1. A picture (presumably a chart going up and to the right)

2. A sentence (“sales went up a lot last month”)

3. A spreadsheet full of numbers (1.24, 1.55, 1.37, 1.74)

Hopefully the answer is obvious.

When it comes to analyzing data: pictures > words > numbers.

And yet here we are, tasked with interpreting the results of our financials (numbers) and turning those results into usable information to take action.

Every month, you’re asking reasonable questions like:

• How profitable am I?

• Am I going to run out of money?

• Is my cash flow getting better or worse?

• Are sales where they need to be? Expenses too high?

Instead of answers, you just have… numbers.

So what should you do about this?

One of the core principles for running a profitable business is: make things easy.

Simple can be harder than complex; you have to work hard to get your thinking clean to make it simple. — Steve Jobs

Here are 3 ways to keep things easy when managing your finances:

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1) Simplify information

The standard profit & loss statement (P&L or income statement for newbies) was designed for accountants; and let’s be honest, it reads more like a CVS receipt than a children’s book.

In it’s raw format, most financial statements are over-engineered for the person trying to actually run the business (too many line items, too much precision, noise > signal).

When I’m working with financial data, I’m immediately doing 2 things: (1) rounding everything, everywhere; and (2) reducing the number of things I’m looking at (i.e. “zooming out”).

• Rounding — Start by rounding everything off and up. Eliminate all decimals (you’ll thank me later). And start thinking in $100’s or $1,000’s — you don’t need $47,832.19, you need $48k. There’s a time-and-place for precision, but as a business owner with ops, sales, people, customers, etc. to deal with, this precision creates mental friction making your brain work harder without giving you any better information.

• Zoom out — Next, reduce the number of things you’re looking at… by a lot. If your income statement has 200 expense lines, consolidate it down to 50; if you have 50 line items, consolidate down to 10. Ideally, everything fits onto a single page that shows you the whole picture in under 60 seconds. Revenue, gross profit, key expense categories, net profit, etc. I call this the “30,000 foot view” of your business. You can always zoom in later, just don’t start by zooming in.

Rule: if you can’t explain every line on your financial statements to a 10-year-old, it’s too complicated (p.s. I’m going to test this tonight with my kids).

I refer to this exercise as “condensing” your financial information, and it’s always the starting point when reviewing numbers.

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2) Add charts, graphs, or visuals

Once you’ve simplified your information, the next step is to put it in “pictures.”

Reminder: pictures are the easiest method to understand data.

Here’s a bunch of numbers:

And here are those numbers in picture format:

Cool. Looks like things are going well here.

This is why every public company in the world uses charts in their earnings presentations. Not because investors can’t read numbers, but because charts more clearly outline the story behind those numbers.

How to do this?

Take your simplified financials from above and build a small set of visuals that you review each month. I’d start with revenue trends, gross margin trends, cash, and profit. Four charts on a single page.

Pretty basic example, but it could look something like this:

That’s an interesting picture and leads me to all sorts of questions as to what’s going on in this business.

Anyone who’s sat through one of my classes knows that we never look at a single point of data either, that tells you nothing. But 6 months or 6 years of data? Now we can really get a sense for the direction of the business.

Color-coding, trend lines, or monthly/yearly averages can add meaning to these pictures too. Especially for something like margins where you want to see what a baseline level of performance is.

You don’t need fancy dashboards to do this either, a basic chart in excel or sheets takes only a few minutes to set up.

3) Write the story

Most people skip this step and it’s arguably the most valuable of the 3.

At some point, you’ve probably read a business school case study. The typical format is: background information / context, then questions, then facts & figures. That context at the beginning makes the rest of the exercise infinitely easier to work through.

Have you ever tried this for your own company?

It’s astonishing how something so simple can be so revealing about your financial situation.

After you review your monthly financials, grab a piece of paper and write 2-3 sentences about what happened (just quick notes). It’s sort of like a journal entry for your business: What drove the numbers? Why did this big swing happen? What did you do (good or bad) in that month which could be showing up in the numbers?

Example: “April had record sales of $108k, up 10% from April last year. We onboarded 2 new salespeople earlier this year and they’re finally starting to see traction in new clients. Margins were flat because of those new hires, but if we keep seeing sales momentum, they should recover by the end of the year.”

That’s it… just 3 sentences. Keep a little log like this as part of your monthly financial review and it will deepen your understanding between the actions you’re taking (input) and the financial statements (output).

If monthly is too frequent, just try this once each year and with a little more detail (maybe a full page instead of 2-3 sentences).

By the way… This is exactly what Warren Buffett does in his annual shareholder letters. He gives you the numbers and walks through what happened to make them so. (Public companies do a great job of taking data and explaining it concisely, a valuable skill for business owners too.)

Putting it all together

Make things easy: simplify your numbers, turn them into pictures, write down the story.

• Simplify = zoom out so you can can easily spot changes (signal)

• Visualize = pictures > numbers; shortcut your tracking of major trends to stay focused on the most important thing(s)

• Write the story = the context (words) to make sense of what happened (numbers)

No CFO or expensive accountant needed :) and this requires maybe 1-2 hours a month plus a willingness to change how you think about your financial statements.

Happy hunting (for profits).

TL;DR — Simplify your numbers (round off/up, reduce line items, zoom out), visualize the trends (charts and graphs!), and write the story (2-3 sentences of context). Do these 3 things with your monthly financial review.

P.S. if you find this content valuable, give this article a “like” and share it with someone! help us spread the word!

Most people see the interest rate and are automatically repulsed by the 12.5% option, but let’s take a closer look…

At this stage in my career, I’ve navigated dozens of loans ranging from SBA to conventional to mezzanine to “private credit” (translation: most of these lessons were learned from experience).

Recently, we refinanced some loans in one business and got a new loan for an acquisition which had me thinking about several aspects around lending:

1. The impact on earnings and cash flow (the terms)

2. The perceived difficulty in obtaining a loan (the process)

3. The risks that usually get overlooked by a borrower (guilty here)

Let’s stick with #1 on this list for today…

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Why do you need the money?

The reasons for getting a loan are wide-ranging:

• Buy out a partner(s)

• Buying property or real estate

• Funding a period of high growth

• Covering seasonally slow periods

• An acquisition of an entire business

• Capital investment (machinery, vehicle, equipment, etc.)

(Usually the worst reason to get a loan is to fund sustained operating losses, but that’s for another day.)

Loans are an incredible tool when it comes to creating value and building wealth, they call it “leverage” for a reason, as it amplifies both good and bad results. Borrowing money is one of the key pillars to economic growth. It makes the otherwise impossible, possible (how many of us have a few hundred thousand dollars lying around at a young age to buy a home as an example).

But, as Spider-Man once said: “with great power comes great responsibility”

So today I want to focus on one of the core tenets of financing to help you get the most out of that value-maximizing loan you seek…

When I talk to people about loans, they’re always focused exclusively on the interest rate: “a 5% rate? that’s so low, must be a good loan!”

But in my opinion, your interest rate is always a secondary factor… the real driving force for cash flow is the payback period, or what’s known as the “amortization period.”

What is amortization?

Amortization = the repayment timeline and schedule for your loan. It tells you how long you have to pay back the loan and it’s the determining factor for the principal portion of your monthly payment.

Simple example. You borrow $500,000.

• At 7% interest over 5 years, your monthly payment = $9,900

• At 7% interest over 20 years, your monthly payment = $3,900

The difference is entirely driven by the amortization period (5 vs. 20 years) and you’ll notice it has monthly cash “savings” of nearly $6,000.

That $6,000 per month is meaningful… for most small businesses, that could make or break a single month.

Loan terms

Here are some of the important pieces in your loan docs:

1. Amortization period — How long until the loan is paid off? This drives your monthly payment more than anything else. Most conventional loans have a 5-7 year amortization, an SBA loan is usually 10 years, and a commercial mortgage is anywhere from 20-30 years. The bank’s determination will depend on the asset being financed (collateral) and the business’s cash flow capacity (among other factors).

2. Loan term vs. amortization period — These are not the same thing! The term is when the loan actually matures while amortization determines your repayment schedule. Let’s say you borrow $1m with a 7-year amortization and a 3-year term… your monthly payment is based off 7-years while the loan matures in 3-years (meaning you’ll either need to refinance, renew, or make a balloon payment to cover the balance).

This is not inherently bad, but you want to know it’s coming.

3. Interest rate (fixed vs. variable) — A fixed rate is just that, fixed, for the duration of the loan. A variable rate floats (usually tied to prime or SOFR), so it can increase or decrease over time. When rates are rising, variable loans get expensive fast. When rates are falling, they get “cheaper.” Most small businesses are better served by the predictability of a fixed rate.

4. Other terms — Notable items to watch for include: prepayment penalties, personal guarantees, collateral, covenants, excess cash recapture, etc. (these are for another day).

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What to do with this information?

Most entrepreneurs want the lowest interest rate possible, which is fine; but your rate doesn’t optimize for maximum cash flow durability. If given the choice, I’m taking “maximum amortization period” over “lower interest rate” every time.

Why?

I want the lowest monthly loan payment (principal & interest) possible. This is built-in downside protection for slower months, and I still have the option of paying more principal if my cash flow is strong.

Flexibility is an entrepreneur’s most coveted goal.

To see just how impactful this is… Here’s a table of a $250k loan with various interest rates and amortization periods.

Note the difference between a 10-year and 3-year amortization is >$4,000 per month while the difference between 5% and 9% is ~$400-500 per month.

Which are you optimizing for?

Can you afford it?

Look at your monthly payment and ask: does my business generate enough cash flow to comfortably cover this?

“Comfortably” means making that payment in both slow months and when things are good. That’s the key.

Banks literally measure this with the debt service coverage ratio (DSCR).

Take your annual operating profit (before interest and depreciation) and divide by your annual loan payment. A DSCR of 1.25x means you have $1.25 of operating profit for every $1.00 of loan payment.

Your bank wants at least 1.25x DSCR, but your goal should be higher than that. A higher ratio = more breathing room.

You should be calculating this DSCR ratio for a potential loan before you even set foot in the bank. This will guide how much borrowing is realistic for you and what terms you’ll need.

TL;DR

• Loans are a tool for creating value (when used properly)

• Interest rate and amortization period determine your monthly payment

• Longer amortization period (years) = lower monthly payment

• Lower monthly payment = maximum business flexibility for managing cash

• DSCR measures your business’ ability to make your loan payments (track it)

And, as always, please read the whole thing before you sign :)

P.S. the “pop quiz” from the beginning? These loans have the same monthly payment (principal and interest). Sure, Loan A will pay more interest over the 25-year life. But it comes with $1.5m additional capital to deploy! The real answer depends on what the money is being used for.

• Build a thing

• Work really hard

• Hit a big number

• Exit and make a lot of money

• Retire to the beach and finally start relaxing

“Once we get through these next 3-4 big things, then we can settle in for a while.” I caught myself saying this to my business partner after perhaps the busiest quarter of our entire careers.

