The 3 Main Metrics To Optimize Profit In Your Business 📊

Foreign. Welcome to the Success Cool podcast. I'm your host, Tim Ferray and today I'm going to be talking to you about how to build an insanely profitable business. So what's coming up on this episode is what profit margins are the absolute minimums that you need to achieve to achieve success in your business, what pricing and inflation means and what you need to know and what you need to consider. And we're going to talk a little bit about taxes and what to consider with taxes and then we're going to do an 8020 analysis on your expenses. A little bit of a nitty gritty episode. Not super fun, depends what you're into in business. But an important topic to broach and touch on nonetheless if you want to build a successful six and seven figure business. So I'm currently in the process of building the house of my dreams or designing the house of my dreams with my wife. So we actually just moved into an incredible house in Perth. But as soon as you move into a house, you start to pick up the floors pretty quickly. So we bought this house pre built, so it was already built. So an existing house we didn't build ourselves. So our next step was actually just to build the house of our dreams. So we started to put together some Pinterest boards on our dream house, our dream lifestyle and what that looks like. Like, so there's this place in Perth called the Swan Valley. It's a really nice kind of rural, rural E area probably, I'd say like 60 minutes out of Perth CBD, a couple of hills, slash, I wouldn't say mountains, but hills in the view and you know, it's rolling lands, basically greens. So that's kind of where we want it to be. So we're imagining a Hampton style house with a massive pond, infinity pool. I'd like a barn that would match the Hampton style house. I've got it. I've had a dream my whole life to have a supercar. So we just got a Range Rover and that's cool. And I'm like, I want a supercar. We're actually hiring one in Europe by the time this is released. I would have, you guys would have seen that. But hiring one in Europe just to feel what that's like. But I've really got these dreams of having a Porsche 911. So I want a car garage or barn that I can have that car in. Then I can imagine like ax throwing guns, oval office jars. These are all things that are going in my vision board at the moment for this Hampton style house. But why I'm telling you that is when you start building something like this and you have big goals, you realize that you need a lot of profit. You need a lot of profit in your business to afford something like this. So I'm probably looking at two, $3 million for that. And the purpose of this podcast actually says to talk about profit maximization and how to make more profit in your business. So if you're listening to this, you're probably most likely a service based business or you could be a product as well. So commonly profit margins in service based businesses are anywhere from 20 to 60%. So what that would mean is if I would charge a hundred dollars for a personal training session, 20 to $60 of that would be profit. If I was, if I had a product, it would be 5 to 20%. And if the product was $100, I'd make 5 or $20 profit. That's just on the actual product or service itself. In business, you have a bunch of other expenses which cut away at that profit margin, which is something that needs to be considered as well when designing a product or service. So the higher your profit margin, the better your business will be. That's a pretty simple statement that I'm sure every single person could agree with and would agree with. Business is about the money you keep, not the money you make. Okay, so revenue is just this crazy vanity metric like, Yeah, I make 100k months, but how much do you actually keep? The what you keep is the more sexy thing. Commonly as a business grows, the profit margin will decrease as expenses tend to rise. Then you go through this period where you're like, damn, I'm spending a lot of money here. How can I reduce this or maximize the expenses I'm actually spending on the business? And it's very common. And I've seen this in coaching over the last couple of years. For people to have massive booms, you know, they go from 0 to 60, 70, 80k months and then their expenses rise with that. And all of a sudden you've got a 70k a month business, but with no profit in it, which is a pretty scary proposition. Cause you may as well just have a job in that case until you realize there is a way to maximize and capitalize this, which I guess is the benefit of coaching and having mentors who have done that. I've made all these mistakes, I've done all these things previously in the last 15 years in business. So a key point here guys, is you need to calculate how much it costs. You to sell the service or product and then calculate the profit mar so if you're solopreneur and you're running everything yourself and you're doing, you're working in the business, you could say that it's costing you $0 to carry out this service or product or, or whatever the situation is. But if you actually had to hire someone and pay them to do it, what would the profit margin actually look like on that? That is the real test. And this is where you actually do scale a business. So, you know, a lot of personal trainers exam I'm in the fitness industry. So you know, I'm going to use this as an example as well. A lot of personal trainers will charge 75 to $100 an hour. But as soon as you go and you've got to pay them 50 or 60, profit margin starts looking pretty slim. And then you've got to account taxes on top of that and GST and VAT or wherever you are in the world. And that's where business gets a little bit hairy and challenging, which a lot of people can't handle. And that's why they never graduate from that solopreneur stage. But there are ways to do it. So I want you to calculate how much it actually costs you to sell your product or service. And if it's not within that range, that 20 to 60% for a service or the product is 5 to 20%, I would generally consider a price increase. Okay. And another thing on price increase is pricing should generally increase year to year in line with inflation. Okay. So that inflation is essentially, you know, your, the power of your dollar gets less every year due to inflation because there's more currency in the world. Long story short. But the government will report a inflationary figure every year. Yeah, I think at the moment it's somewhere between 5 and 8% they're saying. So that means your profit or your revenue that you're charging should increase by 5 to 8%. Otherwise you're actually taking home less money each year. And that sometimes when you say that to business owners, it's a bit of a hard pill to swallow because it's the truth of it. So there needs to be a high profit margin inbuilt into what you do