Money is always flowing in one direction or another. And in a business, it needs to flow in from the customers. It needs to flow through to the employees and to the suppliers and to everybody who is providing you with services. And there needs to be something left over at the end to take home. And when you’re able to make those things happen consistently, everybody’s just better off.
David: Hi, and welcome to the podcast. In today’s episode, cohost Jay McFarland, and I will be discussing sales, profit, and personal income. Welcome Jay.
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Jay: Yeah. Thank you, David. I’m so excited, as usual, to talk about these topics that we discuss every podcast. I think that people often get caught up, especially small business owners, in one of these aspects, instead of having balance between all of them.
And I feel like the one that they think about the most is sales. We have to drive sales. And if you’re not focusing on profitability in that regard, you could be generating all kinds of sales, but you’re not controlling your costs. And so ultimately those sales aren’t helping you.
David: Yeah. Been there, done that. I think anybody, if you’ve started your own business, you’ve probably found yourself in this situation and gross sales is usually a good place for people to start. They’re thinking in terms of top line. Okay. I need to bring in as much as possible, which is true. You got to be bringing it in. But if you’re not paying attention to the rest of it, as you indicated, you could be selling a lot of stuff and losing money every day. And unless you’re keeping track of that, you’re not going to know it.
I remember in the early days of my promotional products business, I would get together with my accountant once every 90 days. At the end of every quarter, actually the beginning of the following quarter, we would review the numbers for the previous quarter. And at that point, it’s too late to do anything about it.
You feel like things are going well because you know, you’re selling stuff, but then you look at the expenses, the cost of goods, the cost of people, all your internal costs, your overhead costs. And you find out that you’re not making money on it. And 90 days later is too late.
So once we got that in focus and we started doing it every month, reviewing what happened last month, where are our expenses too high and where are our gross sales too low? And which customers take up too much time and don’t generate enough revenue?
Once we’re able to focus on the things that actually allow you to operate a profitable business, things got a lot better, a lot more quickly. And when we think in terms of these three things, sales, profit, and personal income, it’s almost like you’re starting here with the sales and then that generates whatever profit you have.
And then after you’ve spent money on overhead and things, then you have some money to pay yourself, get some personal income going. But different businesses operate different ways. There are some business owners who are so focused on what am I going to bring in for myself that they may cut costs. They may short change people in terms of what they’re delivering in terms of product.
They may choose less quality products. And so depending on where people’s focus is, determines where they’re going to be successful among those three things.
Jay: Yeah. And I think you need balance. I mean, they’re all important. And so as you talked about looking at things monthly, I think having systems to identify and track each of these areas and have proper goals and benchmarks and reporting systems so that you can catch issues quickly. And pivot quickly is the only way you’re going to find balance in the force with these three things.
David: Yeah, I agree. And I’ve operated businesses that had overhead that was too high. And that’s really hard. Because you feel like you’re trying to do everything right. And you’re trying to take care of the business and you’re trying to take care of your employees and you’re trying to take care of your customers. And if you don’t have the metrics right, it’s going to be pretty darn close to impossible to do that.
And so finding the balance between the quality of product, which has to be high, the customer service, which has to be great. And the quality of client you’re interacting with, which also has to be great. When you get those three things lined up, you’re more likely to be successful, but if you’re not quite connected with some of those things, it’s a really uphill slog.
Jay: Yeah. Yeah, absolutely. And we’ve kind of mentioned this in some other podcasts, but I see businesses when they need to increase their profitability. Their default is we need to increase revenue. And I think that can be misguided. Because in order to make a dollar in profit, you may need to increase your sales by $10.
But if you focus on reducing cost, like for example, in a restaurant, if you can reduce your food cost by 1%, that immediately goes to the bottom line and increases profitability. So I find that the much faster route to profit than increasing your sales. And I don’t know that every business person understands that.
David: Right. And I think it’s probably because there is a limit to how much you can cut. But theoretically, there’s not a limit in terms of how much you can generate. Now, obviously there is. If it’s a restaurant, you’ve got a certain number of seats or whatever. In a promotional products business, there’s a certain number of customers that you can visit with. Whatever your business is, there are going to be limits on the upper end. But most businesses never see that.
