16. The One Word That's Missing From Almost All Scaling Discussions

When you hang out with entrepreneurs with a vision for their business, there’s one thing you’re bound to hear them talking about: scaling

But there’s a word missing from almost every discussion: PROFIT

And profit, not revenue, is the real point of scaling. But for various reasons, all the conversation about scaling centers around revenue. And this is resulting in businesses scaling prematurely and building outsized businesses as they scale, rather than building efficient, profitable businesses. 

Join me this week's episode where I'm up on my profit soapbox again, this time talking about it relative to scaling. 

Have a listen and you'll learn:

• The revenue trap that business owners ready to grow their business fall into
• What scaling means in financial terms
• The things to do BEFORE you start scaling so you set yourself up for success

Mentioned in this episode:

• Get your free cash flow guide
• Learn 10 ways you can improve your profit
• Continue the conversation and book a free call

For the full show notes, including the transcript, go to www.carlamoats.com/podcast/episode16





This episode was produced by The Podcast Teacher.

DISCLAIMER: The information in this podcast is for informational purposes only and does not constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, we assume no liability or responsibility for any errors, omissions or regulatory updates.

Transcript

Hello there, and welcome back to the Purposeful Profit Podcast. Glad to have you come back for another week. If you're new, I'd really like to welcome you and introduce myself. My name is Carla Moats, I'm the host of this podcast. And, one of the things you're going to learn about me is that I have a lot of passion for profit. It's in the title of the podcast. 

I have a long history in corporate America of working with Fortune 500 businesses to achieve their revenue and profit goals. And in corporate America, profit is the center of a lot of the discussions. Pretty much every decision that's being made is being looked at from a profit angle. Yeah. We care about revenue, but what we would always be really focused on, whether it was in the short term or the long term, is what you know, what's this do to our profit. 

As I started my own entrepreneurial journey talking with business owners, this is very different in small business. In small business, there's really very little discussion of profit; all discussion is around revenue. And I'm here to try and change that because profit is how you build generational wealth. It is how you have an impact on your business, on your family, on your community. And I really wanna bring profit to the forefront in the discussions with small business owners the same way it is in corporate America, including this week. 

This week, we're going to be talking about scaling. So when you hang out with entrepreneurs with a vision for their business, like I do, there's one thing you're bound to hear them talking about and scaling. Everybody wants to make more money, which is great. I'm, you know, I'm always excited when I talk to entrepreneurs, especially female entrepreneurs who are really willing to talk about, you know, yeah, I want to made more money. Perhaps they're fully booked. Perhaps they've maxed out their capacity. But for whatever, they wanna find ways to increase their revenue. 

I'm saying revenue here because pretty much every time I talk to a small business owner and they talk about scaling, they never talk about profit. They're always looking at it from, I wanna grow my business, to them equals, I wanna grow my revenue. And that's the thing. There's a word that's missing from virtually every discussion on scaling that I hear, and it’s a really important word. Okay? You get 3 guesses and if you've been around here for long, the first 2 don't count. That word is obviously profit. 

The thing is, that increasing your profit, specifically your profit percentage, which is the percentage of each dollar that you keep. That's the real point of scaling. The point of scaling actually isn't revenue. It's basically to improve your profit percentage. 

So today, we're going to talk about the revenue trap that business owners ready to grow their business are falling into. I wanna help you get super crystal clear on what scaling means for financial insurance, because I think there's a real lack of understanding of sometimes of what scaling really means. And then I'm going to give you 3 things to do before you start scaling so you can set yourself up for success. There are some things that I think business owners should be doing, like foundational steps that give them a much greater ability to come through scaling as a more profitable business. And I'm going to give you some details on what those are. Alright? So let's dive in. 

Let's start with the revenue trap. I've talked about it before. Most scaling discussions are totally revenue focused in the small business space. When a business owner says, yeah. I'm ready to scale, If I ask them what that means, that is pretty much always they wanna be able to take, say, a smaller offer -maybe they have a 1 on 1 offer, they're working with high touch container with clients, and it's kinda maxed out its ability for them to grow that way because they don't have any more capacity. So they wanna increase their revenue. And so they're often looking at, okay, can I take this high touch offer, and how can I scale it up? 

There's a fundamental belief they have that if I grow revenue, profit will follow. So if I'm making $100,000 now and I'm putting $20,000 in my pocket…if I grow to 500,000, I'm going to put $100,000 in my pocket. And that's simply not true. It doesn't bear itself out. In business terms, revenue is mostly a vanity metric. We all wanna hit the next milestone. It starts off, you know, I want a 50k, I wanna have a 6 figure business, I wanna hit a half a million, I wanna become a 7 figure business owner. 

But, honestly, I don't really care much about your revenue. I really don't. My clients have all figured out how to sell. So it's not that I don't care if they know how to create revenue. Clients that are coming to me, they've already figured that part out. They figured out how to sell. They've created 20k plus months. But these same owners are often not paying themselves. They aren't making a profit. I'm working mostly with women who are building lifestyle businesses, and these businesses don't all look alike. Some of them are content to have a $500,000 - $600,000 business. Some of them want to go to 3-5 million. 

