205. How to Create a Profitable Business (Revenue vs Profit)

Welcome back to another episode of the Ben and Bergs podcast. I'm Ben, your favorite high school dropout and founder of collective shift alongside Ms. Berg, your favorite MBA and CEO of Collective Shift. We're here to bring you world class crypto research strategies and insights to help you crush this crypto bull market. Plus, get an exclusive behind the scenes look as we scale Australia's leading crypto research company. And if you're listening to this podcast, we would love for you to share it around with a friend. It's how we grow the podcast each and every week. And today we are talking to all the business owners out there or maybe just trying to start a side hustle. Today we want to talk about the topic of revenue versus profit. And this is kind of built from the book Profit First. If you haven't read this cracking book, we're sort of going through sort of conversations around now with our business. Like we've grown quite substantially over the last two or three years and now we're really trying to hone in on like what are we, what are we optimizing for? Because you can grow a business super, super fast, grow your top line revenue people like yeah, you know, I'll do five meal rev. Awesome. You know, cool story bro. How much money are you making though? And that's like, that's like really the metric at the end of the day that you should be looking for. Unless you are looking to raise a bunch of money, do the VC growth and scouting like an Uber and you just revenue at all costs and then you, you know, figure it out later. But for most small businesses, most startups, most scale ups at that sort of 1 or 0 to 1 million, 1 million to 5 million, even 1 to 10, 15 million.

Usually you know, profit is going to be the key sort of performance indicator of how you are tracking. But it's interesting burges, you can have a massive business, you can be doing 20mil a year and making the same amount of money as someone on doing 3 million a year.

It's pretty crazy when you hear those numbers and you see a lot on social media about companies raising big amounts of money and they do hit revenue because they're going revenue targets are going after market share and eventually they'll go public and then privatize the profits and socialize the losses. Classic examples like Twitter, right? I don't think it was ever profitable, but they're going after market share. They're just burning more and more money. But these are the stories you hear about that's not the reality for 99% of businesses, and only very few businesses can become as large as Twitter or Facebook or whatever it may be. So when we meet business owners and they come and talk to us and if the first thing they say is what revenue do you do? Or how many people do you have in your business? That is the biggest red flag. Because why do any of those two matter? I could be doing 10mil revenue, I could be doing a hundred mil revenue. That doesn't matter. What matters is how much money do I take home, how profitable is my business, what dividends do I get as a business owner.

Yeah, I was definitely guilty of that when I first started business. It was like a bit of like an ego like dick swinging contest of like, oh yeah, how many employees you got? How many, how much revenue you got? You know, and now after doing this for nearly seven or eight years, I'm like, you know what I'd rather have like no employees, very little revenue and a bunch of profit because like, at least you're making a bunch of money rather than having huge amounts of people, massive headaches, huge revenue, and you're not making any money. Like you just, you sit back and go, what the am I doing?

Exactly. And there's an old saying that revenue is vanity, profit is sanity, and cash is king. So revenue doesn't paramount like that is literally just a number. That is your top line number of things coming in. Profitability is what you want. So that's revenue minus expenses. And then cash is king. At the end of the day, how much cash do you have coming into your business? What are your cash to cash days? Because you could have all of this profit and it could be all on accruals. And then the fuel in your business, which is cash, you will run out of that. So you need to monitor that like an absolute hawk so your business can keep operating. There's a lot of things in that chain that you need to optimize.

Yeah, and, and an old coach, you know, once, you know, sort of taught me, I guess, or a lesson I learned from him was like, you know, over the course of a year, when you're doing your yearly planning, you know, what are you optimizing for? You optimizing for revenue or optimizing for profit? It's very hard to optimize for both. So let's say like you're trying to optimize for revenue, maybe you're going to, you know, put more marketing money into marketing, advertising, hiring sales people, blah, blah, blah. So you're going to increase Your revenue, but then your expenses are going to go up too. Right. So, you know, you're probably not optimizing profit too much versus the opposite. When you're optimizing for profit, maybe increasing pricing, you're lowering, you know, headcount, you're leaning at the business, you're looking for operational efficiencies, you're looking to grow your margin. That's a different strategy than growing your revenue. And that's when you're optimizing for profit. And from my experience in this business, we've always probably the first three years optimized for revenue because we're trying to grow the business, trying to grow market share, grow the products, grow the brand, really go sort of big. And now I think we're sort of on that flip side now where we really want to lean things out, look for profitability and make it a really sort of successful cash flowing business.