On a personal level, the past few weeks/months have been absolutely nuts — roughly 20,000 miles traveled for Profit Mastery, closed on an acquisition in the insurance space, completed a divestiture of another business we own, refinanced some loans at another business, and wrapped up the first part of a (first ever) capital raise…

This is a lifetime’s worth of accomplishments, and yet I was (am) still thinking about the next 3-4 big things?

The truth is — things never settle down when you’re running a business. And as a result, you’ve got to lean into the frenzy and enjoy the process…

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Business ownership is a lifestyle, not a singular goal, project, or outcome. Sorry friends, there is no “finish line” where the work stops and the relaxation begins. The work is the thing, and we need to learn to love it.

The Work Is The Thing

Here are a few lessons I’ve learned firsthand (and am still working on applying) and through observing others:

1. Process > Outcomes — In his excellent book, How to Fail at Almost Everything and Still Win Big, Scott Adams preaches this concept. His idea is that goals are just temporary end points, while systems/processes are repeatable behaviors which indirectly lead to good results (outcomes). Imagine you’ve got a goal (revenue/profit target, valuation number, whatever it is). Let’s say you get halfway through the year and that goal no longer looks remotely achievable. Do you throw in the towel and abandon it altogether? Don’t be “anti-goals,” just focus on processes/systems.

2. Slow is smooth and smooth is fast — This is a favorite Navy SEAL saying of mine (I find myself mentally repeating this during a grueling run/workout). In your business, the moment you complete 10 items on your punchlist, 10 more will appear. Don’t be frantic about getting things done. Find the most important thing, and focus deliberately on it.

3. Find your purpose — Having “purpose” in life (however you define it) is pretty freaking important. I’m a big believer that Buffett & Munger were so sharp into their late 90’s as a direct result of having purpose (a reason to get up every morning + doing something they enjoyed). Whether it’s solving specific issues for customers, bringing joy to others, whatever; find the purpose in the work you do.

4. Treat things like a puzzle or riddle to solve — The best owners I’ve seen have a genuine curiosity about how things get done in their business. They find the puzzle interesting. If this thing can be figured out, it could make XYZ faster, better, or more enjoyable for customers. That’s a cool mentality which makes work not feel like work.

5. Learn to love small wins — Good operators also take satisfaction in small wins (a good hire, fixing a workflow issue, an unsolicited customer review, a big client win, etc.). Stop to appreciate your victories. Give yourself credit before moving on.

Resetting Expectations

Here’s where I struggle with this: what does it look like to “stop and smell the roses” (i.e. acknowledge what we’ve already accomplished)?

Maybe it isn’t an excuse to slow down, but a reminder of where we’ve been motivation to keep going.

An excerpt from a Ryan Holiday article on “not having goals” spoke to me on this subject:1

I don’t have goals.

I know that might seem a little crazy, but it’s true. I don’t.

There’s not a certain amount of books I’m trying to write. There’s not a certain amount of books I’m trying to sell. I don’t have a “number” that I’m trying to hit financially. There’s not a certain number of downloads I’m trying to get ​my podcast​ to or followers I want to reach.

I run every day, but I’m not training to run a marathon. I swim a lot and bike, too, but it’s not because I want to do an Iron Man.

That’s sort of the point. What I want to do is run and swim, what I want to do is write — to me that is the win.

I run because I love running, I write because I love writing, I work because I love my work. It’s the activity itself (the journey) = the work is the thing.

When you finish something significant (new key employee hired, a new product launched, resolved some pesky client situation, or hit a new revenue milestone), pause for a second and actually recognize it before moving on to the next thing. Most entrepreneurs are so focused on the next thing, they never register the current thing was actually a win (maybe even a big win).

Warren Buffett has been running Berkshire Hathaway for 60+ years. He still writes the shareholder letter, shows up for work everyday, does interviews, makes deals, etc. This is what it looks like “for the love of the game.” (Purpose)

Building & Compounding

Here’s a thought I keep coming back to: the best businesses in the world (the ones that outlast their founders) are the ones that build real value over time, and they’re almost never built by people chasing an exit or quick gain.

They’re built by people who got genuinely good at something and kept working at it longer than anyone expected.

Don’t treat the journey (i.e. the hard work) as the “price paid” for reaching your goal/outcome. Instead, let’s treat the journey as the destination… the goals will come as a byproduct and we’ll be much happier along the way.

TL;DR

1. Focus on systems/processes (the activity of what you do) instead of goals/outcomes/destinations (you’ll be much happier)

2. Slow is smooth / smooth is fast — be focused and deliberate instead of frantic, the work won’t go away so learn to enjoy the work you do

3. Find your purpose — reframe what you’re doing (i.e. “delivering happiness” > “selling products”) to find meaning/purpose/joy in your day-to-day activities

4. Solve puzzles, tinker, experiment, try new stuff

5. Love small wins and take time to appreciate/acknowledge the victories you’ve had

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P.S. — I’d love to hear what you’re working on right now… what’s the “big thing” keeping you up at night? Hit reply and tell me… I read every one even if I’m slow to respond :)

Ever wonder why a business would purposefully charge less than it could for a product?

Some of you may have caught the Masters Tournament at Augusta National last weekend and noticed the absurdly cheap menu items available: $1.50-3.00 for sandwiches, snacks at $1-2, drinks for $2-5.

You could build an entire meal plus a beer to wash it down for just $10-12 all-in. The same setup at a football game might run $30 or more.

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What does this have to do with your business?

There’s actually a lot of interesting strategy behind this pricing decision and maybe some parallels we can draw to running your own company…

For starters, the Masters generated ~$153 million in revenue in 2022 (according to Forbes). What were the sources of that revenue?

• Merchandise was ~$70 million (46%)

• Ticket sales ~$40 million (26%)

• TV rights & sponsorships $35m (23%)

• Concessions of just $8 million (5%)

Compared to other event venues, they’re leaving a ton of money on the table when it comes to food & beverage. No one would bat an eye at prices 4-5x higher.

Why do it?

Because the $1.50 sandwich isn’t just a “concession,” it’s marketing.

Every year, without fail, this story goes viral. Journalists write about it, fans post about it on social media, regular people who have never watched a golf tournament in their life share the story; because it feels genuinely incredible in a world of $15+ stadium beers.

Augusta National Chairman Billy Payne said back in 2007:

“We take certain things very, very seriously. Like the cost of a pimento cheese sandwich is just as important as how high the second cut of grass is going to be.”1

The sandwich is a legitimate part of the brand here.

So how can they “afford” to do this?

Let’s think back to that revenue mix and the product margins behind each of those streams…

• Merchandise is likely a 40-60%+ category (apparel, gifts, etc.)

• Ticket sales are probably the lowest margin (think of all the production costs to operate the event) at 0-20%?

• Broadcast rights and sponsorship dollars are very high margin at maybe 70-80%

Blended, those 3 income streams work out to $50-60m before overhead. Under normal prices and margins, concessions could add another $15-20m, but instead they’re probably breakeven at best.

It’s a testament to the power behind these other high margin revenue streams.

There’s a similar playbook over at Costco (as I’m sure many of you are familiar with $1.50 hot dog).

Founder Jim Senegal said to then CEO Craig Jelinek: “If you raise the effing hot dog, I will kill you. Figure it out.”2

Costco’s reasons are slightly different (it’s “on brand” for them as a low-cost leader to maintain such a ridiculously low price and therefore somewhat symbolic), but the outcome is the same = viral marketing.

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How to apply this to your business

The Masters can afford to aggressively price (market) their food & beverage at such low prices because the engine of the business runs elsewhere (merch, broadcasting, sponsorships, tickets).

And adding fuel to that engine is the mystique/prestige/scarcity behind the whole thing (I saw an ad for a $200,000+ car at one point).

The food is a loss leader that pays dividends in brand equity you couldn’t quantify on a spreadsheet.

The main takeaway is the power of having multiple revenue streams with different economics (especially when one part of the business is highly profitable). This gives you the freedom to be strategic somewhere else in the company. You can afford to make decisions that don’t make sense on a spreadsheet.

Most small business owners don’t think this way (myself included, I’m a card-carrying spreadsheet jockey) and that’s exactly the opportunity here.

Let’s try to apply this now…

Ask yourself 3 questions:

1. First, where are your real profit centers? Every company has some product or service which carries better margins. Do the unit economics work and see which parts of your business are carrying the most weight.

2. Second, if that “super high margin” product or service doesn’t yet exist, where could it be? Is there something you currently do which has the potential to be that mega-margin segment?

3. Third, where is there potential to price aggressively as a marketing investment rather than a profit center? Maybe it’s a front-end service that ultimately leads to higher margin work? Maybe it’s something you can provide at a substantially lower cost than competitors?

This doesn’t have to be complicated.

I’m just trying to get the wheels turning for you

Frankly, this setup may not exist in every business, I just want more businesses getting off the hive-mind virus that is digital paid advertising (most owners treat Google/Facebook ads as the only means to marketing).

Homework

1. Grab a piece of paper.

2. Look at your product or service catalog and write down all the different streams coming in today.

3. What’s your “pimento cheese sandwich” (the thing you could price aggressively)

4. Then ask: do you have the revenue base to support it? If product A has a 60% margin, can it subsidize an intentionally low-margin product B that acts as marketing for you?

TL;DR — A cheap price on the right product or service isn’t always just a discount, sometimes it’s a massively differentiating factor for your business.

“An organization's ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.” — Jack Welch

We use a ratio scorecard to flag trends in the numbers, then we dig into the drivers of those ratios, then we take action to course correct.

Check out the guide on building a ratio scorecard here:

If you’ve been following along, you should have a scorecard with key metrics and ratios for your business model and financial situation; and you’re ready to get tactical with it…

Now, it would be impossible to cover the tactical side of using this tool for every business, in every financial situation, so I’m going to focus on 2 areas that I see frequently.

Hopefully this “investigate — analyze — action” framework will help you use this tool on your own numbers.

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Using the scorecard

For starters, here are the 3 primary ways to use your scorecard:

1. Track your numbers across time — you want to know whether your business is directionally becoming more efficient or less efficient (“the trend is your friend”)

2. Establish a baseline range or average — this makes it easier to see if current performance is inside or outside your normal baseline

3. Compare to industry averages (benchmark) — it helps to know if your metrics/ratios are better or worse than peers or competitors (where do you rank amongst the group)

Running a business is dynamic, not linear. Your numbers won’t move in a straight line. It’s far more helpful to find a baseline (range) for each ratio than rely on a single point-in-time measure by itself.

Clearly, you want that baseline to be a tight range (i.e. 52-55% vs. 45-60%), but having a baseline helps you avoid excessive worrying when results fluctuate up or down.

Interpreting the results

Let’s try this process for 2 ratios on our scorecard. We’ll look at the trends and determine which actions are available to us.

