Dashboard: Do You Know What Your Margins Are?

[Music] welcome to another 21 hats dashboard brought to you by our sponsor the great game of business I'm Lauren Feldman and I'm here with Tracy Beck to talk about the things we think business owners should be thinking about this week Tracy is CEO of starboard collectives which facilitates CEO forums and she co-authored the latest edition of the 60-minute CFO with her father welcome back Tracy hi Lauren thank you great to have you here Tracy we've been uh emailing a bit and you brought up this notion that running a business is a little like well running uh can you explain what you're thinking you bet so in a lot of the work that I do with businesses we talk about business finance and one of the ways that I really anchor it for people is understanding key ratios and understanding what those benchmarks and Industry averages are for the business in question and when you start doing that you start understanding targets and uh what's possible right that's kind of the point of that exercise and it started to make me think about how while that is really good to do and understand it it also might be a little bit limiting and the the example that came to mind was Roger Banister in in running he broke the 4minute mile and prior to doing that doctors and Physicians and coaches actually said that if someone if a human were able to break the form minute mile uh they would die so they really firmly believed that it was impossible to run a 4-minute mile and what actually happened is Roger banister did run a 4-minute mile he actually ran out on a day where there were literal headwinds right and so people really doubted he was going to be able to do it and then he did it and once he did uh 1700 other people were able to run the 4minute mile you know something that we had beforehand thought would kill you and it was interesting to me because as I tell people what the industry benchmarks are or industry averages are for let's say your gross profit margin I also want to say that remember that's what's possible today but you might come up with something that makes something new possible or in other words the impossible possible and I think it's really important to remember that that we are going to continually evolve and change and um not to be limited by what others are doing necessarily it's interesting it kind of points out the notion that goals can be um can help you achieve something but they can also be limiting if you think something isn't possible and you don't really try for it you're not going to hit it but if you're open to the idea that you might be able to exceed what's been done elsewhere uh all things seem possible yeah yeah and and it's interesting and you think uh you don't you you don't want to put a goal out there that's so lofty it's unattainable that can be very demotivating but when you look at it the other way and think this is possible today but I don't want to rule out what might be possible tomorrow and have that growth mindset and that opportunity seeking mindset I think it's it is motivating and it doesn't put these things that seem lofty or Out Of Reach into this um this place where it's like oh that seems so hard I don't even want to try um and so just knowing that um and and the all the other way you can think of it is if you are um you know I do a lot of work with groups of CEOs right and and they're all in the same industry and when I start talking about the different I'll just use gross profit margin as the example here between the that you know we look at each other's finances and I can say company a has a 50% gross profit margin in Company B has a 30% gross profit margin it's very tempting for Company B to think oh man you know we suck or whatever sure and instead the exercise is really to say no no no look what's possible so if it's possible for them it's possible for you let's take that you know one step further and make sure we understand the differences in the way you're running your businesses and you know we get into strategy from there and then even still it's important to remember that the company a with that 50% profit margin in two years we might look and see that it's 52 you know so we we don't want to get stuck thinking that these things that we measure and monitor are what they are and they will always be what they're going to be um and that opportunity for growth and change is always there and it you know at one point we might think we would die if we if we were going to do it but in actuality if one person does it you know 1,700 other people do it it's it's just to me it is it's a fascinating phenomenon and it's it's just one worth remembering when we kind of put ourselves into the black and white world of numbers and finance and um you know what kind of the day-to-day business you know can bring a little bit of complacency as well can you walk us through a little bit if you're talking to an owner who is disappointed in his or her uh gross profit margin where do you look how do you think about improving that well so the gross profit margin just just to make sure we all understand exactly what that is that's your first level of profitability so it's your it's after you make your money paying for everything that was required as a direct cost of making that money so we can also think of it as cost of goods sold so there's a couple different things that happen there one is we want to optimize our expenses right so anything that we might already have um pay that we're paying um we if it's you can think of it in two different ways right does the money you know is it something that we pay the same amount every single month so if it's um you know like if you for example um have to pay the rent on your store um that would be a fixed expense it's the same amount every single month or if you have a salaried employee who sells