Good Times Call for Good Data (and Good Coaching)
When your phone is ringing off the hook and sales are rolling in, it’s easy to bask in the glory of dollar bills and new customers, neglecting the nitty gritty of your business.
Growth is good.
But intentional growth is better.
Here’s why:
Growth isn’t always all it’s cracked up to be. Maybe sales are soaring, but have your costs gone up, too? At the end of the day, who cares how much your top line is growing if your bottom line is stagnant (or worse, diminishing)?
Growth Mindset Missteps
All too often, small business owners reach out to us when their top line has taken a hit.
Very few entrepreneurs engage a financial coach when sales are at an all-time high. I’m growing, so I’m good, right? Not necessarily.
When gross revenue is off the charts, we often see two common mindsets:
- Your business is growing so much, so quickly, that you’re just trying to keep your head above water. You’re throwing money at problems to alleviate the sudden influx of work. You lack time for strategy. You certainly lack time for financial coaching.
- Your business is growing, so obviously you’re the next Warren Buffet. Why would a successful business owner need to work with a financial advisor? Clearly, you know what you’re doing — look at how busy you are!
But in both scenarios, when we crack open the books, a less than pretty picture reveals itself.
Maybe your revenue is high, but what about your cost of goods? Or labor? Are you having to outsource the excess work to subcontractors who decimate your profit margins? Are you so busy keeping up with demand that you’ve lost a handle on managing your margins?
Stop Glorifying Growth and Start Glorifying Data
Busy isn’t always better. And while we reward busyness (much as we celebrate revenue growth) it’s all irrelevant if you don’t actually make any money. Why would you grind day-in and day-out only to come home with pennies?
Instead of glorifying busyness and growth for the sake of growth, we glorify data. We glorify intentional goal setting. And we glorify calculated decision-making.
Financial coaching isn’t just for businesses facing hardship. Financial coaching is also for the businesses that are raking it in.
Even in the (perceived) good times, you still need good data, and you need good coaching, too.
At MACKEY, we’re data nerds (graphs are fun, ok?!), so let’s dive in and discuss some real-world examples that show why not all growth is created equally.
1. The Overly Prosperous Proprietor
The year was 2015 and our Prosperous Proprietor was living the life. Our client watched the dollars roll in for her busy and blossoming entertainment venue. Revenue was trending up.
And while net profits weren’t great, she was certain her net profit would follow eventually. After all, revenue is growing, so it’s only a matter of time until the income would follow. In the meantime, her busyness meant new expenses. She felt good about the direction her company was headed, so she continued to make the needed purchases to handle her growing company.
But somewhere along the way things started to go south. Sales stopped growing. And the bottom line (that never caught up with revenue) started to feel grim. Even with new marketing efforts, sales continued to diminish. That’s when our entertainment venue owner engaged MACKEY.
MACKEY joined the ranks in January of 2018. Looking at the data revealed more than diminishing sales. Even when things appeared good, the reality was that there was an inverse relationship between the company’s total revenue and net income. Sales went up, but profits went down.
It’s a case we commonly see when people grow. As businesses grow, so do expenses. But many business owners in this chaotic (but exciting) time aren’t paying enough attention to their bottom line. These small business owners adopt what we call an overly prosperous mentality, making quick financial decisions out of necessity without thinking about the bigger picture.
It took a while, but with data leading the way, we pulled total revenue and gross profit back to an upwards trend. Additionally (and most importantly), the company’s net income started to correlate with its top line and margins.
The best part? We didn’t come in and give the client new, wild ideas to make her business grow. Everything implemented came from our client and her team. They had the knowledge to forge a successful path; they just needed MACKEY to help them understand the data that would identify the profitable pursuits.
2. The Rollercoaster Fanatic
OK, an important caveat: This client is a general contractor, working in an industry that is notorious for high highs and low lows. So yes, to many, this graph looks a bit… scary. But we’re going to walk you through which parts are cause for concern and which parts are worth celebrating.