1. Gross margin; and,

2. Marketing efficiency ratio (MER).

1) Gross margin

We use this ratio to measure profitability at the sale level (i.e. after covering all direct costs to make, produce, or sell). The formulas are:

Gross Margin = gross profit ÷ total revenue

Gross Profit = revenue - COGS

Let’s say you’re a few years into running the business. Revenue has been growing steadily from $1m to $1.275m (revenue growth hasn’t been a problem so far). But profit doesn’t seem to be following…

You update your scorecard for the past few years and months, noticing the following trends:

67.5%
66.0%
62.0%
63.0%
57.5%

It doesn’t take a rocket scientist to figure out a 10% drop in gross margin is a lot, but it does require some investigation to figure out why. On $1.275m annual revenue that’s $127,500 lost profit; enough to pay for another employee, more marketing campaigns, or extra take-home for yourself.

So what do you think is happening here?

First, let’s think about the inputs to gross profit and gross margin:

• Total revenue = Average sale price x volume x customers (new and returning)

• COGS = materials, labor, shipping, processing fees, royalties, etc. (completely dependent on your business model)

These inputs help us identify why and where gross margins might be declining… which leads us to the tactics to influence this ratio:

1. Raise prices — perhaps you’ve neglected to raise prices for years (while costs have increased each year); this one is simple, but often overlooked, when was the last time you raised prices?

2. Discounting — it’s easy to give away 10-20-30% of a sale to entice a prospect to buy… this kills gross margin

3. Unprofitable customers — some companies “give away” very attractive pricing to lure a “whale” customer… only to find out months/years later that the customer doesn’t generate any profit and/or consumes a ton of capacity

4. Volume — for the high-fixed-cost-businesses out there (manufacturers, distributors, some professional services), more revenue is need to spread across those fixed costs

5. Revenue mix — it’s likely you have more than one product/service offering, and those offerings likely have different price points and profitability levels… think about your revenue as a pie chart with all those offerings, we call this your “revenue mix” — if you’re selling more of your lower margin products, that will drag gross margins down

6. Materials — costs are higher for the things you sell or make… if you can’t increase pricing as an offset, then you need to be thinking about improving efficiency or finding new suppliers / reducing your material costs (buy in bulk, run an RFP, or negotiate with your own suppliers, etc.)

7. Labor — if direct labor costs are rising faster than revenue, then you might have a labor efficiency problem… send hourly workers home early if things are slow or investigate where workers might have inefficiencies or are slowing down completion of sales

8. Other costs — you have less control over certain expenses (like CC processing fees, royalties, and shipping costs)… with shipping you can negotiate better rates as you scale; for the others, just make sure you’re consistently passing along cost increases with pricing

This is just a short list of items which could be quietly eating into your gross margins… if you brainstorm enough, you can probably add dozens of other areas to investigate.

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2) Marketing efficiency ratio

In addition to the gross margin weakness, we notice the business is spending large and growing sums on marketing & advertising each year, so we decide the Marketing Efficiency Ratio (MER) is worth tracking.

MER = total marketing expense ÷ total revenue

This ratio tells us how much we’re spending on marketing per dollar of sales (i.e. 5% = 5c marketing spend per $1 of sales). Here are the last few readings on marketing efficiency:

6.0%
6.2%
8.0%
8.5%
8.9%

This business is spending a LOT more on marketing than in years past… from 6% of sales to almost 9%, this expense category is eating into margins to the tune of 3% per year (that’s a $30,000 profit hit for every $1m in sales).

Is this a bad thing?

Each dollar spent on marketing should be productive for your business. If not, you have an efficiency problem.

Based on the MER trends above, we should expect revenue growth to accelerate in the next few months.

To measure this, I’d check how growth is changing over time. Let’s say the business was consistently growing 2-3% per year (back when we were spending 6%)… if that growth is accelerating to 5-10% or more, then the additional marketing costs are working for us.

If growth is slowing (or non-existent), then I’d consider the additional costs as inefficient and worth reviewing or reducing.

Some tactics we can use to address our MER:

1. Reduce marketing budget — be careful here, if you were spending $2k per month and cut to $1k per month, your goal would be no change in revenue (i.e. eliminate the inefficient spend)… treat this as a “test” and reverse course if sales trends worsen

2. Shift your marketing budget — modern businesses are brainwashed into thinking digital ads on Google or Facebook are the only outlet for marketing dollars… explore other channels to spend on revenue-generating ads (look into direct response marketing)

3. Sales team efficiency — if you have a direct salesforce, those employees should be consistently producing sales… perhaps you’ve recently hired additional reps on the team which require training and ramp-up time… otherwise, the MER is a great indicator for struggling performance by the sales team.

Don’t get complacent and treat marketing as a fixed cost. Each $1 going out should produce more than $1 coming back in the form of sales; if not, then investigate your marketing activities and channels.

TL;DR

1. Fill out your ratio scorecard with your key metrics/ratios and look at the trends (direction) for each metric or ratio

2. Establish a baseline of performance (i.e. between 5-7%) — baseline > single-point measurement

3. Identify the 3-5 worst trends (deteriorating) and investigate the inputs for those ratios (like we did in the gross margin & MER examples).

4. Brainstorm the actions/events in your business impacting each of those inputs for corrective actions.

5. Repeat this process each month to keep close tabs on your most important measurements.

P.S. reply with a specific trend, measure, metric, or ratio that you find helpful or that you’re struggling to interpret and we’ll take a look!

As you look to answer this question, you might be checking some figures from your financials:

• Are you making money? (i.e. currently profitable)

• Is there cash on the balance sheet? (whether it’s enough cash is another question)

• Are sales growing or declining? (which direction is the business heading)

• Are you consistently making your loan payments each month?

These are the most common starting points among business owners I talk to: sales, profit, cash, debt. But how are you gauging whether it’s “good” or “bad?”

We use what’s called a ratio scorecard to give us these signals.

In our last article, we covered the KPI scorecard (a weekly tracker for operational KPIs), that tool is more tactical in nature with real-time leading indicators. Example: if you’re looking to track outbound sales activity, that’s where you’d find it.

This is different. The ratio scorecard is a monthly tracker built directly from the financial statements. Yes, it’s lagging in nature since those results already happened, but it takes your numbers and transforms them into a “report card” of sorts.

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What are metrics and ratios?

First, some definitions. You’ve probably heard terms like ratio, metric, and figure. Here’s how I think about them:

• Ratio (narrow) = Something relative to something else. Example: profit (from P&L) divided by revenue (from P&L) = profit margin.

• Metric (broad) = Any measurement, financial or non-financial. It’s broader in nature; example: revenue would be considered a metric but not a ratio.

Here are some examples of each:

This distinction is important for a few reasons…

While metrics are helpful (let’s say you have a profit target of $100k, you’ll want to see whether profits are actually above or below that level), ratios reveal the true health of the business.

Say you want to compare that $100k profit (a metric) to another business (or your own business from a few years ago), that $100k amount isn’t really comparable without other pieces of information. Now let’s say your profit margin (a ratio) was 10%; you can absolutely compare that margin to past years or a competing business.

Picking the “right” metrics and ratios takes time and refinement. Ideally, you want to track the ones most relevant to your business model and financial situation. Over time, you’ll see patterns and trends which allow you to quickly diagnose problems.

To keep things simple, we’ll focus on four categories of ratios for now: profitability, liquidity, efficiency, and leverage. Each category unpacks a different part of the business.

Four categories of ratios…

1) Profitability — are you making money?

This is the most intuitive category, so it’s a natural starting point.

Gross margin = Gross profit ÷ Revenue

Gross profit is what’s left after you subtract your direct costs for making, selling, servicing, delivering your product or service. Gross margin is your profitability at the sale level (i.e. before paying overhead costs). A 40% gross margin means you’re making $0.40 on every revenue dollar before paying rent, salaries, and everything else.

This is a critical ratio for every business and you’ll want to track it monthly. If it’s trending down, you either have a cost problem or your pricing isn’t keeping pace.

Net profit margin = Net income ÷ Revenue

If gross margin is profitability at the sale level, then net margin is profitability at the entire business level. It’s also known as your “bottom line” since it includes everything (direct costs, overhead costs, interest on debt, etc.). A 10% net margin means you’re taking home $0.10 of every revenue dollar. Industry benchmarks vary widely, but a general rule of thumb = 5% net margin is OK, 10% is solid, and 15%+ is excellent for most small businesses.

Return on assets (ROA) = Net income ÷ Total assets

How much net profit does your business generate for every dollar of assets you own? This one matters more as your business scales and accumulates property, equipment, inventory, and assets in general. A shrinking ROA over time is a signal you’re adding assets faster than you’re adding profit, or your assets are becoming less efficient (or both).

2) Liquidity — can you pay the bills?

Profitable businesses can still go bankrupt (it happens more than you’d think). The reason is almost always liquidity or cash flow issues (i.e. they ran out of cash despite being profitable).

These ratios track cash and cash flow problems…

Current ratio = Current assets ÷ Current liabilities

Current assets convert to cash within a year (cash, receivables, inventory, etc.) while current liabilities are payable within a year (credit cards, payables, short-term debt). The current ratio measures your ability to pay bills coming due.

A ratio above 1.0 means you have more coming in than going out in the near term, below 1.0 is a yellow flag.

A ratio above 2.0 is very comfortable for most businesses. Too high (above 3.0) and you might be sitting on idle cash or excess inventory/receivables that could be working harder (an efficiency problem; albeit a good one).

Quick ratio = (Cash + Receivables) ÷ Current liabilities

This is a more conservative version of the current ratio; it includes only cash and receivables in the numerator. The balance sheet is sorted by liquidity so cash and A/R are the 2 most liquid assets in your business.

If the current ratio measures your ability to pay bills coming due, then the quick ratio measures your ability to generate cash in the short-term. If your quick ratio is below 1.0, you’re more dependent on inventory and other current assets to cover bills. For inventory-centric businesses (retailers, distributors, manufacturers), this is a critical ratio.

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3) Efficiency — how well are you managing what you have?

Efficiency ratios measure how effectively your business converts assets into revenue, profit, and cash. These ratios are quite revealing beyond just the profitability line, it’s where I usually find “beneath the surface” problems.

Days Sales Outstanding (DSO) = (Accounts Receivable ÷ Revenue) × 365

How long does it take your customers to pay you on average?

This is your DSO. It measures the average collection period (in days) for your entire business. If DSO is 45, then you’re getting paid every 45 days on average. The lower this number, the better. A rising DSO is a warning sign for cash flow (sales are being collected at a slower pace). This is a great ratio to track across time and industry peers.

Days Inventory Outstanding (DIO) = (Inventory ÷ Cost of goods sold) × 365

How many days of inventory are you sitting on?

Faster (lower) is better. Slow-moving inventory is cash tied up in the business. If DIO is creeping up each month/quarter, then you’re either stockpiling inventory, sales are slowing, or some combination.

Asset turnover = Revenue ÷ Total assets

Every dollar of assets should be generating revenue. This ratio tells you how efficiently that’s happening. If you have $500k in total assets on $1m in revenue, your asset turnover is 2.0, meaning each dollar of assets produces $2 of revenue. Higher is better. This one is best tracked over time to monitor how your efficiency changes as you scale.

4) Leverage — how much debt are you carrying?

