Simple Numbers Presentation Slides 031815

Simple
Numbers
PROFIT +
™
P U R P O S E = I M PA C T
Slides at:
SimpleNumbers.me/slides
Greg Crabtree
Greg.Crabtree@crbcpa.net
256-704-0620
Your Experience With Accountants?
How many times a year do you visit your CPA?
§  Four or more
§  Three
§  Two
§  One
Would you like a better financial model that allows

you to make better business decisions?
www.SimpleNumbers.me
The Accountant’s Apology
3 Keys To Unlock Your Business Potential
#1: Remove #2: Labor #3: Four Forces

Distortions Productivity Of Cash Flow
Are you looking at How are you Have you set your
your ‘true’ numbers measuring and priorities right to
and understand your improving your labor build a solid
‘true’ targets? productivity? foundation?
Growth And Profit Must Go Together
What’s your current business situation?
1.  Growing Profitably – Profit exceeds 10% and
annual revenue growth is 5% or above.
2.  Profitably Stable – Profit are 10% or better, but
no annual revenue growth.
3.  Need To Cut – Less than 10% profit and no growth.
4.  Grow Into My Costs – Less than 10% profit, but
“trying” to grow to make up for lack of profitability.
5.  Consuming Muscle – Losing money.
#1: Remove Distortions
Are you looking at your ‘true’ numbers and understand
your ‘true’ targets?
Three Identical Companies – Different Owners
Company 1 Company 2 Company 3
Revenue $1,000,000 $1,000,000 $1,000,000
Salaries $400,000 $500,000 $600,000
Opera6ng Costs $350,000 $350,000 $350,000
Total Expenses $750,000 $850,000 $950,000
Pre-‐Tax Net Income $250,000 $150,000 $50,000
as % of Revenue 25.00% 15.00% 5.00%

Owner Salaries Included Above $0 $100,000 $200,000
Dividends Taken Out $250,000 $0 $100,000

Market-‐Based Wage $100,000 $100,000 $100,000
Revised Actual Net Income $0 $150,000 -‐$50,000

Business Net Income Poten6al $150,000 $150,000 $150,000

Cash Available To Grow $0 $150,000 -‐$50,000
Common Distortions Of Owner Comp
§  S-Corporation owner trying to save on payroll taxes
§  Multi-owner business where shareholders all make
the same wage
§  “Sweat equity” in a startup
§  No guaranteed payments in an LLC
§  “Leftover’s are mine to consume” mindset
§  Not paying a market-based wage (too high or low):
“As the owner, pick any job you want, but the
market determines your wage.”
Watch Your Language – Words Matter
EBITDA
Earnings before: PRE-TAX
Interest, Taxes,
Depreciation PROFITS
& Amortization
GROSS CONTRIBUTION
MARGIN MARGIN
REVENUE Revenue less
Gross Margin less
direct costs,
direct labor cost
excluding labor
Simplify Your Profit & Loss Report
§  Revenue – “Revenue is a vanity number.”
§  Cost of Goods Sold (COGS) – “It’s not your money.”
§  Direct Labor Cost – “Do not mix labor with non-labor.”
§  Expenses – “Too many lines on your P&L create noise.”
§  Facilities
§  Marketing
§  Management and Admin Labor
§  Sales Labor (Optional: May be tracked with Management/Admin)
§  Payroll Taxes and Benefits
§  Other Operating Expenses
§  Other Income/Expenses (Depreciation, Interest Income, etc.)
ConstrucFon Services

Company Company
Revenue $20,000,000 $3,750,000
Simple Number P&L View Cost of Goods Sold (COGS) $17,150,000 $900,000
Business Engine
Gross Margin (GM) $2,850,000 $2,850,000

Direct Labor (DL) $1,000,000 $1,000,000
Direct LER (Gross Margin/Direct Labor) $2.85 $2.85
Contribu5on Margin (CM) $1,850,000 $1,850,000

Opera6ng Expenses:
Facili6es $150,000 $150,000
Business Chassis
Marke6ng $75,000 $75,000

Management and Admin Labor $750,000 $750,000
Payroll Taxes and Benefits $100,000 $100,000
Other Opera6ng Expenses $150,000 $150,000
Total Opera6ng Expenses $1,225,000 $1,225,000
Management LER (Contribu>on Margin/Mgmt. Labor) $2.47 $2.47
Net OperaFng Income $625,000 $625,000
Overall LER (Contribu>on Margin/Total Labor) $1.63 $1.63

