Capitalism at Its Best

Change the Game™ Podcast

Run Your Business Like An Investment

Posted by Greg Crabtree on Jun 1, 2021 10:30:00 AM

Greg Crabtree, Partner at Carr, Riggs, and Ingram LLC, Author, shares why you need to run your business like an investment, the importance of behavioral economics and why your number one critical number shouldn't be net income.

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Episode with guest: Greg Crabtree

Partner at CRI, Author

(This episode was recorded in May of 2021.)

 

Key Episode Take-Aways:

1. Distortion. We do things to our data that hide the truth. (click to jump to this topic below)  distortions, you know, we do things to our data that hides the truth. And you know, the number one distortion for a business under $5 million in revenue is owner compensation. And so, if you get them to put the correct owner compensation, whether you take it out or not, I will fight that argument later.

2. Labor Efficiency Ratio (LER), it's not about labor as a percentage of something it is about taking $1 of labor, and what is its output. (click to jump to this topic below)  the way we look at it is saying it's not about labor as a percentage of something it is about taking $1 of labor, and what is its output. Because what can it produce? What is the leverage that I get from the deployment of a good dollar of labor, and it just turns the map, you know, the other way, and everything about this every dollar of labor in an organization has a numerator that's held responsible for, and it's and that numerator is never sales? That numerator is either gross margin or what we call contribution margin, which is gross margin minus direct labor.

3. Reasons people do not pay you timely -- They don't have the money, do not trust you, or they don't want to bite the economic bullet. (click to jump to this topic below)  Number one is they ain't got the money. Well, that means I don't want them as a customer. So, let's get rid of them. Okay. what else They don't trust you. Okay, well, you know, what are the ways that we can build trust, I'm going to deliver the service, I'm going to deliver the product. Okay, let's work on winning trust. And then the third reason is they just want to be an economic bullet.  

 

Continue scrolling to read the full episode transcription.


Announcer 0:03

The "Change the Game" Podcast is sponsored by Prairie Capital Advisors, helping businesses think forward. For more information, visit prairiecap.com/ggob. That's prairiecap.com/ggob.

Announcer 0:23

Welcome to the "Change the Game" Podcast, where we share stories of open book management and highlight capitalism at its best. Thank you for tuning in to this episode of the "Change the Game" Podcast with special guest Greg Crabtree. In this episode, Rich Steve and Greg discuss why you need to run your business like an investment, the importance of behavioral economics and why your number one critical number shouldn't be net income. Here's your hosts Rich Armstrong and Steve Baker.

Steve Baker  0:55

Welcome to the "Change the Game" Podcast where we are changing the game by doing business differently and highlighting stories of capitalism. at its best. I'm Steve Baker and with me always is Rich Armstrong, president of the Great Game of Business and co-author of our new book Get in the Game: How to Create Rapid Financial Results and Lasting Cultural Change. Hello, Rich 

Rich Armstrong 1:17

Hi Steve. How are you?

Steve Baker 1:19

Well, I am exceptional today. If I was any better, I'd be twins because man I'm telling you we have a real legend with us. Today we're excited to welcome our special guest, Greg Crabtree. Now Greg is a speaker, author, entrepreneur, a financial expert. He has used his entrepreneurial skills to develop Crabtree Rowe & Berger PC, a CPA firm that focus solely on the needs of entrepreneurs helping them build the economic engine of their businesses. And then in 2020, Greg merged with a top 20 us accounting firm Carr Riggs and Ingram working with entrepreneurs all over the country in a broad range of industries. Greg simplified financial reporting and empowered all entrepreneurs to take ownership of their finances. And he has pioneered a revolutionary metric for driving business profitability, measuring labor efficiency and developing simple benchmarks for the company team and individual performance levels. And then in 2011, also, he published his first book, simple numbers, straight talk big profits, sounds pretty good to me, especially the simple part in which he shares his core principles of how to turn your business into a wealth building engine. And then his second book was just recently published, “Simple Numbers 2.0 - Rules for Smart Scaling. And he did that late last year, Greg Crabtree, welcome to our podcast.

Greg Crabtree 2:49

Well, I appreciate you guys having me. I'm a huge fan of Great Game of Business. And we refer to that quite often in our consulting clients. And so just really, really honored that you guys would have me on.

Rich Armstrong 3:03

Yeah, absolutely. Thank you, Greg, for joining us. I'm going to start out with a question because it's probably more my interest then the audience's interest just because I'm an avid golfer, myself is that I read that you're an avid golfer, and you enjoy playing historical golf courses. Whenever possible. I'm curious about what's the most unusual golf course you've ever played on.