your items um and you can't sell them without them but they're on salary you pay them the same amount every single month and you're noticing that you're not making as much money as you would like one thing you could do is you could experiment changing that cost from that fixed expense every month same amount every single month you might change it to a variable expense you might explore using an hourly employee that way you can say when we have more work we pay more money but when we have less work we pay less money so that's an example of changing something that was fixed to variable but you might also look at it the other way around if if that um person you know would be better if you could optimize better by you know putting them on a part-time salary for example so you want to look at where the opportunity is in changing an expense from fixed to variable in other words when you have more work you pay more money when you have less work you pay less money and the other opportunity uh you know in that is how can you do it more efficiently right so is there something in your business that is currently taking ex extra time or extra resources that can be optimized and is there something you can pay for one time a piece of technology a training a machine a piece of equipment that would maybe cost you money today but then take away some of that direct expense down the road um so there's there's that and then the third thing is looking at ways to maybe change your business mix so there might be some things that you do that are just going to have a lower margin and it's always going to cost you more money uh to produce that work and your margin will always be lower and if you would like to see an overall Blended higher gross profit margin it might s to to add in a line of business that has a slightly higher gross profit margin where it's just easier to get that work done it costs less and that's going to overall bring your your profit margin up so there's you can kind of come at it a lot there's a lot of things you can do to optimize your expenses and there's also some things you can do on the revenue generating side to Just Produce higher margins as well do you find that most of the businesses you start working with are fully aware of the different margin for their different offerings whether it's a different business or a different product do they usually know what they should know to make the kind of decisions you're talking about no they definitely don't know so Step One is is learning what your margins are for sure and that thank you for asking that question because that's that's assuming we know what the the margins are and we want to get crystal clear on that and one of the ways to do it is to start costing every job so if you're you know if you're making a website or if you're running an ad campaign you know really take yourself through the exercise of tracking every single cost back to that singular job you know you don't necessarily need to start on a whole business line you know all of the advertising or all of the web development or you know whatever the case may be um figure out one project that you did and figure out the margins on that and you can sort of do post-mortems you can go back in time and you can pick on a client that you suspect was probably pretty low and you can go back and pick on a client you think is probably pretty high and start to give yourself a range of what the the margins might be and as you do that over time you will actually learn how to you know if we're using this like an advertising or a web development agency model as an example every project you bid you will get more and more accurate and you will aim for the the gross profit margin that you want right and you might find that some were a little too high and uncomfortable and maybe you didn't you know have enough resources to service and some were definitely over serviced so you will you will find what feels right for you and then the next piece you know if we're talking about uh these possibility thinkings and and taking what we thought was impossible and making it possible like the 4minute mile the next thing you can do is start to ask people adjacent to you and in your industry or in slightly similar Industries how they're doing it and what's working for them you know not everybody gets their gross profit margins published like a running race and so the way to figure out how other people are doing is is by simply asking right and reaching out and and and having friendly conversations where you can to really understand what people what what's possible for them sounds like that kind of conversation or series of conversations could pretty quickly lead to a conversation about changing a business model uh altogether do you find that that happens yeah so many times and people maybe maybe not all together or maybe not over definitely not overnight but if you think about the way we have done business 10 years ago compared today and if you also think about the way we've done business five years ago years ago given what we've been through exactly I can think of particular Industries I can think of even clients that I have who let's just let's just use Virtual versus in office meetings you know I had people who I coached through their very first Zoom call when Co hit and now it's a it's a no-brainer and they're going to you know 90% of their meetings online and that's that's one we're all really familiar with but these are people that I would have assumed would never go for this you know and and it they would die if given this option and and now it's become common place so yeah it's just it's it's incredible really how adaptable our businesses are and we are are in business as soon as we give ourselves that room to believe that it is possible I've been following in particular the restaurant industry which has had