of management teams, because it is the harsher of the of the salary caps. So you really have two salary caps that you're trying to manage inside the business, I got a direct labor cap, but I got a management labor cap. And in that management labor, in the end, what we also know that sure, this is if you do a mathematical build up of if for every dollar that I added management labor, it's a low of a six to a high of a 10 for almost all business models, except for the really low margin, like distributor businesses, but all all operating businesses, it's a it's a six to attend us eight to 10 is a good average. And just think about that. I mean, you're about to bring on, you know, an a new member of the management team, you're gonna pay $100,000 to Well, my question is gonna be really simple. Where are you going to get the $800,000 revenue that you need to justify that hard? Okay, so
Mark 48:09
that's the question I was gonna ask. So the your management efficiency ratio is revenue to salary.
Greg 48:16
It's revenue, IT management, labor efficiencies, is his contribution margin is the numerator. Okay? management labor is the denominator. But when you when I do the build up, and I take for every dollar of management labor, maybe I need $4 a contribution margin. Okay. Well, once I get the contribution margin, I'll give you another kind of general average, one pass on contribution margin, contribution margin is your traditional gross margin services. It's kind of what most people call gross profit. But it's revenue revenue minus cost of goods sold is what we call gross margin, gross margin minus direct labor, his contribution margin, and what if, if you look at kind of a QuickBooks p&l or those kind of things, it or most businesses are going to refer to that as gross profit. Now, this is where I'll give her unharnessed credit, burn when I was writing the chapter for burns book. And I had this discussion because I use the term gross profit in the first book, and Vern had a very good point that I really appreciate it. He said, you know, profit is a slippery term that confuses people. And he's absolutely right. And I said it until we agree that any subset of the financial activity and financials the best term is margin. So I have a gross margin, and then I have a contribution margin. And then I have a net op, if you were probably going to be correct about net operating income, you call it net operating margin, then minus other expenses would then be net income or net profit, you know, in that sense, and so. So that's really the terminology that we use. So I will tell you that contribution margin work which above it, you got direct labor and cogs to get to revenue. It it's between 45 and 55%. The vast majority of businesses now Don't, don't buy into percentages, you can't take a percentage to the grocery store and buy groceries with it. It's like dollars. But it's just kind of the way business models work. And when you see the way a lot of industries kind of think things, and why do you get this value? Somehow, someway? You know, how does it How does it play out. And so you can see that, if I'm at a 50% contribution margin, well, I just back into that number, I gotta have two times that number in revenue, so that that's how you get to an eight at the top line. Now, thing is, I mean, revenue slip, revenue is a slippery snake, I mean, and not every dollar revenues, the same value. But if you have relative consistency of revenue, you can kind of back into that. But entrepreneurs need these frameworks, when you can give them a framework to do quick thinking to challenge an idea. You get them to not make a lot of turnovers in business to use the sports analogy. Yeah, you know, that somebody just dribble dribble the ball off their foot, you know, going up the floor, because it wasn't paying attention, and they just, you know, lost sight of what they needed to do. And, you know, and and that's really where I think it's helped. Because once we give them a framework, then they can start to think about how to execute, what are the plays, we're going to run, you know, to do this. And there's people who like to take big bold steps, and they're willing to be take more risks. There's others that kind of incrementally test their way through it. take you back, you know, and then and but once you get the framework of how to attack the issue to grow, then you keep score, and is it working? And I will tell you, it doesn't work all the time. And that's the reason why entrepreneurs deserve the return that they get, because they are taking chances that the vast majority of everybody else who has a job not taken. And, you know, until you put put payroll on a credit card, you're probably not a true entrepreneur.
Mark 51:57
So how do you score it in terms of the two specific pulses I'm most interested in are the monthly pieces, like the handful of numbers that people should be looking at a monthly basis. And especially the hardest ones are the weekly numbers, like what matters most looked at on a weekly basis?
