Ignore Your Revenue and Focus on This Instead - Simple Number, Straight Talk, Big Profits! Chapter 2
Simple Numbers, Straight Talk, Big Profits!
By Greg Crabtree
Chapter 2: Profit: Why 10 Percent is the New Breakeven
“Revenue is for Show and Profit is for Dough!” - Craig Crabtree
In this chapter Mr. Crabtree introduces the concept of pre-tax profit and why we should ignore EBITDA.
Profit is the lifeblood of every business. If your business isn’t profitable, you’re not taking business away from others and your business will eventually fade away.
Pre-tax profit is the profit you make after you minus all of your costs from all of your sales before you pay taxes. Pre-tax profit is your earnings before taxes.
I’m sure most of you who have been in business for a while are familiar with the term EBITDA, which are earnings before interest, taxes, depreciation, and amortization. According to Mr. Crabtree, investors like to argue that interest, depreciation, and amortization are not real costs. For a small business interest, depreciation, and amortization are real costs anytime you are spending cash to pay an expense. For example, interest is a real cost that should be allocated as an expense. As a small business, it’s important to understand that you should ignore EBITDA and focus on pre-tax profits.
I was recently watching a YouTube video by Greg Crabtree and in it he states that his goal is to fix the wrongs that his “accounting profession” industry has imposed on small businesses, EBITDA was one of many examples given.
Here are some key points from Chapter 2:
Ignore revenue and focus on gross profit. Gross profit is revenue less cost of goods sold. Mr. Crabtree’s recommendation is that you do not include labor costs in getting to gross profit. By omitting labor costs from gross profit, his definition of gross profit gets you to the number that is the true economic engine of the business.
Mr. Crabtree argues that our current definition of “breakeven” is flawed because a business has income that is equal to their expense. With this definition his team has discovered that by the time you are at your breakeven point, your business is already dead. Instead, a true breakeven point is when your pre-tax profit is at 10%. 5% or less of pre-tax profits means your business is on life support.
As your business grows from 1 million to 5 million in revenue, it will pass through a blackhole. To survive the business owner must have:
Adequate resources to hire additional staff to take responsibility for key functional areas.
A capital safety net. Prepare monthly case flow forecasts to determine how much of a capital safety net you will need.
Raise your capital safety net by either reserving profiles or seeking funds from investors.
Learn how to hire the right people and then take your time to train them.
Make a plan to live off of your market-based wage and leave every dime of profit in your
business as you grow from 1 million to 5 million in revenue.