But even the ones that want to go to 3-5 million, they don't want to do it the old-fashioned way. They don't want to be working 60, 70, 80 hours. They don’t want to be in a constant state of hustle. They want both financial and life freedom. And profit is the metric for financial and life freedom, Because profit is what allows you to pay yourself a good salary; fund generational wealth; it allows you to fund investments in your business; it allows you to create that lifestyle that you want to create. So what I really care about is how much profit you are making because that's what's allowing you to build the lifestyle business you want. 

Let's face it. We are service businesses. We are not Amazon. I'm not working with high-tech startups. We're not the latest hot tech company. We are our investor; we are the face of our brands. Yet when talking about scaling, I almost never hear anyone talk about profit. And, you know, I'm in quite a few large groups of business owners, and you just never hear them talking about profit. If I ask them, well, you know, what are your profit goals? I’ll get hit with, like, the deer in the headlights kinda look. I just think it's just this misunderstanding of how you really create growth and wealth in your business. And it's from profit. It's not from revenue.

The other thing I wanna talk about is what is scaling? Because I think there's a misunderstanding of what scaling really means. The end goal of scaling from a financial perspective is to grow your revenue without growing your expenses at the same rate. This allows you to become more financially efficient or profitable. So it means if I grow my revenue this year at 20%. I'm growing my expenses by less than 20%. That's the real goal. 

What I often see in the small business space Is that they're growing their revenues in leaps and bounds, but they're growing their expenses in even greater leaps and bounds. So they might grow their revenue by 10%, but their expenses are going up by you know, it could be 12%. It could be 15%. So, in essence, their profit dollars may go up, but the percentage of money they're keeping is actually going down. 

So when not done correctly, when scaling is solely focused on revenue, the result is that your expenses will grow faster than your revenue and you actually become less profitable. When that happens, the bill starts to stack up and the pressure is on for even more revenue. It becomes a vicious cycle. So, I scaled up, I increased my revenue, but my expenses increased at an even higher clip. Well, now I've got all these new bills to pay, and often these new bills come in the form of team that you've added. So now there's even more pressure to increase your revenue even more, and now your expenses increase even more. And so it just becomes this vicious never-ending cycle. 

The end result might be 7 figures, but you're bleeding cash and you're living sale to sale. There's a lot of 7 figure entrepreneurs out there that are living sale to sale, living check to check. Instead of being a slave to a corporate job, they've really become a slave to the next sale. Premature scaling is a mistake I see so many business owners make. Scaling almost becomes like this default thing. “Okay, I've reached 200,000 - it's time to scale.” Or “I've reached a 100,000 even - it's time to scale.” 

But there's 3 things that you should really be doing and getting locked down before you start scaling. When you get these 3 things locked down, your likelihood of achieving the ultimate goal of scaling, which is, to grow your profit percentage and to become more financially efficient, will greatly increase. Because they help you lay a really good foundation. So I'm going to talk through these 3 things. 

The first one is something I come back and harp on a lot, is to know your numbers and where you're spending your money today. Don't go scaling until you actually know where your money is going today, and I mean really know where your money is I don't mean I spent x dollars. Who are your vendors? What are the categories you're spending money on? 

So these are some of the questions you want to be able to answer: What are your major spend categories? How much does it cost you to acquire a client? Client acquisition cost is a key metric you wanna be tracking. What is your cost of service or cost of goods sold? Most of my clients are typically service-based business owners. So cost of goods sold, cost of service, what is your cost to deliver your service? 

What's the lifetime value of your clients? So the clients that you have now, what's their lifetime value of them? Do you have 5 to 7 KPIs that drive your business financials that you're tracking and monitoring? And one of the big things is: don't just take those financials that your bookkeeper sends you and file them away. Really spend some time understanding them.

I have a client right now who is pretty typical. She came to me when she's on pace for about 250k a year, but didn't understand her financials at all. She got this financial statement from the bookkeeper. She didn't really understand them. The bookkeeper didn't have enough knowledge to really sit down and explain the numbers to her. She wasn't paying herself. She had minimal profit. And, again, I see that a lot where these business owners learn how to sell and I could generate those consistent 20k, 25k months, but they're still not paying themselves, and they don't have a profit. 

So, one of the things we've really focused on doing as we work together is we've identified some changes to her bookkeeping so that she can better understand her numbers. So she's going to have much better visibility. She has quite a few contractors, but she doesn't have a real good grasp on what's her total spend on contractors every month. What's it costing her to provide her current offer? We looked at her financials originally, pretty much all of her costs are sitting down in in what we call SG&A expenses, which is sales, general, administrative expenses. So she didn't have any visibility to what's it actually costing her to deliver her service. 

She's going to have a better feel for what her overhead rate is. Your overhead are the costs that you incur just to keep your business running. They aren't tied to clients, but you need to consider that in your pricing. It's always important to know, what is my overhead? And what's a rate I need to use in my pricing considerations to make sure I'm recovering that overhead in my pricing? And she's going to get visibility to her client acquisition cost or what she's spending today to acquire clients. 