Greg 52:12
Well, the highest form of truth is rolling 12. And so so it is. So rolling 12, if you have a monthly kind of financial management mindset of business, rolling 12 is telling you the highest form of truth, rolling three is the next level of truth. So if my if I'm a fairly consistent business, in my rolling three, performance is worse than my rolling 12. It's telling me where I'm headed, unless I do something about it. And so it's in, but because you cannot take data in a static concept, you have to look at it in movement. And so I look at the rolling 12 tells me what has happened in the last 12 months, because I can take all the excuses out of it, holidays, seasons, you know, whatever. And then rolling three is telling me that the near term prediction of direction of where we're going, and what are we going to do about it a month, and you know, months are highly inaccurate periods of time. But when our clients who have consistent operations on a weekly basis, they can take that and get one step further. That's, that's just enormously powerful. And that's the rolling 52 week version. So that's the rolling 12. And then I got a rolling 13 week, which is my quarterly my rolling three. And then
Mark 53:27
by default, it pushes to that, you know, have that trailing 13 weeks and all your weekly metrics. So that's that's the easiest way for most people to digest it. So
Greg 53:34
if you wait to the end of the month to find out what you did for that month, you I mean, you've wasted time because you know, that my farm reference of choice on this one is the you know, the cows done left the barn by the time you shut the gate, it ain't gonna help.
Mark 53:50
So what are the activities because like, you know, in your world, every was leading indicators, lagging indicators, you know, the accounting and finance world is just like the absolute center of all trailing indicators, right? So you have to you have to re engineer its people's thinking to say like, well, there are some things that we can do on a weekly basis that will predict a good end of the month, as opposed to tell the story of a very bad past. Several.
Greg 54:15
I will tell you, though, that it is actually a productivity measure that tells you more because the companies that don't sell enough, they know that it's the thing that drives me up the wall is we have good activity that we can't get out the door and it could have gotten out the door. Yeah, and I will tell you that 90 plus percent of the businesses fail in maximizing profit more so of not getting everything done that could have gotten done.
Mark 54:47
And and I'm hearing that your your leading indicators to your financial indicators are operational, typically operational or selling or their output? Yeah, okay. The backlog. I mean,
Greg 54:57
what's the blocker?
Mark 54:58
And if it was services business, your inventory expires every single month. And if you don't have people productive, then you can never get that money back.
Greg 55:06
And backlog is important, though, don't get me wrong, and and certainly, you know, leads and you know, contracts and depending on every industry and I think what we're afraid of, and so if I was going to go back to college, I'd get a doctorate in behavioral economics. To me, that is the most fascinating field of study, you got guys like Adam Grant, Dan pink, and you know, the Malcolm Gladwell 's of the world. Those are, those are the fascinating areas of study is you look at, and the one thing we're scared to death of, and business is running out of things to do. And it's like, Listen, I'm telling you get your people focused on, get everything done, and there and there obviously have nothing to do and let them go home with with pay. And I'll challenge you that it ain't gonna happen. I mean that but you got to get to that point. Because when you have people that are totally done, and you don't have coverage for them, it creates a vacuum to your, your sales and marketing effort to really focus on Well, let's go get some more work. And a lot of times, you're the sales and marketing people are hesitant to go push the market because Well, where's the capacity, especially
Mark 56:25
today, especially in services, if there was any kind of bad outcome last month, the project was done behind schedule, and the customer is upset? That selling team has the hardest time going out there and selling confidently?
Greg 56:35
That's right. Exactly. And and so so I would rather see people prove to me that you can actually get everything done that you have. Now granted, I mean, there's a there's an art to the marketing and the sales side. And kind of we have this discussion a lot in that, you know, there's this common fallacy, you know, that if I just give the right compensation package to the salespeople, we're gonna go get sales, and it's like, it can be the furthest thing from the truth. Yeah, I'm glad you say that. Because I, my experience, I'm more of a fan. So. So we've long given short change to the marketing aspect of the world, because we always say sales and marketing. Even I said it just a moment ago. And so yeah, and it's like, no, it really, we should always say marketing and sales. Because last time I checked, you correct me if I'm wrong, marketing must always precede sales. Now, this may be the salesperson that does marketing first to then get the sale. But marketing is an activity must precede the sale. I agree. And now if you're really good at marketing, then I don't need a salesperson to scope and get under contract, I think a good customer service representative that's there and has a good heart for the customer to do what they need. And I don't have to sell anything. And you know, and and I know there's certain things you do have to sell, you do have to have salespeople. But I got a long list of personal experiences with clients that gave out a lot of compensation to order takers.