Absolutely. And there's a general rule where if you look at a business, generally one third of their expenses will be for fixed costs, a third will be essentially wages, a third will be overheads, and then a third should be profit. And what you find in the majority of businesses is that profit third gets squeezed right down because expenses spill over, overheads spill over. And that's just this kind of sign of an inefficient business. And if you want to do this, the general principle is like in personal finance, you pay yourself first. So you get your weekly or monthly salary, you take 10% out and you invest it with this model. You work out what profit that the business owners would like, or dividends or however you want to measure that. And then you work backwards from there. So you're like, great, if Ben and I Both want to $200,000 profit each or a dividend at the end of the year, that's great, we've got that number. Now what are all of our other costs? Great. This is the revenue amount that we need to achieve that. And this is so key in knowing your numbers. You have to get real with your accountant. You must know your numbers. Even your basic third, third, third numbers, you must at least know those. The way that Ben and I do this is we have weekly reporting and monthly reporting. So weekly reporting we chose about or 10 metrics plus maybe six, so 10 performance metrics and probably just six. Where are we at balance sheet metrics? And they're things like how many customers did we get this week? You know, from different sources. What are the outgoings for this week? What are the incomings for this Week where us, where's our cash balance at? Crypto balance and a few other things. So we're right on top of it. We know just by looking at that. And the whole goal of this is if you're on holidays and you have five minutes, you look at this worksheet and you'll know exactly where the business is at and any areas that you need to target to fix it. And this has been revolutionary for us.

Yeah, the school card's been awesome. I think the other thing as well, that really for me, like the forecast and like what we're using, Float, where you can really understand your outgoings, what you're spending on a month by month, because you've obviously got accruals and cash. You know, the, the P and L is going to tell you one thing in terms of what you're spending. But really knowing your cash outgoing has been super helpful because then you can start to figure out, well, okay, well, what cash do we need coming in to make sure the bank balance is going up? Because yeah, man, I remember back when we first started, like, I didn't, I didn't really understand finance that much and I was like, wait a minute, the P and L was saying one thing, but yet the bank balance is going down. What the hell's going on? So having those numbers and knowing your numbers can revolutionary, as you said. Otherwise you're just sort of running around in circles.

Exactly. And it lets us know the thing that we need to focus on for that week or that month and the key areas in the business to get to where we want to go and achieve that profitability and have the dividends that we want. So let's just talk nuts and bolts tools that we use. So the scorecard I was talking about, those weekly metrics, that's in a Google sheet. Very easy. Our bookkeeper prepares that simple to do. We do all of our accounting stuff in Xero. We've got our cash flow forecasting in an app called Float, which is absolutely amazing, little SAS production. So you know your cash coming in and out. You can do different scenarios. We've got base case, bullish and bearish. And you can project your cash flow out, which is super important. We can also hook that into Xero so you can have a budget there and see how you went against your forecasting and your actuals. So you're measuring performance, which is really important. We do that on a monthly basis along with a bunch of other accounting metrics, you know, basic ratios, seeing where P and L is at, where our balance Sheet is at. We end up doing that monthly as well. We've got a few little things that hook into Xero like Spotlight which just essentially prints out beautiful charts for us, which is very, very cheap. Your accountant will have access to that. And that's pretty much all we need because that runs all of our invoices, our pays, everything goes through zero. We can see our cash flow. We get those specific numbers that we need in a reporting way that we want and that really sets us up for success.

Yeah, yeah, spot on. And also you know, on, on the other end of like, you know, areas in the business to focus on those profit centers, bergs like those products that you know, that are generating a lot of profit versus maybe other products where customers are, you know, costing a lot internally. Remember support or like they, you know, the margins on that product aren't quite high or the churn's quite high or the LTV is not quite there, where you know, there might be somewhere in your business that you're actually seeing. Well, hang on a minute, this, this product over here or this customer demographic is actually producing a lot more revenue, a lot more profit because the margins are a lot higher. Let's focus our attention there rather than wasting all of our time over here, you know, getting bugger all results.