Greg Crabtree 3:27

The most unusual, it's kind of interesting. I would say the most unusual is a course that's actually close to where I live. And it's gotten a lot of popularity, it's of course called sweetens Cove. So, it's a nine-hole golf course just south of Chattanooga, so it's about an hour from where I live. And I would say it's quite an interesting little golf course in the way that they've developed it that you know, a nine hole track that most people will play a team they'll play it twice but it's garnered a lot of interest I'm a huge fan of the laying up guys that are you know, kind of golf enthusiasts that you know guys that probably came from business and you know, but they're really good golf amateurs and they actually shot some video some of their events there. But it's really kind of a kind of a cool place but I will say that when it really comes to golf, COVID kind of messed up my rhythm of have generally gone to either Scotland or Ireland once every summer. And this past year didn't get to go but at my I'm actually planning to go this year and get to Ireland. try to get to the southwestern part. But that's where I mean you can't beat golf in the kingdom. When it comes to that so

Rich Armstrong 4:47

yeah, that's one of my dreams for sure. Well, we'll have to get you down to the Ozarks soon Greg and play some golf here with Johnny Morris of Bass Pro just, you know, built three or four new golf courses right here.

Greg Crabtree 4:59

I have had my eye on that place.

Rich Armstrong 5:02

Yes. So come down and visit us sometimes we'll go out together. I'd love to do that.

Greg Crabtree 5:07

That sounds great.

Steve Baker 5:08

That's awesome. Well, let's get into an area that that I can understand. And then Greg, how did you? How did you first begin your journey and helping entrepreneurs?

Greg Crabtree 5:21

But, you know, like, like all crazy people, I had a really good paying job as a controller for a bank and VP of operations, and I got this wild hair to go into business for myself. And it was really well planned. You know my wife was expecting our third child, I had a house that we just bought. And, you know, I had no money saved, and no clients, so it's a perfect time to quit and start my own business.

Steve Baker 5:43

You're motivated?

Greg Crabtree 5:45

Yeah, I was really motivated. And, you know, but I, you know, apologies to any accountant who might be listening to this, but the everyday practice of accounting, sometimes can drive you nuts. And especially when it's around, you're dealing with taxes and those things. And, you know, I always found that the random projects that I could work on to really work with a client to fix something and make a business better. I mean, really, I kind of feel bad that I had that I charged him to do it, because I was really at the time learning more from them than then probably, I was helping them. And then just happened by chance to hook up with an organization called the entrepreneurs organization, in 2001. And, and really more, so just be peers, with other entrepreneurs. And, you know, much like Great Game of Business community, you know, when you have a community of businesses that are privately held, they can get together share data, share data in a common language, you know, we found that that was just a real simple boost of everybody's capability. The problem is, is us accountants' kind of get in the way of that we don't all speak the same language, as much as they're generally accepted accounting principles standards, I would probably don't tell the accountants I said, This Gen Accepted Accounting Principles generally do more to hide truth than to illuminate it. And so, the reality is, if you really look at true business, you know, an entrepreneur has an intuitive way, the really good entrepreneurs are really good at understanding financing that practical way. And I had I, I've been forever changed by me went through in 1998, many, many years ago, I went to the two-day plant tour in Springfield, remanufacturing. And I was just flabbergasted by the fact that you had machine operators that could explain balance sheets, P&L and cash flow statements better than any accountant I'd ever met. And I knew we had to do something different, you know, in that process. And so, between the interaction of organizations like great Game of Business organizations, like EO, you know, and getting input from other entrepreneurs, I really kind of began his journey to say, you know, what, I need to do something different. And what we found was, we turned the business model on its head and said, instead of being an accountant who snuck in some consulting, when they weren't doing taxes and financial statements, I said, you know, what we first need to lead off with is how to help people run a better business. And I'm not worried about the rules of accounting, I'm not trying to help them understand functional findings in that way. And as we just tested some things and looked at different aspects of things, you know, the material started to come together, I started to do some speaking on it. And next thing, you know, you take your speaking notes and turn them into the first book, and first book turns into a consulting practice. And then that turns into a second book. And so, you know, and like I said, real, even though we merged a year ago, on so run in the same practice, you know, that that we were running before we merged, I just have access. Interesting enough for me, we could grow the consulting practice with no problem. And it was more so that traditional accounting stuff that we need, we would sometimes have surge demand that we couldn't always hire to. And so being part of a larger firm, like our rigs has been wonderful, you know, from that aspect of, there's a ton of things I can do that I don't have to do, or we don't have to do in our office. And so, we can really focus on, hey, how do you run a better business? How do you do those and, you know, we run multiple mastermind groups, some with industries, some are blends of businesses, those are fun, you know, when you get people together, and you can share data, and get everybody talking the same language, but they can see the movement of the data and you let the data tell the story. And if you can get your data to the point where it can tell the story. You're so far ahead of the game amongst everybody else that you can then start acting on that data.

Steve Baker 9:48

Jack Stack always says numbers are just stories about people.

Greg Crabtree 9:53

They are absolutely and oh, by the way, the last time I checked, there's nothing that happens in business without human effort. So, I think humans are still here to stay for a while.

