Next Level Pros - #52: Back To The Basics: Essential Financial Knowledge for Founders

Starting point is 00:00:00 as the CEO, as the founder of your organization, it's imperative that you have a grasp on the basic knowledge so that you can give direction and make decisions that are going to push profitability within your organization. Yo, yo, yo, yo, welcome to another episode of the Founder Podcast. Today, we are going to be jumping into a little bit about finances. So a lot of people in their business, they operate when they're a small startup or when they're getting it off just based off of a cash business. And so one thing I realized this week, so we run a little group, it's called Founder Acceleration, in which we have about 50 entrepreneurs. We get on a call every single week and we go through like what's working in their businesses and whatnot.

Starting point is 00:00:49 And we dive in and we do Q&A. And one thing became very apparent this week as we were discussing a particular business. And it was just understanding the basic financials of your business is absolutely imperative to really be able to go and scale. And so this is something for the longest time as we were scaling our business from zero up to $233 million a year that I just didn't frankly understand or look into on a regular

Starting point is 00:01:21 basis. And so one of the things as a business owner that you really got to understand is those monthly financials. What exactly am I contributing to the bottom line? And just some of the basic things. So you can go and hire a controller, you can hire a CFO, you can have a great accountant. But as the CEO, as the founder of your organization, it's imperative that you have a grasp on the basic knowledge so that you can give direction and make decisions that are going to push profitability within your organization. So today we're just going to talk about some basic accounting principles that you need to understand in order to scale your business. First and foremost is understanding how your financials look and work. And so when we're talking about your P&L statement, your profit and loss statement,

Starting point is 00:02:17 this is the most important thing that you can understand to scale your business. So initially, up at the very top, you have your gross revenue, the amount of money that you get paid for your product or your service. And some of you guys have products that are scaled that are about the same product over and over again. Like for example, in my solar business, we had an average sale that we would get a certain amount of revenue on pretty much every single system that we went out and sold. But at the end of the day, you've got to understand, okay, what my gross revenue is, and then what are my unit economics? And what I mean by unit economics are the things that actually contribute to that product being delivered.

Starting point is 00:03:02 Like, for example, I'm going to use solar as an example. If you have a $35,000 product and your unit economics are, I have the cost of goods, which is the actual solar panel, the inverter, the racking, the direct labor, like the actual installers that are on the roof, the people that are pulling the permit, the people that are doing the design, right? Like the direct labor that can be directly attributed to the delivery of that product, where if you had no installs that you would not be paying. So that's really where you can distinguish between just like general and administrative labor and your actual direct labor that is attributed to that actual installation or delivery of your product. And the other example of your

Starting point is 00:03:53 cost of goods sold, your inventory, you want to be paying for this inventory if that sale wasn't made. And so first and foremost, you got to understand your revenue. How much revenue am I making? Then what is my above the line? And the above the line is what's called, because below the line is what is your gross profit margin or your gross profit. It's the money that you make before you have to go and spend money on your fixed costs. And to once again, go back, you have your variable costs, which are, are they vary based off of how much volume you're doing. And then you have your fixed costs that you have to pay regardless of whether or not you generated any revenue or not. And these things would be things like a

Starting point is 00:04:39 building lease, salaries to employees that are going to be there regardless of whether or not you generate revenue, utilities, things like that that are just standard every single month, gain a dollar of revenue, regardless, it's going to be what we call below the line, below that gross profit line. And so what you need to first and foremost understand is what is my gross profit? So like for us in the solar industry, our gross profit was about 50%, which means if I went and sold a solar system at $35,000, I would have $17,500 to contribute towards fixed costs below the line. And where this becomes imperative is then you start understanding that my fixed costs below the line. And where this becomes imperative is then you start understanding that my fixed costs have to be covered every single month by that gross profit margin. Then I can perform what's called a break even analysis. And you're making $17,500 for every single deal that

