Matt Dart explains why a $2 million business can be worth less than a $500k one if margins are thin. A tradie's low-margin call-out fees, an agency that hired before building systems, and a client whose weekly overhead jumped $500 all show how revenue hides profitability problems. He walks through a four-step margin audit to identify which services and customers actually make money.
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Alright, guys. Episode 140. I hope you guys are having an epic week so far. So firstly, quick little update from me. Nice little exciting times for us. We sold both of our cars finally, which has taken us about 6 weeks to do, which is awesome. Now that we've got the Tesla, poor little Winter is at home at the moment. So if she comes in, she's just gonna be part of the episode. So you'll have to wait and see if she, she comes in or not. Poor little thing. She's been home with me all week. But thank God, thank God, right? I've got a team that could do a lot of the, a lot of the stuff for me that I can spend time at home with, with Winter. Obviously still doing some stuff. She's, you know, obviously 4 years old now, so she can do a lot of stuff on her own. And I'm just, luckily, I can do bits and pieces whenever I want flexibility of being working from home. But of course, having the right team in place. So shout out to the team if you listen to this episode. So today's episode is a little bit controversial. Your $2 million business might be worth less than a $500K business. So let me explain what I'm talking about here. I'm talking about margin. So I'm gonna go through a couple of examples of people that I've been talking to recently and also some clients as well, because Everyone always focuses on the revenue, but the real metric that you need to focus on is the profit. It doesn't matter if you're turning over $2 million a year, if you're not making much profit, it's almost worthless. And it's almost like a job you can't leave because it's, it's a decent size. You can't just get up and leave. Okay, so I'm gonna go through a couple of examples and then I'm gonna go through the margin audit that we do with all our clients to make sure they're operating under a under a higher margin. So ideally, you obviously, the higher the better. Of course, if you're more like an online business, you should be going between like 50 to 70% margin. If you've got like a brick and mortar business, a 30% margin is ideally where you wanna aim for. Obviously, every business is a little bit different, but at a bare minimum, we get people to over 30% margin. So let's get into a couple of examples that's happened recently just to give you guys some Context. And by the way, if you ever wanna sell the business, they go on, usually it's like 2.5 times the profit each year. So if your business is doing $5 million a year but only profiting $50K, you're only gonna sell for like $250K. But if you're doing $500K a year and you're profiting $250K, you could sell it for, what's that, $750K, sell for a lot more. So food for thought. So prime example, a client of mine actually had an increase in fixed overheads of $500 a week locked in for the next 2 years out of the blue. So his profit dropped from about $2K a week to under $1K or about $1.1K overnight. So it was out of his control, but this is exactly the reason why you need to have a bit of margin there. So just in case things like this happen. Yeah, some of these things might actually happen to you. So you need to make sure you have a margin there just in case this stuff happens. Now, I'm not saying this is gonna happen all the time, but I'm just saying you wanna have a bit of a barrier or a— what's the word I'm looking for? You know what I'm trying to say. You wanna have like a space to move because you're taking all the risk, right, as the business owner. Another example, an agency that we are currently working with, they hired team first before fixing their systems. So when the team came in, they were super unproductive and actually right now they're not even making a profit. Just think about this for a second, like you're doing $60,000, $70,000, $80,000 per month and you're not even making a profit after all your expenses. Because the team that you've got, the team is like fine, but they haven't got the right systems and processes in place. So everyone's kind of double handling, everyone's doing things manually instead of having like some automated systems or some semi-automated systems, which means that the margin is pretty much scrapped, gone. And it's not a good business to have, obviously. But this is the type of thing that a lot of businesses are going through right now. So if you're going through this process, I mean, stay to the end. Let's go through, let's have a proper conversation where we can see how we can actually increase your margin, because at the end of the day, if you don't have the profit, then you don't have the business. Okay, so the other thing you could obviously do here is, first thing, you need to be aware of your margin to start with. So you obviously need to go through these stats or these figures to understand your margin. But secondly, you need to forecast what would happen if you were to increase your price. as an example, or if you were to get rid of certain services. Let's give you a little bit of insight into what we do with our clients. We do like a margin audit. So we go through every single type of customer that you've got and also every type of service that you've got. And we go through how much is that bringing in for you income-wise and how much is it costing you to deliver on that service? And we're looking to identify if there's any products or services or types of customers that are higher margins than others. So, prime example, this is like perfect for tradies. For example, a lot of tradies will do like a call-out fee, or they'll do like, you know, 3 or 4 different types of services. And what we actually found was the call-out fee, which is only a small fee, like $200, $300, for how much it costs the tradies to go out there with the time and fuel, for example, it was like a 20% margin. And 3 of the 4 services they offered was a 70% plus margin. So wouldn't it make sense just to drop the callouts and then focus all your energy on those 3 other services that had a 70% margin? But because most people don't even think about that stuff, they never get that opportunity to understand where the money's actually going. So it, it's, it pays very well to understand the numbers and what you're spending money on and how much it actually costs to deliver on that service. Okay. So that's number one that we do. We identify the margins of the current service services and also the margins of every customer. So some customers, for example, maybe you have a group model, maybe you have your one-on-one model. Maybe the pricing isn't done correctly. So maybe your one-on-one model is only 50% margin and your group option is 80% margin. Wouldn't it make sense to do more of the group? Yes, of course. Or you increase the one-on-one. So it also has 80% margin. So that's the second part of the process that we do is we then be like, cool, how much do we need to increase the price to get to the margin? Or if we were to increase by this amount of price, how many customers can we afford to lose to get the same amount of profit? And then obviously moving forward, your, your profit will increase. Okay, so we actually forecast and we can work that out for you on a simple spreadsheet. So this is gonna be a relatively short episode. I'm gonna I'm gonna share that with you if you guys want a copy of that margin audit template so you can work out where your margins are at right now and then how much you're able to increase your price and how much you need to increase your price by to get the, the margin to, to increase and how many people you can afford to lose to be able to still make the same profit but serve less customers. Because I think we all agree, if we're all making $1 million a year, and one business was serving 5,000 customers and one business was serving 500 customers, which one would you prefer to be in? The 500 customers. Less overheads, less team, more, more room to move. Okay, so this is exactly what you need. I want you to send me a message right now. You've got 2 options. Either send me a message on Instagram or Facebook, or option number 2, you can click on the link and apply to work with us so we can have a proper conversation on how we can get your time back, but also specifically for this, how are we going to increase your margin? If you do wanna work with us, we go through 3 pillars. The first pillar is getting your time back. The second pillar is increasing your margins, and the third pillar is growing your revenue. Okay? So you can't grow your revenue unless you've got the margin there, and you can't grow your revenue if you don't have any time. Okay? So if that sounds like you, let's have a conversation. Click on the link in the description, or you can send me a message in the DMs. Also, side note, I just wanna say a massive shout out to everyone that's watched The podcast. We've actually more than doubled the podcast views in the last 2 episodes. So super, super grateful. They're nice and short, nice and sweet. So if you guys got any feedback for me as well, I'd love to be able to hear it. We usually try and keep these episodes to around like 10 minutes, you know, short and sweet to give you the value, and then you can kind of get on with your day, or you can watch obviously multiple episodes. But if you've got any suggestions in terms of what you want on the podcast, then, you know, please let me know. Don't be a stranger because otherwise I'm just kind of making it up as I go along in terms of what I think you guys want. So have an awesome day. I'll see you in the next episode.