They never get to the point where it’s like, I’m totally overwhelmed. I’m extremely profitable. I’m making a lot of money and I’m capped out. Because when you’re doing things well, when you’re doing things right, you’re generating the revenue, you’re generating the profit, which means you can hire additional people.
You can add the staff, you can get the help and you can still continue to make money. But when you’re not in that situation, when you’re just sort of barely eeking things out, and you’re saying, “okay, I need to generate more. I need to generate more.” Yeah, you probably do. But as you indicated, if you are able to cut some of your overhead costs by even just a small amount, all of that drops, whereas gross sales don’t drop. Gross sales do not drop to your bottom line.
And I can’t tell you how many people I’ve worked with who forget that. And when they think about gross sales, when they focus on gross sales, when they talk about gross sales, they’re like, “oh yeah, we’re generating all of this.” It doesn’t matter if you don’t get to drop it and keep some of it and pay everybody who needs to be paid.
Jay: Yeah, absolutely. And one of the things is knowing what your cost should be. What is the ideal cost that you’re shooting for? Because you’re right. You can’t continue to reduce costs. There is a line. There’s a threshold My experience, like in the restaurant business, we had something called a theoretical food cost versus our actual food cost.
The theoretical was if we had no waste, if we had no theft, if we had no shrinkage, if we ran perfectly, what would our food cost be? And then we compared that to our actual food cost. And so the goal was constantly trying to close the gap between those.
And if you’re not an industry where there’s no shrinkage or things like that, then that’s not going to be as easy. But this was a great system for us to always be trying to achieve, to close that gap between the theoretical and the actual.
David: Yeah, there are also a lot of business people who, when they start talking about this or thinking about this, it feels cold. “Well, I don’t like thinking about the numbers. I want to make sure I’m taking care of my people” and all that sort of thing, which is great.
You do want to take care of your people. But the only way you can take care of your people is by remaining in business. Cause if you don’t remain in business, you can’t take care of anyone anymore. Can’t take care of your customers. You can’t take care of your employees. You can’t take care of yourself or your family.
So, paying attention to this and recognizing that, yeah, this is a real thing and it’s not just driving gross sales is absolutely critical. I’ve operated businesses that generated huge gross sales, but they didn’t have the profitability they needed.
I’ve operated businesses that didn’t generate a huge gross amount of money, but they had really good margins. And that works well too. And I’ve also operated businesses that generated a lot of sales and had a lot of profit. That’s my favorite. That’s probably most people’s favorite. That’s what you want to stick with. But if you recognize that that’s the goal and you’re taking the actions necessary to make it happen, then you’re going to be in a much better position.
Jay: Yeah, totally. And then, you know, something like a pandemic can come along and your sales drop and now you’ve got to pivot dramatically to figure out how to stay open. And so it’s not like you can assume that the status quo is going to be the way it always is. You’ve got to be prepared to identify issues quickly and pivot quickly.
David: Yeah, you should probably assume that the status quo is never going to be the status quo. Because in life and in business, things are constantly changing. And some people were able to pivot extremely well and extremely effectively during the epidemic. And some people were just like, “I don’t know what to do.”
And we’ve, we see the results of that. There are a lot of businesses that are no longer around because they couldn’t do it over. Even over the past six months. I’ve still seen a lot of that fallout happening, where there’s still businesses that are sort of merging with others or they’re being acquired, or people are retiring earlier than they would’ve otherwise because they just couldn’t figure out how to do it.
And I think if you recognize that there are these three primary things, what am I making from it is the third part of it because you’re not making anything if you’re not generating sales and if you’re not generating profit, but looking at those three things and saying, okay, where do I need to focus my attention?
Do I need to focus on bringing in more sales? Do I need to focus it on trying to reduce my costs without reducing the quality of the product and the service that I’m delivering. I mean, if you cut food costs by getting cheaper, less tasty ingredients, then you can save some money there it’ll drop right to the bottom line. But then your gross sales are probably going to drop too.
