Know your numbers: every question you asked, answered.

Some of the most successful business owners I have worked with had the cash balance at the end of yesterday waiting for them on their desk every morning. Cash matters almost more than anything else, and if you are keeping an eye on it every morning, it will change where you decide to spend money that day.

A daily revenue target

What is your revenue goal for the month? How many days are you going to work that month? How much revenue do you need to generate each day? This does not mean you will generate revenue every day, but it keeps your mind focused on the revenue engine, which is what drives the cash balance.

Your monthly burn rate

How much are you committed to spending because of agreements you have already made with employees, landlords, and software vendors? Total expenses every month are a combination of decisions you made a long time ago — the employee you hired four years ago whose payroll you still have to cover — and the decisions you make in the moment to spend more. You should know what you are already committed to spend at the beginning of each month. At the end of the month, the difference between that number and your total expenses is what you chose to spend at your own discretion.

Numbers are scary because we don't know what to expect, and the surprise creates the anxiety.

Set the expectation ahead of time — what your cash balance should be, what revenue is going to be, what your committed burn rate is, and what discretionary spend will be — and something interesting happens. You start looking forward to your financials, because they tell you how you did against a target you set yourself.

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You should be looking at a complete set of financials every single month. A complete set means three statements:

• A balance sheet
• An income statement (also called a profit and loss statement)
• A statement of cash flows

The balance sheet

The balance sheet shows your financial condition at a specific date. It tells you all of the assets you own, all of the liabilities you owe, and the resulting equity in the business. Equity is just a fancy word for the book value of the business. Think of it as what I own minus what I owe equals what I am worth on paper. It will not tell you the fair market value of your business — nobody knows that until a buyer hands you a check and it clears the bank — but it is a good indication of whether the value of your business is rising or falling.

The income statement

Instead of a single point in time, the income statement covers a period of time. The balance sheet gives you the numbers on the last day of the month. The income statement shows the activity from the first day to the last day. It tells you:

• What your total sales were
• What it cost to deliver those sales (cost of goods sold)
• The resulting gross profit — total sales minus cost of goods sold
• The overhead expenses it took to run the business
• The bottom-line net income

Your income statement is where you get your two most important performance numbers. Gross margin is gross profit divided by total sales, and it tells you how you are doing against other businesses in your industry. Net margin is net income divided by total sales. That is the one to watch.

The statement of cash flows

Very few people talk about this one, because it usually takes a trained accountant to build it. QuickBooks will produce a statement of cash flows, and if that is the only thing you have access to, it is good enough.

The statement of cash flows is the missing link between the performance recorded on your income statement and the change between your balance sheet at the beginning of the month and your balance sheet at the end. It tells you where cash is being generated in the business and where it is being consumed.

Learn to read your statement of cash flows and you will be in the top 1% of all business owners.

Always compare

Looking at one set of financial statements by itself rarely makes sense. You need something to compare it to. A budget and forecast you put together in advance is very helpful. Last month works, but seasonality introduces variables that make it hard to tell what is working. The same month last year, the same quarter last year, or the prior full year — that kind of period-to-period comparison gives you the best read on direction.

As you grow in your understanding, work toward tracking the most important numbers on a twelve-month trailing basis. The numbers we track for every client, no matter how big or small:

• Revenue
• Gross profit and gross margin
• Net profit and net margin
• Cash balance
• Equity

Twelve-month trailing numbers strip out all seasonality and give you a much better understanding of where the business is heading. Generally, up and to the right is better.

If you want twelve-month trailing numbers on your business, talk to your CPA, CFO, controller, or bookkeeper — or reach out to me and I will connect you with JoAnna Kelso, the president of Axis Outsourced Accounting.

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The income statement is analogous to physical performance. I could take you out to the high school track and time your 400-meter split. You might post a phenomenal time that puts you in the top 25% of people in your age class. Then I could send you to the doctor for a physical, where you find out you have stage four cancer. The physical at the doctor's office is the balance sheet.

You can have great monthly performance in revenue, gross profit, and net income. But if the only way you got those numbers was by giving customers ridiculous credit terms — selling to people you will never collect from — the business is in terrible shape.

This is why you have to look at all three statements, not just the one that flatters you.

