Tiêu đề RIG_Simple Numbers Straight Talk Big Profits Text Summary.pdf ✅

KEY QUOTES A ReadinGraphics production • Copyright © 2022 Skool of Happiness Pte Ltd. • All Rights Reserved. SIMPLE NUMBERS, STRAIGHT TALK, BIG PROFITS! GREG CRABTREE (WITH BEVERLY BLAIR HARZOG) 4 Keys to Unlock Your Business Potential 1. Owner’s Salary: Go for Market-Based Wages Introduction Part 1. Mastering the 4 Keys to Profitability 1 “It is my hope that this book helps you dream farther because you can see farther!” “You get paid a salary for what you do, and you get a return on what you own.” Many entrepreneurs struggle to understand and manage their finances. Greg Crabtree is a Certified Public Accountant (CPA) who has worked with banks, financial institutions, and financial data from hundreds of businesses. In this book, he simplifies business finance to help you make sense of financial numbers, make smart business decisions, and grow a truly profitable business. The insights are targeted at small businesses (from startups to $5mil revenue), but are still applicable for larger businesses with >$5mil revenue. Many entrepreneurs confuse owners’ salary vs profits. A salary is what you earn for working in the business, and a profit is a reward for your business ownership. A truly profitable business should be able to (i) pay its owners market-based wages (assuming they’re working full-time in the business) and (ii) provide a good return on their equity (or what they own). Otherwise, the business isn’t profitable enough. In reality, 90% of entrepreneurs underpay themselves either because the business isn’t earning enough, or because they’re trying to save on taxes. Entrepreneurs may pay themselves There are 4 issues that prevent small businesses from building the right financial foundation: owners’ salary, profits, labor efficiency and cash flow. These problems multiply as the business grows. If you’re not profitable when the business is small, you won’t become profitable when the business is big.
KEY QUOTES A ReadinGraphics production • Copyright © 2022 Skool of Happiness Pte Ltd. • All Rights Reserved. 2 “Fair does not mean equal.” below-market wages to reduce taxes, then take profit distributions or even use company funds to pay personal expenses (e.g. groceries or house repairs). • This distorts the business’s financial picture. For example, a company may pay its owner $20,000 (instead of $100,000 of market wages) and declare a 5% profit. In reality, it’ll make a loss if the full salary is included. • If you do this in an S-corporation, it could also attract an audit by the Internal Revenue Service (IRS). Incomes from S- corporations are treated as the owners’ personal income, and taxed at an individual (not corporate) level. So, the IRS treats distributions as salaries, especially if they're taken on a regular basis. If you’re a business owner, pay yourself a market-based salary. • Establish the market rate for your role: If you passed away today, how much will your successors have to pay to get someone else do your job? You can use websites like erieri. com or salary.com to research the salary ranges. • If the business can’t afford to pay you a market-based salary yet, then keep track of the wages you’re giving up: this is your “sweat equity.” Let’s say your market-based wage should be $75,000, but you pay yourself nothing in Year 1, $50,000 in Year 2, and $75,000 in Year 3. This means that you’ve invested $100,000 of sweat equity over 3 years. • In a multi-owner company, it’s common for partners to split the shareholding equally (e.g. 50-50) and draw the same salary regardless of their contributions. This can lead to disputes over time. If Partner A draws a full salary of $75,000 each year ($225,000 over 3 years), while Partner B only draws $125,000 (based on the scenario above), then the company owes Partner B $100,000 in sweat equity. Once the sweat equity reaches a certain level, Partner B’s $100,000 unpaid salary should be repaid in cash or stocks. • When a business is funded by outside investors, entrepreneurs tend to behave differently and expect a fair wage at the investors’ expense. If 1 party is contributing all the capital (i) (ii)
KEY QUOTES A ReadinGraphics production • Copyright © 2022 Skool of Happiness Pte Ltd. • All Rights Reserved. 2. Profits: Aim for 10-15% Pretax Profits 3 “You don’t want your numbers to lie to you. Inaccurate numbers will distort your financial information and cause other problems as well.” “Profit is like oxygen—your business can’t hold its breath very long without it.” (money-partner) while the other party is contributing all the effort (effort-partner), Crabtree recommends this approach: Pay the effort-partner a wage (accounting for sweat equity if any) and use 100% of the profits to repay the money- partner first. Once the initial investment is recouped, both partners can take a share of the profits based on a pre-agreed percentage. • When the owners are paid market wages, it’s also easier for them to exit the business. You can: Hire a new CEO with the same salary; or Have the owners shift to limited/part-time roles and gradually ease out of the business. You should pay all your employees a market-based wage. People leave when they are underpaid, and the company ends up paying a higher cost in the form of replacement, retraining, loss of productivity, quality and customer relationships. In short, your first goal is to grow the business until it can pay you a market-based salary and be profitable. • Make sure you can live off your market-based wages instead of relying on profit distributions. • If your profit numbers don’t reflect your business realities, rectify it asap because you’ll need accurate financial numbers to set meaningful goals and make informed decisions. A business that’s not profitable simply isn’t sustainable. Small businesses should focus on gross profits and pretax profits. • Don’t focus on EBITDA (earnings before interest, taxes, depreciation, and amortization) since interest, depreciation, and amortization represent real money flowing out of your business. (i) (i) (ii) (ii)
KEY QUOTES A ReadinGraphics production • Copyright © 2022 Skool of Happiness Pte Ltd. • All Rights Reserved. 4 • Likewise, revenue isn’t useful as a standalone figure. A firm with $20mil sales can be less profitable than a firm with $2mil sales. • Instead, focus on these important figures: Cost of goods sold (COGS) = costs that go directly toward producing your product (e.g. materials or subcontractors). Gross Profit = Revenue – COGS. You can exclude labor costs from gross profit to see what’s driving your economic engine. Pretax Profits = Revenue – COGS – Direct Labor – All Expenses (before taxes) “Revenue is for show, and profit is for dough.” “Your gross profit matters most, followed by how you get to pretax profit.” “5 percent or less of pretax profit means your business is on life support... By the time you’re at the breakeven point, your business is already dead.” (i) (ii) (iii) EXAMPLE OF PROFIT CALCULATIONS Company A 20,000,000 14,000,000 6,000,000 3,000,000 3,000,000 1,000,000 800,000 1,200,000 170,000 500,000 (670,000) 150,000 (870,000) (4.3%) (14.5%) 50,000 Revenue Cost of Goods Sold Direct Labor Operating expenses Other expenses Facilities Depreciation as a % of Revenue Marketing Interest Expenses as a % of Gross Profit Salaries (Management/Admin) Payroll taxes & benefits Others Gross Profit Contribution Margin Net Operating Income Pretax Profit Company B 20,000,000 600,000 1,400,000 400,000 1,000,000 100,000 50,000 250,000 35,000 50,000 515,000 30,000 485,000 24.3% 34.6% - It’s not enough to breakeven, i.e. to have income = expenses. You should aim for pretax profits of 10%-15% of revenue. • Pretax profits of ≤ 5% revenue = business on the brink of death • Pretax profits of ≥ 10% revenue = a good business • Pretax profits of ≥ 15% revenue = a great business