Rich Armstrong 10:07

Well running into you over the over the years, Greg in different conferences and different business events and things, it's always been interesting have really loved your approach to that. And it's really powerful for our audience to, I'd really encourage you to read Greg's book because it is his build, his concepts are really built about really understanding the numbers from what you can do to actually influence those numbers, not just understanding what happened, but how you can use them to really guide you to what to do next and what you should do to improve your business. I would I'm curious, when you when you talk about that, Greg, and I know you've had an awful lot of opportunities of sharing this with a lot of entrepreneurs, what's been the biggest roadblock for small business owners, when they're faced with understanding the numbers are understanding money?

Greg Crabtree 10:56

Well, it still comes back to the in the first book, I mean, the first thing I start off with is, is

1. Distortion. We do things to our data that hide the truth.

distortions, you know, we do things to our data that hides the truth. And you know, the number one distortion for a business under $5 million in revenue is owner compensation. And so, if you get them to put the correct owner compensation, whether you take it out or not, I will fight that argument later. But I need to see true profitability of what the job that you do in the business. So, as we say, you get paid a salary for what you do, you get a return on what you own, don't confuse the two. So, I am adamantly opposed to this concept that is rampant in the franchise industry. Would they call it ODP owners' discretionary profit, so where they take profit plus owner compensation and say, oh, that's, that's what you make out of business? No, it is now. I mean, you know, that piece for the salary piece that you should be making out of the business, I got news for you over the arc of the life of the business, there's, sometimes you're worth that money, and sometimes you're not there, sometimes you'd be better off paying it to somebody else who's actually better at it than you and you just be an owner and an investor. And that real kind of led to the overarching theme of the second book is really how to run your business as an investment. And really appreciate the enormous wealth building capacity that a privately held business does for you. There is nothing in the marketplace that can yield a return that a probably a business can in the US market. And in most markets around the world, you know, so if you we've got clients in US, Canada, Australia, you know, Europe, you know, not quite as good. In some cases, certainly Latin America, you know, depending on what country you're in Asia, you know, Kind of depends on where in Asia you are at third world countries have done, been fortunate to present my material, you know, in 15 countries around the world. And I've often said that the only difference between a third world economy and a first world economy is the speed in which cash moves through the system, and really not so much cash, but margin. And, when I've done presentations in Africa, you know, it's like, people keep trying to think to be an entrepreneur, you go grow your business by getting a piece of business from the government or a big multinational company. And I go, no, no, that that's, that's not, you know, go do what the market needs. I said, there's a ton of people out there that are going crazy doing stuff. And that tells me that there's need of the market that you're not even thinking about and go solve that need and run a business that that that's needed by the market. And really the last year as proven that philosophy that we have, because we literally had, we only had one client go out of business, and they were in you know, kind of a touristy business in San Francisco. And so that they can go back into business any moment, you know, if they if they're if tourists ever come back, you know, but out of the other 300 businesses that we manage out of our office here, literally nobody went out of business. And Matter of fact, don't tell anybody. Many of them had the best year ever. And don't tell anybody but they got a lot of cash. And, you know, doing the necessaries is a wonderful thing, because it may not be the sexiest thing. It's not Google is not Apple, it's not Facebook or, or WhatsApp or whatever. But you know, it's the stuff that you know, people build great wealth, employ a lot of people do meaningful things that serve their communities and their families. And I just think we need to learn to love the necessaries and build great businesses out of that.

Rich Armstrong 14:45

Great message.

Steve Baker 14:47

Yeah, no kidding. I also like the fact that this must be of tremendous podcast because about half the content so far has been followed with shh or exceeded with shh so Keep those secrets coming, Greg. In your first book, you talk about an organization's key financial indicators and making smart decisions using those, you say the number one key performance indicator is the amount of tax you pay. I think this is really going to be very interesting to our listeners. So, can you talk about that a little bit?

Greg Crabtree 15:25

I just had a discussion with a client this morning that just paid out $1.6 million in cash for last year's taxes. And they were okay with it. Because they buy into the idea. And I said, you know, you take that number times about three. And I can tell you how much the How much where the other cash is that you got to keep because you paid those taxes. It really grew out of this frustration, of watching people make good profit, and then throw it all away in the last two weeks of the year. And it's like, why are you doing this, I mean, to spend the dollar to save 40 cents in tax, if you're not in New York or California, to spend $1 to save 50 cents in tax if you're in those states. Why? I mean that that economics doesn't work. And its really kind of one of the things that my favorite field of study that I would consider myself a an amateur, but I'm gaining experience every day is the field of behavioral economics. Humans do not logically make the right decisions. When it comes to finance, it is not a natural behavior, it is a learned behavior. And the more that you can then learn those proper responses. There's a great behavioral economics study based on cab drivers in New York City, and a cab driver will rent a cab for 12-hour shifts. And on a slow fare day, they'll sit in the cab for the full day. On a good fair day, they quit it two o'clock. Why would you do that? This is just not this is not making sense. But we do we see this play out in human behavior. And so, in knowing these things, I said, okay, what can I do? What is the information that I can do to change people's responses to that information? Well, it starts with better data. If you actually, if next time you sit in a café or sit in the car, and the Uber driver or Lyft driver, start talking to him. These are always fascinating people to talk, they just say how they got there. But Uber and Lyft have figured they know about that study, and they prompt the drivers to drive when the fares are plentiful and keep driving while the fares are plentiful. Because that's when Uber and Lyft make money to, they're motivated to connect to them, but people left to self-manage will not achieve the highest output potential and the highest best result. And like I said, you know, early on the you know, we were in an economy that still requires labor to be productive. And to me, that's my biggest worry, we are out of really good quality labor in this country. We saw this right before the COVID. Impact started. And we had seen a slowing of the economy from our data set. Going into that. And then we're now in the last two months, we've seen this surge of demand. And now it's just a free for all a fighting for the existing labor and people stealing from each other and offering stupid amounts of money and getting people to move. And it's a real problem. And we're going to keep fighting ourselves and keep pushing inflation. I mean, they're not even close to calculating the real inflation number that actually exists right now.