Debt has a bad reputation, but when used properly it can create massive wealth (used poorly and it’ll bankrupt you). Here are some ratios to stay on the right side of that equation:

Debt-to-equity ratio = Total liabilities ÷ Owner’s equity

This compares what you owe to what you own (in the business). A ratio of 1.0 means you owe as much as you own. Higher ratios mean you’re more leveraged (more dependent on borrowed money to fund the business). There’s no universal “right” number, but watch the trend over time. A steadily rising debt-to-equity ratio is worth investigating.

Interest coverage ratio = Operating income ÷ Interest expense

Can your business comfortably cover its interest payments? A ratio of 3.0 means your operating income is three times your interest expense (plenty of cushion). Below 1.5 and you’re cutting it close. This ratio is critical if you’re carrying significant amounts of debt or thinking about adding more debt.

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Building your scorecard

Consider the ratios mentioned above as a “starter kit” for building your first scorecard.

If you’re doing this for the first time, I’d suggest grabbing your last 3 years of financials and calculating each ratio for that 3-year period. Use this to diagnose where problems are hiding.

As you get comfortable with the process, update your scorecard monthly alongside your financial review. Give each ratio a target based on goals or industry benchmarks. Color-code them red, yellow, green to easily spot trends. After six months, you’ll have a baseline. After a year, you’ll start seeing the “story” behind your numbers.

Ratios do their best work when you track them over time, the trend/direction (i.e. improving or worsening) is far more important than a single point-in-time snapshot. And the more time (data) you have, the more reliable the trend is.

Let’s say your gross margins are 40% while competitors are running 45%. That’s pretty helpful, but it’s more helpful to know last year was 42% and the year before that was 45%. Now we have a real problem to investigate.

Takeaway (TL;DR)

A ratio scorecard takes the financial statements and turns metrics into ratios which help measure the financial health of a business. Track ratios over time to get a sense for improving or worsening trends. This is your “jumping off point” to diagnose problems in the business. Update this scorecard every month and use it as a guide for managing your business.

Next week we’ll look at how to actually use both scorecards together as a decision-making & operating tool (the tactics).

What one piece of information would you want to see sent to you in a bottle once a week/month/year to know your business is still doing well?

This is an extreme scenario since it would be nearly impossible to gauge overall health with a single piece of information, but hopefully it gets the wheels turning. The “desert island” situation is the thought process behind a scorecard.

Let’s take a closer look at the scorecard — what it is, how to build them, and how to use them. Consider this a primer on one of the most powerful operational & financial SMB tools.

Today will focus on the KPI scorecard (part I), next week will cover the financial (ratio) scorecard (part II, and last we’ll look how to actually use this information (part III).

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Definitions

• Scorecard — A tool to track and monitor your business’s progress toward goals, objectives, and historic performance. It’s a curated collection of key performance indicators (KPIs).

• Key Performance Indicators (KPI) — The underlying measures which tell us how things are going. They can be activity-based, leading, lagging, financial, operational, etc.

  • Leading — Sales calls, backlog, traffic, call volume, cycle time

  • Lagging — Turnover, average order value , on-time delivery

  • Financial — Sales, profit, A/R, billings, collections, cash flow

  • Non-financial — Labor hours, utilization, inventory units, leads

These concepts were popularized by Peter Drucker (“what gets measured gets managed”) in the 1950’s, Andy Grove’s 1983 book High Output Management, and the Robert Kaplan HBR article on the Balanced Scorecard in 1992.

The many types of scorecard

Anything which tracks a measurement (KPI, metric, ratio, financial figure, etc.) over time can be considered a scorecard.

They don’t have to be in a specific format and don’t have to include visuals. If a business is tracking some metric on a regular cadence, then consider it a scorecard.

Some examples:

We’ll focus on 2 core tools:

1. KPI Scorecard — operational in nature on a weekly cadence

2. Financial (Ratio) Scorecard — financial in nature on a monthly cadence (usually part of a monthly financial review)

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The KPI Scorecard

Most KPI scorecards go something like this…

• Define your strategy

• Set goals aligned with that strategy

• Pick KPIs which track progress against goals

• Monitor and take action as necessary

The folks who devised this process have likely never experienced the daily knife fight known as running a small business.

The traditional approach may work for larger, more complex organizations; but as an SMB owner, we need something more practical…

Here’s a better approach for tracking operational metrics:

1. Start with core areas of the business

2. Select KPIs and metrics tied to each area

3. Use a mix of leading and lagging indicators

4. Track a basket of 15-20 metrics weekly and review with team

1) Core areas of the business

Most businesses consist of 5 functional areas:

• Sales & marketing — finding new leads/prospects and converting them into paying customers

• Customers — relationship with existing customers (retention!)

• Employees — measuring aspects of your team (productivity, morale, etc.)

• Operations — product quality, delivery, service, processes, etc.

• Finance & admin — financials and organizational stuff

You could go deeper than this, but it covers just about everything involved in running a company.

Instead of the traditional top-down, goal-driven KPI process; most businesses would be better served to track a “bottom-up” basket of metrics across these 5 functional areas.

If we can keep the list of metrics to 15-20, then we can get a complete view of business performance in a single view. Sweet. It’ll look something like this:

2) Select KPIs and metrics tied to each area

Again, the formula is:

• 5 functional areas of a business

• 3-4 metrics each

• 15-20 metrics in total (single page view is the goal)

The selected 3-4 metrics should give you a clear picture of how that functional area is performing. For example, maybe I’m a newly-opened business and revenue is scaling quickly; I probably want to focus my operational metrics around capacity (when do I need to hire/add), service quality (make sure all those new customers are happy), and repeat customer rate (make sure all those new customers are coming back).

Anything can be measured. Let’s say you care about “making things easier” to run. Even that can be measured. Example:

• Goal = “make things easier” by reducing my return-on-headache

• KPI suggestions:

  • Number of clients that call/email more than twice per week (customer)

  • Frequency of refunds/returns/complaints (customer)

  • Manual touches per transaction (sales)

[P.S. scroll down to the bottom of this article under the section titled “Appendix: KPI List” to find a list of sample KPIs.]

3) Use a mix of leading and lagging indicators

Consultants will tell you to stick with only “activity-based leading indicators” like number of phone calls, backlog, touch points, utilization, etc.

Leading indicators are great, but they’re overrated when you’re trying to BOTH track progress toward a goal AND get a quick pulse on overall business performance (i.e. real-time health)

When it comes to activity-based metrics, I prefer the OKR framework (objectives and key results). You have an objective (grow by 20%) and some key results to achieve the objective (outbound activity of 100 per week, hire new sales rep, ask for 20 referrals). Some of these key results are one-and-done actions as opposed to true KPIs (like hiring a key employee).

Instead, our KPI scorecard should track a mix of current (lagging) performance and leading indicators.

Here’s an example of a potential scorecard for Profit Mastery:

4) Track a basket of 15-20 metrics weekly and review with team

Every passing week brings us new information about our business. After we’ve gathered enough data (maybe 4-6 weeks), we’ll see baseline performance levels and can set targets.

Let’s unpack the example above…

First, I could (and should) start by color-coding performance levels above-or-below my targets. Then, I can add some visuals to see how each metric is trending.

Sure, it may look like a Christmas tree, but at least it’s very clear that I’m operating below my targets (though I’m seeing more “green” popping up recently). Something I may want to consider here is adding a “yellow” for metrics within an acceptable range.

Next week, we’ll look at the financial (ratio) scorecard in part II and in part III we’ll cover how to use the information from our weekly operational scorecard and monthly financial scorecard (i.e. a decision-making framework).

P.S. like and share this post and we’ll drop a link to the template + KPI list in the comments.

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TL;DR

The KPI scorecarding process — Grab a piece of paper. Brainstorm 3-4 metrics for each of your 5 core business functions (sales & marketing, customer, operations, employees, finance & admin) for a total of 15-20 metrics. Remember, these are what you’ll get while on a desert island. Track those metrics weekly and look for consistent performance (your baseline) and improving trends. Each quarter, swap out metrics that aren’t working.

Appendix: KPI List

1) Sales

• Pipeline value ($) (leading, financial) — Forecasts future revenue and effectiveness of sales reps / process

• Qualified leads (leading, operational) — Top-of-funnel sales activity (i.e. the transition from marketing to sales), early signal of future pipeline

• Close rate (lagging, operational) — Sales efficiency (converting qualified leads into closed business)

• Average deal/order size (lagging, financial) — Tracks revenue efficiency, up-sell & cross-sell efficiency, and sales mix (i.e. higher ticket vs. lower ticket offerings)

• Sales cycle (leading, operational) — How fast is the timeframe from prospect to closed business? Also has downstream measurement for ops/capacity planning

• Revenue per sales rep (lagging, operational) — Individual productivity of sales team; also a measure of ROI on sales dollars

2) Marketing

• Qualified/interested leads (leading, operational) — Measures quantity of interested leads coming out of your marketing activities

• Cost per lead (leading, operational) — Tracks marketing efficiency; big implications on unit economics and overall profitability

• Visitors / traffic (leading, operational) — Overall level of visitation / potential customers (harder to capture in B2B and brick-and-mortar retail)

• Followers / subscribers / audience (leading, operational) — Tracks the overall size of your audience which has revenue-generating potential

• Conversion rate (leading, operational) — Indicator of advertising effectiveness to turn cold visitors into qualified leads/prospects (or paying customers)

• Customer acquisition cost (CAC) (lagging, operational) — Fully loaded cost to win a customer; key component of unit economics

• Return on ad spend (ROAS) (lagging, operational) — How much revenue is generated by paid advertisements

3) Customer

• Net Promoter Score (NPS) (leading, operational) — Tracks level of customer happiness; predictor of both future referrals and potential customer churn

• Customer churn rate (lagging, operational) — Measures customer cancellations; good indicator of quality or service issues

• Customer lifetime value (CLV) (lagging, operational) — Quantifies total value of a customer relationship; indicator for S&M investments

• Support ticket volume & response time (leading, operational) — Rising volume or slow response times are leading indicators of customer churn

• Customer complaints (leading, operational) — Indicator of service issues and potential customer churn

4) Employees

• Employee engagement score (leading, operational) — Predicts retention, productivity, and culture health

• Voluntary turnover rate (lagging) — Measures the cost and disruption of losing talent; high rates erode institutional knowledge

• Revenue per employee (lagging, financial) — Core labor productivity metric; easy to benchmark based on industry

• Labor margin (lagging, financial) — Labor productivity metric; good indicator for over/under-staffed situations

5) Operations

• On-time delivery rate (lagging, operational) — Late shipments are an indicator of service quality

• Capacity utilization (leading, operational) — How much of your resources are in use (team, equipment, etc.); good indicator for potential quality issues and/or hiring needs

• Order cycle time (leading, operational) — Time from order to delivery; shorter times = better customer experience

• Defect/error rate (lagging, operational) — Frequency of issues/errors; both financial impact (refunds, rework, etc.) and customer churn impact (lower repeat business)

• Inventory turnover (lagging, operational) — Efficiency of inventory management and tracking; good indicator for cash flow

6) Finance/Admin

• Revenue/growth (lagging, financial) — Heartbeat of a business; every company should know YoY down to a weekly level

• Gross margin (lagging, financial) — Profitability at sale level; indicator of scalability/viability of the business model

• Operating cash flow / cash runway (leading, financial) — Predicts how long the business can operate; crucial for turnarounds

• Budget variance (lagging, financial) — Highlights forecasting capability; overruns indicate poor planning or expense creep

“The main thing is to keep the main thing the main thing.” — Stephen Covey

In the words of my business partner, 2026 is the year of simplicity and profitability (feel free to borrow that motto).