Yeah, there's a great book called Built to Sell on this and it was about a guy running an agency and he just stripped back all of his products. He worked out what his most profitable product was and then doubled down on that so he doesn't have to go out and hunt and get more work. And then he's basically killing himself for not much profit. So let's say he gets a million dollars revenue and it might cost him $990,000. Why would you do that for $10,000 profit at the end of the year when you could go out and do smaller pieces of work that'll generate way more than $10,000 profit at the end of the year. And that was really eye opening book as well. Just cutting back to the essentials, saying no to almost everything and backing yourself. And this comes down to knowing your business, knowing your most profitable products and knowing where your well is before you get thirsty. So it's understanding your most profitable customers. And to do that you need to know obviously how much things cost. You should know that. But then figuring out the inputs to those costs, what goes in there like what are the overheads, what are the people, resources, their time, how even, how annoying is it, how much does it stress you out all of these things, because if you're. If it takes a lot of your time and you're very stressed out, you're going to do a poor job at it. It has a higher cost, you're not going to be at your best, and you're not going to reel in all the customers and get that flywheel going.

Yeah, Bang on. And back to that profit first book burgs, like even just sitting down and figure out what is that number you want to make at the end of the year and starting to reverse engineer how you get there. It's like trying to build a house without a plan. It's like having a crypto portfolio without a strategy. You know, what is that number you want to get to? You know, we've sort of got that. That number sort of roughly in mind. And then you can kind of reverse engineer how much, you know, can I spend? What is my budget to spend each month to get to that. To that, to get that profit goal? And that's essentially what profit first is, Putting that money in your pocket first before giving it to others.

Exactly right. So let's say I've only got a $50,000 budget for this month. This is the profit target I need. What does my business look like with only $50,000 spend? And that is a very different mindset to, I've got this guy and I have to employ this person, and we kind of do this over here. We need this person for that. It's like, no, throw that out the window. This is my goal. This is what I can spend. What are the essential resources I need to achieve that?

Yeah.

And it's a very different mindset. And let's get into some of the mistakes that people can make that they get caught up with, because what we're taught from a lot of areas and what you actually need are very different things. And you start to realize this when you talk to experienced business owners that have been doing it for a decade or two in their business, and their businesses are running absolutely smoothly, just humming like a machine. They're going to lunches and breakfasts and all this kind of stuff. They're living a very relaxed life because they got it right.

Let's go first. This is the big mistake. Grow first and profit later. That is absolutely bullshit when you're right at the start. Yeah, fine. Figure it out. You have to find a market. You have to find a product and customers. But just saying, nah, we're going for growth. We're going to hire all these people, we're going to figure it out later. And then once we figured it out, we'll lean it all out. Bullshit. When your business is profitable, it will show you the path to growth. So don't try and figure out all of the growth and hire all the people and all of the inputs. Try and get profitable first. Really lean with the basic amount that you need and you will start to see where you are profitable and then start to feed those areas. And that will start the flywheel. It'll kick it off. That will generate more and more profit out the back end.

Yeah, I like that base. And then also, like, I think at the start when, when, when I was, when we were building this business, it was like, yeah, revenue at all costs. But also to what end? Like, what do you, like, why? What? Like why do you need to get revenue to crazy amounts and figure out profit later? You know, what's your ultimate outcome here? Like, are you trying to sell the business? Is it a lifestyle business? Like, because personally as well, like, again, in my opinion, businesses are just a vehicle to help you achieve what you want to do in life. And you know, at the end of the day, the only way you're going to achieve that is profit. You can't put business revenue in your back pocket. Like, you need profit to grow the bank balance and then, and then use that money to do something with and you know, revenue at all costs. I think unless that's what you're optimizing for, for whatever reason, can sometimes, as you said, just be a bit of a fallacy.

