007 How to Scale Your Profits

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This is the affluent Entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom, because that's what it really means to be an affluent entrepreneur.

Hey there, Mel Abraham here, and welcome to this episode of the Affluent Entrepreneur show. And in this episode, we're going to talk about profits. How do you scale them? What does it mean? Why does it even matter? All right, so stay tuned. Let's talk profits. What are they? Why they matter? How do we get them? What should we be doing? Here's the thing. Here's what I noticed working with a lot of entrepreneurs over the years, over the decades of me being a cpa, a financial mentor, a consultant in various capacities. There's a tendency, especially in the online space, there's a tendency for people to focus in on top line revenue. What I mean, it's. It's basically what your sales are. All they want to do is grow the top line, grow the top line, grow the top line. And. And this isn't a new phenomenon. Yeah, I had a client back in the 90s. I know I've been doing this a while, okay. But I had a client back in the 90s that all they were focused on. They were selling generic beauty products, hair care products and things like that. And he was so caught up with growing his top line. That was his sole metric for success. I want to be a $5,000,000 company. I want to be a $10,000,000 company. I Want to be a $15,000,000 company. I WANT to be a $20,000,000 company. And what he did is he. He was totally focused on revenue growth.

To the detriment, the sacrifice.

And the compromise of profits. And cash flow. Now, I will tell you that that is the death knell for a business. Okay? Revenue is a vanity metric. Revenue is a vanity metric. I'm going to say it twice because I think it's that important. Unless you can convert the revenue into cash that ends up in your bank account and, or your pocket and helps you build wealth, profits. That's what it's called. Okay, here's why this is important. That Same company in 1994 is the same year that we had the big earthquake here. What they did is they sold beauty products to large scale retailers at the time markets and things like that. They sold it for a 100% return policy. And so here's what happened. They're worried about revenue growth. And as they're growing revenue, in order to grow revenue, they were taking on debt to finance the inventory buildup that they needed to get to distribute the product. They also were financing the accounts receivable that weren't getting paid by the customers. And I kept saying to them year after year after year saying, stop it. The revenue doesn't matter. If you don't convert it into cash flow, into collected cash in your pocket, it's going to be a problem. Lo and behold, earthquake hits their warehouse. Their facility happened to be right on the fault line almost and had a lot of damage to their facility. And ultimately the word got out that their facility was damaged, that they weren't sure where they were going to, when they were going to be able to supply, what they were going to be able to do. Now here's the challenge. They sell a product to a customer, the customer now owes them money. So if they sell a product for $100 to a customer, the customer owes them $100, but the customer hasn't paid the $100 yet. That customer owes the company $100, but there's 100% return policy from the company. So when these customers found out that they were having some challenges because of the earthquake, the slow moving inventory that they had sitting on their shelves that they haven't paid for, they returned against a credit for the amount owed. So instead of converting it to cash, they got dead inventory back six months from the date of the earthquake. They ended up in receivership and bankruptcy. And it was because they were so focused on the top line, so focused on revenues, so focused on on doing that. I've got a dear friend and I'm not disclosing anything that he hasn't disclosed on his own podcast, who Brandon Lucero, who did a launch and this is I see this a lot in the online space. Did a launch, he spent a year and he did, he had a really good year, so he thought made half a million dollars. Half a million dollars as he was growing his business. But because he was so focused on the top line, the revenue, he ended that half million dollar year, $40,000 in debt and had to crawl out of a hole. Now you sit back and you go, wait a second, you're made half a million. How is it that you end up 40,000 in debt? How do you end up $40,000 in the hole when you're making half a million dollars? When you, you're making half a million sales? Well, it's easy. You're not tracking profit, you're not looking at what truly matters. Revenue