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PROFIT LEVERS

Do the profit levers in your business sometimes feel like moving targets in your business?

If they do and you’d like more sustainable, predictable, and scalable profits stay tuned.

Today’s guest Danielle Hendon will reveal the profit levers you need to focus on for a healthier bottom line and she even has a free action guide you can download called Identify Your Most Profitable Revenue Stream.

What You’ll Discover About Profit Levers:

* The three profit levers every business absolutely needs to understand to stay profitable and in business

* The number one reason business owners ignore their profit levers

* Why losing sight of gross profit margins spells doom

* How frequently entrepreneurs need to monitor their profit levers to keep their business healthy

* At what stage of growth does it make sense to engage the expert services of a fractional chief financial officer

* And MUCH more.

Guest: Danielle Hendon 

Danielle Hendon is the founder and owner of 4 Corners CFO, a firm offering financial advisory services to small business owners on a scale that fits their company and budget.

Coupling her decade of experience in corporate finance and accounting with her passion for people, Danielle brings the benefit of “big business” financial analysis to entrepreneurs.

Now, instead of helping corporations increase share price, Danielle gets to help business owners increase their personal livelihoods so they can leave a legacy and lasting impact on their community.

Related Resources:

If you liked this interview, you might also enjoy our archive of other Finance episodes.

Contact Danielle and connect with her on LinkedIn, Facebook, and Instagram.

Get Danielle’s Identify Your Most Profitable Revenue Stream download FREE.

Visit Danielle’s business website for more information about her work as a fractional CFO.

_____

ESSENTIAL PROFIT LEVERS TO TAKE YOUR BUSINESS TO THE NEXT LEVEL

Hanna: Do the profit levers in your business sometimes feel like a moving target? If they do, and you’d like more sustainable, predictable, and scalable profits, stay tuned. Today’s guest, Danielle Hendon, will reveal the profit levers you need to focus on for a healthier bottom line. And she also has a special gift for today’s listeners. So, stay tuned.

Announcer: This is Business Confidential Now with Hanna Hasl-Kelchner, helping you see business issues hiding in plain view that matter to your bottom line.

Hanna: Welcome to Business Confidential Now, the podcast for smart executives, managers and entrepreneurs looking to improve their business performance and bottom line. I’m your host, Hanna Hasl-Kelchner, and I have another terrific guest for you today. She’s Danielle Hendon. Danielle brings the benefits of big business financial analysis to entrepreneurs through her financial advisory services firm, 4 Corners CFO.

It’s where she combines her decade of experience in corporate finance and accounting with her passion for small business owners to help them increase their personal livelihoods so they can leave a legacy and a lasting impact in their community. Entrepreneurs are often so busy working in their business, they don’t have time to work on their business. And that’s why I’m jazzed about having Danielle join us on the show today because besides having a better understanding of our profit levers, doing it in a more strategic way of knowing where to concentrate our efforts helps us to grow our business.

So, let’s have her join us now. Welcome to Business Confidential Now, Danielle.

Danielle: Thank you so much for having me, Hanna. I love any opportunity I can get to help business owners listen and talk more about their finances. It’s something so many of us would love to stick our head in the sand, but it’s the game changer when you’re trying to grow.

Hanna: Absolutely a game changer. The idea of profit levers, I think, sounds very sexy and has a kind of Wizard of Oz behind the curtain vibe. But most entrepreneurs don’t have an accounting or finance background. Could you help us understand exactly what you mean by profit levers?

Danielle: Yeah. So, a lot of times in business, when you are trying to bring home more money that comes from your profit and so many business owners feel like you just have to sell more. You have to sell. That’s how you bring home more money. But it’s not always selling more. There are actually three different profit levers in every business that you can pull to increase profit and bring home more money without actually selling another thing.

Hanna: Well, you got me curious now. Three things. You’re leaving me hanging, Danielle. What are they? [Laughter]

Danielle: Okay. So, I will start with the very first one, which is going to be to raise your rates. And I know a lot of you have probably heard this, but especially as women in business, we tend to not value our time and our effort as much as the business world would and as much as other people do. And especially in this market right now, as we’re talking, inflation is through the roof. Things are costing more money. Even if you are a service-based business that doesn’t have to pay for products, your personal life is costing more money, and that’s going to require you to make more money.

Everyone is raising rates in this market. You have to in order to keep up. And if you don’t, then everything ends up costing more and that profit that you have left gets smaller and smaller every time. So, the very first profit lever in any business, and the easiest one to pull, is to raise your rates. Think about the last time that you raised your rates. And if it’s been one, two, three years or more, you probably need to look at those rates and see what your industry, what your market could support you increasing, too.