It could just be optimizing for ego. And if that's what you're doing, that's okay, right? Because if your goal is to have the biggest business possible and the most revenue, even though it's not profitable, you need to be honest with yourself. Why are you in this business? What do you want out of it? Once you know that you set the values for the company, which are an extension of your values, plus the team's values as well. But then also you need to look at, all right, where am I going with this? What is my strategy? Which, which market do we operate in? And there needs to be a straight line through all of that. This is what I want to achieve with my, my life and where I want to go. This is what gets me up in the morning. These are my values and the company's values to get us there. And this is the strategy that aligns with that and a market that we can tackle. You need to be really, really honest with yourself. And a lot of people go wrong as well. Another mistake is people cut the wrong costs. So they've already got a business. They're like, great, I want to get to profitability. And they either cut across the board or, or they cut an area they don't understand. And the way to stop this is to do that work. Figure out what your most profitable products are, have that strategy and that alignment with your values and where you want to go and be like, this is the thing. And then double down on that and cut the areas away that aren't essential to that arm of the business.

Yep, yep, totally.

And it can be brutal. Like, we've, we've got a business advisor and he's gone into companies and they don't want to do this. They, he's looked at him and he's like, well, you've got too many people. You need to cut a couple of people and you'll be exactly where you want to be. You don't have enough business coming in. Oh, no, I can't do that. It'll ruin the culture. We need to do this, we need to do that. And he's like, well, they're underutilized. You either need to get more business or you need to cut those people out and you'll achieve all your goals that you wanted to do and you got. Let's not lie to ourselves. This is a very difficult path. You have to make very hard decisions.

You have to do the hard thing 100%.

Yeah, exactly right. Another trap is too much, too soon. People want to be profitable day one. They want to implement tons of changes in their business. That's just not going to work. You need to do maybe one to two changes per month. Even that is like rapid pace because your people have to catch up your processes, your systems. The process money has to come in, go slowly to build a profitable business. The earliest I've ever heard was like three years. Yeah, right. To get it to a point where it's absolutely singing. I've even seen businesses that were completely screwed go to highly profitable. That was a three to five year path. Generally it takes five to ten years for the average business to be absolutely singing. So don't try to do too much too soon. Take your time, small changes, and don't run too far ahead of your team because these are the guys that are going to execute your vision. You need to make sure that you're leading them, but you're only a couple of steps ahead, not halfway up the mountain.

I've been, I've been fell up the mountain a few times.

Yeah, we have to reel you back. Right. And the whole thing is like you're climbing a mountain. Who are the people that you're going to need and the people that you're going to need to get you up that mountain? They're going to have certain skill sets and they might not be the people that you have in your company today. You will need to form a team that will support you to get you up that mountain.

And I think, like, the way I sometimes look at it is like three, three steps forward, one step back, or even three steps forward, two steps back. Like, you know, and that comes from like reviewing and leaning out what's going on. Because I think one of the most valuable things you and I do burgs, you know, every quarter or every month or whatever it is, and just go through really, with a, you know, through the books, pretty, pretty deeply and figure out where we're spending money and looking at the ROI of those investments. Because you just collect and. And when I say collect shit, you just, you just start having all these people that you're paying and you're like, well, now I mean it. Like, what the hell is like, what are we paying them for?

So a buddy of mine in his business, he. He does this quite regularly, like at least quarterly. And he went through all of their expenses and he goes to his guys, he's like, he's got a team of maybe 10. So how many mobile phones do you think we have? And like, oh, I've only got like three. You know, this guy has one, this guy has one, this one. They had 27 mobile phone plans out paying for.

Probably three.

Probably. Yeah. These tell stability. He's like, come on, guys. Like, you know, you start to. There's always waste in a complex system in a business, and you just need to review it. Like, you're going to.

Implement a lot of changes. If you're going after profit, you're going to continually improve. You always want to do better. Yeah. You always need to look at that system, how the market has changed, how your business has changed. New tooling, get rid of old tooling. The amount of software we were paying for that we didn't need. My God.

Yeah.

There's a lot of things you need to go through and just optimize that value chain for your business.

Yeah, agree.

And the final mistake that I see a lot of people make is they go for complexity.

