Simple Numbers, Straight Talk, Big Profits! Summary

"Profit is not an event; it’s a habit." This book challenges the common belief that revenue is the ultimate measure of success and instead shows how focusing on profitability and smart financial practices can transform your business.

1. Pay Yourself What You Deserve

Many small business owners underpay themselves, thinking it will help their business grow. However, this practice can distort financial metrics and harm long-term success. Paying yourself a fair market wage ensures accurate financial reporting and builds a sustainable business.

When you underpay yourself, you artificially inflate your pre-tax profits, which can mislead you and potential investors about your company’s true financial health. This can also attract unwanted attention from tax authorities, as underpaying wages is considered a tax scam by the IRS. Paying yourself fairly not only keeps your books honest but also prepares your business for future growth or sale.

Additionally, when it’s time to sell your business, potential buyers will scrutinize your financials. If your wages are unrealistically low, it can lower the perceived value of your company. Paying yourself a market-based wage from the start avoids this issue and ensures a smoother transition if you decide to exit.

Examples

• A business owner paying themselves $30,000 instead of the market rate of $75,000 may face IRS audits.
• A company with accurate wage reporting attracts higher offers from buyers.
• Underpaying yourself can lead to cash flow issues when hiring a replacement CEO at market rates.

2. Profitability Over Revenue

Focusing solely on revenue can lead to financial trouble. Instead, aim for consistent profitability, especially during the challenging growth phase when your business surpasses $1 million in revenue.

Revenue growth often comes with increased expenses, such as hiring more staff or expanding operations. Without a focus on profitability, these costs can outpace income, creating a financial "black hole." To avoid this, aim for 10-15% pre-tax profitability, which provides a buffer for growth and stability.

Profitability also impacts your business’s valuation. Buyers look at historical profits to determine a company’s worth. A business with steady 10-15% profitability is far more attractive than one with high revenue but little to no profit.

Examples

• A company with $1 million in revenue but no profit struggles to pay new hires.
• A business maintaining 15% profitability reinvests in growth without taking on debt.
• Historical profitability increases a company’s market value during a sale.

3. Use a Salary Cap to Control Costs

Labor costs are one of the most controllable expenses in a business. Implementing a salary cap ensures you protect profits while managing growth.

A salary cap sets a limit on total labor costs, including your own wage, based on your profitability goals. For example, if your revenue is $1 million, you should aim for at least $100,000 in profit, leaving $900,000 for all other expenses, including salaries. This approach forces you to prioritize productivity over simply hiring more staff.

By sticking to a salary cap, you can strategically grow your team while maintaining profitability. This method mirrors the approach of successful NFL teams, which operate under strict salary caps to build winning rosters without overspending.

Examples

• A business owner recalculates their salary cap to maintain 10% profitability after hiring new staff.
• NFL coach Bill Belichick builds championship teams by hiring young, affordable talent.
• A company uses a salary cap to balance growth and profit during its expansion phase.

4. Boost Productivity Instead of Adding Staff

Rather than hiring more employees, focus on improving the productivity of your existing team. This approach saves money and increases efficiency.

Start by measuring productivity using the formula: gross profits divided by labor costs. This metric helps you identify trends and areas for improvement. Once you have a baseline, ensure employees are paid fairly to reduce turnover and maintain morale. Overpaying, however, can hurt profitability, so aim for market-based wages.

Regular evaluations can also improve productivity. Identify key skills for each role and provide training to help employees grow. This not only boosts performance but also increases retention, saving you the cost of hiring and training new staff.

Examples

• A company reduces turnover by adjusting wages to match market rates.
• An employee evaluation system identifies training opportunities to improve efficiency.
• A business owner tracks productivity metrics to spot and address declines early.

5. Manage Cash Flow with Four Key Forces

Cash flow is the lifeblood of any business. To stay financially healthy, manage these four forces: taxes, debt, core capital, and distributions.

Set aside money for taxes to avoid liquidity issues. Avoid taking on debt whenever possible, as it increases risk and limits flexibility. Build a core capital reserve equal to two months of operating expenses to handle cash flow fluctuations. Finally, only take distributions after covering these three priorities.

By following this framework, you can weather financial ups and downs and ensure your business remains solvent and profitable.

Examples

• A business owner avoids cash flow problems by saving for taxes in advance.
• A company builds a two-month core capital reserve to cover seasonal revenue dips.
• Distributions are delayed until the business achieves consistent profitability.

6. Avoid Debt at All Costs

Debt can be a dangerous trap for small businesses. Instead of borrowing, rely on savings and sweat equity to fund your operations.

When you use your own money, you’re more cautious with spending. Borrowed money, on the other hand, often leads to riskier decisions. Venture capital can also be risky, as investors expect rapid growth and high returns, which may not align with your long-term goals.

If you need to cut costs, temporarily reduce your salary rather than taking on debt. This approach builds equity in your business and keeps you focused on sustainable growth.

Examples

• A start-up founder lives off savings instead of taking out a loan.
• A business avoids risky investments by relying on sweat equity.
• A company grows steadily without pressure from venture capital investors.

7. Monitor Key Metrics Regularly

Tracking a few key metrics can help you spot problems early and make informed decisions. Focus on cash balance, sales, labor productivity, and cash-flow forecasts.

Daily cash balance monitoring is essential for new businesses, as it ensures bills are paid on time. Weekly reviews of sales and productivity trends allow you to address issues before they escalate. Rolling profit-and-loss statements provide a clear picture of your financial health over the past 12 months.

By staying on top of these metrics, you can make adjustments quickly and keep your business on track.

Examples

• A business owner notices a drop in productivity and implements training to improve performance.
• Weekly cash-flow forecasts help a company avoid late payments.
• Rolling P&L statements reveal trends that inform strategic decisions.

8. Forecast Cash Flow to Plan Ahead

Cash-flow forecasting helps you predict future financial needs and avoid surprises. Use your profit-and-loss history to estimate upcoming expenses and revenue.

Start by identifying fixed costs, like rent, and variable costs, like labor. Then, use past performance to make educated guesses about future income. Regularly compare forecasts to actual results to identify discrepancies and adjust your plans.

This proactive approach allows you to address potential problems before they arise, giving you more control over your business’s financial future.

Examples

• A company forecasts cash flow to prepare for seasonal revenue fluctuations.
• A business owner adjusts labor costs based on projected sales.
• Regular forecast reviews reveal areas for cost savings.

9. Profitability is a Habit, Not an Event

Sustainable profitability requires consistent effort and smart decision-making. Treat profit as a habit by prioritizing it in every aspect of your business.

This means setting clear profit goals, managing expenses carefully, and reinvesting earnings to build equity. Avoid the temptation to chase revenue at the expense of profitability. Instead, focus on creating a stable, profitable business that can grow over time.

By making profitability a habit, you’ll build a stronger, more valuable company.

Examples

• A business owner reinvests profits to build a core capital reserve.
• A company prioritizes productivity over revenue growth to maintain profitability.
• Profit-focused decision-making leads to long-term financial stability.

Takeaways

1. Pay yourself and your employees fair, market-based wages to ensure accurate financial reporting and long-term sustainability.
2. Focus on achieving 10-15% pre-tax profitability instead of chasing revenue growth.
3. Regularly monitor key metrics like cash flow, productivity, and profitability to spot trends and make informed decisions.