Ryan Deiss shows business owners how to use expense ratios to keep profits consistent as they scale. He walks through defining a target profit margin using the Rule of 40, breaks down typical expense buckets like people and sales and marketing, and explains how to build a spreadsheet to track them.
There's money hidden inside your business and I'm going to show you how to find it so you can be consistently profitable month over month, year over year. But over and over, we talk to owners of eight figure businesses who don't even know how profitable they should be. And so they can't define their profit first, which is why they're not profitable then. As a result, their profits are inconsistent month to month. And even though they have positive months here and there, they bleed cash over time. When this is the case for businesses entering our portfolio, we implement expense ratios. This is part two of me teaching you how to use them. In the last video, we talked about the first part, which is why you need to define profit first. Any optimistic entrepreneur's ability to spend will always outpace their ability to earn. This means we need to pick our profit first. So what should that number be? Well, this is where we often look to the Rule of 40. The Rule of 40 is a simple rule that states that your year over year growth rate plus your profit margin should equal 40%. So if we know that we're growing at 10%, then we should have a profit margin of around 30%. If we're growing at 25%, our profit margin can be 15%. Now, if you don't know what your growth rate is, that's okay. A lot of time, 20% is safe. But I would never aim for anything 10% or lower. If you target a 10% or lower profit margin, slip on one banana peel and that's it, you're not profitable. Got it? Okay, great. So we've defined your profit margin and now I want to make sure that you remember that percentage because we're going to need it later on. The next thing I want you to do is to consider your expenses. Brainstorm the main buckets or categories that your expenses fall fall under and come up with a list of expense categories that account for all of your major spending in your business. Here's a common list. We're talking about things like people, cost of goods sold, facilities, sales and marketing expenses, your tools and technology, merchant fees, miscellaneous. You get the idea. Now you need to pop open your laptop and make each of these categories a line in a spreadsheet, with that last line being, you guessed it, profit margin. I set up a template for this. If you want it, just drop ratio in the comment and we'll send it right over. Now we need to get our targets and we need to compare those to our reality. That's exactly what we're going to be doing. In part three.