I'm a person that's seduced by complexity. Right. If there's a complex problem, I want to solve it, but I don't like complexity in my life. I like simple, elegant solutions. If you're doing something in your business that is too complex, fix it or eliminate it. If something takes 20 steps to do, that's madness. How can I get it down to 8? What can I get rid of? What can I eliminate? What parts don't my customers actually need? We did a lot of this work with our few of our content supply chains. The way that we've done that we generate it, we've also done it with customer onboarding. What exactly do they need? Even employee onboarding. A lot of times we went overboard and people get overwhelmed and they didn't need a lot of the things and it was taking up a lot of resources. So we looked at that chain and we were like, okay, what other high value things? What can we eliminate that people won't really miss? You? You can 8020 a lot of stuff and you will be damn surprised. A lot of people are scared off. I remove this one thing, my customers won't like it. Guess what? Half the time they won't even notice. And if they do and kick up a stink, bring it back. It's not a problem.

Yeah, yeah, I agree. And yeah, and it makes life easy for employees as well. Because I think sometimes you start just paying for things, you're like, oh, that's a problem. Not enough efficiency. So, you know, get another person and you pay for this new software or whatever. But I think a big thing is, you know, coming back, improving the efficiency. You're going to save money, your employees will be happier, the process is going to be better. Like, just fix the actual problem. Don't just band aid it over with more and more people. Like, I've definitely done that in the past. And it's just, it's not, it's not the solution.

Don't, don't add big fixed costs. And you know, Ben and I don't have all the answers, but our people do. So we ask them quite regularly, what are you doing that you think is stupid and you can stop today? Yeah, what am I doing that is stupid and I should either do better or stop doing today? And they tell us, like, I don't need this thing. I don't understand why I have to do this process or we have this meeting and why I don't really need it anymore? I did once upon a time or I met with my team. And you got to remember, as a business owner or a manager, you give your people a lot of things to do. You also need to tell them when to stop, because they just add more and more things and if you've told them to do it, they're going to think it's important and it must be done. But a year or two later, sometimes those things aren't even relevant. So regularly review with your team at least quarterly, saying, hey, what are the things that you're doing? What's taking up your time? What do you want to get rid of? What pisses you off and you're making that job and that role better for that person. You can even outsource or eliminate a few of those things and your employees will be way more efficient and you'll be more profitable.

Yeah, love that a hundred percent. Totally agree, mate. That's a good wisdom there. Mate, I'm going to have to listen back to this.

I think you should, mate, I was just dropping Knowledge and you're just off somewhere else.

No, it's good, honestly. Like that Profit first book that I read a little while ago, like that's, you know, two or three years ago, really, really sort of changes your perspective and it makes you think a lot harder around where you're focusing your time, where are you spending your money and is that the right ROI areas to be investing all of that time and.

Attention and it just makes business easy. It gives you all the tools that you need. Profit first and Built to Sell. Read those two books, they're very small. And once you implement those lessons and you change your mindset and you're set in that way, business becomes a lot easier. All the noise gets canceled out. You don't listen to all the, the, the Instagram, the big stories that you know, the big, yeah, you know, and life's exactly right.

Business is a lot easier when you make your money, that's for sure.

That's exactly. And that's the whole thing. Don't delude yourself. You're in business to make money.

Yeah.

Business is there. Yeah. You can do some social good along the way, you can make some products, you can change a few lives, but at the end of the day, it's a business, it needs to be self generating, it needs to produce cash and that's its function. Do not delude yourself.

Yeah, bang on. Well, thank you so much for listening. I know that was a bit more direct to the business owners, but again, we deal with a lot of business owners in our platinum service. We've got over 100 high net wealths and business owners in that group. So if that resonated with you and you're into crypto, we've got an awesome community over in our platinum group where we do networking and events and obviously talk a lot about crypto. But there's some awesome successful businesses in there. Like, you know, companies have exited for eight, nine figures. There was one company recently that went for nine figures was absolutely nuts. Some epic, epic people in there. So if you are a business owner and you're interested in crypto, I definitely recommend checking out the platinum group. You can book in a call over on our website, see if it's a good fit and we'd love to chat business and crypto with you. That's, that's what we like doing over here.

That's what we're about.

Yeah, exactly. Well, thank you so much, everyone for listening. If you like this episode, we'd love for you to share it with a friend. Otherwise, we'll see you on the next episode.

Thanks, champions.