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Your net profit comes from your income statement. Your bank account is what you see on your bank's website. The two can have very little to do with each other. Net income can be $100,000 while your bank account sits at zero, for any number of reasons:

• Your net income is on an accrual basis and you have $100,000 in outstanding accounts receivable. The income statement shows you made the money; you just have not been paid yet.
• You distributed $100,000 out of the bank account to yourself for personal living expenses. Distributions show up on the balance sheet, not the income statement.

This is why it matters that you understand your financial statements. Too many businesses gauge performance by what is in the bank account, and as you grow that becomes more and more dangerous. The cash in the business can be disconnected from actual performance in a lot of ways, some good and some bad. Understanding your statements is the only way to know the difference.

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Three to six months of overhead spending is a good target. Overhead is what it takes to keep your doors open — the salaries you are already committed to and the overhead expenses you are obligated to pay. That is it.

If revenue stopped tomorrow, you would probably have to lay some people off. But if you could survive three to six months, you would be in really good shape. It is unlikely revenue ever turns off completely, and that reserve will make you far less anxious when things slow down.

The healthiest businesses don't get anxious about a slowdown, because a slowdown creates incredible opportunities.

The ones who were not ready cannot take advantage of everything that just got cheaper.

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There are four of them, and most owners only think about one.

• Tax savings equal to 20% of your net income.
• Operating reserve of three to six months of overhead expenses.
• Marketing reserve of at least 5% of sales, if you are in growth mode.
• Hiring reserve covering the first three to six months of the fully loaded salary you plan to pay, if you are in hiring mode.

That is a lot of cash — more than most small businesses think they need. The reason is simple. When cash is running low we make stupid decisions. We also take jobs we should not take, that make a lot less money than the jobs we should be chasing. A lack of cash reserves is responsible for the slow and then dramatic demise of many small businesses. In Hemingway's The Sun Also Rises, a character is asked how he went bankrupt. The answer: gradually, and then suddenly.

What that looks like on a real set of numbers

Take a business doing $200,000 in sales at 40% gross margin and 15% net margin:

As we said, that is more cash than most small businesses keep on hand. But that is the cash that makes it possible to go from $200,000 to $500,000 in two years instead of ten. Once you have the business figured out, cash helps it grow faster.

Why not just borrow the money after you have it figured out? Because you are always figuring it out. Moving from $200,000 to $300,000 you will make mistakes. When the cash is not yours, you delay the hard decisions that fix those mistakes — and growth slows down while debt goes up.

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First, pay yourself a market wage for the work you are doing, if you can afford it. When you do that, taxes come out of your paycheck and that portion of your personal income is covered. If you do not have enough net income yet to pay yourself what it would cost to replace you, pay yourself as much as you possibly can and keep raising it until you are at market.

Your net income doesn't mean anything if you're underpaying yourself.

Once the business begins to generate real net income, set aside 20% of profits in a separate savings account and work with your CPA to determine how much to send the government in estimated payments each quarter.

Do not fall into the trap of paying this year's taxes with next year's profits. Pay as you go.

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I do not like paying taxes any more than the next person. But I know that the more my tax bill goes up, the more profitable my business has been.

Too many business owners make bad buying decisions to save on taxes. If your tax rate is 30% and you spend $100,000 on a truck to save $30,000 in taxes, I would ask you: would you rather have $100,000 depreciating in the driveway, or $70,000 in the bank to grow your business?

Do not waste significant time, effort, energy, or anxiety trying to lower your tax rate. That time is much better spent growing the business. Once net income reaches $200,000, two things should be true:

• You have a financial planner in your corner helping you manage the profits you are not reinvesting in the business.
• That planner either has a tax expert on their team or a strong relationship with one who can help you.

Until then, put all of your effort into growing the bottom line of a healthy business. There are a few small moves you can make along the way, like paying your kids through the business or adding your spouse to the payroll. Do them if you want to, but they are not going to build your wealth.

Don't spend time counting nickels when you could be making dollars.

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First, make sure you are charging the right price at all. Almost every business owner undercharges when they start. Understand what your competition charges and adjust accordingly.

