[30Daysto30K] Day 18 - The MOST Obvious Place to "Find" Money

If I'm gonna talk about "making money" every day for 30 days, there's no way I can't bring up the topic I've chosen for today. In fact, I can argue that this may just be one of the most valuable, relevant and important posts I ever share around business. And this is on the topic of PROFITABILITY and Financial Management in your business.

Sadly, it's boring to most...  but I'm not here to entertain you. 

And I can't tell you how many "money making" business owners have admitted to me they are in the red, or losing money, or can't make payroll.  ...and a lot of those businesses aren't here today. 

So, the simple post could be: "hey, clean up expenses and you will FIND money FAST."  (Heck, we did an expense audit last Summer, and found $6,000 A MONTH in unneccessary expenses!). I mean, the nature disposition of a business IS to aquire expenses, so you must fight against that!

But, I want to go deeper into a series of topics around expenses, profitability and managing finances in your business that I think are essential to mastering. So, let's get into it.

"I can't live off my business!" 

And... I don't care! You're gonna have to get over that. If you need your business to pay for your life, get a job and get out of entreprenuership. ALL businesses (unless you buy one) start at zero. No way around that. And all growth happens in stages. You need to be present and ACCEPT the stage you are in right now. And STOP focusing on whether or not it can pay for your lifestyle. 

Look at it like this: If you owned a farm, would you say your young toddler is a problem because they can't contrbute to the chores or duties of the farm yet? NO! Because... not yet. But OVER TIME, as that toddler grows, one day they will be able to perform a TON of work to contribute to the farm.  Your business is the same way.  The first few years... your business is a TODDLER. And you complaining about that doesn't make it grow up any faster. (opposite really!) 

Profitabilty = Health

Instead of focusing on a "number" your business makes today, you need to focus on PROFITABILITY. Or PERCENTAGE of profitability.    "My business only profited $20,000 last year."    Ok... but you also only generated $30,000 in sales.  So... You have a 67% profit margin on a business you just started, that's incredible... maybe try to be grateful? "But James, I can't live off of $20k!" No shit. Keep building it! 

I'll never forget the new client who came up to me with tears in her eyes and asked, "when I will I finally be able to breathe?" Upon explaining her situation, she revealed she was already making $1M per year in revenue, yet her expenses were over $950,000. (not a typo). 

MORE MONEY is NOT the answer.  More SALES do not SOLVE a PROFITABILITY problem. Just like more water poured into a leaky bucket doesn't plug the leak. 

That Profitability Percentage is a true marker of the health of your business. And for digital product-based businesses that number should be at 50% or higher ONCE you've gotten over $40,000/year. (Why $40k?  Because we will ALWAYS have FIXED costs like our tech stack, VAs etc. And we can keep these fixed costs steady and "fixed," even as we grow revenue. 

So, from roughly $40k (plus or minus 10%) per year in revenue, if you aren't maintaining a minimum of 50% profit margin, you are mismanaging your expenses. You are being reckless with your spending. 

In fact, until you are generating at least $200k/year, you should be using an all-in-one CRM tech-stack. Most of these are $200/mo and include everything you need: landing pages, course portals, email marketing, etc.  Often times they are limited on functionaility, but still cheaper than buying 10 individual software systems. 

Note: I am referring to digital products ONLY. If you run events, sell physical goods or run a different model, the rule is not the same.

Operating Expenses Are The Only Expenses I Care About Here

I'm sure some of you reading this are already starting to dive in and take a closer look at your expenses... good! But when I talk about the 50% profit margin, (which I still feel is conservative), I am speaking about OPERATING EXPENSES.  ...not what you can write off to the IRS. 

If you go to a marketing event, your CPA may inform you that you can write off your travel, maybe meals, etc... you may think "oh, I'll rent a car service then". Cool. Expenses. You can write them off.  But THOSE ARE NOT OPERATING EXPENSES. Did you need a private car so your business could run today? NO. 

Coaching... mentorship... education... these may be write-offs, but they are NOT OPERATING EXPENSES.  So... for most, the number your CPA gives you is not the most true and accurate number. 

Operating Expenses are expenses that are ESSENTIAL for your business to operate.  Your tech-stack, payroll, media buying... you get the idea.  But KNOW what those expenses are, and know your profitability from that.

...and talk to someone else about tax-strategies etc, because I am not your guy on that. This is purely a chance to look at the HEALTH of your business by comparing the REVENUE that came in... to what it COST to operate that business SO that revenue could come in.   

Not All Expenses Are Created Equal

It's also important to know that there are different TYPE of expenses.  Therefor you must treat these expenses differently. Here are a few to consider:

ROI Expenses - there are some "costs" that move in tandem with revenue.  When that COST goes up, SALES go up.  Example: Spending MORE on FB Ads could result in MORE sales.  So, for these type of expenses, you don't focus on lowering your expense or create budgets, but rather "thresholds." For something like FB Ads, that could be like "spend no more than $15 PER lead."  

Performance Expenses - Similiar to an ROI expense, you will see this "cost" increase in tandem with revenue.  Any sales commission, affiliate payouts or percentage deals fall under this category.  Seeing this as a HIGH cost is not neccessarily a bad thing, because it means you are making more sales.  They got paid AFTER the sale came in.  So... managing these expenses happens on the front in, in the negotiation process.  What percentage you decide to pay per sale (for example) will determine if you've set yourself up for profitability or problems.  And this is a WHOLE other longer conversation to be had... but the TLDR: don't rush into anything here, think through ALL your scenarios (will this work at scale? long term)

Fulfillment Expenses - A fulfilment expense is a payment that occurs on the fulfillment side of your business.  Now... these are expenses that we "could" categorize as an operating expense... but often time, these are "unneccesary" for the OPERATION of the business itself.  A great example: you run a retreat, and you decide you'll buy $50 journals for every guest, catered meals, snacks, and an open bar in the evening.  ...you wake up only to realize you actually LOST money on this event.  THIS is where BUDGETS are essential.   