absolutely doesn't matter. So let's just talk about a bit about what profit is. And for those of you that are listening, I'm going to do some writing on my iPad. I'll make sure you have the notes downloadable at the show notes. So go to the Show Notes and download these. But I'll walk you through it and talk you through it. You'll still get it exactly the way you need to. Here's the thing. We start with sales or revenue, okay? This is your sales. If you're in the online space, it could be launch sales if you're in a product or bricks and mortar, any kind of it's revenues. Okay? So we call sales and revenue. That's the top line. That's what we're billing. Our customers are coming in and selling. Then we have something called expenses. Expenses, cost of sales. I'm just going to put them all together. This is your costs for operations, for product facilities, it's for labor or our team, okay? It's all the costs that it's necessary to operate. And then once you get done paying all those expenses, there's this number left over. There's this number left over. And this number left over is our profit. Is our profit. Now there is one other expense. Once we get to profit, we'll just put it down here just so we're clear and that there's, there's this number called taxes. The mean, mean devil of taxes. We're all going to have to pay taxes. So here's the thing. Do not, do not, do not ever sit back and not consider taxes. Taxes. Depending on what state you're in, what country, and could be anywhere from 10% on up to 50%. So you're always going to have an additional expense called taxes. And you'll have net profit. But what I'm talking about here is just the profit before taxes for the most part. First, is really, I just want us to focus on that. That the profit, basically your sales and your revenue minus your sales and your revenue, minus all your operating expenses, all of your expenses gives you your profit. See the profit? And this profit needs to be cash. Okay? It can't be owed to you because if it's owed to you, it's not cash. You can't go and spend it if it's owed to you. I want it cash in the bank so you can go use it to pay the bills. You can go use it to buy stuff. You can go use it to build wealth. Profit is what's left over when you are done paying the bills. And the challenge is that we're not looking at that. We're so focused on the revenues, we don't look at the expenses and we don't look at the profits. So what we need to understand is that profits are where our financial growth, our wealth and our business growth are going to come from. If we don't have profits from our business, we will not have a business. Okay? You cannot operate at a loss forever or for a long period of time and expect to survive. And people will say it's a sales problem. It's not a sales problem. Yeah, maybe in some cases it could be a sales problem, but. But the problem is an operational problem. If I'm making a sale and that sale is not a profitable sale, then I shouldn't be making the sale. If I'm making the sale and I have too many expenses supported by the sales, I need to figure out how to make more sales without upping the expenses. Or I need to figure out how to reduce the expenses. But either way, I need to have a positive profit. Positive profit. And remember, when we talk about the mind frames of an entrepreneur, profit optimization is the second mind frame. And this is one of the things that we need to think about and look at. How do I maximize the profits of my operations? And the way we do that is I got to increase my revenues, decrease my expenses, maximize the profits. We got to increase our efficiency and effectiveness to increase my profits. And the reason for that is the profits are going to be the lifeblood of your wealth building and your future success. Let me say it again. The profits are going to be the lifeblood of your wealth building and your future success. Here's a common mistake that I think we all do, and I've talked about it before, but even in my own firm. Even my own firm. In 1996. I know I'm dating myself, it was a while ago, but in 1996, my partners. I had a traditional CPA firm. They. They decided they didn't want to be partners with me, which is, you know, I get it. I'm not easy to be partners with, I guess, but neither here nor there. You know, the fact is that in the process, they decided they wanted to be partners. I lead the firm, but I have no. No cash flow, no client backlog. I have to build my practice. So I said, here's what I need. Give me an office. Give me a phone line. Give me one assistant to help me out. Now, at the time, we probably had a staff of about 29 or 30 people. I said, I don't want all the overhead. I don't want all the people. I don't want any of that. You keep it. That first year.