Other Income/Expenses:
Deprecia6on $75,000 $75,000
Interest Expense $25,000 $25,000
Total Other Income/Expenses $100,000 $100,000
Total Pre-‐Tax Net Income $525,000 $525,000
as a % of Revenue 2.63% 14.00%
as a % of Gross Margin 18.42% 18.42%
Common Distortions Of Profit & Loss
§  Owner Comp
§  % versus $ – You can’t spend percentages
§  What is a month? – Not all months are created equal
§  Seasonality – Use Rolling-12’s to remove distortions
§  Misaligned Costs or Revenue – All costs should be in the
same month as booked revenue
§  Mixing Labor with Non-Labor – Details in section 2…
§  Cash Flow versus Profit…
Why 10% Profit Is The New Breakeven
Pre-Tax Profitability Targets:
ABOVE
5% 10% 15% 15%
Life The New Great Enjoy It While
Support Breakeven Business You Can
Focus on When you When you have Harvest profits
improving have a “good” a “great” before market
profitability. business. business. forces catch up.
Cash Flow Versus Profit Chart
Chart is based on the following assumptions:
§  Profit levels shown: 5%, 10%, and 15%
§  Revenue at $100,000 per month
§  Tax Rate 40%
§  A service-based business that bills at the end of the
month and gets paid in an average of 45 days
Why Profit Matters: Cash Flow At 5% Profit
$500,000
$400,000
$300,000
$200,000
Cash -‐ 5%
$100,000 Cash -‐ 10%
Cash -‐ 15%
$0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
$100,000
5% Profit:
Breakeven
$200,000
Cash Flow in
67 Months
$300,000
$500,000
10% Profit:
Breakeven
Cash Flow in
$400,000
34 Months
$300,000
$200,000
Cash -‐ 5%
$100,000 Cash -‐ 10%
Cash -‐ 15%
$0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
$100,000
5% Profit:
Breakeven
$200,000
Cash Flow in
67 Months
$300,000
$500,000
10% Profit:
Breakeven
Cash Flow in
$400,000
34 Months
$300,000
15% Profit:
Breakeven
Cash Flow in
$200,000
22 Months
Cash -‐ 5%
$100,000 Cash -‐ 10%
Cash -‐ 15%
$0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
$100,000
5% Profit:
Breakeven
$200,000
Cash Flow in
67 Months
$300,000
The True Picture Of Available Cash
2% Profit 5% Profit 10% Profit
Revenue $2,000,000 $2,000,000 $2,000,000
Net Income % 2% 5% 10%
Net Income $ $40,000 $100,000 $200,000
Tax (40%) -‐$16,000 -‐$40,000 -‐$80,000
ANer-‐Tax Net Income $24,000 $60,000 $120,000
Debt Service (detail below) -‐$60,609 -‐$60,609 -‐$60,609
Available Cash -‐$36,609 -‐$609 $59,391
Debt Payments Amount

Company Vehicle -‐$500
Office Buildout -‐$1,190
Server & Computers -‐$583
LOC (Termed-‐Out) -‐$2,778
Annual Debt Service -‐$60,609
Getting To 15% Pre-Tax Profit
§  Know your current capacity
§  Being profitable and maintaining market share
can be better than growth
§  Remember that 10% is the new breakeven
§  Use the “baffle” concept to grow to 15% profit
before increasing labor cost
#1: Remove Distortions – Action Items
q  Simplify your P&L
q  Accurately report Owner Compensation
q  Focus on the “true” numbers:
q  Gross Margin
q  Contribution Margin
q  The right pre-tax Profit Margin
q  View financials in Rolling-12’s
q  Understand what “paying taxes” really means
#2: Labor Productivity
How are you measuring and improving your labor productivity?
Direct Labor Is The Key To Productivity
Direct Labor Efficiency Ratio (LER) measures:
§  All employees that spend the majority of their
time (50%+) delivering direct value to clients
§  Do not include benefits and taxes
§  Ideally it can be viewed by client/project/segment
Gross Margin
Direct LER =
Direct Labor Cost
Ways To Improve Direct LER
§  Do you have the “right” people? Any bad apples?
§  Can you provide training to improve productivity?
§  Are you selling stuff that you do well?
§  Do you have the “right” clients?
§  Can management do a better job of “managing?”
§  Are you paying people the appropriate wage?
§  Do all employees know their productivity level and
how they can improve it?
Example Of Building A Championship Team
2013/2014 Miami Heat 2013/2014 San Antonio Spurs

Lebron James $19,067,500 Tony Parker* $12,500,000
Chris Bosh $19,067,500 Tim Duncan* $10,361,446
Dwyane Wade $18,673,000 Tiago Splider* $10,000,000
Total – The “Big Three” $56,808,000 Manu Ginobili* $7,500,000
Boris Diaw* $4,702,500
§  NBA Base Salary Cap $58,700,000 Mad Bonner $3,945,000
§  2013/2014 NBA Finals Results: Danny Green $3,762,500

