In this episode, Bradley Hamner introduces the "Rule of 40," a simple framework for evaluating the health of a bootstrapped business by adding year‑over‑year revenue growth percentage to profitability; the sum should be 40% or higher. He explains why growth and profit are inversely related, walks through concrete numerical examples (e.g., revenue growing from $500k to $1M over several years and profitability percentages), and shows how entrepreneurs can use the metric both retrospectively and prospectively to set realistic growth targets while anticipating profit pressure. The episode also includes two sponsor segments: Club Capital, which offers accounting, tax, and CFO services tailored to insurance agencies, and Coach P Consulting, a coaching program that provides weekly, hands‑on training for insurance agency owners aiming to scale their businesses.
Hey everyone.
All right. So I got a really simple one for you today. One that I learned and it is a absolutely, I think it's a phenomenal framework to be able to look at growth. Let me start off by saying first and foremost, this statement, growth doesn't equal profit. Growth eats profit. Profit and growth are— have an inverse relationship. The more you want to grow, the faster you want to grow year over year, the more that it's going to put pressure on and likely pull down profitability. And so simply put, the Rule of 40 states that in a year we want our year-over-year revenue growth percentage plus our profitability to be 40 or more. I'm gonna say that again. We want our year-over-year revenue growth number plus our profitability number to be over 40. Okay. So what that's showing is, especially in a bootstrapped entrepreneurial environment, which pretty much all of us and as entrepreneurs are in this, if you're taking outside funding, that's a, that's certainly a different deal. All they care about is growth. They care about is growth. And at some point, maybe I'll do the growth framework, talk about that. But specifically, I'm talking about growth. I'm talking about revenue growth. Now, some of you may measure growth in other ways, but this is specifically how much did revenue— what's the percentage of growth revenue grew? Let's say at the time I'm recording this, it's, uh, April of 2024. If you look back, how much did revenue grow in 2023 over 2022. Okay, now we won't know 2024 numbers until we get to the end of 2024. So how much did it grow year over year? How much did 2022 grow over 2021? You can just do the math on that and get a percentage growth. I encourage you to do it. Encourage you to maybe stop this podcast and go do that immediately and just look. Maybe go back to 2020. 2020 revenue was X. Say it was, uh, $500,000. 2021 revenue, what was that? Um, let's say that that was $550,000. Okay, so you can calculate the growth. Then what was 2022? Let's say it went from $550,000 to $750,000. And then the next year, what did it do in 2023? Say it went from $750,000 to $1 million. Now, I didn't do those numbers to then tell you what those percentage growth is. But you would know what the percentage growth is. Boom, boom, boom. Okay. And then look at what was my profitability numbers in each of those years. And so what you can look at is you can say, well, what was 2022, uh, profit? What was 2023 profit? What was 2020? Well, of course we don't have 2024 profit numbers yet, but so you add those numbers together. So if you looked at 2023, let's say that you grew 15% revenue grew 15% year over year from 2022 to 2023. Your revenue grew 15%. What was your profitability number? Let's say that it was 25%, 20, let's say 25. Then you're at the rule of 40. That's fantastic. Okay. And where this helps is it's not just a backwards looking number. It can be a forward looking number. You can actually begin to set targets. You begin to set numbers here. Of what I want that to be. So if you say, man, I'm going to step on the gas pedal, I really want us to grow more than 15%. I really want us to see 25% growth year over year. Okay, cool. That sounds great. What is that likely going to put pressure on? It's likely going to put pressure on your profitability. So in my hypothetical example, say your year-over-year revenue growth was 15% and you want to push it to 25%. Growth, remember, doesn't equal profit. It eats profit.
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So therefore, if it went from 15 to 25 and your profit goes down from 25 to 20, we still above 40. We're in fact, we're at 45. Okay. Profit went down a little bit, but we grew faster. All right. And so that could lead to more profitability down the road. And so there's always this inverse relationship that's happening between the two. And I would encourage you to do the math on that. And then you can start to use that as a way to think about it in a way to approach both growth and profitability. I've shared this with a number of people and they've loved that, you know, that blend, of course. Simple numbers to look at is 20% year-over-year growth plus 20% profit, you're at 40%. And so when you're especially a bootstrapped entrepreneur and you're plowing back profit to be able to grow, we want to know, is that actually working? I know in my early years I kept saying, I'm reinvesting, I'm reinvesting, I'm reinvesting. I'm going to call BS on myself there. No, I wasn't reinvesting. I wasn't profitable. I'm just calling myself on the carpet there. I can call it reinvesting all I want. There was no more money in, in there. There's no profit to be able to reinvest. I was lying to myself. I was lying to myself. There was no profit. There wasn't anything to reinvest. Distributions? I wasn't taking distributions. I was taking loans from myself to be able to basically looked like I was reinvesting. That was, that was BS. And so had I known this, I could have then began. But, you know, I say that if I'd known it then, I don't know if I would have, you know, if I'd realized even what I had, uh, truthfully. So hopefully this framework of the Rule of 40, super simple calculation, you just got to go back and run some numbers and look at your profitability each one of those years, look at your year-over-year growth. Now again, I want to dictate that some of you look at growth, can look at growth different ways. At the end of the day, whether it's your sales numbers that you're making, selling widgets or whatever, at the end of the day, all of that still comes back down to one single thing. How did it impact revenue? Hope this helped. Till next episode, lead well.