Mark 58:10
Oh, yeah, for sure. I mean, I, I I teach there's a continuum of marketing, which is the storytelling and getting engaging interest for somebody who had no awareness before end selling is converting somebody from from the state of like, I think there might be something here too, yes, there is, or actually or No, there isn't me helping them decide in or out, then there's the delivery process. And I coach a lot of companies that they're putting a lot of delivery in the selling side in terms of like account management and retention. Because keeping a customer happy is a totally different experience than finding a new customer who wasn't looking for a solution. And if it's a prospect or salesperson that it's really doing some hard work of knocking on doors and converting people who are committed to another way that might deserve a lot of compensation. Keeping somebody communicated with and getting their needs met, and who is already loves us, that's a different job. And they probably don't need heavy heavy commissioning, they probably just need a good solid salary and, you know, in 40 hours a week.
Greg 59:08
And you know, and it's one of these things that, you know, we think we're being smart by, you know, giving variable compensation, it's like, well, you're just really trying to shift risk, but you're also giving away margin. And especially when you when you tie, you know, I mean one, our hard rule, never ever pay somebody a commission on revenue, because that's a slippery snake. But if you can do it on gross margin, preferably contribution margin, okay, but where's the leverage, you never get leverage in that equation. You know, if you give somebody you know, a consistent cut of something. And and so, I mean, we're fans of, ultimately don't lose sight of the fact in compensation planning of ever how I pay a person whether it's hourly salary base plus bonus or whatever. At the end of the day, you got to look at the total comp paid Look back at what that person did and say, Did you get a fair return for what they got paid? And were they paid a number that the market agrees with, so that it's fair and equitable, and ever held the technique. And we get caught up in this technique of compensation way too often, rather than saying, Let's use the NFL example. Yeah, what you did this year is what you get paid next year. And it's a one year contract. And, you know, and it's like, you know, there may be some guaranteed money, you know, but but outside of that, I mean, you know, it, it really is this thing that, you know, I, I just really caution people about tying things to something that moves, because I'm a $10 million business, and I tie my sales people's commission to gross margin, when I'm a $20 million business, I'll guarantee you, you're not at the same gross margin number. So why would you know, and, and, you know, and you're going to have to keep going back and renegotiating the comp plan. And we all know that those things work, I mean, salespeople really good at negotiating the comp plans. And, and, and, and, and, you know, and you you create this in this in, you know, turnover and, and all those things in, you know, I'm a huge fan, Dan pink, wrote this article for HBr that I refer to a lot. And if you go out to the Harvard Business Review site, he wrote an article and made a case for why you should pay salespeople salary.
Mark 1:01:27
I was gonna ask you, I'm glad I didn't know you were on the same page with that, because I'm a fan of Dan Pink's work and easy to find on YouTube talking about that. And I believe that the legacy of commission based selling is just kind of coincidentally like we've done it so long we know how to kind of make it work. But but it's it has a ton of unintended consequences and it's really difficult to make work with and it goes a long way to explaining why young organizations have a very difficult time launching a sales organization until they have all the backend stuff figured out because it really incense crazy behavior in an organization that's not really really ready.
Greg 1:02:03
Well, it generally at a developing and underdeveloped company, or developing company has a tendency to rely on people rather than process. And so if you develop a good process, the people become interchangeable. So you know, if you've got, you know, I go back to my you know, I'm an Alabama fan. I went school Alabama, so I'm a legitimate Alabama fan. I was there during the Bear Bryant years. You know, but Nick Saban accepted a long time ago that everybody's going to poach his his coaches. And so he decided that he there's the Alabama playbook for the Alabama offense that has evolved over the years, everybody comes in. We'll put some things in it, but the playbook stays. So when Steve Sarkeesian left for Texas. Bill O'Brien just came in, he's running the same playbook we're running last year. Now he's gonna have some opportunity to make his case to add some things to it. But it's largely gonna be this you know, the guys aren't learning a new type of terminology. They're gonna you know, it's it's the Alabama playbook is the Alabama Well,
Mark 1:03:07
I heard Nick Saban talk about that on the documentary with him and Bill Belichick. Have you seen that one? Yeah. And he says, like, Look, there's like 150 people in this in this building that know this system, you got some great ideas. We're using my system. That's good for you. And we're using my system.