So it’s this constant balance. It’s this constant process of looking at, where am I, where am I trying to be? And what do I need to do to get there?
Jay: Yeah, it feels complicated, but I think if you have good systems, if you have key performance indicators, ways to easily capture and process this information, I think that’s critical.
You know, In my experience, a lot of restaurant operators don’t even know what their theoretical food costs should be. They don’t even know what a plate of food is supposed to cost. All they know is what their sales are and what they’re spending. And that’s it.
So whatever your industry is, knowing what those ideal goals are, and then having systems to identify early issues, I think it’s the only way you’re going to find balance. Otherwise it’s an emotional process instead of a tactical process.
David: Right. And knowing the how is extremely important. I know I need to bring in more customers. How do I do it? I know I need to cut my costs. How do I do it without impacting quality? I know that I need to be able to increase my personal income, to be able to maintain the standard of life that’s going to allow me to want to continue in the business.
I mean, I talk to people. Particularly in the last six months where they’re just tired of doing it. They don’t feel like what they’re generating for themselves is worth it. Because they’re doing all this work and they feel like it’s benefiting their suppliers. They feel like it’s benefiting their coworkers and it’s not dripping down to them.
You know, they’re paying everybody else and there’s very little left. And so recognizing that in order to maintain a healthy business, it’s got to be healthy for everybody. It’s got to be healthy for the business owner, for the employees, for the clients, and not always necessarily in that order.
Jay: Yeah, such a great point. I’ve seen this happen so many times. People start a business because it’s their passion.
Jay: It’s a product that helps people or they love to cook for people or whatever it is. And then as things tighten up, it starts to be very stressful and it starts to feel like a job, not like your own business and you become a servant to that business. And that’s a tough place to be.
So,, figuring out how to make it a love instead of a job, I think if you can balance these three things, you’re probably going to be able to do that more effectively.
David: Yeah. Trickle down economics was actually the term I was struggling to think of before, ties to the idea of cash flow. In other words, money’s always flowing, it’s flowing in one, direction or another. And in a business, it needs to flow in from the customers. It needs to flow through to the employees and to the suppliers and to everybody who is providing you with services. And there needs to be something left over at the end to take home. And when you’re able to make those things happen consistently, everybody’s just better off.
And I think a lot of it does come down to mindset too. If we recognize that our goal is to service our customers, whether it’s the people coming into a restaurant or the business owners, we work with, whoever it is, if we’re able to provide them a good quality product, a good quality service at a reasonable price that is profitable enough to us, that we can pay our people and pay our suppliers and pay ourselves. Then that’s a real win.
Jay: Yeah, I love that you brought up cash flow and you might want to make it sales, profit, cash flow and personal income. It’s that important.
Jay: I worked for a gentleman who had a great business. I mean, he was making money hand over fist. But he wasn’t getting paid from his clients for three to six months.
And so making payroll, being able to cover all your expenses becomes very difficult if you don’t have the money. You know, you can have the sales, but you don’t have the money. That can be a very difficult situation. And so cash flow is equally as important as these other things we’ve talked about.
David: very true. So it’s going to flow from sales to cash flow to profits, eventually, when you get the cash flow in, and then eventually to personal income. So it does flow. That’s the point. And sometimes it trickles and sometimes it floods, and our goal is to try to get it to move at a steady enough pace that everybody gets paid.
Jay: Yeah, absolutely. How can people find out more?
David: Oh, you can go to TopSecrets.com/call. If you’d like to schedule a time to talk with our team about how we can help you grow your sales and profits. If you’re an Inner Circle member, be sure to log in. We’ll be talking about that all this week. If you’re not an Inner Circle member, you can check out that service at topsecrets.com/ic for Inner Circle. That’s TopSecrets.com/ic.
Yeah, thank you so much, David. I love that we’re sharing this information and hopefully just planting seeds and helping people think about things that perhaps they haven’t thought about before. So thank you for joining us and for sharing all your great insights.
Thank you, Jay.
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