006: Jeff Redmon - Increase Net Profit by Over 19% With This Simple Strategy

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All right. Hello and welcome to the show. Today we're talking to Jeff Redmond. Jeff is a senior Gazette coach. He's also an attorney, has led other executive groups and he has an interesting take on one of our key exercises, the power of one that is so powerful, so simple and so effective. I've used again, I wanted to go straight to the source and bring Jeff on and talk to us about what it is, how it works and what difference it makes in your operation. So welcome to the show, Jeff.

Thank you, Bill.

All right. And you're in Wisconsin?

Yeah, my office in Hudson, Wisconsin, about, I don't know, 15, 20 minutes east of St. Paul, the Minneapolis, St. Paul, Twin Cities.

Awesome. And you're actually an attorney?

Yep, seventh grade. I announced to my parents I wanted to be a lawyer. And, you know, 50 years later, I'm still being a lawyer.

And they didn't burn you at the stake for that?

No. In fact, it was interesting. A number of my parents friends thought that this was a profession that they should not support and whatever they did, they should not help me pay for law school. That all lawyers were evil and that I was going to the dark side.

No, they did have that. I was joking. But I have a lot of lawyers in my family.

Well, I had nobody in my family had ever even gone to college. So the idea of going to college was kind of a novel thing. And the prospects of going to law school was kind of unheard of. But my folks were super, super supportive and always proud of what I did. So I did it. Not withstanding some of their friends.

Well, we've seen Quite a few CFOs get into this work. And in fact, some of our financial work comes from some people with some strong financial background. And we've also seen a number of ex Entrepreneurs go into being coaches with our group, but the attorney route's a little bit different and I suspect it plays a little bit of a role in how you got to this simplification that it's so powerful.

Yeah, you know, I can fly spec of financial with the best of them. I've kind of an audit committee wonk. But one person suggested that I was bilingual, that I could both speak English and finance. So I kind of take great pride in being able to simplify financial issues down to the operational level. So this is kind of where my one plus one plus one equals 19 workshop kind of spoke to me.

You sure you don't need remedial math with that?

You know, my son was a math major. He teaches math now. So, you know, when I do my workshops, I make it pretty clear no CFOs allowed. This is not about math. This is about operations and finding nickels in the niches.

That's awesome. Nickels in the niches and finding that opportunity. My son is also a bleeding edge math wizard and he finds all business math to be sort of absurd and beneath him.

Yeah, can't join the club.

Right. So this is an interesting bit of math and obviously it doesn't follow the normal math rules. We learned 1 plus 1 plus 1 equals 19.

So let's talk about that.

So there was a Gazelles coach a number of years ago, Rich Russikoff, who sort of introduced this math formula. And so when you take a very simple profit and loss statement, you kind of have four categories. You have, you know, your sales, you have your cost of goods sold. Sales are a revenue item. Cost of goods sold is an expense. Your what I call overhead, some people call SG&A, but that's another expense. And you end up with your bottom line, what, you know, accounts called net income. Right. So four lines.

And with many of our clients, of course, more and more we're dealing with services firms. So cost of goods sold is also cost of services.

Yeah. So I'm a lawyer, so my cost of goods sold is the time I pay my staff, you know, lawyers to do the work of our office. That might be my time, it might be my partner's time, but service organization is the same. It's just the cost of whatever it is you're delivering, whether it's services or goods or in some cases, this is a combination of the two.

Yeah.

And so the one plus one concept is that if we increase the top line by only 1%, we cut our cost of goods or services sold by 1%. We cut our overhead by 1%.

I have a 3%, right?

Yeah, that's what you would think. But I have a P and L that shows net income going from $100,000 to $119,000. So we just increased our net income by 19%. Hence 1 plus 1 plus 1 equals 19.

So we'll put an illustration of this in the show notes so that people can see it visually to go along with us.

But just walk us through your hypothetical company then.

So we have, you know, sales at 1 million.

Okay, easy to work with.

Cost of goods sold at half a million and our SGA overhead at 400,000. So a million minus five minus four equals 100,000. So on a million dollars of sales, this company makes $100,000.

So million dollar company, I've got half a million in my cost of service or cost of goods. So that gives me his gross profit. Right, 500 still. Now I take out.