Are you the low-cost provider in the market? Is that how you sell yourself? Then your price should sit near the low end of the range. Or are you the premium provider — everything about your process, presentation, and messaging communicating that you operate at that level? Then your pricing needs to be near the top of the range.

The biggest disparity we see in small businesses is that they want people to believe they are at the top of the market while their pricing sits below the middle of it.

The loudest signal you can send in your marketing is your price. It anchors the expectations of every prospect.

Then keep it there

Holding your price in the right part of the range is a constant job. At a minimum, revisit prices once a year to account for inflation. Search for the change in the consumer price index over the last year, get a number, and raise your prices by it.

Markets also move. Slowdowns and recessions change everybody's market price, and if you do not change yours you will suddenly be outside the range you need to be in to close the customers you want. On the other side, high-demand seasons move prices up. Accept that reality, because in those seasons all of your costs are moving too.

Why this is the highest-leverage change you can make

A real business offering home services was struggling to hit 5% net margins on $300,000 in annual sales. Pricing was well under market. They bravely implemented a 15% price increase. They lost some customers — the ones they did not want anyway. The bottom line went from $15,000 to $45,000.

A 15% price increase produced a 200% increase in the bottom line. Pricing is the hidden lever inside almost every small business.

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If you are not spending any money on marketing or customer acquisition, your cost to acquire a customer is zero. This is where we all start. It costs nothing extra, beyond your time, to go to networking events, take speaking gigs, or book coffee meetings. It costs nothing to earn word-of-mouth referrals from satisfied customers and other professionals.

Eventually you may dedicate real marketing dollars to:

• Digital ads
• Hosting your own events and buying meals for prospects
• Referral fees to affiliates
• Dedicated salespeople

The question then is not what it costs to acquire any customer. It is what it costs to acquire the customer who came to you as a result of that spend. Which means you have to be able to track where your customers came from.

Once you have that tracking in place, spend money on marketing if you have it. If you don't have the tracking, don't spend the money yet.

The math nobody finishes

The first half is simple. Over a given period, how much did you spend, divided by the number of customers it generated. What most people do not understand is that you cannot stop there. You have to compare that number to the gross profit a new customer produces.

Say you go all in and spend $30,000 to generate 10 new customers. Your cost to acquire is $3,000. Your average customer generates $5,000 in revenue. You start thinking you should spend even more, because every customer nets you $2,000 over the marketing spend.

But every new customer also costs you $3,000 in labor and services to deliver. You are losing $1,000 every time somebody becomes a customer through marketing.

The good news is that this is not yours to solve alone. You should only work with marketing companies that understand your financial metrics, including gross profit per customer. Those companies should either have access to, or help you build, the systems that track where customers came from and what the net gross profit per customer is after acquisition cost. You have great digital and content marketing professionals in the Collab. Use them.

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Take them in order: revenue, gross profit, net profit.

Revenue

If revenue is bad, you need to sell more. So why aren't you? Are you not making time? If someone is selling for you, are they being held accountable? Are they incentivized by commission or sitting on salary? Do you know how to sell? Are you selling to the right people? At the right price? There are a dozen questions here. If you do not know which ones to ask, get a mentor who has done it or hire an expert to teach you how to sell and to help you determine what you should be selling.

Gross profit and gross margin

Gross profit has two inputs: revenue minus cost of goods sold. So the problem is either revenue — see above — or your cost of goods sold. Are you getting the discounts you are supposed to get on materials? Is direct labor too high? Does direct labor include rework to fix mistakes you cannot bill for? Those are the main ones.

Net profit and net margin

Net profit also has two inputs: gross profit minus overhead. Either gross profit is too low, or overhead is too high. And overhead has many inputs of its own — rent, insurance, office supplies, administrative labor, professional fees, software subscriptions, and every other cost of running the business.

When overhead is too high there is rarely one reason. It is death by a thousand cuts. As you grow you will experience overhead creep. Auto-renewals on software you no longer use. New subscriptions nobody cancels. Hiring extra help for a busy season with no plan to downsize when it ends. I once had an office manager who stockpiled $5,000 worth of printer toner, because when she got bored she liked to buy things and she knew we would eventually use it. I discovered twelve months of toner in the kitchen cabinets on a Saturday morning.