When we first met this client in March of 2016, a few months before we officially started working with them, we weren’t convinced they’d make it. Contractor models are interesting birds. Why? Because they bill customers (pun intended) in advance and then withhold money to pay subcontractors. As a result, they always have a lot of cash on hand, but that doesn’t necessarily mean they’re making any money.
Prior to partnering with us, their net income plummeted. A big part of this is because they were taking jobs that raked in high sums of cash but didn’t actually lead to profit.
After we opened their books, we started to look not just at the types of jobs they’d tackle, but also opportunities to streamline expenditures and practices. We identified the types of jobs that were profitable and the types of jobs that broke even (or worse). Once they realized which projects would improve their bottom line, they were able to place bids with confidence, knowing that at the completion of a job, they’d have money in the bank leftover — you know, actual income.
Yes, they’re still on a rollercoaster ride, but notice the narrowing between gross profit and net income. That’s a sign that their decision-making is rooted in an understanding of the data.
In Spring of 2018, their numbers take a hit. But unlike the freefall they experienced in 2015, this was a calculated and anticipated drop in numbers. In an industry where “buying your way in” is often the approach, this client took a low paying job because of the known long-term benefits.
Just as it’s true that not all growth is necessarily good, the opposite is true, too: not all dips are necessarily bad. Sometimes you have to spend money to make money, but the secret to that commonly used expression lies in one of our favorite words: intention.
3. The Servant Leader
Look at that total revenue line soar! Before this professional service firm became a client, they were growing like crazy. Their top line growth was a thing of dreams, but their actual net income wasn’t just stagnant, it was diminishing.
This chart shows a metric we’ve dubbed “Return to Owner,” combining net income, wages, and rent (for clients who own their building). It’s a metric we developed because it helps small business owners to better understand their return on investment and the inherent value within their growing company.
Another important piece to add to this client’s prosperity puzzle? The founder and his business partner didn’t take salaries prior to working with us!
Servant leadership plays an important role in the world, but small business owners frequently sacrifice their return with the hope of long-term gains. Many, many well-intentioned and passionate leaders negate their own financial well-being for the overall growth and good of the company.
But in reality, this client was doing far too much business to not reap any rewards. It was time he put his oxygen mask on, but to pay himself, he first needed more cash flow, which meant it was time to regain control of his margins.
Together we looked closely at two primary areas:
- Overhead
- Revenue streams
The data allowed us to discover opportunities for more intentional spending while also determining his most profitable clients. Our Servant Leader started to implement these spending decisions, which lowered his operating costs. He also targeted new clients that he knew would prove to be more profitable.
Guess what happened?
Not only was he able to continue to grow his revenue, but he was also able to start paying himself and his business partner a fair and appropriate salary.
Not only does this client’s return to owner line begin to trend up after partnering with a financial coach, but that line also factors in two executive salaries and the cost of our financial coaching services — now that’s what we call good growth.
With a net income that has tripled since partnering with us, the firm is finally experiencing healthy growth and the owner is saying goodbye to his life of servitude and sacrifice, deciding that yes, he should (and can) pay himself, not just his employees.
Regaining Focus: Intention = Net Income
Society tells us to keep our eyes on the prize. But what if the wrong thing is holding our attention?
Too often, small business owners get distracted by that shiny, ever-enticing top line. We get it. Growth is sexy. Growth is exciting. Growth is celebrated in our society.
But what lurks below the top line is sometimes less than glamorous.
We believe it’s not an either/or scenario.
We believe you can have top line growth and bottom line growth — it just requires you to go about things differently. It requires deep knowledge about data. It requires analytical thinking. And it requires calculated decision-making.
The good news? We’re data nerds at your service. Combine your deep industry knowledge with our financial expertise and you’ll soon realize that when you focus on the right things, all lines point to prosperity.