I’ll set aside the “simple” part of that equation for now; as I reflect on how we’ve achieved profitability in past years and how we’ll add more of it in 2026, I’m boiling it down to three simple ingredients:

1. Grow revenue

2. Dial in our unit economics

3. Control our fixed expenses

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1) Revenue growth

You’ve probably heard the adage: “if you’re not growing, you’re dying.” But have you ever asked why that’s the case?

Check out this not-so-long-term chart on the purchasing power of the US Dollar.

If you were making a $100,000 profit ten years ago, it’s now worth just $73,000 because of inflation.

Let that sink in. This means ten years from today, you’ll need to be making $136,000 just to maintain the same buying power of today’s $100,000. This is why we must grow.

And unfortunately for business owners, this is happening on two levels: first, with the costs to run your business (labor, materials, services, etc.); and then when you use your profit as a consumer to buy goods and services.

We’re fighting a war on multiple fronts here.

It’s possible for a company to maintain or improve profitability without growth for brief periods of time, but it’s not sustainable over the long run.

Without getting into the meat of “how to grow revenue,” let’s start with some basics:

1. Defining revenue growth — I think of revenue growth as “this period vs. the same period last year” (known as year-over-year, or YoY, growth rate). It can be measured on a daily, weekly, monthly, yearly basis. Example: last month sales were $1,000 and the same month last year was $990 = 1% YoY growth.

2. Knowing your growth rate — Growth rates ebb and flow throughout the year and they’ll vary from a weekly-to-monthly-to-yearly view. Think of it as a range, not a single number. Your weekly and monthly growth rates give you a view into short-term trends (i.e. what’s happening right now) while quarterly/yearly growth rates are your long-term trends. Pay attention when the short-term view starts to diverge from the long-term view.

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2) Unit economics

This is one of my favorite concept since it rolls 3-4 pieces of profit measurement together — pricing, unit costs, delivery costs, etc.

What are unit economics?

It’s your unit-level profitability. It measures the profitability of a specific business model by looking at one single unit of what you sell. It can be measured by product line (product, service, customer, etc.) or by sales channel (store, website, wholesale, Amazon, etc.).

Sketching out the unit economics for your business is incredibly valuable to understand where you’re making money and where you aren’t. There’s an added benefit to doing this annually in that you’ll see how profitability is changing over time.

Here’s a super simple example of unit economics for different product lines in a business. This could be a view of a standard product (A), a higher price point item (B), and a wholesale/bulk offering (C).

Which of these would do you want to focus your efforts on?

It sure helps to know these economics when answering that question!

1. Write down your top 3-4 product lines or sales channels

2. Think about all the costs that go into a single sale

3. Sketch out these calculations for each product/channel

4. Keep it simple and don’t get hung up on complete accuracy

Tracking unit-level profitability reminds me of Buffett’s view on pricing power in a business (a key input):

“The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business.” — Warren Buffett

Where do you have pricing power in your business?

It may not be everywhere, but surely you have at least one product, channel, or customer group which has pricing power over time.

3) Fixed expenses

Fixed costs do not change regardless of sales.

You pay for these whether sales are $1.00 or $1 million, which makes these expenses very important, if not critical, to business success. It almost feels criminal not to track them!

And it baffles me why this concept isn’t baked into more P&Ls.

As a small business owner, you have flexibility in crafting your chart of accounts (i.e. how your financials are displayed). Design your financial statements to closer align with this fixed vs. variable concept.

Example: track salaried vs. hourly wages as two separate expense lines, don’t commingle credit card processing charges with bank fees, split out paid advertising from marketing agency costs.

Once you start paying close attention to them, it becomes much easier to keep them fixed and only grow them when needed. After a while, it will pain you to add to your fixed cost base!

Here’s what overall profits look like with revenue growth + flat fixed expenses:

In this example, sales grew from $2,000 to $10,000 (a 5x increase), but profit grew from $300 to $4,300 (a 14x increase). That's called leveraging your fixed costs, and it's powerful stuff!

For now, this starts with: (1) understanding which costs are fixed and which are variable; and (2) designing the income statement to (very) clearly show these fixed vs. variable costs.

Good management starts with good measurement.

Homework — Grab a sheet of paper to find your growth rate + unit economics + fixed costs. Check your YoY sales for the past 3 months, then look at the last 3 years; what’s your growth rate? Then, calculate your margin for your top 3 products/services; which is the golden goose? Last, separate your fixed/variable costs on your P&L; how did they change over the last few years?

P.S. hit reply if you’re completely stuck on where to start with this!

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First, an introduction

We’re a 40-year old company training thousands of business owners each year to read and use their financial statements (check us out at www.profitmastery.net).

This newsletter will share practical guides, financial tools, and concepts. It’s meant to be easy-to-use and easy-to-read since most business owners come from a non-finance background.

PM was founded in 1983 by Steve LeFever, a former banker and entrepreneur. He took some core SMB financial concepts and turned them into a very comprehensive 2-day curriculum. Previously, this curriculum was taught exclusively in-person during a 2-day bootcamp. Today, we teach this program in-person and virtually, along with other workshops.

My partner and I came into the picture around 2020 when we attended a virtual session of Profit Mastery University. The program was fantastic. Even as a CPA and CFA, I came away with several new tools for running our businesses.

A few years later, we (Circle City Capital Group) acquired Profit Mastery and began adding lessons and learnings into the classes and programming.

Next, an intro to the author

My name is Colin and I’m an “entrepreneur” (I use quotes because my entrepreneurial endeavors were all done through acquisitions). Since 2018, my partner and I acquired 15 companies and 1 piece of real estate (plus I’ve personally done another 2 acquisitions dating back to 2016). [you can connect with me here.]

Most refer to this as Entrepreneurship Through Acquisition (ETA).

I’m the finance and accounting side of our partnership. Professionally, I spent time as an accountant, worked at an investment firm analyzing and investing in public companies, and had a brief stint in private equity buying small businesses. My partner brings operational expertise to the table. It makes for an excellent partnership honestly.

We run a holding company (HoldCo) of disparate businesses with very different financial and operational profiles. It’s cliche, but it’s our little Berkshire Hathaway in a sense.

Profit Mastery was a 2023 addition to this HoldCo and I currently act as President & CEO.

The lessons run deep in this combo accounting, investing, SMB, pool of experience and I enjoy writing on topics touching all 4 of those subjects (hence the newsletter).

>> Here’s a podcast I did with Acquiring Minds in 2024

Next, some lessons

Fellow business owners will relate to many of these.

It’s not all glory and success. This path is incredibly challenging, frustrating, and taxing both mentally and physically. But there’s nothing quite like that feeling of rolling up your sleeves and reaping all the reward for your hard work.

If I were talking to myself 10 years ago, here are some quick pieces of advice I’d offer up:

1. Find a good partner with the same goals, a different worldview, and an opposite skillset to yours (share the risk, reward, workload, and capital required to get started)

2. Business ownership is incredibly lonely at times and very few people (if any) will truly understand what you’re dealing with — this is where a partner, support groups, mentors, etc. come in

3. The SBA 7(a) program is an excellent route to acquire an established business when you don’t have lots of equity (cash) lying around

4. On the other hand, buying a business with 90% leverage + personal guarantees is a seriously risky commitment with little room for error — it can, and will, cause some sleepless nights

5. Passive investors or silent partners are a great way to reduce risk — if I could do it again, I’d use more of this

6. No one is there to tell you what to focus on (”shiny object syndrome” is a real risk for every entrepreneur) — be methodical about stepping back to see the big picture and focus on needle movers

7. There is a time to focus (go deep) and a time to explore/tinker (go wide) — recognizing these “seasons” is not difficult when you’re in it

8. Build some buffer into your projections — whatever you think EBITDA, SDE, or earnings will be after you close, it’s at best a 90% confidence interval

9. You need more working capital — after you’ve penciled in the total capital you need to buy a company, add more... managing an undercapitalized business is tough (especially with 90% leverage!)

Last, the newsletter

Why write on Substack?

My reasons are twofold: 1) Substack has a large audience which should extend the reach of our 22,000 email subscribers; and 2) I’m hoping to get more interaction using a social platform (direct email newsletters are great, but only a small subset truly interact with the content).

So if you like the content, have thoughts or comments, or specific topics you’d like to read about, let me know!

Most of the content here will focus on financial management for small businesses (accounting, finance, ops, M&A, etc.).

Hit subscribe and learn a few things about finance + operating small businesses.

Cheers,
Colin

• ​Days Sales Outstanding​

• ​Growth Rate​

Today, we’ll cover the Cash Conversion Cycle (CCC). It’s a bit of an advanced concept, but worth the investment.

For starters, here’s a stripped down definition of operating cash flow:

Operating Cash Flow = Profit + Depreciation +/- Working Capital

You’ll notice working capital can add or detract from operating cash flow. The CCC is a way to measure just that working capital portion of cash flow (since it’s arguably one of the peskiest financial concepts on earth).

1) What is it (CCC)?

CCC measures how long (in days) it takes a dollar of cash to move through your business, from start to finish.

Think of it this way, you’re a retailer and you just placed an order for 1,000 units of your best-selling product; how long until those 1,000 units are sold, shipped, and the cash is collected? That’s your CCC.

It combines the 3 working capital metrics:

1. Days Sales Outstanding — length of time to collect sales

2. Days Inventory on Hand — length of time to store and sell inventory

3. Days Payable Outstanding — length of time to pay bills

2) How to calculate it?

Starting with some basic formulas you’ll need to know...

• Working capital = A/R + Inventory - A/P

• Cash Conversion Cycle = DSO + DIH - DPO

• DSO, DIH, DPO outlined below:

What we’re measuring is: 1) the average length of time we hold onto inventory before we sell it; plus 2) the average length of time it takes us to collect from our customers; minus 3) the average length of time we take to pay our supplier bills.

Remember, working capital is expressed in dollars, it’s the dollar amount you have tied up in those accounts on your balance sheet. CCC is expressed in days, it’s how long it takes those dollars to come back to you in the form of a collected sale.

3) Why is this so important?

Your CCC is one number to rule them all when it comes to measuring cash flows from working capital. Pretty sweet.

Plus, it’s measured in days which is intuitive for owners and employees. Those days are easily translated to dollars to measure the actual cash impact too.

It varies based on how much working capital is needed in your business. See the chart below for various cash cycles of different business models. Retailers typically carry lots of inventory and have a higher CCC than a restaurant for example, which has no inventory and customers pay via credit card.