Three things keep overhead in check.

1. Keep a clean set of books

Make sure expense tracking is consistent. It is hard to track overhead if printer toner is categorized as office supplies one month and materials the next. Review your expense line detail by account every month to catch misclassifications. You will be surprised how often things land in the wrong place.

2. Review every bank and credit card transaction

Easier than it sounds. Once everything is in your accounting software, run a general ledger report for all bank and credit card accounts, then go through it line by line. Thirty to forty-five minutes for a typical small business. If your numbers are bad, this is bitter medicine. It is also good for you.

You will find the $300 annual software renewal for something you no longer use. Often you can call and get it cancelled and refunded; at minimum it is the last time you pay it. You will find employees putting $100 lunches on the company card for team building. That may have been fine during the busy season when everyone was working overtime, but it will not stop on its own just because things slowed down.

If you aren't willing to sit down and review your own numbers, don't expect anyone else to do it for you.

They might. But they will not look at it the way you do, they will not prioritize what you prioritize, and they will not feel the urgency when things move the wrong direction.

3. Get in the habit of building a budget

Two to three hours, maximum, to build a budget for each of your overhead accounts. It does not matter if it is accurate at first. You just need to draw a line in the sand and see whether expenses land over or under it each month. If you forgot a major expense, adjust and rebuild the budget for the rest of the year. After a couple of years, this discipline will do more to control spending than anything else you try.

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There are two ways to raise money: debt and equity.

Debt

Everybody is familiar with debt. You borrow from a bank, from friends and family, or from third-party investors. The good news is you keep 100% of the company. The bad news is you have to make those loan payments regardless of how the company is doing. Many companies have gone out of business because debt repayments consumed all of the cash during a downturn, and when the cash dries up the business is done.

Most people lending you money will want collateral: your house, your receivables, your equipment, or the entire company. Debt is great when you can repay it and catastrophic when you cannot. If you are considering it, make sure covering the monthly payment will be easy. If those payments put financial stress on the business, you will start making poorer and poorer decisions, and it will not go well.

Equity

Equity means selling a piece of your company. The good news is the money goes straight into the business and you never repay it. The bad news is that if you sold half your company, half the profits go to somebody else forever. Equity is almost always more expensive in the long run than debt — but if you see a truly great opportunity and the only way to get there is bringing investors along, equity is the way.

The critical piece when selling equity is corporate governance: documented guardrails on the investor's role in the business that the new investor has agreed to. Most people who sell equity later complain that their investors do not understand what they are trying to accomplish, ask too many questions, and get in the way of the vision. Good governance will not fix all of that — you still have to pick good investors. But without it, frustration is close to guaranteed.

Only consider debt or equity when you have a proven business model.

That means you are currently making money, your margins are good, and the balance sheet is healthy. The reason you are raising cash is to increase scale — you are taking a machine that already works and making it bigger. If your business is not running at optimal performance at its current size, do not take outside investment of any form.

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When you know what they are going to do, and when you can pay their salary for three to six months out of extra cash you do not need for operations.

Sketch the org chart first

Before you hire anyone, sketch your organization chart on paper for your next three to five hires. It just tells you who is doing what. The higher on the chart, the more responsibility and authority. At the top is typically the CEO; toward the bottom, entry-level positions.

Every person you add should create capacity to increase revenue. My first hire was an executive assistant. She took bookkeeping, scheduling, and administrative work off my plate. It did not increase my quality of life. It did not give me free time. It gave me more time to sell.

My second hire was a junior advisor — someone who could come to meetings, take notes, reduce my prep time, and handle follow-up. He also did not improve my quality of life. He gave me the ability to serve more clients.

The third hire was another senior advisor. He gave me the ability to bring on more clients he could serve.

Why the reserve matters

You will not get every hire right. That is exactly why you want three to six months of cash reserves. If you hire the wrong person, you know within the first 30 days. If you act quickly you can let them go and still have cash left to try again. But you have to act quickly. It takes time for a new hire to get up to speed before you can get back out there and create more sales, and most of that reserve is really for onboarding and training.

A $55,000 hire costs about $5,000 a month once you include payroll taxes. So have at least $15,000 saved before you start interviewing. The first $5,000 is just to find out whether you got the hire right.

