Advertising is DESTROYING this Company!

Hey, everyone, My name is Mike Andes, founder of Augusta Lawn Care. But today My name is Dr. Diagnosis. We're looking at a previous turnaround video with Trinity Tree. They do almost $400,000 in annual revenue.

I'm about to spend another quarter million dollars. Truth is, yeah, I can't afford it.

We're going to break down their profit and loss statement, their actual profit and loss statement. Not anything fake. This is the actual numbers that I got when I showed up at their business.

I was just like, we're doing good, we're rocking, we're rolling. And I was just like, maybe we're not.

Remember, a profit and loss statement tells a story. Over the course of time, I should be able to look at all these numbers and be like, oh, we're spending too much in wages, we're spending too much in marketing and come with some conclusion when I show up at the turnaround to be able to actually give them advice because I'm only with them for a couple hours.

Every dollar that I've made, I've spent it.

This is a little bit more than the first quarter quarter of the year. So January, February and March cuts from January 1st to April 3rd. So a little bit more than Q1 of 2024. So if you multiply this out by four, they probably are going to do around $400,000 in annual revenue, assuming they don't grow a whole lot. First thing we always look at is top line and bottom line revenues. So top line revenue, we got $102,000 in revenue, I should say. Now we have a net income or bottom line profit of negative $2,700. So. So about a negative 3% profit margin. Obviously not good thing to have a negative profit margin. Something's broken in the business. Now there's going to be. In most home service businesses, if you have a lot of seasonality, there's usually going to be what I call Q4 collapse or 1/4 in the year where you do lose money. So if you have a 1/4 and you're looking at profit and loss statement, don't think that you got to like change everything. Everything's going to hell in a hand basket because 1/4 you have a negative 3% profit margin. I believe that Trinity Tree Care will probably be 10 to 20% profitable for the entire year. But it's probably likely that their Q1 is the worst profit of the entire year when it comes to which quarter. This is very common with home service industries because what happens is Q4, we slow down our amount of leads. That come in, it's Christmas, it's Thanksgiving, people are less likely to do work on their house. And then what happens is that actually hits our profit and loss statement in the first quarter of the year. And so many times Q1 is the worst quarter in terms of financially for any home service business almost across the board. Now tree care on the other hand, does have winter storms that should provide to a much more stable revenue flow throughout the entire year. But I want to preface by saying if you have one quarter where there's negative profits, don't freak out, look at your entire year to get a better scope and understanding of really what the story is telling. Let's dig into this a little bit more and see why that potentially might be the case. The first thing I'm looking at on a project based business like this one is going to be their marketing budget. So if I see here, their total advertising cost for the quarter was about $7,500. So about 7% of their total revenue, I look here, about 7% was spent on marketing. Now this is not absolutely horrible, but I do want on project based jobs for this number to be under 5%. What that means is if I spend or if I earn $100,000 in revenue, I only want to be spending 5% or less or $5,000 or less on marketing. This is for one time jobs. If you're doing more recurring work, so something like lawn care and mowing, or treatments and fertilization, any sort of recurring work, pool cleaning, janitorial, any service where there's a recurrence, then this does this breaks down. What then I'm going to be looking for is how do I recoup the cost of acquiring the customer within three months. But for Trinity Tree Care, most of their business comes from one time jobs, taking trees off of houses, off of power lines, etc. And you know, once a 40 year old tree gets cut down, there's no recurrence. And for one time projects I want to be spending less than 5% of the total project value on marketing and getting the customer. So that's the first big red flag. They're spending a lot of money on marketing. And sure enough, as you found out when you watch the turnaround, he was spending almost $5,000 a month on ads at certain periods of the year. And what really stinks is that he was attracting the lowest quality leads. These are people that needed like a 300 or $400 bush trimming. He's attracting them and paying thousands of dollars for very low quality Leads, when in reality, if you went after B2B, business to business and large commercial projects, he might be able to get customers for a whole lot less in terms of acquiring the customer. But more importantly, go after big projects. It's very difficult to get a customer and spend $100 or $200 on customer acquisition cost and meet the 5% rule. If you're selling projects that are like 4 or $500, it's just going to be difficult to make the 5% rule apply. So if you're in projects, going after really small projects usually is a losing game and simply due to the fact that you have no recurrence and the fact you're going to spend so much in marketing to get the lead and then the lead doesn't have a high enough value to hit the 5% rule. So that's the big takeaway from Trinity Tree Care when it comes to marketing and advertising. Now when I look throughout the rest of the P and L, there's nothing that like blows my socks off in terms of numbers that scare me. The number one thing though I am looking at is this $8,000 expense for continuing education. You might in your industry not necessarily need continuing education. That's not the point I'm making. The point I'm making is that 8% of his revenue was spent on this line item. And a lot of times the reason that people will have an unprofitable business and not think it's a problem is because they can easily explain away one time expenses. So for example, when I talk to the owner, I could say, hey, what about this continuing education thing is $8,200? I think 8% of your revenue went out the door to this one time expense. Oh yeah, no problem. Like it was just like one time thing. I have to do it once a year. And you know, it's a big test. But what if in all those other three quarters you also have one time or annual expenses that one expense line item could, could literally tank the business. Because if I didn't have this one expense of a continuing education, this 8%, all of a sudden my 3% of negative profit would immediately go to 5% positive net income. And so what you want to be careful of when you look at profit and loss statements is trying to explain away the data of being unprofitable because of one time expenses. He could very easily do that as the owner and just tell me, oh, is one time it's not going to happen again or happens annually. But these type of things happen all the time in business. These are the type of things that in a business that does under a million dollars in annual revenue can sink you if you don't have enough cash on hand. And so be very careful about trying to explain away these big red flags. Guess what? You can count on one off expenses happening regularly and more often as you grow the business. You want to make sure you're prepared for that. And don't explain away a bad business model simply because you have one time expenses, because they're going to keep happening over and over again. So if you want to watch the actual turnaround, I go to Trinity Tree, we talk about all of this and we actually attack this one big problem up here that I didn't talk about, which is payroll. Watch this video here because unfortunately, someone got fired.