You've already overcomplicated it. Don't talk about gross profit. It is sales minus cost of goods minus our expense of costs.

And then I got 400,000 of expense overhead. Yeah, overhead expense. Yeah.

So Now I have $100,000. That falls to my bottom line.

Yeah. Okay, good.

So now we're going to apply our 1% rule.

Got it.

So we're going to increase a million dollars by 1%. That's 10 grand. Okay, so we've raised our price by 1%, and all of a sudden, boom, we got $10,000 more coming into the bank. We're going to reduce our cost of goods sold by 1%. That's a mere $5,000. So on $500,000 expenses, we're going to try to lots of different ways to squeeze $5,000 out of our cost of goods sold or services sold. So now we're going to attack our overhead, and our overhead was 400. We're going to squeeze a mere $4,000 out of our overhead. So we have $10,000 at the top line, plus $5,000 we saved in our cost of goods sold plus $4,000 we sa and voila, we just dropped $19,000 to our bottom line. When added to our 100, we got a 19% increase in net income.

So nearly 20% improvement to your net income to your profit for the year through this simple exercise of little shaving in each of three areas.

One of the things that I do when I. Yeah, I mean, very simple. And it might not be one thing, you might do 10 things or 100 things to squeeze these nickels out, but it's by that kind of a sensitivity, we just found $19,000 in our operation that we can use to hire a new person to buy a piece of equipment that we didn't have to go to the bank to borrow or ask someone to invest money. We found 19,000, almost 20% of our annual revenue or annual profit. Just doing stuff that we should always be doing.

I think the first thought that people have when they are confronted with this is that is the value of that multiplied in that way. They see that there's not a. That pursuing 1% changes is actually worthwhile. And we all know that we can do more than 1% often in different areas, but even 1% is a worthwhile effort.

What I do when I do this workshop, and I've done it for over 100 business owners, I ask them to bring a couple years P and L, you know, and they come in all kinds of forms and variety. They're not as simple as this ever. And we just ask them to do the math. All right, take your top line, multiply it by 1%. What's that number? You have something that's cost of goods sold, probably some line here that might be gross profit or whatever. Find that, multiply that by 1%. How much are you going to. I asked each business owner to do this in a workshop, and they raised their hand and report I've had anywhere from 7% to 8, 80% improvement based on their relative size of cost of goods sold, overhead, their revenue line. So, you know, I've never actually had a business owner come and say, well, mine's 19% too. But it shows them. And, you know, they don't need their CFO to figure out this calculation. I can help them. They can figure it out. And as I said, we have clients that have a wide range. But I've never had. I mean, it's impossible that it isn't a positive number. It has to be. It has to be a positive number. So you're dropping cash to the bottom line.

Yeah, yeah, right there. Boom.

And then.

And then you probably engage them at. What do you take next with the exercise? Now they've seen the value of 1%.

Well, what I do is I just remind them that we've also increased the value of their business. So if we had my hypothetical million dollar revenue company and we added $19,000 to the bottom line, and let's say that their value of their business is a multiple of five times their net income, we just added $95,000 to the. If they were trying to Sell it. So this is not just short term cash. This has long term value application as well. So in my workshop, I have the business owners divide into small groups and we sit around and say, okay, you know, without sharing any absolute confidential information, let's just talk about ways that we might increase top line revenue by 1%. And they come up with all kinds of ideas and we report them back and I ask them to record what's one or two things you might do going back to your company and how much do you think that'll save you. Then we do the same with cost of goods sold. I had a trucking company, for instance. He was able to negotiate a long term fuel purchase that saved him $5,000 a week in fuel costs. Well, that's quarter of a million dollars that he's added to his bottom line, you know, by just looking at that line and figuring out how I can shave a few pennies here and there. Then I do the same thing with overhead. And when I get all done, I ask people to report. If you took these handful of ideas that you took, came up with here, applied them to your business, how much do you think you could add to your bottom line in the rest of this fiscal year? And the poster child was a company that did $10 million in annual revenue. They were about six months into their fiscal year. And at the meeting the CEO woman announced that she thought she could find $100,000 to drop to her bottom line by the end of the. In six months, in the end of her fiscal year. And I'm like, wow, we're like all applauding. That'd be awesome. Great. Congratulations. Two weeks later, I get a call from her. She's all excited because she took this exercise back to her senior leadership team and they did the same thing and they were very confident that they could find $400,000 by the end of the fiscal year. And you know, we followed up with them and in fact they did. They literally dropped $400,000 to their bottom line because of this little simple exercise. And then the discipline to drive revenue to cut costs where you can. So an amazing, amazingly powerful tool.