Hanna: Okay. That’s one.

Danielle: So, the second one is going to be – is also going to be revenue related. And it’s going to make – it’s going to make some of you cringe a little bit because it’s going to be numbers related. You need to understand what your profit margins are. So, I’m going to take a step back and explain that a little. When you bring in revenue, a lot of business owners know their revenue numbers. They can spout off how many figures in revenue they have.

But the more important number is that profit number. We call it gross profit. It is your revenue after the cost of goods sold. And again, I’m going to call out all our service providers that are going to say “I don’t have any cost of goods sold.” Your time is a cost of goods sold. So, if you are marketing something on any form of flat fee or hourly rate, you need to know how much your time costs as a cost of goods sold when calculating profit margin. Profit margin is going to be your revenue minus the cost of goods sold.

And we want to know what is your most profitable product or service line. Because when you know the most profitable, that’s where you want to focus your marketing efforts and your marketing dollars. So, the second profit lever in your business is to market the heck out of the most profitable product or service that you have by selling more, even if you’re selling less of something else. By selling more of your most profitable thing, your profit numbers are going to increase.

Hanna: All right. And last but not least, profit lever number three.

Danielle: This is the one everybody usually turns to when we talk about profits outside of selling more is cutting costs. And I call this your below the line expenses. So, when we just talked a minute ago, we talked about revenue and cost of goods sold. If you’re looking at a PNL, a profit and loss statement, or an income statement for some of you, depending on what your accountant calls them, you’re going to see revenue and cost of goods sold, and then you’re going to see this gross profit number. Then – or net revenue. It might have one of those two terms.

Then, underneath that, you see all the other expenses in your business that don’t directly generate revenue for the business. We’re talking about rent, cell phone, internet. I don’t know business that can run without those. But those are all going to sit in that expenses section. And we want to make sure in that below the line section of expenses, that everything there is generating time, money, or both for you or your business.

So, I work with all of my clients in an expense review, where we go through all of those below the line expenses, and we put them in one of three buckets. You have what I like to call the required cost. And I’ll know a business that can run without cell phone and internet today. Then, you have what I like to call personal perks. We all have the things our tax CPA or EA told us to run through the business, but they don’t necessarily add value to the business.

They add value to the business owner. And in terms of benchmarking, owner’s compensation and things like that, we want to know what those personal perks are because really, they’re kind of an owner’s compensation thing. We are not going to take them away. Those aren’t costs we necessarily want to cut, but they are more of an owner’s compensation than they are a business expense. And then everything else in your business below that net profit, net revenue line, gross profit, net revenue line is going to be an investment in your business. If it’s not required, if it’s not a personal perk, it is an investment in your business.

And we want to make sure that that investment is giving you a return. And when I say return, that is that component of either time, money, or both back into the business. And if it’s not, the next question is, okay, is it marketing? Because marketing is not going to return right away. And we want to set some goals and deadlines and metrics to make sure that we’re not continuing to pay for marketing that doesn’t give you a return, but we also want to give it time to give you a return.

But if it’s not marketing, it’s not required, it’s not a personal perk, and it’s not returning time or money, then it’s not an expense you need in your business, and it’s something we want to cut.

Hanna: Well, these are really helpful in terms of evaluating these costs and also revenue sources. And they’re just so perfectly logical, which makes me wonder why don’t more people do this. And so, I’m curious in your experience, Danielle, what type of emotional factors keep people from doing this? What are the emotional blinders, shall we say?

Danielle: The biggest one that I see is, honestly, overwhelm. Looking at the numbers when you are not a numbers person is overwhelming, and it’s so much easier to give your bookkeeping to somebody else, which by the way, I do recommend your bookkeeping be with somebody else. From a time, money perspective, your time is worth more money than you’re going to pay a bookkeeper. But you still need to be looking at them. It doesn’t have to be overwhelming.

You can look at the big numbers, the revenue, the net revenue. And at the very bottom, underneath all those expenses, is net income. Net income is the number that allows you to put money back in your pocket. But I definitely feel like the business owners that come to me, they’re usually overwhelmed by the amount of information that you see in those numbers and not knowing how to make the numbers tell a story.

Hanna: Telling a story. That’s interesting. When looking at the story, what type of red flags should they be looking for? I mean I understand like let’s evaluate each of these components. But what would be some of the reddest flags?

