SCALING YOUR BUSINESS
THE ' SIMPLE
NUMBERS '
APPROACH
A certain service business , clawing its way to $ 5 million in revenue during 14 tough years , was barely turning a profit or providing a reasonable wage to the owner . That ’ s when Greg Crabtree ’ s accounting team stepped in and , using Crabtree ’ s " Simple Numbers " approach , helped the owner see his business in a different light . They made gross margin their key top line instead of revenue . The service firm adjusted the owner ’ s pay to a real market wage so that profits would not be overstated , and Crabtree ’ s team introduced techniques for tracking labor efficiency , which helped the owner align his labor costs immediately with business cycles .
The net result was this : Crabtree ’ s client grew to $ 25 million in the next five years and hit 10 % profit after paying the owner a competitive salary . Yes , there were significant taxes to pay , but that ’ s because the company was now generating real aftertax wealth that helped both the business and its owner become debt-free and flush with cash .
In the upcoming series , we will explore the pillars of Crabtree ’ s " Simple Numbers " formula and break down the process that has helped hundreds of business owners improve their profitability dramatically . One of these pillars is understanding the four forces of cash flow .
The 4 Forces Of Cash Flow
Once a company is on the road to 15 % profitability , as defined by the " Simple Numbers " formula , it faces additional cash flow challenges . We say “ additional ” because whenever management tells us there ’ s a cash flow problem , we always start with fixing profitability , unless the company is broke and needs an immediate cash infusion to make payroll .
You can improve cash flow by negotiating favorable terms with customers and vendors . However , we recommend sacrificing your margin with special deals only if you ’ re desperate .
Force No . 1 : Taxes
You need to know how much you owe in taxes throughout the year to avoid the annual Tax Day surprise , and you must resist the temptation to spend $ 1 in order to save 40 cents in taxes by rationalizing , “ Hey , the government pays for 40 % of the cost of the computer ( or whatever the company is buying ), anyway .” Crabtree believes that rather than chasing the very limited tax-saving maneuvers available , certified public accountants would better serve business owners if they would emphasize that true wealth is created only with after-tax profits . If you do not pay any taxes , you either have not created any wealth or you have cheated , and both scenarios are bad .
Force No . 2 : Manage Debt
Debt is generally not your friend . If not managed properly , debt will enslave your business and keep it from reaching its full potential . Once you have set aside your tax money , eliminate debt on your line of credit and remain current on any term loans . Lines of credit are addictive for businesses because it ’ s too easy to draw on them to solve cash flow issues rather than make the hard decisions that lead to improved profitability .
If you need a line of credit to handle seasonal ups and downs or to extend your customers ’ credit , we recommend that you borrow on it only when you are profitable . If you are losing money , do not draw on it before you fix the underlying problems . Banks know that a company losing money will eventually have no funds to repay the line of credit .
Term debt can help you spread the cost of long-term assets over their useful life . However , if you have “ termed out ” your line of credit , pay off this debt as quickly as possible if it does not support any long-term functional asset . You must avoid