Rich Armstrong 18:43

You know, it's interesting, you mentioned Greg, this, you know, challenge we're in in terms of war for talent. You know, I mean, just here at SRC, we have 100, job postings opened right now.

Greg Crabtree 18:54

Exactly.

Rich Armstrong 18:55

It's not getting better, it's getting worse. And you talk a lot about managing productivity of labor is like a key metric. He talked a lot about using that analogy around salary cap, is there anything in that those lessons that would maybe help people manage through that.

Greg Crabtree 19:12

The thing I was really proud about is in the new book, I've got a full chapter dedicated to LER, labor efficiency ratio. So, if you ever heard if you ever hear anybody say LER, you'll know that they’re a simple numbers fan, because that's our term. It's unique to us. And essentially,

2. Labor Efficiency Ratio (LER), it's not about labor as a percentage of something it is about taking $1 of labor, and what is its output.

the way we look at it is saying it's not about labor as a percentage of something it is about taking $1 of labor, and what is its output? Because what can it produce? What is the leverage that I get from the deployment of a good dollar of labor, and it just turns the map, you know, the other way, and everything about this every dollar of labor in an organization has a numerator that's held responsible for, and it's and that numerator is never sales? That numerator is either gross margin or what we call contribution margin, which is gross margin minus direct labor. So those are the two primary numerators that we look for. And so, what you're looking for is this way of saying, how quickly can I deploy $1 of labor and ramp it up to its optimal productivity. And oh, by the way, because labor is the only cost that comes to work every day with an attitude, it's not constant output it has good days, and it has bad days. And I got to keep it at this run rate, you know, throughout time. And so labor efficiency ratio, and is a number that tells a story, as you see it plotted across time. And certainly, rolling 12 is the truest number, rolling three is the next year is number and so forth. And so, if you're a business that has seasonality, rolling 12 is the number you got to focus on. If your business is pretty consistent 12 months out of the year, I can get you to focus on rolling three and say this is really the predictor of where we're, we're currently at, and is my gross margin to direct labor dollars going up or going down. Because notice, what we focus on is not an economic number per body, it just drives me nuts. When somebody says revenue per person, profit per person, I got news for you that is dehumanizing. I mean, just stop it. I mean, there I laugh. I don't know about you guys. But I've never seen two people that that are equal. I mean, everybody's got different skill sets, everybody's got different capabilities. And it's not about that, but the one thing that is equal is $1. Even so, for $1 of labor input, what is the output that we get now then I can start to narrow it down by person. in my industry, I can measure literally, the bill dollars by every person who works for our firm to their salary. So, I've got a labor efficiency ratio by person. And when I stack rank those across the grid, you learn pretty quickly who's producing and who's not. And it's, and I have a little secret, you know, if not the highest paid people are the best producers. So got news for you. And what we've been seeing lately in this world of labor is this idea of much faster arcs. So, think of an arc is in terms of the career lifetime that somebody is going to be with you as a business. And what the winners that we see right now in business are the people who can take someone fairly early. Maybe they're just below the immediate needed skill set that you have. But you can take their raw skill sets and fuse them with some very quick onboarding and focus training, to get them quickly productive, and then continue to grow them to even greater productivity. Now, the key is how long is that arc going to be? How long will we keep them? And, you know, that's a challenge in the moment, but I think the businesses that are good at training and onboarding, and just lather, rinse, repeat, they're going to be the winners, you know, in the long term.