I don't know about you, but when I do that kind of work with a client, I just feel so empowered and fulfilled by the work. I feel like I did my job and now I made money available to invest, to compensate people, to build for some investment. It's a terrifically empowering thing to help somebody to get to that point.

Well, I've never met a client that says, you know, we Just plain have too much cash. We don't know what to do with it. And also to find this is stuff that was already there. Once I worked with a guy, he had a Dairy Queen, and he sold it after years and years. And he says, you know, when they tear that building down, I want to be there, because I know there's at least a half a million dollars that fell through the cracks into the basement. And that's what we're capturing here in real time.

Yeah, I think a lot of times we get so busy with big strategic initiatives that we forget some of the basic business things of just going and finding the little things. And certainly when business is growing and all of our clients are either dealing with growth or trying to get something growing faster, there is often not an appreciation for doing this. And I know I've done it more than once myself, where things are going good and I'll worry about finding the pennies later, except then I go to the bank and I borrow some money to fund something, or I go try and raise another. Try to raise another aircraft carrying a.

Loan package and defending the need for cash when you had it there all along, if you just would have looked for it, It's a cool thing.

I had a client last year who was all focused on the next round. Yet when I looked around their operation, I'm like, please just focus on getting the ship in order, because you don't actually need to raise money right now. You need to operate.

Well, the other thing that's interesting in my workshop, and I use one of our Gazelle slide that shows, you know, here's your working by yourself, and here's your brain working as a group. And I do think there's some benefit to having your leadership team do this together instead of just taking your own P and L and say, well, gee, I think we could rebid our insurance and save a little money to have your leadership team do it. I think it's. They then benefit from the reward of doing this together. And they found is one person, the team found the money. And I just found in our workshops, and these are business owners that don't know each other, you know, and they working together and they come up with ideas that they wouldn't have come up with by themselves. Now take that back to your team and do the same thing. And I just think it's like exponentially more powerful than just trying to be that business owner that has to tough it out by themselves.

Yeah, I couldn't agree more. And I think also there's an Opportunity to go even to lower levels of managers and to take this in, depending on the size of your organization, of course. But you can take this concept and go on a hunt for lower end. And also to use, maybe we'll have a future show about our cash conversion cycle and looking for all of the mistakes, delays and business model problems that can identify that. So we'll do a future show on that one. But that's one again where you can engage a wider audience than the typical finance and executive or even operational crowd that often gets involved in a conversation like this. Whether you're going through income statements and looking for ways to improve things.

And I use that, I just glance at the cash conversion cycle and challenge the business owners to look for elimination of mistakes, shortening a cycle, improve your business model. I kind of tee those up as something as you're talking in your small groups to think about, you know, how you might generate cash. And inevitably somebody comes up with, well, I think I could sell a subscription maintenance service contract to my capital equipment purchase, you know, and so there I tee that up. I don't go into any great depth because that's another workshop, of course, but I think that's a good, a good way to look at how can I improve this particular line item.

Now, when you go through this the first time or two, are you going through this just the three elements to get to your 19 hypothetical, or do you then go into all seven variables for the power of one exercise that we often do? And do you then contrast cash versus profit?

You know, this is where I convert finance to English. When we start kind of fly specking that, well, you know, if it's not a price increase, but you're actually increasing sales by selling new products, well, then we have to subtract out the cost of goods. Now I see eyeballs roll in the back of their head. I'm really trying to drive these three. My workshop with the slide, with the seven, you know, power of one, all seven value drivers, right? But you know, they get more complicated. And if I can get companies just to do this, then we can graduate to a more deeper system. This is not about financial management of your company, right? This is about saving some money and dropping money to the bottom line in a very easy way that everybody can understand, from the CEO to literally the guy that sweeps the floor and uses stuff that, hey, I could use half as much of this stuff. And you know, that saves me money. So I do not go into any more detail. The true CFO CPA type coaches are Happy to go. And when they do, I just immediately see my clients going into a fog like, okay, now you're talking finance. This is for my cfo. And I'm trying to convince them this is not about finance. This is about operational efficiency. And don't get confused that only your finance people can help you find money.