That first year, I build. I build, oh, probably.

70% of what they built as a firm with 29, 30 people. And it was me and one other person. So I built. I. I built, billed 30% more or less than they did, 30% less than they did.

But I took home my profits were 50% higher. Profits are what matter. I don't care what you build. I don't care what your revenues. I don't care how big your launch is. I don't care about any of that. Because until you convert your revenues, your launch size to cash flow, it doesn't build wealth. It doesn't give you freedom. It doesn't give you financial liberation. It doesn't build affluence. It doesn't give you the ability to pay bills. It doesn't give you the ability to pay team. It doesn't give you the ability to grow. It doesn't give you the ability to have an impact. It doesn't give you the ability to do all the things you need to do. That all comes from profit. Hopefully, that makes sense to you. So what do we need to do? I think there's two things I want to walk you through, something that I call the 50% rule. But before we get there, well, let's do this. Let me Talk through the 50% rule first, and then we'll talk about how to get there. The idea behind the 50% rule. Now, this is the way I built my practice. This is the way I've built my businesses. This is the way that I've built my lifestyle. And there'll be some of you out there going, you got to Be kidding me. Are you out of your mind, Mel? Well, in some cases, maybe I am. But it seemed to work well for me, and it seems to work well for my clients. So hear me out before you ridicule it, hear me out and test me on it, all right? Because if what you're doing right now isn't working, if what you're doing is still going check to check or figuring out going, I have no idea. The money came in and. And I made a lot of money, and I don't know where it went. And if we don't know where it went, we ain't tracking it. So we got to figure this thing out and figure it out quickly, because my job is to help you maximize your growth, maximize your wealth, to maximize your affluence, to maximize your time, your freedom, your impact, all of that. And that's going to come from profits. So here's how the 50% rule works. Because too often we think about things from a. From a revenue standpoint. And I'll going to draw this out so those of you that are listening, make sure you download the notes to make that happen. And so let's do this. This is revenues. So we're going to revenues, and I'll put numbers to this, and we'll. We'll do a little bit of math, but I promise you, I'll do the math for you. So we make money, and then, like I said, there's expenses that need to be paid out from that money. And so we're going to spend some money, and these are our expenses. So if our revenue is 100% and we spend 40% of our revenues on expenses. Okay, 40% of our revenue on expenses. Now, depending on your business, it may be more than 40%, but I want you to understand the principle of the 50% rule first, then your specific numbers. You can figure it out. But let's just assume and presume for a moment that you have 40% in expenses. Now, if you're in the online business without a huge team, this should fit for you. There's another expense, Remember I said in here called taxes. Let's just say it's 15% of revenues and it's just some ballpark average. But what that means is that your expenses at 40%, your taxes at 15%, that means that's 55% of your revenues going out the door. 55% of your revenue is going out the door. What that leaves you with, what that leaves you with is down here, is 45%. The 45% that's left over after expenses and taxes go out the door. That is what we call your net profit. All right? This is where the 50% rule comes in. Okay? That's what we call your net profit. There's now 45% of whatever you've made still left over. And here's how I want you to do it. I want you to split that in half. And now we're going to look at this and we're going to take half of it. I'm going to take 50% of this, and that's going to be for my lifestyle, meaning whatever that number is, you get to live your life on it. Now, the other 50%, this is about my, my future. Okay? So what I'm. What I'm doing here, what I'm doing here is putting a situation in where we take whatever the profits are that are left over, whatever the profits are that are left over and I split it. Half of it is to build wealth. The other half of it is for my lifestyle, to pay my bills, to build my lifestyle. Now, here's what I get all the time. But Mel, 50% of my profits isn't enough for me to have the lifestyle I want. I go, yeah, that's the wrong way to look at it. See, too often what we do is we decide what the lifestyle is and we just spend away without any regard for what it is we're trying to accomplish. Now, that's fine if you want to live that way, but here's what I'm going to invite you to do. If you look at it and say, hey, 50% isn't enough for me to have that lifestyle, now's the time for you to then go back and re examine your revenues and your expenses to boost the 50% so it's enough to give you the lifestyle you want. Does that make sense? Let's do some numbers. Maybe this will make sense. I'm going to jump to this. So let's just assume for argument's sake that the revenues here are going to be. I'll put some numbers in. This is going to be $500,000. I'll do the math for you. I'll make it easy for you, especially if you all are just listening. So you made $500,000. If, if truly 40% and, and 15% is your expenses, that's 55%. 55% of $500,000 is $275,000. So we have $275,000 in expenses.