Greg 1:03:24
And I think that's really kind of the way if you look at it that way. So let me give you this great overarching concept. So the guy that got me into the entrepreneurs organization, I'll give giving credit Ron Hollis, great entrepreneur in his own right, you know, in as much as Ron was a client and a friend, we had just tons of discussions about business, we were both this business strategy geek. So going, why does this why is this why is this and, and so i a lot of my thinking to Ron as well, you know, but but he taught me this concept that they had a company that they were the first company to do an instant quote for a custom manufactured part, you know, so you know, this, this mouse, you know, that started off in somebody's CAD program is a theoretical idea what it was, you know, it, it got sent to the output to what's called an STL file and uploaded and they would give you an instant quote, you know, for that part, made in laser cured, resin, sterile lithography to be delivered tomorrow. And so it first of its industry, there were literally I could get a version of that, in my hand tomorrow, actually have a version that you can actually get one be ordered in the morning, you could actually get one delivered in the afternoon, if the FedEx delivers. And so that really kind of a cool thing because it did a couple of things. It established a market price. And it was a process of even though there is 1000 data points or more than that STL file, there were 14 that mattered for pricing. Oh, okay. And they created a pricing algorithm. Now, their company didn't own any equipment. No They had a supplier that tested the pricing algorithm and said, whatever you quote, we'll make it for 60% of whatever you call it for. And they and their supplier became a client of mine as well. So actually, I mean, I get information from beginning value. Yeah, it's incredible. But But essentially, and I noticed Iran, and I've used this with a ton of clients is it developed this idea that the value chain, a rough idea is the value of the product or service is about 60% of the price. And 40% of the price is the value of marketing, sales, and project oversight. And so when you take marketing sales and project oversight, and say that's worth 40%, it's roughly 20% is probably the worth of the lead, I think the marketing pieces were 20% of that value chain, the sales piece, the scoping, closing, contracting, is worth 10, and the oversights work 10%. And so we've used this with a lot of clients who use shared services, they don't do the complete thing from beginning to end, what piece Do you do the market piece? Do you scoping closing piece? Do you the oversight piece? If I don't do the oversight? Well, I'm probably going to do a 7030 relationship. If I just do a get the marketing lead and throw it over to somebody to close it and deal with it from there, it's probably an 8020 deal. And you can plus or minus those 5%. You know, but you're not gonna move them dramatically. Right, you know, in that process. And and what we see in this gig based economy is a lot of businesses that are built around those principles that they need a framework of thinking, yeah, what are the, you know, those four things that happen? The marketing, sales, oversight and doing and, or the thing itself? And, and so you've got to keep all of those things contained, and say, who's responsible for it? Because they have, if they're responsible for it, they have cost associated with it, for sure. And he must connect the value to the cost,
Mark 1:07:03
and how many how many businesses have asked the question like I could buy that from somebody and resell it. But if I make it myself, I keep the margins like, well, you really don't know, unless you really have a better way of making that mousetrap. You're better off outsourcing it to somebody who's actually got that figured out?
Greg 1:07:18
Well, and I think it's really what you see is the reason why the private economy I think, is far more dominant to US GDP, then the public companies. And I don't know that we have a really great way to measure that. But my sense is is I mean, there's there's, we've had this shrinking of public companies over the last 10 years. Because we haven't needed to go public to get liquidity because there's private equity layer that sits between the private companies in the public markets. I think we're starting to see a shift of these s PACs is special purpose acquisition vehicles that raise money with no business that I've never heard of that
Mark 1:07:51
are right now. And now the spec is ever it's
Greg 1:07:54
it's a validation of a prediction I made about three years ago, because this idea of lack of public companies, I said they need we have too much money flowing into the stock market, then there's not enough companies to buy. And so you know, yet the market may go down. But notice it always goes right back up. Well, that's because last week's payroll withholdings for 401, K's came in, and it's got to buy something. And it's called a stock and they're not buying private companies with us because they can't. And and and so I do, I predicted that there would be a new type of vehicle that would own private companies, that would be a public type stock. And so I think it was I think it was Vanguard, if I'm not mistaken, it actually created a mutual fund of private equity owned private businesses that people could invest in. So that was the first step. But I think these aspects is likely that vehicle that we're gonna start to see, because they're, they're really just a public hedge fund is all it is. And that,
Mark 1:08:54
I'm glad we had this conversation because you crystal, I've been trying to figure it out for a while. And so now I'm like, Oh, that makes perfect sense. And I can see how they have a flow.