Rich Armstrong 23:08

Now, good point,

Steve Baker 23:09

Well said, well said. So, I'm thinking about your second book. You brought it out, you published it in late 2020. Was that intentional, you know, around the pandemic? Or was it just happenstance,

Greg Crabtree 23:27

No, it's called when you finally get around to getting it done. You know, I mean, I've probably been peddling that book for about four years. But it was kind of, you know, good that it came out. And, you know, and so, you know, I was getting close to finishing it, and pre-merger. And then, you know, it was supposed to come out fairly close after that. But between the merger and the pandemic, you know, it just kept dragging on, and, you know, they're self-published. So, you know, it's like, it's, it's up to me to get it done. Now, the good news is, is I actually have just finished going in studio and doing the audio version of both books, so that the audible version will be coming out here, hopefully, within the next couple of months. And what was funny was, you know, I've not read the first book for 10 years, you know, I mean, I, you might look at some piece of it, and somebody reverse it, but I hadn't read it word for word, 10 years, and which I had to read it, because I really couldn't let somebody else read it, I mean, has to be my voice. And so, I go through day and a half to read it, you know, I get done with and I go, you know, that's a pretty good book. I was scared, I was scared, you know, to read every word. You know, I might say, you know, but there was only one thing that I didn't believe in it. And it was this tax comment that I made that the rules are different now than it was when I said it. And so, I left that but other than that, I mean, I really felt good about everything I said the first time. And then the reading the new book was a little bit easier, because literally every word of that book I wrote the first book, I had to get a writer because I really wasn't very practice at doing this, and I've had to write a ton since then. So, you kind of get a rhythm and get to where you can do right? Got to find your hiring partners, you hire people to correct your subtle verb disagreements.

Steve Baker 25:14

Just to follow up on that, could you? For our listeners, could you kind of compare and contrast the two books?

Greg Crabtree 25:20

Yeah. So, the first book is clearly it was developed for early-stage entrepreneurs and so generally, I would say 5 million and under. Now, I have found people, much larger than $5 million businesses that have found it very useful. So, I mean it's got some very strong, principled ideas. Because really, if you think about it, a $30 million business is probably a collection of $5 million businesses. And so, to a certain degree, that's why those are the business owners that still find that first book quite usable. Because if you use it for division management or segment management, then those principles because it still is true, the new book is really does not know, a beginning or an end. So, I would say for it's really overarching that. I mean, literally, we've had, we've talked to $2 billion sized businesses about the concepts that they wanted to use in it. And in a startup, it matters just the same. Because really, the idea is I'm trying to get your head wrapped around this idea of business as an investment first, and then understand, you know, so I would say, whereas the first book, you know, I did make that statement about how big of a check, right that is a key performance indicator, really, I would tell you that the way that truly manifesting true KPIs is return on invested capital. And so, in the second book, I tried to bring this measurement that to be quite honest, I had not done since college, and then I was at a I get to chair an executive ed program at Wharton Business School with like legitimate professors, and they let me share a little bit of my stuff too. And, so, you know, but David Wessels, I have to give him a lot of credit. He's the one that kind of turned me on to this rlfc calculation, because it's really a, it was the number I was looking for, to win an argument, what I'm trying to get you to understand is the value of your business as an investment. And that pretax profit number is no different than the yield on a CD. At the end of the day, how much money did I have to put in to get this much money out? After I've been paid a market wage base wage, and so I'm not distorting those financials. And when you start to look at that number, the number was astonishing. Whereas the pilot market probably run somewhere in the 20 to 25% range or less. I mean, we were seeing numbers. I mean, literally, our belief is no business in is probably held in a in a developed first world economy should be less than a 50% return. Well, I mean, just think about that. I mean, what why would you? I mean, why would you ever think about messing up a business, an investment that gives you a 50%, year after year after year after year return, when you when you want to reinvest in that as much as it would take reinvestment? Yeah, and now a lot of times the business marketplace itself is closed to reinvestment, there is no more market share to be gained without something drastically different. A new plant a new geography, a new line, significant new line of business. But until you've run the course of market penetration, and something is in we say 50 is the minimum, I would say the average of our clients are about 75 to 100% return. We've got one industry that we deal with quite a few clients and the IT managed service business, their average return on investment is 200% per year.

Steve Baker 28:57

Wow.

Greg Crabtree 28:58

So, it gets down to this thing of understanding your only your challenge is not cash, your challenge is execution. cash is eminently available, if you figure out how to execute. I there's not a single business, I'm having trouble getting funded if I can get them to execute.

Rich Armstrong 29:20

That's great. That's great.