Which then leaves you an additional $225,000 left over so now I have $225,000 left over in net profit that I get a chance to turn around and say, this is what I get to spend to build my life. Now, 50% of it is for your future. 50% of it is for your current lifestyle. So of the 225, we split it in half. So 112,500 is for lifestyle and 112,500 is for my future. I'm going to invest it. I'm going to use it to build wealth. I'm going to do the things that I want to do with it. Now, if you think 112,500 isn't enough to fund the lifestyle that you want, then let's figure out how we're going to get our expenses down and our revenues up so we can increase that number. But what we don't do is compromise our future by sitting back and saying, well, there isn't enough. I'm going to spend 200,000 of the 225,000 on, on my lifestyle and only put 25,000 away because you're selling your future, my friends. You're selling your future for your today. So let's do it right, and let's give you all the freedom that you need when you can get it. All right? But watch what happens, because when you do this right, what that means is this. 111, 112,000. 5. We're going to invest it. And when you invest it, okay, let's just assume you invest it for 10 years at 8%. 10 years at 8%. $112,500 that you invest 10 years at 8% is going to turn into $1.6 million in 10 years. The 50% rule is your friend. I know it doesn't feel like it when I'm saying, hey, figure out your lifestyle. What happens if you just hold it five more years? What happens if you do that? 112,500 five more years. Instead of 10 years, you go 15 years. So five plus years more, that 1.6 million turns into $3 million. My point is, this is the 50% rule is how I spent my time looking at my business, saying, what's my net profit? Maximize the profit. Profit optimization. And let me take 50% of it and use it to build my future, to build the financial machine, to give me the financial liberation, the affluence and the independence that I want. And if I need more to fund my lifestyle, then the only way I'm going to do that is increase revenues, decrease expenses. So I'm funding my current lifestyle and my future. Hopefully that makes sense to you. So you're sitting back maybe and going, great idea, Mel. I love the idea. In fact, my own son said, that's so conservative, dad. That's really conservative. You know what he thanks me today? Him and his wife, 27 and 30 years old, three homes and a multimillion dollar net worth at 27 and 30 years old because they got it right too often. We get fat, we get happy, we sit back, we're making sales, we're making money, we say, what the heck, I'm. I'm going to live high on a hog. You got to split it. You got to give to your today, but make sure you're taking care of your tomorrow. So how do we do this? There's another exercise I want you to do. Now, this, son, I'm going to warn you, can be a little bit painful, but it's about doing a wants and needs analysis. So if you're sitting back and saying, I need more profits to be able to give me a better lifestyle, we have a couple ways to do it. One, increase sales, increase revenues, make more money, get more people in the door. Okay, so that's one piece. But if we're getting people in the door and it's not profitable, that's not helping us. So we need to get profitable people in the door. That's one second. Is to reduce our expenses. And one of the ways that I have all my clients look at and figure out their expenses is to do what I call a wants and needs analysis. I want you to get your bank statements out. I want you to get your credit card statements out. I want you to get them for six to 12 months, okay? If you need a little bit of wine to make this easier, I'm totally cool with it. All right? But I want you to go through every single line item, every single expense, and I want you to ask yourself, is this a want or is it a need? So now let me give you a little bit of a definition. A need is something for your survival. It is your medical. It is your food. It is your clothing. It is your transportation. It is. It is your protection. It is the roof over your head. Those are your needs. They're not a lot of needs. The mistake we make is that we have unfortunately taken our wants and now replaced them and said their needs. Because we've gotten used to it. We've gotten comfortable sometimes to figure out your profits, to optimize your profits to do some of these things. We got to get uncomfortable again. So I got to tell you, Mannies and Petties, not a need, a want technology like I've got, unless it's business related, directly tied to generating revenue, generating profits. It's a want, not a need. Okay. Luxury cars, want, not a need. Netflix, sorry, want not a needle. And the wants you can cross off if you have the discipline and the desire to truly maximize your profits. Now, now, let me get clear, because some people say you tell me to just live on, on ramen and Mac and cheese. No, I'm not. What I am telling you to do is to live. Intentional, conscious and aware. I will never tell you not to spend. That's your choice. It's your life. If you choose to forsake your future, I'm totally cool with it as long as you do it consciously. But I think if you're conscious and aware and intentional, you won't do it. You'll find a way, you'll understand it, you'll do the right things because it's your future that's at stake here. So I'm not telling you not to spend. I'm not telling you not to buy. I'm not telling you not get Mannies and Petties to not buy technology, not drive a luxury car. I'm telling you do it responsibly. If you want that, figure out. Instead of asking yourself, God, can I afford it? Ask yourself, how can I make it affordable? Ask yourself, how can I make it affordable? In other words, how can I go earn that? So I can get it without going into debt? So I can get it without going into debt and selling my future for my present. That's what we need to do. So you're going to go through the wants, and of all those wants, I want you to look at it and say, does it really matter? Do I have a subscriptions that I'm not using? I cross them out and cancel them. Because then we take all those wants that you've crossed out, you've redlined by choice, they add to the profits, and now those profits can be used for today and for tomorrow. It's a tough exercise to do for some people because you're sitting back saying, wait a second, you're telling me to stop doing what I'm doing? Yeah, I am. Here. Here's what I know. If you're not financially where you want to be, if you're not moving towards financially where you want to be, then unless you change what you're currently doing, nothing will change for you in the future. It's as simple as that. If you want to change your financial destiny, then we need to change your behaviors. Remember, no one has a money issue. They have a behavior issue. Let's change your behaviors, starting with this. So profits are the key to your financial. Profits are the key to building a financial liberation. To build wealth to give you what you need. Use the 50% rule. Go back through it. Walk through the math with yourself. Go look at it and say, what am I making on the top line? What are my expenses on a percentage basis? Are there things and the wants and needs I could cut to reduce those expenses? What's my profit that's left over? And if I split that 50, 50, where am I? What am I living on versus what am I building my future with? Go back through the wants and needs. Cross some things off. If you need to figure out some strategies to scale your income, we'll talk about scaling income in another episode, but figure out how we can scale that income so it drops to the bottom line, drops to your pocket, drops to your wealth and build your future. All right? So I hope that helps you. Profits are the lifeblood of your future, your business and your growth. It's the key to your freedom. Let's get it dialed in. Let's forget the vanity metrics of revenue. Let's forget the vanity metrics of the car you drive and all that other stuff. Let's do the right thing to give you the peace of mind, the financial liberation, the affluence that you deserve. Listen, if you want to continue this conversation with me, do me a Favor, send me DMs, send the comments. Also join our private Facebook group, the Affluent Entrepreneur Facebook Group. I will put link all that stuff up in the show notes and because I want to hear from you, I want to have a conversation with you. If you have questions or comments or anything that you need help with on money, wealth, business, business growth, entrepreneurship, send them my way. Let's get them on the show. Let's get them answered. Let me be your guide to affluence. All right. I look forward to seeing you on the episode next episode, hearing you, hearing from you and continuing this journey. Until then, keep living strong. Talk soon. Cheers. Bye. Thank you for listening to the affluent entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

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