Greg 1:09:00
Well, when you have a 30 price to earnings ratio, the markets a little crazy, you know, but because and it's gonna stay that way, because it's a supply and demand problem. There's not enough stocks for the money that QID continues to flow in Week after week after week.
Mark 1:09:15
Yeah, and that will that creates all kinds of crazy unintended consequence, the
Greg 1:09:19
last last time I checked, I mean, I think that supply and demand thing still kind of matters.
Mark 1:09:25
It's kind of the it's what we talked about early on in the in the tight labor market. And when your supply and demand creates a problem, if you have any, no unemployment, if you get to zero unemployment, you've got infinite salary at that point, because why you could you could have a job at any price you want at that stage. So that's part of the factor. Well, man, we've covered a ton, a ton a ton, and I'm really grateful for our conversation. What and I got two questions that wrap this up and sometimes they sometimes it goes five seconds and then as it goes another hour, but the the first question is, what else do you want to make sure We share and then the second question is going to be, what is your passionate plea for entrepreneurs right now? So go back to the first one, what else? Give them what we covered? Is there anything you want to make sure, you know, our listeners here?
Greg 1:10:11
I mean, I mean, in terms of concept, no, I mean, I've kind of laid out the idea of kind of that sequence of understanding. You know, I start the new book starts with three simple principles that I kind of touched on first and foremost, is figure out what the market needs. I mean, I, I love the businesses that we call the necessaries. And so we have a lot of those, and we have a few that are luxuries or discretionary, you know, kind of businesses, but but, you know, the necessary businesses, you know, that the do services do, you know, make things, but most of it is, you know, we're definitely a highly dominant service based economy. But, but there's, there's a lot there, but but who cares? I mean, really, you know, figure out what the market needs. And sometimes it's, it's not the thing itself, it's how you interface with a customer's what the market is really aching for in that process. Secondly, is find a way to do it profitably, we feel like that's where I mean, we're pretty good at that of giving people helping people get clarity around the profit model of one or more activities that a business may do. But then the final piece is understanding that return on invested capital, every business model has a different capital signature, and your profit target is relative to your capital signature, not your industry, not anything else. It's an app, it's absolute physics at the end of the day. And and once you understand that sequence, then, you know, you can really start to apply it in the launch capital principles of how to scale and grow the business. And, and not to say that we're against getting outside capital, there's certain businesses that need it. But But you're making a clear decision of going when when do I need it? And and what am I going to do with it? You know, once I get it, you know, but but there's a batch of
Mark 1:11:57
companies around capitalism has been this, tell me if you agree and feel free to challenge it, they don't I say that outside capital is important, when one or both of these factors are in place, when you were talking about adding a zero to your scalability, like you were talking about exponential growth in the in the slice of the pie is going to be so much bigger, that it would make sense to to bring it outside leverage, combined, maybe with or separate from the idea that time is is a major, major factor to your ability to execute in the market. Did those make sense to you at all
Greg 1:12:28
the time factor? it? Well, I would look at them different ways in saying your, your need to invest to front run the activity is larger than what the cash flow can be produced from the activity. Now, but we've seen phenomenal shift of people who thought they couldn't generate their own cash to grow to they realize like good. Yeah, and that's a I mean, I speed of growth is is not dependent on capital is dependent on execution.
Mark 1:13:06
And yeah, I like that thinking. So you have to run the model, you have to determine whether or not you can outrun your capital or not. And if you can, if you can out execute your capital, then that opens the door to like, what would we what would it look like if we brought in more money?
Greg 1:13:19
I don't have a single client at the moment who's struggling to grow because of lack of capital. It's not a problem. They're struggling to grow because the execution of their idea of what leads to growth. But it is
Mark 1:13:37
it's a truism that everybody feels undercapitalized and you're saying that if we get that if we get our hands on this, you're probably not if you really that's that's, that's pretty contrarian thinking that's Britt's a big thing. If you get a real entrepreneurial handle on your finances, you might not be undercapitalized. And you might have changed your thinking, taking away some excuses, which I love. And I love to take my excuses from entrepreneurs like you know, you have everything you need to win right now. So let's go do it. So what is your passionate plea to entrepreneurs right now?