Usually, your CCC is the limiting factor when it comes to: 1) turning profits into cash flow; and 2) growing your business. Both of which are on most business owners’ bingo card.

4) How to use it?

Try plugging your financial data into this simple calculator to determine your CCC trends over time:

Get the CCC Template

From there, look at the trends to determine whether you have a working capital problem and which bucket is leaking (A/R, inventory, or A/P). Then, you can begin taking steps for corrective action.

Want to free up more cash?

Bring this number down. There are even rare business models with a negative cash cycle, meaning they get paid before they shell out cash to suppliers or inventory.

Here’s my approach...

I want to find benchmark cash cycles for my industry and try to operate at a level better than average. If my peers are running 90 days to convert cash and I’m at 110 days, then something in my business model is off. Perhaps I’m getting no terms from my suppliers or I’m overstocked on inventory.

Then, I want to keep tabs on my CCC over time (i.e. trends) and make sure they stay within guardrails. For example, my peers are at 90 days and I want to be at 80 days. I’ll want give myself some wiggle room and stay within 80-90 days.

Example:

Check out the company below. It’s a visual of 10 years’ worth of cash conversion days. What do you think of recent performance (i.e. since 2022)? Though trends have improved since then, do you think this company has opportunity for more improvement?

Happy new year fellow profit seekers!

As a gift for the holidays (the kind that pays you!), we’re highlighting 10 tips to make 2026 your most profitable year yet. Last week, we covered #1-5 to set a foundation, and today we’ll get tactical with #6-10.

Here they are:

1. Hold your fixed costs (keep ‘em fixed)

2. Set a salary cap (reverse engineer labor costs)

3. Audit your inventory (convert to cash)

4. Check your marketing efficiency (only pay for customers)

5. Calculate your breakeven point (fight cost creep)

6) Hold your fixed costs

Fixed costs hang around regardless of your revenue. You’ll need to pay for these things whether sales are zero or $1,000,000.

Examples would be: rent, utilities, maintenance contracts, loans, salaries, insurance, software subscriptions, etc.

If you keep fixed costs flat over time while growing revenue, then profits will explode higher. And what’s the best way to keep fixed costs fixed? By paying attention to them!

Your first “mission” as a business owner is to know & cover all fixed costs.

Pull out your monthly P&L from tip #4 and add your fixed costs to that step. If you build a good habit of monitoring your monthly expenses looking back 6-8 months at a time, you’ll be able to see these fixed costs with your eyes closed.

Also, if you need to modify your chart of accounts to better see these expenses, do it.

7) Set a salary cap

Struggling with high payroll expenses?

Try setting a salary cap.

Just like a professional sports team, you can manage your business by “solving” for specific expenses. Let’s say you have sales of $1,000 and want to make $100 profit. That means you need to keep expenses at $900. Of those $900, maybe $400 are for materials, overhead, etc. which leaves you with $500 to spend on payroll.
​

Compare that $500 estimate to your actual payroll costs. Then ask yourself some questions:

• Where can you make cuts?

• Where can your team be more efficient?

• How much additional revenue would you need to hit your profit goal without changing payroll?

A salary cap is a great planning and benchmarking tool.

8) Audit your inventory

The goal is to minimize inventory on hand while maximizing revenue.

Every inventory-centric business should spend time periodically reviewing their inventory position. For these businesses, it’s the largest potential source of cash consumption.

How can you tell if you have too much or too little inventory?

Like the cleaner in Toy Story 2, you’ll need to probe your inventory at a level of detail never seen before.

Start by building a “source of truth” master item list, grab a friend and knock out a full physical count to get accurate on hand quantities, then start segmenting with the “ABC” method (A’s are top 70% of sales, B’s are next 20%, C’s are bottom 10%), set basic reorder points and never run out of A’s and B’s.

Inventory planning takes practice and an extreme detail orientation. Do a deep dive at least a few times each year.

9) Check your marketing efficiency

Why is growth so important in business and life?

Let’s say you were making $1 and saw no growth over the next 5 years. Your $1 from 5 years ago is worth only 80¢ today. This is why we have to play the game.

To grow, we need new customers, and new customers require marketing.

But we don’t want to spend marketing dollars that don’t bring in new customers.

Enter: marketing efficiency.

A few ways to track how effective your marketing dollars are:

1. Track “top of funnel” potential customers like foot traffic or visitors to see whether you’re getting more people visiting you (this works with physical, digital, or B2B businesses)

2. Track the number of “new” vs. “old” customers buying from you

3. Track your percentage of marketing & ad expenses to total revenue over time (look for a stable or decreasing %)

It’s a lot of tracking, but these are good KPIs to get a window into the effectiveness of your marketing dollars.

10) Calculate your breakeven point

Breakeven can be a revenue number or volume number.

It’s the point at which you have zero losses and zero profit; complete equilibrium.

Why does this matter?

Your breakeven is not something you calculate once and it’s set in stone forever; it changes constantly, especially when you’re growing and adding more expenses and people to your business.

Knowing your breakeven point is a great way to combat “expense creep.”

Also, if you have a profit target (hint: you should), then you can use the same breakeven formula to find the sales required to hit your profit target.

The breakeven formula is simple:

Hopefully by now you’re realizing how important is it to know your fixed costs (see tip #6).

We’re just a few days away from the new year; and while it’s somewhat arbitrary in the sense that we wipe the books clean (hello retained earnings!) and start all over again, it gives us a renewed energy to make it the most profitable year yet.

This week, we’ll start with #1-5 (the foundations) on our list of ten tips to make this a profitable year. They are:

1. Track your cash flows (every week)

2. Build cash reserves (load up on cash)

3. Invest in good bookkeeping (don’t do it on the side)

4. Start a financial review process (look at your numbers)

5. Make a scorecard (track your key metrics)

1) Track your cash flows

A 2-question pop quiz:

1. How much cash did you collect last week and where did it come from?

2. How much cash went out and where did it go?

If you can’t answer those 2 questions for last week, then I’m guessing you can’t answer them for the past 2 weeks or 2 months either.

Track your cash flows every single week.

This is completely separate from your financial statements and it will give you a very different lens to look at your business. Once you start tracking these cash flows for a few weeks or months, you’ll start to see recurring amounts and patterns which make it easy to forecast where cash is headed (we call this a 13-week cash forecast and every business should have one).

A cash flow tracker is also incredibly useful for new business owners or folks who are uncomfortable with financial statements.​

2) Build cash reserves

One of my favorite stories about Bill Gates from his early days at Microsoft was his thought process around cash and liquidity.

Gates insisted on keeping tons of cash around for playing both defense and offense. His suggested amount of cash reserves? 12 months of operating expenses!

This is overkill (12 months), but the typical small business has somewhere between 2-4 weeks of expenses in cash on hand. That’s not enough to protect from unforeseen events.

Stick with 3-4 months of opex in cash plus open up a line of credit for emergencies (and treat it as such).

3) Invest in a good set of books

It’s never too late to invest in a good set of financial statements.

If you’re doing the books yourself, then hire a bookkeeper. If you have a bookkeeper, review the quality of their work. If you have a good bookkeeper, ask if you’re getting the right reports or have the right format. There’s always something to improve when it comes to the books.

What are some signs of good bookkeeping?

1. Consistency → Everything is in the same place every month

2. Timely → You get the financials in time to use them (it’s late-December, do you have November financials yet?)

3. Concise → Do you have an unwieldy chart of accounts with 200 line items? Are some accounts getting used once every 18 months? This will not provide you with better decision-making.

4. Trust → Do you trust the numbers? Sometimes “gut feel” makes sense. If you don’t look at your numbers because you don’t trust that they’re correct, then there’s no better signal to invest in a better set of books.

Treat bookkeeping like an investment, not an expense.

4) Start a financial review process

Finance and accounting are meant to be supporting functions for a business (data, information, reports, feedback).

What’s the best way to start using finance as a support tool? Start with a monthly financial review process.

Here’s the situation: you’ve just received last month’s numbers, what do you do next?

Answering that question is your review process in a nutshell. My suggestion is to start with a basic checklist of things to look at each month. From there, write down your notes, thoughts, and areas to investigate. Refining this process over time will better help you understand and communicate your financial story (to yourself, your team, or any external stakeholders).

A basic checklist to get you started:

1. Year-over-year (YoY) performance → How does this month stack up against the same month last year? How about this year-to-date (YTD) vs. the same period last year?

2. Growth → Every company should know whether they are growing or declining. What is your YoY growth rate (%) this month, last month, last week, or the last few years? Growth is imperative so track it across many time periods

3. Monthly P&L → Grab a copy of your P&L with 6-8 months stacked together. This is known as “horizontal analysis,” and we’re looking for trends across time. Do you notice relatively flat expenses (perhaps rent & utilities)? These are your fixed costs, you’d be smart to track them every month!

4. Common-sized P&L → This is known as “vertical analysis.” Take the monthly P&L and divide each line item by that period’s revenue, you’ll get a percentage (%) which you can compare across time. How do this month’s margins compare to last month? Or last year?

5. Cash flow → Remember those weekly cash flows we started tracking? Now let’s look at them through a monthly view. How do cash inflows & outflows compare to your P&L? What is your cash position? These are good things to check in on at least monthly.

6. Ratio scorecard → Pick 10-15 metrics for your business model + financial situation and track them each month. Consider this the best place to get an overall picture of your business.

7. Rolling 12-month analysis → This is a bit advanced, but it’s very powerful. In a rolling 12-month view of your business, every column represents an entire 12-month period of time (i.e. a full year). This eliminates all seasonality and lumpiness in results (like paying a full year of insurance expense in a single month). A R12M is my go-to when assessing business trends.

Review your financial reports every month.

5) Make a scorecard

Whether financially inclined or not, we all have certain numbers or metrics we’re regularly looking at to get a pulse on our business. Take this one step further and track it in a scorecard.

What is a scorecard?

It’s a tool (can be a spreadsheet, notebook, or special software) to track self-selected metrics. Pick 10-15 metrics, calculate them, and track them each month (or weekly if you need more real-time information).

Some examples to get you started:

1. Growth rate (YoY)

2. Margin (gross, EBITDA, net, etc.)

3. Inventory balance

4. Cash balance

5. Fixed costs

Think about your scorecard like this: you’ve been stuck on a desert island for a year and want to know how your business is doing; what are the fewest possible things you’d need to know to answer that question?

Use this tool as a “jumping off point” to see what’s going well and what’s going poorly in your business (i.e. early warning indicators). These can be a mix of financial and non-financial metrics too (like traffic, employee morale, etc.). And don’t be afraid to swap out metrics that aren’t helping.

​>> Take the ratio scorecard mini-course​

See you next week for tips #6-10. Those are the real money-makers :)

It was Sunday evening, my kids were asleep and my wife and I were peacefully enjoying the heavy snowfall from the comfort of our sitting room.

At that moment of peak relaxation, I got a text from my business partner: “flight cancelled, won’t be home for the TV broadcast.”