Starting point is 00:05:51 you sell. Now, a hundred thousand dollars for this type of business would be very low, but we'll use it as an example. So this would mean that I need about six installs every single month to break even. Then the question would be asked for every additional install above six, how much money would I make? And the beauty of it, that is your gross margin. Your gross margin now becomes your net profit for every additional sale, every additional install or delivery of your product that's over and above break even. That's where your gross margin really comes in into play is in this break-even analysis and adding that additional

Starting point is 00:06:31 delivery of your product. And as you understand this, then you start understanding like, okay, if I spend more money on marketing and it delivers me additional product, additional delivery, right? And I can do that with, then I start understanding my cost of acquisition, right? So my cost of acquisition would be the amount of money that I pay to a sales rep, the amount of money that I pay for marketing to acquire one additional customer, then I can analyze, is it worth spending an additional $2,000 per customer to get $17,500 contributed to the bottom line? Of course, in this particular example, it would be yes. And so then if your limiting factor is your marketing or your sales, and you have plenty of gross margin, this means you just need to spend more money on sales and marketing, as long as there's capacity on those fixed costs to deliver. And what I mean by that is like your building can only hold so many people, or your warehouse can only hold so much product, or your management that is fixed salary can only oversee so many people. And so then you start to understand and analyze, do I add additional fixed costs? Do I rent out an additional building? Do I bring on an additional manager that's going to contribute to my breakeven analysis. And so then if I decide to take on an additional $30,000 in fixed costs over and above the $100,000, now I know I need two more installs

Starting point is 00:08:13 every single month to breakeven, before I start making money. And then every single, once again, every single install over and above that, that contributes to what is your net profit or ultimately your net profit margin. If you have a good standardized business and you really understand it, your gross margin, if it's like steady, you sell about the same spread of the same amount of products across the board, your gross profit margin percentage should not vary tremendously. It should be within one to two points. That's if you have a really tight dialed in direct labor, cost of goods sold, managing your inventory and those type of things. Once you have that in, then you can understand what you are essentially losing on by not

Starting point is 00:09:02 adding additional deals, additional deliveries, additional products sold to your bottom line. So once again, in the solar industry, for every deal that I don't get on the rooftop, that's costing me $17,500 every single deal over and above my break even. But then you begin to understand below breakeven, how expensive it is not to breakeven, right? And so that is the goal ultimately in this business is we got to drive up the net profit margin. The only way that we do that is by understanding that gross profit margin. And my encouragement to you, if you have no idea what I'm talking about, pull out a financial seat, take a look at your profit and loss, your P&L statement, right? Understand your revenue, understanding all the contributing factors in the cost of goods sold, the variable cost that's going to get you to that gross profit margin, and then

Starting point is 00:09:59 get a real firm grasp on what are my fixed costs? What are my software costs? My, my, uh, rents, my, uh, my SGNA, my marketing costs, the things that are, that I have to cover my nut, right? And so a lot of you guys understand from a personal finance, uh, level is that you have this nut that you have to maintain. You're going to have to pay your mortgage. You have to pay your rent. You have to pay your, your car payment, your insurance, those types of things. Those are all in the nut that has to be covered, your break even. Understand where that is, how do I get there, and then what that looks like for every single deal, every single fulfillment of my product or service that I do above the line. Hopefully this helps in better understanding the general aspects of your profit and loss statement

Starting point is 00:10:46 as you become greater founders and contribute to society. With that, I would ask if you guys have not looked into our founder acceleration community, this is where we talk about things like this every single week. We dig in, we do Q and A's, we put people on the hot seat, we dig in, and it is literally the cheapest possible thing that you could potentially ever add into your business. It's not an expense. It's an investment. It's the cheapest employee that you have. 497 bucks a month. We are limiting it to 100 people. We're currently sitting around 45. We'd love for you to be a part of it. If you look down in the show notes, there should be a link, the founderexceleration.com.

Starting point is 00:11:25 So founderexceleration.com. You can go ahead and apply for there. We'd love to have you. Until next time.

Next Level Pros - #52: Back To The Basics: Essential Financial Knowledge for Founders

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