such a difficult time going back to the beginning days of covid and I think there you know there've been a lot of efforts to figure out different ways to do thing I do things I recently highlighted a story in the morning report about a restaurant in Philadelphia that has decided to be closed on weekends which is something I don't think very many restaurants would have thought was was a feasible business model not too long ago but they've decided to do it in part because it makes it easier for them to attract employees who can actually have lives and the owners themselves uh are enjoying it and they're finding that they can they can make it work uh being open five days a week but not on weekends absolutely and I I I I think I followed that story and if I'm not mistaken they were also 8:00 a.m. to 5:00 p.m. right like it was just like we have to make this livable for our employees because without this without employees we can't do this um I also know someone in the food industry who um will is extremely focused on paying a livable wage for every single employee down to the dishwasher so you don't um come in the door without making $70,000 a year period you know and that would previously have been considered impossible in in something like that so it's I it I I think it's incredibly inspiring it's incredibly exciting and uh you know I I I always like to bounce between you know what's current like what's actually happening now but don't get stuck there what could what could be possible there's there's a lot of opportunity there the last time you were here Tracy it was early August and you told us it wasn't too late to try to pull out the stops and try to hit your numbers for 2023 is it still possible to do that absolutely absolutely uh we still have a nice chunk of the year as of you know a order and the yeah nothing is nothing is set in stone yet so I I very much encourage people to think creatively uh you know using using what we've just been talking about what's you know this four minute mile idea and really you know even if we also just talk about learning what your margins are doing so between now and the end of the year is going to give you that opportunity to bid that next job or do that next project uh at the profitability that you want you can you any any month any week that you can uh go forward and do good work is going to positively impact that end of your uh timeline forecast scenario everything when do you suggest people start thinking about next year now definitely now um you know so planning planning when done strategic planning for 2024 is nice to do not on uh a super condensed timeline it's nice to give yourself about a quarter the last quarter of the year to do two things one is to reflect on how the current year has gone to date and give yourself some really well informed guesses as to how it's going to end because we are so close so while I'm encouraging you that you can still change the script and make it happen um you're also getting pretty darn close to knowing what that what that might actually look like um in terms of you know just the number of weeks we have left here and then what we want to do is use this year to inform next year and that's that's that's such a great starting point because we don't have to start from scratch and we are you know the economy is going to change everything's going to change but it's not going to change a ton right we we can do some incremental uh again guessing as to what's going to happen and just start to write that just start to write that plan the other thing that's really nice to do and is really a best practice that many many many business people business owners don't do is check in with your CPA they would love to know how your business is doing at this juncture in the year rather than finding out after it's over because they're going to help you make sure that you've saved or paid enough in taxes for to you know uh fulfill that liability and they're also going to help you out in terms of what you can do to lower that liability and again the year is not over so you're going to have all of this nice time you're not going to feel rushed you're not going to feel under the gun and you can start making some really informed decisions on that in that realm as well I was recently at a conference for the great game of business um they really emphasize uh planning and forecasting one of the things they suggest is checking in with your customers and not being afraid to say to them you know what are your plans for next year uh are we in your plans um is that something that you've seen um useful for businesses as well oh absolutely yes checking with your customers um let asking what's going on with them and also sharing with them anything that you have going on um no you know no one really loves surprises so letting them know that you're they are on your mind and um you know giving them things to think about um so that you are on their mind um all of these things just are so helpful you know the third entity that I would add in there is your Banker if you carry um you know a line of credit or if you have a lot of financing or if you think you're going to need it um making sure that that relationship is strong and solid and again no surprises is a really nice way to um just feel ready right just just kind of know where we are wrapping up and and how things are going to play out uh in the coming year Tracy Beck is CEO of starboard collectives which facilitates CEO forums and she co-authored the latest edition of the 60-minute CFO with her father this episode was brought to you by the great game of business which helps businesses use an open book management system to help build healthier companies you can learn more at Great game.com thank you Tracy appreciate you taking the time thanks Lauren thanks for having me have a great week everyone [Music]