anyway. And then you've got other things to consider on top of that. So general rule of thumb, January price increase in line with the governmental inflation or what they claim is inflation. The true figure is actually probably a lot higher than 5 to 8%. But that's just what the government is recording. And what they're tracking and the metrics they're using. So we're going to talk about some other ways of increasing profit. Okay, so do an 80, 20 on all of your expenses. So what do you actually need? What are the expenses? What can you cut? And I don't want you guys to just go out there and haircut the shit out of your business. So you're not spending any money. Because some expenses actually do provide a return. So you just want to do a logical analysis of what you're spending and is that actually returning you money? Okay. I know a lot of people waste a lot of money in business because they actually don't know what they're spending and they're hiding from the truth. So at the end of every month, I do this across all of my businesses. I print out my bank statement and I go through it line by line, one by one. What is this? Is it needed? How can I cut it? And this is providing me with the value on it. Okay. I do that across three businesses every month. On the first of every month, generally an expense should be giving you a two to three times return. That's what I look at. So if I'm spending $100 on an email marketing platform, am I making at least $300 a month on that profit? Okay. For it to be justifiable in the business and then last thing to consider with profit in a business is the more profit you make, obviously the more tax you make. It's a good thing. It's a good thing to have a highly profitable business. At some point it will become very annoying for you, especially as you grow towards a seven figure business. It's a frustration. Depends what you or how you look at it. Okay. Some people love paying taxes and they think it's great. And then other people don't love paying taxes. But taxes is something you really need to consider as well. Something I didn't consider at all. Starting out my business, you know, 15 years ago, it's just like, yeah, whatever. And then you start to understand more about finance and money and it becomes much more of a big deal. But things you need to consider as well is like once you crack that, I think it's 70k now is the GST threshold where you start having to pay 10% GST. I think there's that in other countries as well. But Australia has one of the highest tax rates in the world. I think there's about 82 taxes in Australia that we pay throughout our lives, which is fucking crazy. It's an Astronomical amount of tax. But I would be if I were you and you wanted to understand a very simple way of money and profit in your business. Look at profit first. It's a very simple system. You could just Google it, you could check out what profit first is. But it's a really easy way of doing accounting and money. But you need to consider the tax that you're going to pay on profits as well. I know a lot of people just will spend whatever is in their account and then they're hit with a massive tax bill and they're fucked. Which I have a funny story about soon. And then after all is said and done, you need to ask yourself, is it worth it? Okay, we get to this point now, entrepreneurial journey, where if you haven't been there yet, you probably haven't been doing this long enough. Where you need to consider, is it all worth it? Because that's the point where, you know, you really need to step it up. You need to charge more for your product, you need to spend more to make more. You need to weigh up the stress that it's causing on your life. And I'm not telling you this to turn you off the idea, but like, at some point after you get out of the junior phase of business and you become more seasoned veteran and you build a high six and seven figure business, it's gotta be worth it for you. Obviously you've got this massive time freedom that comes with running a business like this, or you should do if you're doing it properly. But there is a point where you need to ask yourself, is it worth it? And how do you make it worth it? Generally you need to charge more. And then how you charge more is you get better and you deliver the best fucking service possible. All right, it's story time. So I had a call from my accountant in my second year in business and he said, can you come to the office? And whenever your accountant says, can you come to the office? You're like, this is either going to be terrible or very good. And the odds are it's going to be terrible. So I had the problem where I didn't account for this thing called tax. And the thing called tax can be quite nasty. So I did pretty well in that year and I didn't really realize it because I was young, dumb, and, you know, whatever the other end of that saying is, I owed the taxman 16K. And you know, for you, that might not sound like a lot of money. And at the time when I was like 20, it was a lot of money. That was like a car for me. I didn't have the 16k so I didn't account for it because I had no idea about finance and I had no idea about money. But I think the saying is if you keep doing the same thing, the definition of insanity is keep doing the same thing over and over. And that was the first and last time I made that mistake with tax. And now I'm onto every month and I put the money is away. So I'll go through my Xero, which is accounting software I use, I look for my profit margin and then I put that money away. So that doesn't sting me in the future. But at some point you will get stung with tax if you're not aware of what's happening. I would highly encourage you, if you're on this journey of business and building a seven figure business is to get across it very quickly and study it for yourself. You really need a solid accountant to work with you, okay. If you know what I mean. And then I really think you should look into a system called profit first. Okay? It's a good way to set up your financials in a business. So my action items for this episode, guys, is for your service or product, calculate the profit margin so 20 to 60% kind of minimum for a service product, 5 to 20%. This is commonly of what I have seen. Obviously the more profit is better. Do an 8020 on all your expenses and and make any cuts if necessary. Check out the profit first model. Okay. On the next episode of this success school podcast, we're talking a one page business plan which is the key and the foundational element of building a seven figure business. Okay. It doesn't take long to do, but once again, like every episode in this podcast, I wish I did this 15 years ago. I wish I had these tools. I wish I had this podcast that could fall back on and listen to on my journey so I know exactly where I was going wrong. As always, guys, it's been real. Thanks for jumping on.