Danielle: So, the biggest red flag – we talked about kind of three big numbers that you would look at from knowing your revenue, knowing your net revenue, and knowing your net income. If that net income number at the very bottom is negative, your business is spending more money than it’s making. It’s not generating income. That is going to be the biggest red flag in any business. Hopefully, we don’t have too many of you there. The next red flag that I point out to almost every business owner I work with, is that net revenue number.

If your gross profit margin, which is using that net revenue number divided by total revenue, is less than 50%, you are probably struggling to pay all of the expenses underneath especially in a service-based business where you are, you need to be valuing your time. And I see so many service providers come to me, and that net revenue number is actually showing like 100% because they don’t have anything in cost of goods sold.

If you are not around 50% in net revenue, profit, gross profit margin, then you need to be looking at how much you’re spending in cost of goods sold, and if you’re actually capturing your cost of goods sold.

Hanna: I understand the red flags, but what practices do you recommend for helping businesses keep their profit levers healthy?

Danielle: The actions that you want to take in order to keep your profit levers healthy are going to be – well, the very first one we’ve kind of talked about a little bit is looking. You need to know what those numbers are, and know what your profit levers are, what your profit margins are so that you know when to pull a profit lever. If you don’t keep up with those kind of profit margins and net income number, you’re not giving yourself the information you deserve to take the next best step in your business. And when it comes to those profit levers, those really are the actions.

So, if you’re monitoring your net income and your gross profit, then you see those numbers drop, that’s when you need to be thinking, “Which profit lever can I pull? When’s the last time we raised our rates? Do I need to go pull that profit lever in revenue and raise rates?” I have a ton of clients that are raising rates right now in the new year, getting new clients at new rates.

Then, you want to look at what are we selling the most of, and are we selling the most of our most profitable item? This can be very difficult if you are putting all of your revenue in one line. And if you are, please do not feel bad about it. So many business owners just put revenue in one services line or one product line and they’re done. It’s really easy for bookkeeping. It’s not really easy for telling the story though. If you have all of it in one line, you don’t know what is selling the most or selling more, and you don’t know if it’s one of your more profitable items.

The next thing to take action on if you’ve – if you feel like your rates are at a good place, you know that you’re selling your profitable items, you’re not selling what we would call like loss leaders, things that don’t necessarily make your business money, the next step is to look at those expenses. And honestly, this is where I think a lot of the overwhelm comes in.

People – there is so much that goes into that bottom below the line expense listing that you can feel overwhelmed very quickly. And some of it happens monthly. Some of its quarterly. Some of its one-off. It might be taking somebody out for lunch. But really pulling an expense listing just for the month. Just start with one month and pull that expense listing for your most recent month.

And look at whether those expenses are required to run your business, are giving you a personal perk, or are an investment in your business. And if they’re an investment, make sure that they are giving you back time, money, or both. And if you have a lot of expenses that are giving you back time, go and look at those and make sure that you are also using that time to then generate more revenue or to just be happy in your life.

I have some business owners that are what I would call lifestyle businesses. They want more time to do what they want with their life. And as long as the business makes a certain amount of money, they can do that. If that’s your goal, just make sure that you are getting what you want out of the business.

Hanna: Very good. Tell me about your thoughts about cyclical businesses. Because it’s one thing to look at a month’s worth of numbers and maybe some people look at it more frequently and some less frequently, maybe quarterly. But at what point should somebody, I don’t want to say panic, but get overly concerned about their numbers, especially if they’re in a cyclical business or in they’re in a startup mode where it’s like, “Well, you got to give this some time.”

What do you recommend there?

Danielle: So, that gets into a little more – what we’ve talked about so far is very much on your PNL, your profit and loss statement. The cyclical business, the struggle that I see there happens more in your bank account than it does on a financial statement, because a cyclical business is going to go through what I like to call the feast or famine cycle.

You have really good times, and then you have really not so good times. And in those not so good times, you still have plenty of bills to pay. So, it’s coming up with what I like to call your baseline expense listing. So, even if you’re cyclical, there are bills that you pay every single month whether or not you’re generating revenue. And that gives you a number that you can use as a baseline. This is what it costs to run my business at a bare minimum every single month.

And I really hope your listeners are including themselves in that because you’ve got to pay your personal bills, too, that month. So, make sure you know what that baseline number is. And then when you’re in the really good times, you need to be setting aside money to help fund the not-so-good times. It’s not boom and bust. It’s boom and save and survive through the not so good times so we can boom again next year.