If you made a mistake and can't bring yourself to fire them, it's like withdrawing $5,000 in cash every month and setting it on fire in the bank lobby.

Build the system before you need it

Before you think about hiring, build your recruiting, hiring, onboarding, and training system. At Axiom we call this your Talent Alignment System. It covers:

• Assessing the need — why are you thinking about hiring someone?
• Pricing the need — what will it cost to fill?
• Building the Job Blueprint that lays out responsibilities and expectations
• Identifying your recruiting network
• The questions you will ask in the interview
• Who else will interview candidates — there has to be more than one
• What onboarding looks like
• What they will do each day for the first week
• What they will do each week for the next two months
• What they will do each month for the next four months

Without your own Talent Alignment System, you will waste at least some of what you invest in this hire. Do it now. Once they start, you will not have time.

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There is a famous line in Good Will Hunting about dropping a hundred and fifty grand on an education you could have gotten for a dollar fifty in late charges at the public library.

Become a reader

There are more great ideas, insights, and hard-won wisdom locked up in books than you will ever have the chance to use in your lifetime. Read good books. Learn how to read good books — start with How to Read a Book: The Classic Guide to Intelligent Reading.

If you are serious about this, email me at jbrannon@axiomstrategic.com and I will send you the required reading list for every new business growth advisor we hire at Axiom. If you actually read them, I sincerely believe you cannot spend too much money on good books. It is impossible to go bankrupt buying books, because the information you are consuming makes you more valuable in the world while teaching you how to monetize that value.

If you'd rather start with mine: I read Grow with Purpose in full on the podcast, one chapter per episode, across episodes 37 through 46. Same audio as the Audible edition. Free, and it costs you nothing but the drive time.

Then meaningful certifications

Meaningful, because too many people make a living teaching you things with the promise it will make a difference when it does not. Look at the leaders in your field and the certifications they hold. If most of the top people have a particular credential, there is a good chance you need it to be at the top of your field. Build a plan and set aside the dollars.

Then conferences

Industry and industry-adjacent conferences. Twenty years into your career, the difference between moderate success and great success comes down to your network. Do not pass up the chance when a large number of smart people in your field are gathered in one place for several days.

You learn a lot in the workshops. The real value is in the hallways.

That is where a conversation turns into a real relationship with somebody you can spend the next two decades growing alongside and learning from.

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The first question is: what is your current strategy?

When we work with clients, one of the first things we do is establish the vision for the company. It could be a five-, ten-, or fifteen-year vision, but it is defined so that you will know when you have reached it.

The next question is: what do we need to pursue over the next two to three years to get closer to that vision? Whatever that is, that is our strategy. Like the vision, it has to be defined so we know when we have accomplished it and can move to the next one.

If the strategy is retention — the percentage of customers we keep year over year — we need to know our current rate and our target. If we are at 65% and the target is 85%, we are free to move to another strategy once we hit 85%.

Most businesses don't focus on one area long enough to make a lasting difference.

Strategy has to be defined before you pursue it, and defined in a way you can measure as you go. It is the secret weapon for long-term growth and for actually reaching the vision.

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It comes down to one thing: are you going to do something else after walking away, or does the walk-away price need to support your lifestyle for the rest of your life?

If you're moving on to the next thing

Work with a business growth advisor/firm with trained Certified Exit Planning Advisors (CEPA). They will benchmark the value of the business, and you can decide whether the estimated price you could get today is worth it. If it is not, you establish the number you want to work toward and put your head down with the advisor for the next twelve to thirty-six months to maximize value.

CEPAs are trained specifically to work with owners looking to exit. Professionals across a wide range of industries have earned the certification — you will find business growth advisors, business brokers, CPAs, attorneys, and financial planners who are CEPAs.

If the sale has to carry you through retirement

Then you need a financial planner, and again I would look for a CEPA. That person can help you understand the current value of the business, or work with a firm like Axiom to establish it. At the same time they will look at your complete financial picture — all your other assets and investments — and determine how much you need for retirement.

The difference between your current net worth, including the business, and what it needs to be at retirement is your Wealth Gap.

Then you work with a business growth advisor to increase the value of the business enough to close that gap.

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