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Top 10 financial management takeaways from Greg Crabtree’s “Simple Numbers, Straight Talk, Big Profits!”

AUTHOR
Sharn Rayner

DATE
24 July, 2024

CATEGORY
Blog & Resources

In the realm of business, the complexities of financial management often obscure the path to profitability. Greg Crabtree’s “Simple Numbers, Straight Talk, Big Profits!” offers a refreshing perspective by distilling financial data into actionable insights. 

Here are my top ten takeaways from the book, aimed at helping business owners and CEOs who might be missing the fundamentals. By simplifying your approach to numbers, you can drive better decision-making and achieve greater profitability.

1. Focus on the Key Drivers of Profitability

Crabtree emphasises the importance of zeroing in on the critical numbers that drive your business success. Instead of getting bogged down by every financial detail, identify and monitor the key metrics that truly impact your bottom line.

For example, if you’re running a tech company, your key metrics might include customer acquisition cost, churn rate, and lifetime value of a customer. These numbers will give you a clear picture of how efficiently you are acquiring and retaining customers, directly impacting your profitability. My clients know that the annual and sometimes quarterly focus on a given ‘critical number’ does drive focus and results.

2. Manage Labour Efficiency

One of the standout messages in the book is the need to measure and manage labour productivity. This is introduced through the concept of the “Labour Efficiency Ratio” (LER), which is calculated by dividing gross profit by total labour costs. An LER of 2.0 or higher is ideal, meaning for every dollar spent on labour, you’re generating two dollars in gross profit. Monitoring this ratio helps ensure your workforce is contributing effectively to your business’s profitability.

Over the last year many of my conversations with clients have been around what to pay new recruits and existing team members – going through this exercise really helps us to put a cap on what spend is and to move away from simply adding more resource.

3. Pay Yourself a Market Rate

Many business owners fall into the trap of underpaying themselves to make the business appear more profitable. Pay yourself a market-rate salary. This provides a true reflection of the business’s financial health.

When working with my clients, I stress the importance of not fudging the books. If you don’t pay yourself what you’re worth, you won’t have an accurate picture of your business’s profitability.

Whether to minimise taxes or to pretend that profit is higher – it doesn’t serve you. When I work on acquisition of businesses with my clients, I always check what the business owners are paid – and adjust accordingly when determining the business valuation, even if they insist that minimum wage is fair for their role in the market!

4. Establish a Clear Financial Roadmap

Setting financial goals and creating a roadmap to achieve them is crucial. Break down your financial targets into manageable milestones. For instance, if your goal is to increase annual revenue by 20%, identify quarterly and monthly targets that will guide your efforts. This approach provides a clear path forward and makes it easier to track progress.

This should be a given – and I commend my clients on having at least an annual rolling budget… but there are many businesses that I do encounter, who are months into a new financial year before confirming their annual budget – if at all.

5. Maintain a Cash Reserve

Many businesses fail due to cash flow problems rather than lack of profit.  Maintain a cash reserve equivalent to two months of operating expenses. This buffer ensures you can weather unexpected financial challenges without jeopardising your business operations.

My clients know that I refer to this as a ‘war chest’ and I push even further – three months of operating expenses, in a high interest account, which isn’t touched unless there are significant financial challenges.

6. Pay Your Taxes

It might seem obvious, but many businesses get into trouble by not setting aside money for taxes. Always pay your taxes on time and keep money aside for this purpose – be a stickler about this, don’t spend money that is not yours.

Further DO NOT pay yourself dividends until you have paid your taxes and any other debts. This discipline helps maintain financial stability and avoids future cash flow issues.

7. Prioritise Profit Over Revenue

It’s easy to get caught up in chasing revenue growth, but profit should always come first. Focus on creating a sustainable business model that prioritises profitability. This might mean cutting unprofitable product lines or services, streamlining operations, or renegotiating supplier contracts to improve margins.

My clients know (as much as I try to restrain myself), my eyes roll when people hone in on how great their business revenue is … this is pure vanity – what matters is the number out the bottom, profitability – that is the measure that we need to be focusing on.

8. Don’t Spend More to Get Your Taxes Down

A common mistake is to spend more money just to reduce taxable income. This strategy is “stupid.” When working with my clients, I always advise against making unnecessary expenditures just to get a tax break. Focus on profitability and smart investments instead.

9. Keep It Simple

Overcomplicating your financial processes and reporting can lead to confusion and poor decision- making. Use straightforward financial statements and reports that highlight the most critical information. Simplifying your approach helps you stay focused on what matters most.

10. Regularly Review and Adjust

Business conditions change, and so should your financial strategies. Regularly reviewing your financial performance and adjusting your strategies as needed is vital.

For example, if you notice a decline in your LER, investigate the cause and take corrective action, such as re-evaluating your staffing levels or improving sales processes. Don’t bury your head in the sand, nothing about your financial situation should come as a surprise.

To Sum It Up (ha – pun intended!)

Greg Crabtree’s “Simple Numbers, Straight Talk, Big Profits!” offers invaluable insights for business owners and CEOs looking to demystify financial management and drive profitability. By focusing on the key drivers of success, managing labour efficiency, paying yourself a market rate, and keeping financial processes simple, you can make more informed decisions and achieve
sustainable growth. Remember, the fundamentals of profitability are often straightforward—it’s all about understanding your numbers and acting on them.

By embracing these principles, you can steer your business towards greater profitability and long-term success. I highly recommend reading this book – it contains some of the clearest, simplest business financial advice that I have read.