We were slated to do a promo for our flannel business on the local Fox affiliate the next morning.

Suddenly, the scene from Wayne’s World started playing in my head; where Wayne walks out and Garth has to do the show on his own, saying “I’m having a good time... not.”

I’m just the finance & accounting guy, he’s usually the pitch guy! I’ve given presentations before, both online and in-person, but this was TV.

It reminded me of the first time we borrowed money to buy a company. The sheer size of the price tag and the intensity of the loan documents (hello personal guarantees) were terrifying.

(Don’t get me wrong, the SBA 7(a) program is a wonderful tool, but the personal guarantees can cause sleepless nights on occasion!)

Looking back on that situation (hindsight is 20/20), we wouldn’t be where we are today without that first push of our snowball.

So here’s the point: Do things that scare you. Put yourself out there.

Back to the story...

What I did (and how to respond to fear)

After letting my mind drift to worst case scenarios, I regained a sense of clarity on what to do next.

I did what business owners do: I formed a plan. It’s the best way to defeat those moments of crippling business anxiety. In my case, I listed 5-10 talking points for the TV segment, asked my wife if she’d tag along to model some flannel in place of my partner, rounded up as much flannel shirts, pants, blankets, and accessories I could find, and practiced a few talking points.

Preparation is the antidote for panic.

• Make a big list - all the facts, everything that could go wrong, actions you could take, etc. - get it all down on paper

• Find your desired outcome - what does “good” look like

• Start lining up the actions you could take to counteract those “what could go wrong” outcomes

• Practice (if the situation allows for it) - a “dry run” is powerful

So what happened?

We nailed it. The show went well, no stumbles or awkward moments (at least I think).

You can judge for yourself:

Everyone (business owner or otherwise) can benefit from taking the occasional “leap of faith” risk. Think of them as reps; each time you put yourself out there, you get a little better at it the next time around.

Of all the financial metrics, in all the towns, in all the world; your growth rate should come first.

Nearly every move you make in business will flow downhill from whether you’re growing or not. Let’s take a look at:

1. The importance of growth (why this matters)

2. The 4 types of growth

3. Calculations

4. Creating your growth algorithm

Why do you NEED to grow?

I’m sure you’ve heard about this thing called inflation; and you’ve probably heard about the declining purchasing power of a dollar (yes, your cup of coffee is more expensive today).

Let’s say you have a goal of making $100k per year in profit or salary. And once you achieve that goal you decide to live life to the fullest while taking your foot off the gas in your business (i.e. stop pushing for growth).

What happens to that $100k profit/salary in 10 years?

If inflation continues as it has for the past 10 years, then your $100k salary will turn into $73k. Ouch.

Use this as a reminder when 2026 rolls around and you’re hesitant to push through those prices increases for next year!

The 4 axes of growth (definitions)

When reviewing an investment or acquisition, I’m defining growth across 4 dimensions:

1. Long-term trends — Pull up 5-10 years of P&L or sales data and check your revenue trends. These yearly growth rates (%) are your long-term growth trends.

2. Medium-term trends — Pull up the last 6 months of P&L and compare each month to the same month last year. Those year-over-year (YoY) growth rates are your medium-term growth trends. If 5 out of 6 show positive growth, then you have a consistently growing business.

3. Short-term trends — What were YoY sales for each of the last 6 weeks? These are your short-term growth trends (6 weeks = ~1.5 months).

4. Industry outlook — This requires some investigation and intuition. Some internet searching and sleuthing can you help you find future industry growth predictions. This is how the market perceives your business/industry.

Note: I’m only looking at top line revenue when referring to growth here. Technically revenue is a combination of price ($) and volume (#).

We can loosely compare each of these axes to get a blended feel for our business’ growth trends. If long-term growth is >5% but medium-and-short-term growth is 1%, then growth trends are slowing down.

Calculating growth

Some definitions you’ll need:

• Year-over-year growth (YoY) = period sales ÷ prior year period sales -1 [month, quarter, or year]

• Month-over-month growth (MoM) = monthly sales ÷ last month sales -1

• Compound annual growth rate (CAGR) = (ending ÷ starting) ^ (1 ÷ years - 1)

Here’s a quick example...

My business was doing $100 in sales 5 years ago and it’s $1,000 today. That is 900% total growth [$1000 ÷ $100 = 10 - 1 = 9 or 900%].

The 5-year CAGR = 78% per year (incredible). [$1000 ÷ $100 ^ (1 ÷ 4) = 1.778 or 77.8%]

Last year sales were $950 = 5.3% growth [$1000 ÷ $950 = 1.0526 - 1 = 5.3%].

Over the last 6 months, my YoY growth was 5%, 1%, 3%, 9%, 4%, and a 2% decline. That’s 2.5% average growth.

The last 6 weeks were 1%, 2%, 5%, 5%, 2% decline, and 1% decline. That’s 1.7% average growth.

Blending these together, my long-term growth is 78%, last year was 5.3% growth, the last 6 months were 2.5% average growth, and the last 6 weeks were 1.7% average growth.

What do you think about these trends, any concerns?

This looks like a classic deceleration in performance (78% > 5.3% > 2.5% > 1.7%). A great “investigation” signal.

Creating your “growth algorithm”

Big public companies use terms like “growth algorithm” to describe to investors how much they plan to grow in the future. We can steal their playbook and do the same!

First, find out where you’re currently tracking by calculating your long, medium, and short-term growth rates. This is your baseline. In theory, if you were to change nothing, these are the growth rates you could expect in the future.

From there, start looking at how you’ll increase the key inputs to revenue:

[Revenue = Customers x Average Order Value x Orders]

• Use price increases and/or upsell + cross-sell to increase average order value

• Your sales and advertising efforts bring in new customers (via leads)

• Increase volume by adding or developing new products or services

“The most powerful person in the world is the storyteller. The storyteller sets the vision, values and agenda of an entire generation that is to come.” — Steve Jobs

What I love about financial statements (and numbers in general) are the intricate stories they weave about a business.

• Revenue falling over the last 4-5 years? Maybe an industry problem, maybe competition, or maybe marketing efforts are running dry.

• Gross margins declining? Sounds like pricing and efficiency are going the wrong way.

• Interest expense ballooning? The company must’ve borrowed more money, what did they spend it on?

Behind every single number (output) in your business, is a story about something happening (input). Finance & accounting are just outputs from all of your operational inputs.

Why is storytelling important?

Have you ever struggled to articulate what’s going on at your company or where you’re headed next? It’s because you don’t have a firm grasp of the story.

The best use cases for your story:

• Banking — when it comes time to get a new loan, refinance, or simply update your lender for the year

• Raising money — let’s say you’re starting a new business and need to raise money from friends & family (doesn’t matter if it’s a loan or equity)

• Rallying your team — if you want your team motivated and rowing in the right direction

• Figuring out what to do next — this is a big challenge as an owner, no one is there to tell you what to focus on; if you have a sense for the story, it becomes much easier to steer the ship

How do I find my story?

Let’s break it down using the core elements of storytelling:

• Plot (where you’ve been) — What are the chain of events or “where you’ve been.” Ex: we were growing quickly for several years until 2 new competitors came into market; since then, things have slowed down quite a bit.

• Character (the hero) — This is your adventure, goals, dreams, ambitions. No one starts a business without a dream or goal of some kind, it’s the essence of the hero’s journey.

• Conflict (the problem) — All stories have a problem. Even if things are going well in your business, the problem might be simply continuing to make progress.

• Change (the transformation) — We need to change or transform in order to overcome our conflict. Revenue declining? We install a kickass sales system and hire a team to execute it.

• Setting (where things take place) — Which markets, niches, product lines, channels, etc. are we going after? Don’t overlook the subtle details and minutia of this aspect, get granular with it.

• Theme (the meaning) — This is your “why.” It’s hard to win in business without purpose and/or passion. You don’t have to be conquering world hunger; it’s perfectly fine to want to work with people you like to build something cool.

Much of this feels “fluffy” or intangible, but I promise it will help you connect the dots between your business and the underlying numbers.

So how do you use this from a practical standpoint?

1. You’ll need both a long-run and short-run view of the numbers. Think: 5-7+ years for the long-run and ~18 months for the short-run. Business cycles span multiple years, we need enough history to see the ebbs & flows.

2. With that, I’m looking at revenue trends, margin trends, and earnings trends on my P&L. And cash, total asset, debt, and equity trends on my balance sheet.

3. From there, start connecting the dots with the tangible activities.

Think of this process as similar to defining your financial situation, something we’ve previously discussed.

Example

How about some live ammunition here...

I’ve been following media stocks for years and with Netflix set to acquire Warner Bros., I’m intrigued by companies in the industry, namely: Comcast.

Below is a 10-year snapshot of Comcast financials from 2016-2025 with select “key events” highlighted for reference:

Let’s build the story here..

Thanks to growing broadband and theme parks businesses, revenue grew steadily from 2016-2021 (8% per year). Things slowed (almost stopped) from 2022-2025; why? Competition started to enter the market via AT&T and Verizon, plus a continued slowdown in cable TV.

We see a big acquisition in 2018 which contributed to higher debt, but they repaid a good chunk of that from 2018-2023. And right as the business was slowing down in 2022, they started distributing more cash to equity owners (while borrowing to do so!).

Comcast seems at a crossroads... growth is slowing/falling but cash flow is still very healthy. But perhaps the shift to heavy dividends is leading to underinvestment (capex), furthering the growth slowdown.

Hmm...

Homework — This brings up a fun question: have you ever looked at a complete multi-year view of your business? If not, now is your chance! Give it a try with your numbers and see what you find.

When I invest in a public company, I’ll review no less than 10 years of financials to get a complete understanding of the business & trends. You should too.

Most business owners go down the entrepreneurial path for 3 reasons:

1. To make more money

2. To work fewer hours

3. Follow a passion

Not to say that I’m uninterested in #3, but I was definitely motivated by #1-2 when I got started.

Having been exposed to accounting theory and public company financial statements throughout my career, I assumed profitability would be an easy achievement (so long as I picked the right business to get into).

I quickly learned that small business profits do not follow many of the theoretical concepts taught in Accounting 101-401 (apologies to my fellow CPA nerds).

Instead, as owners, we do a lot of “stuff” in our businesses and hope that positive earnings will follow. It’s an action first, wait-and-see second approach

Today, I’d like to introduce you to a concept I call the profit journey.

We all want it, we’re just taking different paths to get there.

First, let’s look at the typical (stereotypical?) journey:

• Action/hustle — continually hack away at working in the business with no real thought for the #’s

• DIY books — a self-starter set of financials that are more of a half-truth... timing and consistency are spotty during this phase

• Desire for more — maybe we see a competitor doing well, or maybe it’s fear of accepting our own #’s, but at some point we all have the desire to do it right

My business partner is a methodical operator, his brain is wired for solving problems; but he absolutely loves numbers (and profit), so he truly enjoys the content we preach at Profit Mastery.

A few weeks ago, we came to an “aha” moment for how the profit journey should work...