Another example here: BBD LIVE costs over $600,000 to host it.  And every little "yes" for a $1,000 expense ADDS UP FAST! I have to put every expense through a microscope and scrutinize it. Do we really need $5k in balloons?  Do we have to rent this? Offer that?  IF it's not in the budget (which was set from DAY 01), it's a "no!"

Time-Back Expenses - I think it's worth pointing this type of expense out, because we tend to forget why we chose to make this type of expense in the first place and make the mistake of cutting it.  It starts with FOUR simple facts I've shared for years: 1. Your time is valuable. 2. There is more stuff required in your business than you have time for in a day. 3. Not all tasks/activites are of equal value.  4. all the time you spend on the low-value activites takes you away from the high-value stuff. It's COSTING you more than you think. 

So... some services, roles and expenses are GIVING you your time back.  Whether it's customer support, scheduling, research, tech or admin... these roles, tasks and expenses are BUYING you your time back.  You don't "save" money when you do your own customer support. You don't "save" anything by spending half your day in your email inbox.  

I have two personal examples... in my Airbnb business, I always hire the handyman to fix repairs. I KNOW how to fix a lot of stuff myself, but I won't do it.  WORST use of my time.  "but James, if you could just do it youself, you are aquiring an unneccessary expense."  No, I'm buying back my time (and my energy) to focus on the highest value activities in my businesses. 

Also, in our personal lives, Jenni and I have a private chef. It sounds hoity-toity.  But we don't LOVE to cook (or clean!), and we are busy.  AND... we don't like going out for every meal. The expense of high-quality meals prepared by a chef and delivered to our home buys back our time AND our health. That expense is 1,000% worth it to us. No-brainer.  

Audit Expenses & Learn How To Spend Money

Buying shit is a skill. I've realized this the hard way.  Simply throwing money at a problem is RECKLESS.  I almost went out of business because I would do this constantly. So, we must learn how to spend money, and AUDIT past money-spending decisions. 

Put on the calendar a time in the next 90 days or less to AUDIT operating expenses.  Can expenses be consolidated?  Are you paying for software or tools you aren't using?  This is the SPRING CLEANING of your business, and it's so important!  

Here are some "best practices" for how to spend money:

Know the ROI to every "yes". - oh you wanna pay for that $20k website package? What's the ROI? What does it contribute to? "I dunno, it would just be cool." Ok, don't buy it. If you do not have a conservative, tangible prediction on how this will result in leads, sales or time back from you DO NOT BUY IT.  You are spending wrecklessly.  

Avoid the Overpriced Freelancers - as you start making money, you'll find yourself having less time. This encourages the notion of simply paying the freelancer to do shit for you. You wish you could just throw money at the problem. If they have a big promise and a big price tag, run.  In 20 years, +90% of the scenarios where some fancy marketing agency promises to come in, build that funnel, fix your marketing, make you a millionaire, etc has ALL ended in DISASTER.  And when your business IS 90% marketing, why the heck would you put the most valuable SKILL in the hands of an overpriced, underexperienced stranger.  That's YOUR JOB!

Don't Hire What You Can't Afford -  Payroll will always be your biggest expense. And when people hear me talk about team, they think hiring 2 or 3 people tomorrow will automatically solve all their problems. No.  Avoid hiring too soon, and follow my additional hiring/expense tips for maintaining your profit margin

Start with a VA from Day One - if you don't have a PH VA on standby for low-level tasks and assignments, you are not being coachable. You have convinced yourself that you are "Saving money" by doing worthless stuff yourself for 10 hours a day... forgetting that your time is invaluable, and if you waste your time you are guaranteed to end up with no time AND no money. That's a lose/lose sitch right there.  When starting out, you are MAKING money by SAVING TIME.  Why? Because those $5/hour activities are COSTING you.  So, if you can't afford to pay $3-5/hour for 5-20 hours of work per week, you shouldn't be running a business yet. Sorry. 

You don't need employees before $500k - I really don't see the need (or the risk of expense) to hire a full-time local higher-level employee before $500k in annual revenue.  If you can't get to $500k with a few virtual assistants, and maybe a part time customer support rep... an +$80k salaried individual isn't gonna solve your problems either.  ...now, if you decide to break this rule, you better already have an airtight plan for scaling to $1M/year in revenue in under 12 months.  ...because as you'll see in the next paragraph, an $80k employee should bring $320,000 in value every year. So, it can be argues that you have ONE employee for every $2-400k in annual revenue.  And... most businesses don't need more than 3 to 5.  

For Full Time Employees - 3-4x Multiplier + Metric.  When it is time to hire someone full time, the process is super simple: you hire someone to own a metric in that business.  When they OWN a metric, they grow it.  That's what you hire them for. You need to know what that metric is WORTH.  The salary you pay them is 1/3 to 1/4 the VALUE of that metric being grown over one year.  Simple. 

And when you track that metric, it's easy to tell if they are providing enough value in exchange for what you pay them. If they don't, you will have a profit problem.  

Ok... that's a lot so I'll end it here. Please take what I'm sharing seriously. Your business depends on it.