Greg 1:14:11
One I would say is, you know, understand, know that to steal from Cameron, Harold, you know, that painted picture of what health in full capitalization looks like for the business. Because I will tell you from my data, if I can get you to full capitalization first, then you make your run. And otherwise, you know, you're you know, you're going to a gunfight, you know, with a stick and and you're not going to win. And, and so, you know, you really need to understand to get that piece, right. And then you're able to then deploy all of these advanced thinking, you know, approaches of going, you know, what, where do you want to take the business and in the book, I'm really proud of the segment that I put we We've kind of created this framework around building value of there's three business value plays, you either run to harvest business, nobody's going to ever come pay you a premium for it. So make sure you build your wealth from the profit distribution and don't consume all that. Your harvest until premium sales. So you're, you're creating some building of wealth externally, but realistically, you're waiting for that premium buyer. And we created a technique for you to evaluate what's a good number? And when to say no, we call that the replacement return decision. And then then you got the bill to sell model, which is the rocket ship to Mars that, okay, you know, and, you know, you don't see as many of those as you saw back during the.com era and those things, you know, most people are launching businesses that really are serving a need of the market. And, you know, they're not quite as speculative. They're just either rolling up existing businesses or, you know, attacking another sort of segment. But once you understand that, those value creation deals, then you've got some strategy to always check yourself with. But, but you know, I, I just love the entrepreneurial process of, you know, we're the ones that that truly employ the people in the world. We spanned whatever political party thinks they're in power, because they think they do stuff, and I got news for you anything, it's on us. You know, we're the ones that make it happen. And, yeah, for sure. And, you know, and yeah, you know, they change policy, here they are, there's gonna be some isolated areas, but the broader aspect of the market, generally, pricing in execution tends to adapt to it, you know, whatever it turns out to be.
Mark 1:16:43
So I love what you said there in terms of like bringing camera, Harold in that, you know, understand your vision, where are you going, because you'll be able to manifest you'll you'll start to be able to we filter out other people's strategies, you know, I need to raise money. Well, my three year picture, which is EOS is equivalent, you know, the, the vivid vision is what he calls it now used to call the painted picture of Cameron Harold's did, of course, an idea of what does it look like in three years? Yep. This is Michael Gerber talking about when you build your structure of your organization, what does it look like at optimum? and have your sense of where you're trying to go? What What can you do you want to produce? And then run the math, run the model, like what's it going to take to get there? And then you can build this model that says financially? What am I salary caps? What do they look like? We've put up these guardrails around this idea of is it working? Is it not? And how you can measure it, you can say if I'm not getting 50 to 100%, return on investment on my on my, my investments of the future, then I got to change something because I think a lot of entrepreneurs get stuck on knowing not knowing when to make changes, particularly people changes which you talked about that management. What if what's the management,
Greg 1:17:50
major labor efficiency and management, labor efficiency?
Mark 1:17:52
that's a that's a tight lens on are your leaders and managers doing their job really well. And, and I know from experience, and my clients know from experience that if you get stuck there, you can get really stuck there. On the right, devious seeds.
Greg 1:18:04
I'll give you one piece of salary cap trivia, that's kind of a fun fact. So I mean, so we believe that businesses truly work the same way the NFL teams work that there is a hard salary cap. And if you don't deploy those salaries correctly, you don't win the game. And so I got I got a little worried this year, but I you know, I've not found any evidence otherwise. So my belief is, is no NFL team has ever won the Super Bowl after with a player that is the currently the highest contract in the NFL. So last year, about this time after the Super Bowl, Patrick mahomes signed the highest paid quarterback in the NFL use the quarterbacks I was going to be the highest paid. And so he was the highest paid player. Now he got close and I was sweating it but as soon as he signed that contract, I told my team I said there you know, go to go to Vegas and put money down at the Chiefs won't win the Superbowl.
Mark 1:19:04
Now pick up on that.