Hanna: All right. Very good. If there is one thing that you want entrepreneurs to know about profit levers, like the most important thing, especially if they’ve heard you. It’s like, “Yeah. Okay. I understand these three things. But you lost me somewhere in the middle of expenses. I’m still kind of drowning in that.” What would be the most important thing they should take away from all this?

Danielle: Make sure you are a profitable business. If you do nothing more than look at that very bottom number on your PNL, make sure you know what that number is. So many business owners focus on the very top number, the revenue number, and they lose sight of that very bottom number. But that net income number at the very bottom of your PNL is what puts the profit in your pocket, and it’s what keeps you getting paid.

Hanna: Absolutely. There comes a point in time as businesses grow, and especially if somebody is not particularly inclined towards numbers and doesn’t enjoy them as much as you, where they may want to engage the services of a more than a bookkeeper, somebody such as a fractional CFO, Chief Financial Officer. What point would that make sense, and what should they be looking for in finding the right person to help them? Because they are turning over a lot of sensitive information.

Danielle: Definitely. And not just sensitive, but personal as a business, very personal to everyone I know that has their own business. What I would say, first of all, where to start and when to look. It’s never too early to have a budget. There are a lot of different resources out there, free to minimal cost that you can use to get a better understanding of your numbers.

Because no matter what you do, even if you hire a fractional CFO, you are still the decision-maker in your business. You need to be able to understand what that information is telling you. I’m a huge fan of Profit First by Mike Michalowicz. It is a very low-cost option to go research and set yourself up in a way that gives you better information about your finances. So, if nothing else, that’s always my go-to for where to recommend people start.

There are also plenty of what I will call fractional CFO training programs, where people could buy a course and learn how to do some of this numbers stuff. I say that with the understanding that most people don’t want to know how to do this numbers stuff. And if that’s you, and it’s a trade-off between time and money, and you would rather spend the money than spend the time, there are plenty of fractional CFOs like myself out here to help you guys out.

If you are at a point in your business, and I’m going to use service-based numbers just for right now, but if you’re at a point in your business where you’re reaching, let’s say, $250,000.00, you’re looking at a revenue of about $250,000.00, you’re probably looking to start hiring what I like to call the mini me, the doers, somebody else that can do the doing in your business.

So, you can take a step back and focus more on growing the business and working on the business instead of in the business. If that’s where you’re at, a fractional CFO is a perfect opportunity to help you strategize those things, to strategize what it’s like to hire somebody, to strategize what would happen if you changed out a CRM, or put in some new automations, or did all these different things.

A fractional CFO can run all those numbers, put them in a budget, and tell you where we think you’re going to end up at the end of the year if everything plays out. When you’re looking at different fractional CFOs, my biggest thing would be make sure you’re comfortable because numbers are personal and they are sensitive. You want somebody that feels like the neighbor next door that you could talk to about your numbers.

Because we don’t talk about numbers. We don’t talk about them nearly enough. We don’t talk about them with family. We don’t talk about them with friends. As a business owner, it can be so isolating when it comes to your finances. You need to be able to talk to your CFO. And you need to be able to have access to them. You need the opportunity to email to – I let my clients Voxer if they want to, or Marco Polo where they can leave me a voice message. I know how on-the-go we are as business owners.

You need to be able to access and let them know what you’re thinking. And because things can change so quickly in a small business, you need more than just that monthly contact point.

Hanna: Thank you, Danielle. This has really been interesting on so many different levels. And I appreciate your time and the advice you’ve shared about profit levers. It’s really important part of business that I think gets overlooked when finance isn’t somebody’s expertise.

If you’re listening and you’d like to know more about Danielle Hendon and her financial advisory services at 4 Corners CFO, that information as well as the transcript of this interview can be found in the show notes at BusinessConfidentialRadio.com.

And as promised at the top of the show, Danielle has been very kind to prepare a free special action guide for Business Confidential Now listeners. It’s called Identify Your Most Profitable Revenue Stream. And it’s available on her website, 4cornerscfo.com/BusinessConfidentialNow. The 4 in 4 Corners CFO is the number, not the word spelled out. So, that link address is the number four, followed by corners, CFO, dot com, forward slash, Business Confidential Now. That hot link and more information about Danielle and how to reach her are all going to be available on BusinessConfidentialRadio.com.

So, thank you so much for listening. Be sure to tell your friends about the show and leave a positive review. We’ll be back next week with another information packed episode on Business Confidential Now.

‘Till then, have a great day and an even better tomorrow!

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