Marco Belinelli* $2,750,000
§  Spurs win in 5 games with highest
point margin of victory in history Kawhi Leonard (Finals MVP) $1,887,840
§  Fifth NBA championship in 5 years Total – 9 Highest Paid Players $57,409,286
What Is Your Salary Cap?
Company
Revenue Target $1,000,000
Cost of Goods Sold (COGS) $200,000
Total Expenses (Facili6es, Marke6ng, Other) $300,000
Net Income (Target 10%) $100,000

Salary Cap $400,000

Current Total Labor Costs $430,000

Over/Under Salary Cap $30,000

Management Labor Must Be Productive
Management Labor has four primary functions:
§  Drive revenue
§  Control costs
§  Manage the “Salary Cap”
§  Make Direct Labor more productive
Contribution Margin
Management LER =
Management and Admin Cost
Sales Labor Efficiency Ratio
Your Sales Labor has one primary goal:
“Sell the stuff we do best.”
§  Not all revenue is created equal
§  Base sales incentives on Contribution Margin
§  View Direct LER by client to find patterns
Contribution Margin
Sales LER =
Sales Labor
Measure And Manage Labor Efficiency
Start Step #1 Step #2 Step #3 Step #4
4.4% Profit 10% Profit 15% Profit Back to 10% Back to 15%
Revenue $450,000 $492,195 $534,383 $534,383 $587,822
Direct Costs Excluding Labor $130,000 $142,195 $154,383 $154,383 $169,822
Gross Margin $ $320,000 $350,000 $380,000 $380,000 $418,000

Gross Margin % 71.1% 71.1% 71.1% 71.1% 71.1%

Direct Labor Cost $90,000 $90,000 $90,000 $98,333 $98,333

ContribuFon Margin (CM) $230,000 $260,000 $290,000 $281,667 $319,667

Management/Admin Labor $75,000 $75,000 $75,000 $83,333 $83,333
Sales Labor $35,000 $35,000 $35,000 $43,334 $43,334
Other Opera6ng Expenses $100,000 $100,000 $100,000 $100,000 $100,000

Pre-‐Tax Profit $20,000 $50,000 $80,000 $55,000 $93,000

Pre-‐Tax Profit as % of Revenue 4.4% 10.2% 15.0% 10.3% 15.8%
Contribu6on Margin as % of Revenue 51.1% 52.8% 54.3% 52.7% 54.4%

Other Opera6ng Costs as % of Revenue 22.2% 20.3% 18.7% 18.7% 17.0%

Labor Efficiency RaFos (LER):
Direct LER (Gross Margin/Direct Labor) $3.56 $3.89 $4.22 $3.86 $4.25
Sales LER (Contribu6on Margin/Sales Labor) $6.57 $7.43 $8.29 $6.50 $7.38
Management LER (Contribu6on Margin/Mgmt. Labor) $3.07 $3.47 $3.87 $3.38 $3.84
LER Across Improvement Cycle
Career Labor Efficiency Curve
Career Labor Efficiency Curve Lessons
§  Make training zone as short as possible
§  Create fair movement of pay relative to value
§  Eliminate crossover to replacement zone:
§  Manage expectations
§  Transition to new roles
§  Lifetime learning
Labor Efficiency Ratio (LER) Case Studies
1.  Crabtree, Rowe & Berger – The true cost of
unproductive labor
2.  Multiple Location Services – Fix margin and
direct labor
3.  Tech Staffing – Low margin, high volume
4.  Marketing Firm – Owner compensation fix
5.  Tech Consulting – Direct Labor model
6.  Construction – Gross margin true top line
Services Business Transformation
Measuring Marketing Efficiency
Gross Margin
(Rolling 12)
GM minus MarkeFng Spend

(This line must go up!)
MarkeFng Spend
(Rolling 12)
Marketing Efficiency Ratio
How is your company using marketing to grow?
§  The goal of Marketing is to generate leads that can be
closed by Sales
§  Separate Marketing function from Sales
§  “Most business do not spend enough on Marketing.”
§  Measure marketing’s impact and know when to take
a break or change directions
Gross Margin (Rolling 12)

Marketing Efficiency Ratio =
Marketing Cost (Rolling 12)
#2: Labor Productivity – Action Items
q  Track Direct Labor Costs separate of other costs
q  Use Direct LER to measure and manage productivity
for individuals, team, segments, and clients
q  Identify and manage to a “Salary Cap”
q  Use
Management LER to measure and manage
admin staff
q  Use Sales LER to measure and manage sales team
q  Measure Marketing Efficiency
#3: Four Forces of Cash Flow
Have you set your priorities right to build a solid foundation?
Four Forces of Cash Flow
Prioritized in order:
1.  Set Aside Tax Liability (Quarterly)
2.  Repay Line of Credit (LOC) Debt
3.  Core Capital Target in Reserves – 2 months of
operating expenses and Direct Labor in cash with
nothing drawn on Line of Credit (LOC)
4.  Pay Dividends (Distributions)
Wealth Building Premise
Company
Revenue $2,000,000
Net Income $200,000
as % of Revenue 10%