Greg Crabtree 29:21

And once you once you understand it now part of that return on invested capital is this. We've created kind of a simplistic view of the building blocks kind of the DNA of capital, in that there's three things that work on your balance sheet and one that hides in your P&L. And that one's that one freaks out all the accountants because they don't think of capital being on your P&L, but guess what, in the real world it is. And so, the three things that are on your balance sheet is capital is might what we call trade capital. So, working capital is the classic measure of current assets minus current liabilities. I hate to make the bankers and the accountants feel bad, but that's a stupid measure. And here's why it's stupid. because it contains two numbers that should never ever been in there that are choices, cash and debt. Cash is a choice, that is a choice. The others are market forces. As a market forces AR on your inventory, work in progress, market forces, AP accrued expenses that normally turnover and deferred revenue when potential. And so that's the idea of it's the net of those things that turnover is that key number now, my good friend, Alan Mills, that he and I do a lot of presentations together cashflow story, Alan's got a lot of great material, he and I really, really sync up well together. You know, Alan has a lot of good material on how you look at each of those components. But as you know, some of this I was sitting in a presentation he was doing, we were doing a joint presentation together. And I'm sitting there kind of thinking on this. And I'm going really if you kind of take the all of the gather inside, but that's really at the end of the day, I can merge on these things from a lot of different ways. But it's the total number that matters. And we look at trade capital relative to trading 12 revenues. And that's a key building block of your capital structure, the business. And the reason why I'd say well why do I need to know that? Well, if you're, if your trade capital averages 25% of trailing 12 revenues, guess what, if you grow by a million dollars, you got to invest $250,000 of that revenue, just to turn it over before you get the first dollar back out. So, it's an incredibly important number to tell you about simplistic cash flow forecasting, in that process. Now, the way that I mitigate that, how big is my profit percentage? So, what we've really there's a term that we put in the new book, I'll CPR cash power ratio, what is my trade capital percentage compared to my profit percentage, so when I can get trade capital percentage below my profit percentage, I'm a cash flow free growth business. Cash is no longer a problem. Just go grow. Just go do it. And if I have a trade capital above my profit percentage, we say, okay, what can we attack? How can we get profit up? How can we get capital utilization down? It's amazing to me how many people just don't ask, no, just ask your customers, can you pay me fast? Can you pay me some in advance? Can I get a vendor, you know, to give me better terms, we this one Amazon reseller that he went to his suppliers, and he said, hey, you know, I know you give me 30 day turns, but you know, I get this crazy idea, but I think it works? How about if you give me 75-day terms, I think I can sell 10 times as much. And I go, okay, that's a, that's an interesting trade off. And then he proved that he could do it, actually,

Steve Baker 32:57

Wow.

Greg Crabtree 32:58

Because he had more free flow, he was able to always have product kept pushing it through the system. And because Amazon actually was a pretty good player, and timely payer, but giving 75-day terms because he could turn things so quickly. He was able to cover not only his inventory demands, but also cover part of what Amazon was still waiting to pay him even as fast as they were paying. And he basically had zero cash in everything that was turning over.

Steve Baker 33:26

Wow.

Greg Crabtree 33:27

And when you are in that position, that's an enormously powerful position to be in.

Steve Baker 33:33

Mm hmm.

Rich Armstrong 33:34

So true.

Greg Crabtree 33:35

So, we've had we've had industries where, so we do our clients in the staffing industry, staffing industry is notorious for one of the worst trade capital percentages of any business out there, we tend to carry about 25%. of revenue in receivables that they they're having to pay; they get no trade support. There's nothing there's no liability side to do that, until I ended up with a staffing client in Australia. And I'm looking at his balance sheet, we're going through the numbers and I'm going, this is weird. You have negative trade capital, which means your customers pay you in advance. And I go, ah, I don't, I'm not saying that for any of my clients. How did you do that? Well, we ask, really, you just ask. And if you think about it, it's really kind of created a really interesting line of thinking, because if you think about it, why does somebody not pay you timely? Well, there's only three reasons.

3. Reasons people do not pay you timely -- They don't have the money, do not trust you, or they don't want to bite the economic bullet. 

Number one is they ain't got the money. Well, that means I don't want them as a customer. So, let's get rid of them. Okay. what else They don't trust you. Okay, well, you know, what are the ways that we can build trust, I'm going to deliver the service, I'm going to deliver the product. Okay, let's work on winning trust. And then the third reason is they just want to be an economic bullet. Well, you know, there were classic examples. You know, Dale was known for this, you know, years ago, they've gotten a lot better. From what I hear, you know, but essentially, you know, companies that used to, you know, the CFOs, he used to pat themselves on the back and break their arm doing it, trying to think about how much they held your cash, all they're doing is harming the system. And I will tell you from looking at finance globally, that, as I said earlier, the faster that you can move margin through the system from start of the transaction to the completion of the transaction, everybody wins, it is a win scenario, we get the cheapest price, everybody plays fairly. And we can get back there and do it again and again. And what you're seeing right now in the marketplace is this great dysfunction of things aren't moving faster the system and what happens, prices go up, your costs go up, terms change. And it's like, we got to get back to this free quickly flow. And that's the nature that you got to get to. And that's when you didn't literally like said it's where it levels the playing field. And where we enjoy in the US literally little to no barriers of entry for any entrepreneurial adventure, versus you better have a big bucket of cash, if you're doing it internationally.

Rich Armstrong 35:26

It's great lessons. It's very, very valuable, Greg and I love how you bring it back to the current economy that we're dealing with, because we're, you know, we at SRC, specifically, you know, its supply chain issues, and people issues is that we're making a lot of financial decisions in trying to manage that. And if they understood the concepts you're talking about, I think they may maybe be making different decisions. Right. So, I think that’s,

Greg Crabtree 36:35

Exactly. Well, I think also, when it comes to people, you're finding that people are getting a little creative, too, and finding if I don't need physical presence of the person, where do where are some pockets of people, you know, that can be accessed, you know, that that really can do it. And I won't share where giveaway secrets. But you know, one of my clients has an incredible source of technical labor in supporting an IT product. And it's just in this little remote town with a little college and you know the workers love it, because they love living in that area. But they don't have to be anywhere in that process. And it's a good classic example of the win. But those are hard to find. But you know, but I think to a certain degree, I think what you got to do in the current labor market, and this isn't going to get better anytime soon. So, you better just started now is go identify every piece of labor that doesn't have to physically reside, where you're at, and go find that labor and those sources in the places where they do exist. And then of the people where you have physical labor, you're just going to have to pay whatever the freight is to keep that labor and learn how to add it continuously develop it, because we have much shorter arcs of beginning and end of driving productivity. Yep. Yeah.

