Profit Leaps

In the immortal words of Swedish supergroup, Abba, I work all night, I work all day to pay the bills I have to pay. Ain't it sad? And still, there never seems to be a single penny left for me. That's too bad. Now, I realize I have put that song in your head for the rest of the day.

Depending on your musical taste, you're welcome or I sincerely apologize. Now, let's talk about making your profits leap.

Welcome to the Business Brickyard Podcast with Howard Mann. Concise lessons learned the hard way about business, strategy, and life.

When everyone in my firm is getting a bonus between 3 and $5,000,000 this year, how am I supposed to keep them motivated? This was a question asked over twenty years ago in a business peer group I used to belong to by a member of the group who founded a hedge fund finance business. I have never forgotten it. Not just because of the sheer out of touchness of his answer when we were all just sharing our biggest worries for the year ahead. Admittedly, this guy was a bit of an ass.

But because I was jealous that this arrogant ass was making such a massive profit at the end of the year and I was not. Here I was toiling away in my business and despite the usual bump in growth every year, bonuses in my company averaged in the tens of thousands of dollars. For almost every business owner I have met and worked with, this is a similar experience for them as well. Their business grows its revenue at ten, twenty or maybe even 40% each year, but their annual change in personal income is not life or lifestyle altering. I remembered this story as if I was considering the question, what does a business owner really want?

A friend of mine had urged me to dig deep and make a detailed client avatar of my ideal client. You may know the drill, give this fictional ideal client a name, a lifestyle, 2.2 kids, etc. And detail out what their true wants and desires are for their lives and careers. As I sat there thinking through every client I have had over the years, I kept coming back to a simple answer. They all wanted a lot more money in their personal bank account.

The type of real wealth that was created every year from their business. The type of wealth that would allow them to create a real cushion for retirement. The type of annual income that would make it easy for their kids to go to the school of their choice. The type of annual bonus that would allow them to easily buy a larger home or to go on amazing vacations. The type of wealth that would allow them to give back to society in whatever way they desired.

While this level of comfort, security and lifestyle meant different things to all of them, the lack of large jumps in their income was a festering frustration that had built up over many, many years. Amidst all the talk about being passionate about our work, having a vision and our businesses having a mission and a purpose, this is what I kept coming back to. When a client hires me, ultimately they want their business to grow significantly enough so they can personally make a lot more money. Sure, they wanted less stress, more fun and not to worry about how they were going to pay their mortgage. But I asked myself, what ultimately is a cure for a lot of the stress and worry?

In the immortal words of Abba, yes, that Abba, don't judge me, money, money, money. We all know that owning a business is fraught with risk. But somewhere we seem to have given a pass to demanding a fat reward that makes the risk really worth it. The business romantic in me, I know, so cute, Would prefer my answer had been to make the world a better place, to make a dent in the universe, etc. But when my clients are the most honest with me, they want to make a lot of money so they can enjoy their lives.

Then they can use that wealth to make their dent. Even the non profit leaders I work with want giant leaps to increase their impact. Some of them even want to create more income for themselves so they can afford to take care of their family while continuing to build their non profit organization. So what is causing this cycle of growth without commensurate increases in wealth? For most businesses, revenue growth is matched closely by expense growth.

You get a bunch of clients, you hire a bunch of people. You grow enough so then you have to invest in IT or maybe a larger office. It also never seems to fail that each year there is some extraordinary expense that sucks up the potential profit growth. In some cases, the entrepreneur's salary has grown enough so then get a larger house or maybe a vacation home. So now, their personal expenses also have grown along with their income.

At the end of the day, their business is not allowing them to create the leaps in wealth and security that they truly desire. Why? In almost every case, the business has not drawn a line in the sand about the profit levels it is committed to creating from every client and as a business in general. Maybe this is a New Yorker in me, but I grew up watching all the Wall Street financial guys drive by in their fancy cars and $3,000 suits. They lived in enormous apartments and had enormous vacation homes.