Greg 1:19:07
We all place mental virtual bets. And and to their credit, I mean, I mean, they performed great, but when they got to the Super Bowl if you really look at it, and the Buccaneers had a much more effectively balanced team. And when you and this is a great comparison of businesses when you overspend in an area to the resources of the business. You'll have a good outcome but you won't win the Superbowl. Now if you're okay with making it to the playoffs and that's your goal in business then, hey, you did fine. You know but if you want to win the Superbowl, you know Tom Brady is one six and Tom Brady's never been the highest paid quarterback. Never. He's always left money to make sure that that left tackle and the center and the offensive line and the receivers. There was enough money for everybody. To put a good team around it,
Mark 1:20:03
it's a great, that's a great analogy, because looking about how they performed I mean, Tom Brady performed very, very well. And in his offense in general performed very, very well. And people who didn't expect to perform gronkowski was doing was doing great stuff and their defense, otherwise unremarkable. It was unstoppable, unstoppable, they had, they had all the things they needed to have try, and the business is no different, right, you got to have the three legs of the stool you got to sell, you got to deliver, and you got to manage the money. And my experience has been that if, you know, these are the three legs of the stool one thing or the other. And I was so surprised that like one of those legs can only be a tiny bit shorter than the other two, and that stool falls right over. You cannot just leave great selling and expect that to sell solve the problem. That's,
Greg 1:20:51
you know, it's not like, you know, the other I mean, Major League Baseball, you know, has this, this, you know, penalty thing that they do is let's not a hard cap league in NBA is not a hard cap league as well, you know, but hockey and and NFL are hard caps. And, and you see a cleaner picture of business in those those organizations. And, and, and you're going to have those times where you know, you you're going to go through a rebuilding year, like the Patriots, you know, went through this year, and, you know, just look and see what they do next year, I think that there'll be there'll be okay, but but there again, businesses go through the same phases, you get people that grow up and up and up, and they want more and more money. But there is a finite output of what that money can produce. And I put a complete chapter on labor efficiency ratio in the new book that goes through kind of one of our most requested illustrations, as we call it, the career labor efficiency curve. There's a point that a person keeps wanting more and more money, but there is no more output that they can give you. Which means that difference between their output and what you're paying them. That's profit. And and when you can't make any profit off of it. Why are you doing this? Yeah, makes no sense.
Mark 1:22:01
That's actually an interesting topic, maybe for a whole other podcast and talk to talk about what the upper out model particularly in pro services, what the importance of turnover, and for both career development and efficiency of the business it which is very counterintuitive for people who really want to create a loyal culture. But that's not always the best interest of the culture or the individuals. So absolutely good stuff. Well, man, I'm so grateful for everything I've heard, I'm so eager for people to check out the books, we'll have links to that, but, you know, I'm sure they're doing well, looking forward to the audio versions coming out very soon, that will be great for me to share with friends and all that. But that's, that's our time for today. If somebody wants to continue the conversation with you, how do they find you?
Greg 1:22:43
A couple of bats ways. You know, certainly simple numbers dot may is the site that we have for the book, and they are consulting material. Our firm website is CRI CPA calm, but, but probably the the the other, there's a Contact link on the simple numbers.me you know, that gets to the consulting team. So CRM is a big firm, and we do all kinds of things, you know, as a firm now, but to get directly to me, you know, certainly reach out to Greg Crabtree at CRI CPA comm and, you know, shoot me an email and you know, happy to, you know, the getting any, you know, questions or feedback or somebody's interested in the things that we do, Mike maxon is one of my partners, he always does the talks with, with new new potential clients to kind of go through, you know, because it is kind of a unique thing. It's not, it's not just random consulting, we have a consulting process that we take people through, that we know works, and we got a lot a lot of successful outcomes to give us that confidence.
Mark 1:23:47
For sure, for sure. And it's different. I mean, it's it's definitely through the lens of business outcomes, and not just avoidance of tax and risk and that kind of thing that and so I'm so grateful for what I've learned working with you in the in the process and the book. So that's it for today. So for today for so those of you listening, please subscribe, share with your friends, if you've got a friend who is in need of some advice and new thinking on how to look at their finances from the perspective of an entrepreneur, then please get this in their hands so they can take advantage of it. And of course, leave us some feedback, those ratings and any feedback good and bad. We can't get enough of it. And we're so grateful for those of you who shared so far. But until next time, we will see you then on you're doing it wrong with me, Mark Anderson, Larry,
VO 1:24:31
this is you're doing it wrong with Mark Henderson Leary for more episodes and to subscribe, go to lyric.cc