Equity need to be fully capitalized $400,000

Return on Equity 50%

Tax Rate 45%
Weekly Accounting Rhythm
Deposits:
§  Take to the bank daily
§  Separate duties if possible
§  Use remote deposit
§  Log into online account to record ACH payments
§  Daily email to management on bank balance and
who paid
Invoices:
§  Invoice weekly, if possible
§  Have the invoicing done by those closest to
the customer
§  Break monthly billing into 4 cycles
§  If invoicing is in a separate system, reconcile weekly
Bill Payments:
§  Only pay bills once a week on the same day
§  Use the “bill” process in QuickBooks to get the right
date on the expense
§  2-week Cash Flow forecast report each week
§  Turn off automatic sweep on LOC
Online Banking:
§  Check bank activity online daily
§  Use a two monitor environment
§  Do a “soft” reconciliation daily
§  Make your accounting system be the authoritative
bank balance, not the bank’s
§  Use online bank alerts
Credit Cards:
§  Input charge detail into your records
§  Download activity if at all possible
§  Update once a week on the same day
Payroll:
§  If a QuickBooks user, we like QuickBooks Assisted
Payroll the best, all data is held within your records
§  Use one of the major players (ADP, Insperity,
Paychex, etc) if you want it separate. Try to
automate the entry back into your books
§  Do not do it yourself! The #1 possibility of fraud
§  Update Labor Efficiency Ration (LER) reports after
every payroll
Data To Manage Your Business
Profit
Marketing Efficiency
Labor Efficiency Ratio (LER)
Gross Margin Thinking
Close Books Weekly

#3: 4 Forces of Cash Flow – Action Items
q  Follow the Four Forces of Cash Flow in order
1.  Set aside tax liability quarterly
2.  Repay Line of Credit
3.  Build Core Capital Target in reserves
4.  Pay dividends
q  Understand your Return on Equity
q  Establish
your weekly accounting rhythms so you
can focus on the important
q  Manage your business with Simple Numbers data
Simple Numbers Dashboard
Available plug-in for QuickBooks users to access
Simple Numbers Dashboard.
Company Dashboard
Business Engine
Simple Numbers Balance Sheet
Your Company Settings
Mapping QuickBooks Accounts
SimpleNumbers Profit Tool Offer For You
§  Works with QuickBooks desktop versions
§  Use Discount code “EO” for a 20% discount off
monthly price of $49.95
§  Use up to 3 QuickBooks files
§  Mapping and consulting packages available
§  Go to www.simplenumbers.me to subscribe
Simple
Numbers
PROFIT +
™
P U R P O S E = I M PA C T
Slides at:
SimpleNumbers.me/slides
Greg Crabtree
Greg.Crabtree@crbcpa.net
256-704-0620

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Simple

Would you like a better financial model that allows

#1: Remove #2: Labor #3: Four Forces

Marke6ng $75,000 $75,000

Cash -‐ 5%

$100,000 Cash -‐ 10%

Cash -‐ 15%

Cash -‐ 5%

$100,000 Cash -‐ 10%

Cash -‐ 15%

$100,000 Cash -‐ 10%

Cash -‐ 15%

Debt Payments Amount

2013/2014 Miami Heat 2013/2014 San Antonio Spurs

§  2013/2014 NBA Finals Results: Danny Green $3,762,500

GM minus MarkeFng Spend

Gross Margin (Rolling 12)

Labor Efficiency Ratio (LER)

Gross Margin Thinking

Close Books Weekly

You might also like

Simple Numbers Presentation Slides 031815

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Simple Numbers Presentation Slides 031815

Uploaded by

Copyright:

Available Formats

Simple

Would you like a better financial model that allows

#1: Remove #2: Labor #3: Four Forces

Marke6ng $75,000 $75,000

Cash -­‐ 5%

$100,000 Cash -­‐ 10%

Cash -­‐ 15%

Cash -­‐ 5%

$100,000 Cash -­‐ 10%

Cash -­‐ 15%

$100,000 Cash -­‐ 10%

Cash -­‐ 15%

Debt Payments Amount

2013/2014 Miami Heat 2013/2014 San Antonio Spurs

§ 2013/2014 NBA Finals Results: Danny Green $3,762,500

GM minus MarkeFng Spend

Gross Margin (Rolling 12)

Labor Efficiency Ratio (LER)

Gross Margin Thinking

Close Books Weekly

You might also like

Cash -‐ 5%

$100,000 Cash -‐ 10%

Cash -‐ 15%

Cash -‐ 5%

$100,000 Cash -‐ 10%

Cash -‐ 15%

$100,000 Cash -‐ 10%

Cash -‐ 15%

§  2013/2014 NBA Finals Results: Danny Green $3,762,500