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Why we’re excited to make less money right now.

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Less Can Be More!

In 2006, we worked hard to become profitable within the first 18 months of building Crankset Group. And the profits went up each year until 2010. Then they started going down and that’s when we got excited. It was a very good sign.

In every business there are cycles of numbers that we should focus on. It’s never neat and tidy, but in general, we followed different numbers at different stages in our business.

The Cycle of Numbers:

Startup? Watch Revenue most.
Don’t bother going through a lot of profitability scenarios until you find out if you can actually sell your widget. Nothing else matters at startup except revenue. Everything else is voodoo and fortune telling. Go sell something. If it doesn’t sell, forget all the rest of the numbers. Our services started selling regularly, so we moved to a new focus:

Early Stage Business? Watch Profitability most.
As soon as you figure out you can sell something, figure out if you can actually be profitable selling it at that price. The polish sausage vendor buys them for $1.00 and sells them for $.95, but thinks he’ll make it up in volume. He’ll just lose more money. Get a good accountant at this stage who can tell you how many widgets you will have to sell per month to be profitable. Then focus on getting there.

Finding Break Even? Focus on Profit
Profitability is theoretical. You’re just making sure you aren’t wasting your time building a business that won’t make it. But Profit is “real”. Figure out your profitability, then focus on nothing but getting to real profit. A good accountant should be able to tell you how long it will take based on selling x widgets/mth at $x per month. Once you break even and start making a profit, the fun begins.

Growing a real business? Focus on Cashflow.
When you finally start making a regular profit, that is a very dangerous stage. Why? Because it is the first time you have something to protect – profit – and you will tend to hunker down and protect it.

Don’t.

If you stop at simple profit based on your own production, you will never grow a real business. Instead of siphoning off the profits and buying a hot tub, it’s time to reinvest them in growing the business to where it can make money while you’re regularly on vacation, or bigger if that is your preference. The problem is that when you decide to grow your business, the profits you worked so hard to realize, will go down or even disappear for a time.

Growth will kill your profit – for a short time
Even though our business has grown 392% in the last four years, our personal income has gone down every year for the last three years. But rather than be concerned, we’re very excited because we understand the principle of growth: growth decreases profit and cash flow. The faster you grow, the less profit you will have right now, but a lot more later.

If you are making less profit because your revenues are bad or your margins are too low, that’s a big problem. But if your profits are low because you are growing quickly, get happy about it. Just watch your cash flow – fast growth can put you out of business if you don’t have enough cash on hand to pay your bills.

Growth slowing down? Watch your expenses
The final cycle – If you decide to stop growing (we plan to keep growing internationally), your profit and your cash flow will return, and if you’ve done it right, you’ll have a lot more of both than when you first starting seeing profit. At this stage, tweaking your expenses will only make you more money.

Make decisions based on where you want to be, not on where you are
Too many business owners focus on expenses early in their business and say this to themselves, “I can’t afford to hire that sales person, buy that truck, install that software, etc.” The problem is that you are looking at an investment (money that comes back in spades) vs. an expense (money that never comes back). When you make decisions based on where you are, you shouldn’t be surprised that you’ll be there again next year.

One final thought – watch cash flow during every number cycle – it can put you out of business at any time.

So don’t be afraid of the growth stage! Give up the profit for a time and grow. You’ll have a lot more of it later.

Stop looking at your numbers

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Pictures vs. Movies

I tell biz owners “Numbers is the language of business”, but also that numbers rarely tell the truth. Not because we did bad math, but because we look at pictures when we should be watching movies. Want to know how you’re doing? Grab the popcorn.

Even if we think they’re important (and frankly, there’s only a few critical ones that are), we don’t look at the numbers the way we should.

Pictures vs. Movies
The most important use of numbers in business is to see trends, not to see numbers. Stop looking at your numbers – that will rarely help you. Numbers are almost always misleading unless they are put in a bigger context.

What if you look at this month’s numbers and they tell you that you won’t be able to cover your expenses. Is that bad? Not necessarily. What if they say you’ll make a bucket load of profit this quarter? That can be very misleading, too. In fact, both numbers might turn out be lies.

How can that be? I thought numbers didn’t lie? In the context of a trend, they don’t, but by themselves as a snapshot they can be very misleading. We need to see the whole movie to know what they are really saying.

Your Most Important Numbers Aren’t In Accounting
Amazon “lost” hundreds of millions of dollars for a few years straight, and if that was the only number they looked at, it would have appeared they were running off a cliff. But they had the sense to couple those accounting numbers with some even more important numbers outside accounting. In their case, the important number early on was market share, not profit. Profit became more important later. They were sacrificing short-term profit for long-term market share, and thus long-term bigger profits.

For any early stages business your most important numbers are almost always outside of accounting, usually in sales. Don’t ignore the accounting numbers, but our sales and marketing numbers are much more important. And the right question isn’t “How many clients do I have?” (that’s a snapshot), but “How many do I need, by when?”, and then, “What’s the trend – am I gaining enough clients in the right amount of time?” That’s a movie.

Retail stores love the last quarter of the year – they can look like they’re making money hand over fist. But if you put that in the context of the rest of the year, it might show that the store is about to go out of business.

If September looks worse than August, should you panic? No, you should look at last August, as well as what is going on in the market right now, plus what you’ve done to change your business if anything, and a number of other non-number factors. All of that together can help you identify a trend.

The best use of numbers is to see the longest trends possible, a quarter, a year, two years, even more. If you’ve got three years worth of numbers to look at, you’ve got a movie that will give you a really great idea of where you’re going and the real strength of the business. August doesn’t matter nearly as much as how it looks next to last August, or your forecast for next August.

In about the 12th month of Crankset Group I wondered if this was going to work. Then I looked at the TREND over the first 12 months and saw plainly that it was going in the right direction – too slowly for my taste, but still trending the right way. And if we just kept the same trend for another 12 months, we would be profitable.

We decided to keep going, the dam broke and three months later we were over the top. The trend was so much more valuable than the numbers themselves in deciding what to do and keeping me encouraged.

Stop focusing on pictures of where you are, both in accounting and throughout your business, and start focusing more on where you’ve been and where you believe that trend is taking you.

FYI – charts are like pictures, but graphs are like movies. I like graphs more than charts. And I like any number in a context that can show me a clear trend over many months. Only then can I really know what the number means and how I my business is really doing.

Stop just looking at numbers, you’ll glaze over like I do. Look at the trends instead. Watch the movies of your business to see how you’re doing and you’ll have the confidence to keep going and to make more money in less time.