This level of wealth is not created from a $50,000 or even a $150,000 annual bonus. Their wealth, not including the trust fund kids, was created from operating a business where a $2.05 or $20,000,000 annual bonus was the norm. Go ask an investment banker if they will help you sell your business for $3,000,000 and you will get some version of this answer. We only focus on deal sizes of $50,000,000 or higher because it takes roughly the same amount of work to close $50,000,000 deal as it takes to close a $5,000,000,000 deal. M and A lawyers will tell you the same story about the amount of paperwork it takes to close a $1,000,000,000 deal as opposed to a $1,000,000 deal.

It also requires roughly the same amount of staff, office expenses, etc. Somewhere along the way, they decided that they were going to draw the line in the sand and leverage their time on deals and clients that would maximize their wealth. Now, I hear you, an agency, service or product business is not the same as a hedge fund or investment banking business. Or is it? I am willing to bet that there is a competitor in your market that is making an extraordinary amount of profit and that the owner of that business is making 10 times your personal income.

I do not care if it is a laundromat chain, a digital agency, a real estate business or a wellness business. Maybe you just chalk their success up to their connections or just dumb luck. Maybe you think they are more talented or smarter than you. Speaking for myself, I have had plenty of competitors that were far from the sharpest knives in the drawer. However, they were smart enough to hire great talent that they could leverage into leaps in profit.

If you can stop rationalizing long enough to take a closer look, you will see they made a choice that just getting by each year was not going to be enough. Now, I am not suggesting that you change your 20% projected growth this year to 2,000. However, I am suggesting that you start thinking about what it would take for your profit to not just grow in small steps, but to leap. What would have to happen in your business for your net profit to quadruple while your expenses stayed roughly the same? Yes, quadruple.

Just sit with the idea for a while before you reject it. A four times leap in your net profit and a near zero increase in expenses. What would have to happen? If you increase your pricing four times, then what would you have to deliver to make that happen? What would you need to offer your clients?

Who would you need to hire? Or maybe what business might you need to acquire? How could you deliver results to your clients that were four times what they are today so you can charge a premium price. How could you handle four times the number of clients you do today with roughly the same staff and overhead expenses? Profit Leaps only occur in an environment that demands them.

Let me repeat that. Profit Leaps only can occur in an environment that demands them. That means a shift in how you think about how much profit you must earn. And remember, revenue is just a metric for your ego. Profit is what creates changes in your life.

You see, it is not just my clients that want to make these leaps, I feel the same way about my business. For me, I answered that question by figuring out how can I take 20 times as many clients through my process in a year? It allowed me to lower my cost to my clients by delivering results in 20% of the time. But I got there from an itch in my brain and my gut. That desire to leap in my income and the impact I want my business to make in the world.

But the first thing I needed to decide is that incremental growth was no longer acceptable to me. These Wall Street bankers do not have a secret that you don't. Either their industries, competitors or markets have long ago baked in what type of wealth creation is expected. More importantly, they have a non negotiable floor for the amount of money they expect to earn from every transaction, every deal and or every client. So I am going to ask you the same question I ask my clients.

Why not you? Your business could and should be the top hedge fund equivalent in your market. No, not tomorrow. However, you can decide tomorrow that you are sick of incremental growth and will put in the time and effort required to start to design a version of your business that will finally create real leverage. A business that delivers such a high level of expertise and value that your profits can leap instead of just small steps that are not impacting your life.

Somewhere, business owners have decided their path should be a struggle and a slog until one day they will sell their business and finally have that windfall they want. That lawyers and bankers just happen to be in the right business. I have two words for that thinking bull and shit. Too many businesses exist that way for decades only to find their industry changes or other economic tsunamis occur, a hello global pandemic and then they cannot sell the business for the amount they hoped and dreamed they could. That does not have to be you anymore.

It is a choice. Make it. How will you make your profit leap in 2021? Better yet, what will you put in place this year so your profit can leap in 2022 and forevermore? Draw your line in the sand and then leap.

So I ask you again, why not you? Thanks for listening. Until next time.

This has been the Business Brickyard Podcast with Howard Mann. Be sure to subscribe wherever you like listening to your podcast or hop on over to businessbrickyard.com.