Cash → Books → Training → Support

1. Cash — What better place to start than cash management? We start here because it’s oxygen for your business. Plus, if you can learn to balance a checkbook, then you can learn to manage cash flow. No accounting knowledge needed, no bookkeeping, no monthly close... just cash.
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2. Books — After (or while) you’re pinning down cash, you’ll want to invest in a good set of books (the accounting kind). Cup up your own cheesy analogy here: driving without a dashboard, flying blind, etc. Here’s the reality: something like 60-70% of small businesses manage their own books without an accountant’s support and another 60% or so feel they make frequent mistakes in their accounting. Spend the money, hire help, get it done right (and consistently).
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3. Training — This will be the bulk of your time investment. With a simple cash management program and a set of financial statements in hand, you’re ready to add knowledge (learn) and tools (practice) to your financial management system. Learning is evergreen, not finite. It never stops. So think of this step/phase as ongoing; you’ll pick up new tools to start using, but you’ll continually refine your ability to use them.
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4. Support — At this point: you’re tracking cash flow, have a set of financial statements, and you’re using tools (reports). Now you’re ready for guidance on achieving your dreams and goals. This could come through hired support like a CFO or fractional CFO, as part of a community, a peer group, or through a mentor/advisor. The point here is to get support in reading & using your financial info to bridge the gap to your ultimate goals.

That’s the process in a nutshell. Like your business, it never ends. You’ll find yourself occasionally stepping down the ladder to fix or tweak something in the earlier stages and that’s perfectly fine.

Also, don’t feel the need to “rush” through these; it’s more a loose guideline than firm structure. You could spend your entire career as a business owner in the training phase while simultaneously in the support phase!

This will be a new monthly series as part of our regular newsletter. There are too many financial metrics and most articles are long on definition, short on “what do I do with this?”

This series will fix that. What we’ll cover:

1. Metric overview (what it is and why it matters)

2. Who should care about it

3. What actually moves it

1) Days Sales Outstanding (DSO)

Long-time followers and fans have been beaten-over-the-head with this metric, but what better place to start than deep in the belly of working capital.

DSO = average collection period of sales for your business in aggregate

It’s a critical metric, especially for businesses regularly invoicing customers (i.e. virtually everyone except for maybe retail/e-commerce).

To calculate it:

• Pick any 12-month period of sales (doesn’t have to be December)

• Compute your “receivables turnover” = 12-month sales ÷ A/R

• DSO = 360 ÷ receivables turnover

• If you’re seasonal, use average A/R from the last few months to smooth results

Example: $1,000 sales and $100 A/R = 10x... 360 ÷ 10x = 36 days. Simple.

2) Who should care?

Everyone. A single day of DSO is cash trapped on your balance sheet. For a $1m business with $100k A/R, a single day is worth close to $3k!

Allow this to go unnoticed and it could cost you tens of thousands over time. The longer your typical invoice terms (net-30 or longer), the more crucial this metric becomes.

You want to compare your actual performance (DSO) against your stated invoice terms (i.e. net-30). This gap between actual DSO and stated terms will dictate which strategies you use to close it.

For example: if you ask for payment in 30 days and get paid in 30 days, then you don’t want to incentivize customers with early pay discounts. If those customers pay in 50 days (i.e. 20 days late on average), then early pay discounts might be a good tactic to close the gap.

A few exceptions for tracking DSO would be: full cash basis (rare), e-commerce, or a brick-and-mortar retailer.

3) What drives this metric?

Sales and receivables are the inputs here. Let’s look at a real company in the commercial lawncare industry:

Their DSOs were hovering around 65-67 for months, then spiked to 72-75. Translation: cash flow got worse the past 3 quarters.

So how do we use this information?

• Set a “normal” range for your business — the above example might have a normal range of 65-70... anything outside that would warrant investigation into A/R aging, collection processes, isolated customer issues, etc.

• Read the trend, not just the number — a few consecutive months or quarters of rising DSO might indicate problems.

• Score your customers — calculate DSO by customer to see your good-paying VIP customers vs. potential headaches, prune the latter group.

• Stress-test growth — use your real DSO to see if you can afford adding crews, trucks, or locations without running out of cash.

• Compare segments — find your DSO by service line, job type, or sales channel to decide where to push sales and where to tighten terms (not all streams pay equally).

• Add to a scorecard — track it on your ratio scorecard and use your “normal range” as a goal.

• Trigger collections — watch for rising DSO by customer and call those accounts before they hit 60+ days.

• Set “no more work” thresholds — use DSO and days past due thresholds to pause work or require deposits from slow-paying customers.

Let me describe your typical business owner routine:

1. Knock out a bunch of tasks on your list

2. Meet with your team so they can knock out a bunch of tasks on their list

3. Add more tasks to your list and their list for the next “round”

In a nutshell, this is business ownership.

This won’t be another newsletter on how to work on your business, instead I want to talk about thinking big.

My business partner and I recently attended a conference where we met other entrepreneurs, operators, and investors. We separately came to the same conclusion about our businesses: “we’re not thinking big enough.”

What does “thinking big” mean?

Thinking big is dreaming, it’s 10x, it’s non-linear — What could my business be? What could my life be? What could my earnings be?

It’s taking the absolute endgame for your goals and desires, then working backward to make it a reality.

Thinking big doesn’t mean:

• How to add the next customer or 10% growth (linear thinking)

• Daydreaming about $1 billion outcomes with no plan

• Ignoring details, discipline, or constraints

Thinking big does mean:

• Choosing goals that genuinely stretch you

• Working on problems that matter beyond the next paycheck

• Making decisions based on where you want to be in 3-10 years

As a litmus test: if a “big goal” wouldn’t force you to do something completely different, hard, or new; then it’s probably too small.

Why should this matter to you?

A big vision forces thoughtful planning and decision-making. If your goal is to knock out a punch-list of tasks this week, then that’s all you’ll accomplish (while saying yes to more punch-listy items).

This will force your brain to think about non-linear paths and solutions to problems. Examples: Is this client/project/idea truly aligned with where I want to go? Will this task/tool/hire help me get to 10x?

Also, thinking big doesn’t have to mean growth. It’s perfectly fine to have a small, well-run business; but perhaps thinking big to you is working fewer hours or with less stress.

Some examples:

• Small thinking: “How can I make an extra $500-1,000 this month?”

• Big thinking: “How can I make an extra $5,000 every month without my involvement?”

At Profit Mastery, I envision a future where we have multiple training offerings plus software plus services to guide complete financial newbies all the way to seasoned CFOs.

How to think bigger

Here’s a simple framework to get you in the thinking-big-zone:

1. Zoom out 10x — Ask yourself what 10x would mean for you (personally) or your business.

2. Choose one mega goal — Could be building a business that runs without you, or getting out of a specific role, or getting to your target number.

3. Work backward — Now ask: “if this were already true, what would have to happen?” This is the world you want to live in.

4. Break that into milestones — With that endgame reality, you can start outlining what needs to change from today. Set 3-5 major milestones to get there. And start aligning your current workload with steps to move in that direction.

5. Revisit every few months — Set a recurring calendar appointment with this 10x mega goal and your milestones in the details. Check in on yourself for regular encouragement.

Hope everyone had a Happy Halloween; in that spirit, how about a tale of horror?

Imagine we’re running a business together (let’s say it’s a cleaning business) and we have ambitions for rapid growth over the next few years.

Starting with some assumptions:

• To get started, we borrow $500 at 10% interest leaving $500 cash in the bank

• Each cleaning crew produces $560 annual revenue and costs $420 per year

• Each crew needs to carry $100 of supplies on average

• The plan is to expand to 15 crews within the next 5 years

• Customers pay us in 60 days on average

• $50 of annual overhead per crew

Here’s my question to you — will we run out of money before hitting our growth goal?

I’ll give you a minute to do some math...

Before I reveal the answer, let’s get to the point of this exercise

Growth consumes cash.

Unless you have a rare business model with negative working capital, this rule is universal and applies to all businesses. Service, product, manufacturing, distribution, it doesn’t matter.

Why is that?

Rapid growth requires front-end investment with back-end cash collection. We have to buy inventory, supplies, pay employees, get a bigger warehouse, etc. And we need those things before we can make the next sale. On top of that, sales are collected later, usually a few days to a few months later.

So we’re on a perpetual treadmill of pay now, collect later.

Back to our growth question

Remember, we started with $500 in cash. When we hit our target of 15 cleaning crews by year 5, we’re down to $140 in the bank despite $1,300 in profit that year!

We didn’t hit zero, but we certainly feel broke. What gives??

[Note, in this example: Cash = beginning cash plus profit minus A/R increase minus inventory increase]

To support our (much) larger business by year 5, we had to build $1,400 of A/R and $1,500 of supplies. Even though revenue, profit, and margins were growing each year, we were outlaying increasing amounts of cash to fund these assets.

This is the power of growth capital and it’s scary stuff!

So what can you do about this?

First, start monitoring some key indicators:

• Receivables growing faster than sales

• Inventory turning slower

• Payables lagging but not enough to offset

• Constant reliance on line of credit draws

• Low or negative operating cash flow despite profit

More sales and more profit won’t solve this growth problem 100% of the time. If your plan is to grow fast, then you need to plan for additional capital along the way.

This is particularly important for newer, less established businesses that are trying to achieve adequate scale.

Last, we’re only looking at the financial side of this equation. Remember, as you grow you’ll need to onboard more people to your team, create processes, and manage a larger group of customers. Those operational challenges don’t always show up on the financials (when they do, it’s usually through too much overhead).

Aside from raising enough capital to grow, the only way to truly manage this situation is to grow within your means.

What was the MOST impactful thing you’ve learned recently?

The truth is that you will never “find” time to take a step back from your business to learn, reflect, and improve.

Instead, you’ll have to force yourself to make time for these things. What’s fascinating about them (learning in particular), is that the return on investment is probably 10x higher than simply knocking out your to-do list.

Here’s a ridiculously simple approach to improving your learning skills when it comes to the financial side of your business (this same practice + learn approach likely works elsewhere too):

1) Practical application (practice)

• Spend 30-60 minutes weekly looking at reports and take notes – these are the key short-term drivers in your business like cash, sales activity, people management, etc.

• Spend 60-120 minutes monthly in financial review (ideally with a trusted advisor) – this is your chance to zoom out, reflect on what happened, and steer the ship

2) Technical training (learning)

• Every 4-6 months go learn something new – read articles or books, watch videos, take a course or class, meet 1:1 or group, etc.

• Take notes – bring those learnings back to your practical application sessions, tinker and try looking at new things to see if they give you new insights (this is like adding tools to a toolkit)

Here are some of our recent write-ups to get your learning muscles moving:

• Pulling levers — the power of operating leverage

• An underrated financial metric — a look at the asset turnover ratio

• Planning made simple — straightforward guide to planning and tracking goals

• Books every business owner should read — a list of books to help you run, manage, and grow your business

• What to do when cash is low — a simple checklist for managing cash flow problems

• The intersection of sales & profit — 4-part series on combining sales with profitability