Rich Armstrong 38:03

I'm curious, you mentioned earlier, and you talked a little bit about this, Greg? Is your introduction to open book management Jack Stack in agreement? That is, how has that concept of transparency and education of the financials all through the entire company? How has that influenced your passion in working with entrepreneurs to understand the numbers?

Greg Crabtree 38:25

Well, I mean, we find that there's, you know, it, once you create a structure of people understanding the data, there's much less fear of sharing it. And then as people get into performance management, well, you got to share some of that data. I will say that my practical experience has kind of settled into I believe 100% of the companies can share what we call contribution margin, revenue, minus cost of goods sold is gross margin, gross margin minus direct labor is contribution margin. We don't see any I've not seen anybody with a credible argument whether they did or didn't. But nobody has a credible argument to not share that data. And what we find is, and the reason why that structure, so we believe contribution margin represents the most important number in the P&L is not net income. It's actually contribution margin. contribution margin is the pure output of the business engine. And so, in realistically, when you get into business, sales and acquisitions, most transactions are whether people realize it or not, is based on contribution margin, not net income. They'll talk about numbers about net income, but I guarantee you somebody in the back whether they realize it or not, it worked back into how can we take that margin and bolted on to our unabsorbed operational costs that we can be more efficient with and do more with it. And it's a concept we refer to as a strip sale. So, most purchases are not purchases of complete businesses. you're purchasing that economic engine of the business and bolting it on to your existing operation. And it's the reason why you'll see some stupid numbers of multipliers, that when you see a stupid multiplier number, there's a different reason why they bought it in that regard, but by showing them that number, we think it's a safe number. And so like, when we run, you know, a similar version of the Great Game of Business bonus program, you know, that you guys are known for. in deference to Jack and the critical number, we believe there's one critical number, it's called contribution margin, we base all of our minimum targets, stretch goals off of contribution margin, planning, you know, in that process, and it's worked beautifully. And really, you know, conceptually, you know, worked really strongly. The, the interesting thing about operating expenses, is, you know, the average person really does not have a lot of impact on those. And, you know, I, you know, if you if you really have the culture like you guys have, which is really hard for the average company to pull off, you know, we find that, you know, if you don't really have the commitment that that Great Game of Business followers have to really put that culture in place to really look at every line item in the P&L, okay, well, let's do the next best thing, it says, let's just look at those as the total and say, and let's just agree, you guys don't really have any choices in this and will be responsible for that. And I said, then I can just really get them to focus on the output number. And, and we've had really good success, you know, with that, of getting people to understand it and respond to it. And really, it creates a simplified language, it's almost funny. The less financially educated you are, the better you are at understanding it. And the more financially educated you are, the harder either well, what about this, and we got to allocate this cost, and it says it's just stop it. You know? It's simple numbers, simple numbers, man, you know, don't make it harder than what it really is.

Rich Armstrong 42:11

No, I think you're I think, you know, I totally, totally understand where you're coming from on that. And, you know, the history of you where this a lot of this came from with SRC, a lot of that was tied in that contribution, right, getting our frontline employees in the decisions that they were making every day can influence that margin.

Greg Crabtree 42:29

But I will tell you the number one thing that I say every day that I'm on a call with a client, that's Great Game of Business inspired, is the constantly re-forecasts. Yeah, I will tell you that the number one thing that changes the direction of a business, is the commitment to forget about the annual plan. It's called re forecast re-forecasts, re forecasting re forecasts and get in and I see, people get tired of me quoting Jack, he says, Listen, I don't need you to be an optimist. I don't need you to be a pessimist I need you to be a realist. And let's, let's develop that forecasting muscle, and if you constantly do it, you get better at it, there's no doubt about it.

Rich Armstrong 43:14

Yeah, In the end, it's the quickest way to really understand the numbers that drive it. Right, So

Greg Crabtree 43:22

Let's say the problem is, I mean, this is where like, the clients we work with, we have, we've created our custom simple numbers, you know, forecast model, and so we're, you know our service that we do that we're known for, is we take our clients data out of their antiquated accounting systems, no matter how advanced they may be, and say no, let, let me help you actually see this in a real way. And we've got it down there really easy, very low labor, you know, concept, but it's get it into a format that we can work with it. And literally, you know, every call that, you know, we're on, we're taking, here's your data that has happened now, what's about to happen? I mean, every call, we're going, okay, what's happening, you know, what's hard forecasted in the next two to three months or a year? You know, depends on what kind of insight you have. And then we flip over to the balance sheet and say, well, what does that do to cash? And, you know, in what does that do to tax money that needs to be set aside? And was that due to money that Okay, you got this much excess cash? What are you going to do with it? Can you Is there something we can reinvest back in the business? Oh, by the way, were you invested back in the business, and it works? We're going to get 100% return on that. Look, we want to look there first, but there is a point that no ideas, and I there's nothing I can't throw any more dollars at it to make it go faster. I just got to get better at it.