Well, as I hear you share it and I think and rethink my own use of the tool, I think that the focus is on getting people in action, which goes to the core of our work, versus having them stuck in analysis paralysis, where they start thinking about too many variables and then they take no action on any of it. And yours just simply says there's more value in small changes than you realize. Go nuts.

And I close the workshop with a call to action. I ask them to take. What's that one thing they're going to go back to the office and do? Email that to me so I'll help hold you accountable. But boil all this down. And if you just do one thing, and it's interesting because you go to these seminars and I always say 87% of you are not going to do anything with the stuff I'm sharing today. And. And 75% of all statistics are made up, but most of us go to these workshops and we don't do anything. This is the one that I really, really want you to do something because it'll put money in your pocket. And I load my worksheets and things into a Dropbox and invite people to download them. And inevitably every single person goes and downloads those tools. So I kind of get reinforced that they're literally doing something with the information. That's kind of exciting.

Well, we can go ahead and include a link to anything that you want. I think we've got a couple links that we'll put in the show notes, but we can add whatever else in for our listeners. I think that if everybody went back and they just did this simple math. What's your top line? Sales. Great. The last year, the last two years, average them up. What's the top line? Take 1% of that. Great. Now what's your cost of sales? Look for the value of a 1% improvement there. Then take your expenses for the last year, the last two years, and look at a 1% drop in that. Tell me the value of that. Add those up and look at what you see to yourself. And then go have a conversation with your leadership team. Figure out what you're actually going to go to work on. Brainstorm a couple of actions in each One, and then just pick one to three things that you're actually going to work on that would drop them down. You could pick on one in each area and have an accountable person chasing down each of those.

Absolutely.

Seems like it works. Key simple takeaway. Make a difference for you. Make this drive time, or wherever you're listening to the podcast worth thousands and thousands of dollars to you. I don't know about you, but I think my average clients are in the tens of millions a year, not one million. We have clients up to hundreds of millions, and they can get a tremendous amount of value out of just focusing in on a few things like this. Jeff, if you would share with us the. But what do you think the greatest challenge is when you've tried to use this or get this done with someone. And then what's been the most fulfilling breakthrough of that?

Well, to be honest, the biggest challenge that I see is the deference that our business owners, CEOs give to the CFOs. And I love CFOs. I have great personal relationship with CFOs. But that deference that the CEO gives, that, oh, no, this is a finance thing. I rely on Bob to do that. And this is not about finance. So if I can just break through to understand that these are operational efficiencies that happen to show up on your financial statement, I think that's a breakthrough that is beneficial to the business owner. And that's why, and I joke about it, I certainly have had CFOs come to my workshops, but, you know, most of the ones that have come are pretty operational. They get it. And, but a lot of the. My. And it's. I don't think it's fair for the CFOs. I mean, this is the deference that our business owners and CEOs give to the finance people. They can get this. And so that's, I think, the biggest challenge that I've seen. And the breakthrough is just, you know, this one $10 million company that found $400,000 and then did it. I mean, it's like, wow, when I share that story, you know, people are going home and looking for their 400,000, you know, because it might be there. Yeah. So, you know, that's very rewarding.

That's beautiful. And then anything amusing along the way? Have you had any. Excuse me, I said, have you had any amusing snafus with trying to get this accomplished?

Well, the, the one amusing thing is when I did my. One of my first workshops, One of the CFOs found a mathematical error in my P and L. In yours I said I put that there just to see if anybody was paying attention.

Yeah, good recover.

No, it's been I really enjoy and I'm happy to share with you. I have a kind of a one page worksheet that I use at my workshop. I'm happy to share with you and you can post it and use it.

As we'll make that a link for download. Beautiful. Well, thanks so much for taking the time. Jeff Redman in Wisconsin, near Minneapolis St. Paul and up on that side of the state. I really appreciate your taking the time today and going through it and I look forward to seeing you at our next summit.

Absolutely. Thanks so much.

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