Rich Armstrong 44:49

This has been great, Greg. I really appreciate all the you know, all the insights and I think it's, it's going to just be absolutely valuable for the audience that we have here with This podcast we end the podcast with a question often is just trying to get back to the idea of you know, what is a question we should be asking you right now, what is something we've missed in our discussion here that we need to be sharing to this audience?

Greg Crabtree 45:22

I mean, I think the, and I've said it, but I want to re-emphasize it. Your number one challenge to grow is not cash, it's execution. And it's understanding this idea of what are the things that I need to do and do better to grow my business? Because if I get the cried capital, aspects of trade capital ride, you know, what little money and the one number I didn't talk about is this idea of launch capital. So, launch capital is that capital component that hides in your P&L? So, think about it, like every business, every person listening, this podcast that runs a business, I want them to think about, what did you spend money on in the last 12 months, that nobody made you spend that you spent to grow the business, and it hasn't shown up yet in the revenue. So, you're, it's a prospective spin, that really shouldn't if you were doing an adjusted EBIT a calculation to try to sell the business, you would take that out. And so, I really try to get people to do that on an ongoing basis. So, I want them to understand here is the discretionary expenses that I'm spending in my business, that I'm not executing on correctly, to grow the business. And I want to hold that accountable. And there's a whole chapter in the 2.0 book on launch capital concepts of a couple of successful businesses that we navigated through this, this idea to essentially assign what is that targeted improvement in profit, not revenue, but profit, because I've spent this catalytic spend in either marketing, labor, tech, whatever those catalysts spend are, but these are expenses in the P&L. But it's teaching people to be better at execution, I think, is the greatest barrier. Even in the tough labor market. If you're better at executing the finding and the development and the onboarding of labor, you will beat everybody else by a longshot.

Rich Armstrong 47:31

Well, that's really good advice when you have a limited labor pool.

Greg Crabtree 47:37

And that it's going to stay there. So just accept it. Just embrace it.

Steve Baker 47:41

Absolutely. I love it. Well, Greg, this has been so fun. Now I, I will always try to give my takeaways and I bet I got it wrong. But I have about three pages of notes here. So, if I get any of it wrong, please correct me. I love this one, run your business like an investment. And no business in the United States should yield less than a 50% return. That powerful stuff. You talked about behavioral economics and the choices we make versus market forces, be honest with yourself, look at those things. Here's one that is really big for our audience. There's one critical number and it's not net income, its contribution margin, which is margin minus direct labor is the purest output of your business engine. I get that right. Yep. That By the way, I was an art major. So good for you, Greg. teaching me stuff. I love this where this is so speaks to me, the less you're trained in the numbers, the easier it is to get it. What a gift, what a gift

Greg Crabtree 48:43

It is, it is.

Steve Baker 48:43

And you had a couple of number ones that I want to share again, with folks, the number one thing that you want to be thinking about is commitment to re forecasting all the time. Don't be an optimist, pessimist be a realist. And the number one greatest barrier to growth or challenged to growth is not cash. It is execution.

Greg Crabtree 49:04

Absolutely. You got great recap.

Steve Baker 49:06

Well. Great stuff you so your books are Simple Numbers and Simple Numbers 2.0. And they're available just about everywhere. Where would folks go to get a copy.

Greg Crabtree 49:18

And then they're available on Amazon, you can also get a simple numbers.me is the book website. There's actually some downloadable spreadsheets from the first book that are on that website, you know, that are free, you know, tools to just knock stuff out if you'd like playing the spreadsheets. You know, but and then, you know, there's tons of presentations I've done that people usually freely let people record them. So, if you just go to YouTube and search on Greg Crabtree or Simple Numbers, there's quite a few of my thoughts out there as well if you really want to geek out.

Steve Baker 49:49

Alright, right. Well, we're going to geek out on Greg Crabtree, thank you so much, Greg. Sure. Appreciate it. Let's keep the conversation going, everybody, let's make sure that we get your westerns, your stories, your best practices, ideas, your challenges and your victories. That is capitalism at its best. Thanks for joining us, and we'll see you next time.

Announcer 50:11

The "Change the Game" Podcast is produced by the Great Game of Business. To learn more, visit greatgame.com.

 

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About The Podcast

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Hosted by Rich Armstrong and Steve Baker the Change the Game podcast highlights true life stories of organizations influencing positive change by doing business differently. They’re teaching people how business works and closing the gap between the haves and have-nots. It’s capitalism at its best. Inside each episode, you’ll discover stories of entrepreneurs who are Changing the Game.

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