In just a few months of working together, She's already got a much better understanding of exactly the cost structure in her business, where her money is going, the financial dynamics of her business, and it puts her in a much better position to make business decisions as she starts to scale. 

Second thing you can do is I really want you to adopt a Profit First money mindset. Make profit the first thing, not the last thing. Profit First is a book, you can go out and Google it. Highly recommend it for small business owners. But, basically, what it does is it flips your standard accounting equation. Your standard accounting equation that accountants use is revenue minus expenses equals profit. So when I say profit's the last thing, that's what I mean. In that equation, Profit is the very last thing in the equation. And so it becomes reactive; it becomes something after the fact; it becomes something that happens to you. What Profit First does is it flips the equation. It says revenue minus profit equals expenses. So now, after I make the sale, profit's the very first thing. I'm going to take profit off the top. 

One of the things I always talk with clients about is whether using Profit First or not, we wanna set an intentional profit goal. When you use Profit First, you're, basically, you're explicitly doing that. But even if you're not using Profit First, the one of the most powerful things you can do is set an intentional profit goal in your business. The Profit First money mindset, regardless of how you actually execute it, basically says: for every dollar of revenue I'm going to allocate it into buckets for profit, for taxes, for owner pay, and then OpEx. And OpEx is now what's left. 

It's set up so that there's no one profit number that's correct, and you can constantly readjust your profit numbers. You can decide for the next 2 or 3 years. You're purposely and intentionally okay with a lower profit percentage because of where that's going to position you to be in a few years. Either way, you're making that decision upfront about what your profit percentage is going to be. When you do this, it establishes financial discipline and intentionality before you start scaling. One of the biggest problems that I see when businesses start to scale is they don't have financial discipline; they don't have intentionality with how they're spending money.

One of the ways you reach those first levels of success as an entrepreneur, right, is you do a lot of experimentation. Throw a lot of things at the wall as you're trying to, you know, make the first 50,000, the first 100,000. But you get to a point where you wanna be more strategic about how you're allocating your resources. You still wanna conduct experiments, but you want those experiments to maybe be a little more strategic and a little more intentional. And when you do this, when you have this Profit First mindset, it's establishing that financial discipline, that intentionality. And when you have that already in place, when you go to start scaling, you're going to have such a greater likelihood of success. It's going to help you keep from having an outsized business and ensure that as you scale, you're profitable as you scale.

Once you have that OPEX bucket, then you're going to create a plan for that OPEX budget. And this is where you can really start to get creative, and you start to look at, how am I going to allocate my financial resources? When you have a profit last mindset, you're not really thinking about how you're carving out your expenses. You're typically spending money more on a whim. You're less likely to really sit down and think through the ROI of decisions. 

The other thing that the Profit First mindset does is it helps you focus on finding operational efficiencies, gets you out of the mindless spending. This just breeds creativity into your business. It breeds innovation into your business. When I worked in corporate, at one point, I was managing a large team and well, it was a back office area. And whenever an employee would leave, My boss would tell me, he's like, “well, you can't replace the person for 4 months. First, you need to try and find a way to become more efficient so that that role is no longer needed.” And, yeah, it was annoying at the time, but we made a lot of operational improvements, a lot of process improvements. We got a lot of automation that we wouldn't otherwise have had because it forced us to get creative. 

Then, the third thing you can do is do a strategic pricing review. This is something you really wanna be doing periodically in your business on at least an annual basis, depending on your business, maybe even as often as quarterly. There's hidden profit and revenue buried in your current pricing, I can pretty much guarantee it. This allows you, when you do strategic pricing review, what you're basically doing is before I go to scale, I'm going to go find the profit that's in my business without needing to go add new clients, work more hours, or go out and chase more dollars. 

The other thing pricing discussions do is they bring up your dirty laundry around money. All your limiting money beliefs will come up. It's interesting, and I think this is especially the case with women because of a lot of the societal messages that we get sent about how we should act as women and about money is we're loathed often to increase prices. We'll do a lot of things, but see a lot of women business owners, they're loathed to increase prices. 

But you can look at, is your current offer priced right? Are you trading time for money or are you pricing for value? You know, one of the quickest ways to increase your profit is, if you are billing for time, is get out of that model right now. Even in my space, you know, as a finance person and I do project work for clients, I really try and stay away from billing clients by the hour. I try and bill for the value, fixed price billing. So trading time for money is one of the things you wanna get away from. 

How can you decrease your cost of service without sacrificing the client experience? Is your pricing taking into account your overhead? Is it taking into account your time? This is a real gap if you're not paying yourself. If you're not paying yourself, Are you really thinking about the cost of your time? Typically, what happens is you're spending more time servicing or providing the servicing than often you're probably accounting for in your pricing. So first, let's go make sure your current offer is priced right. You've got opportunities likely in your existing pricing. 

And then, what opportunities exist within your core business to maximize your client's lifetime value to you? So before we go and chase new clients, we're trying to scale up our offers, your current clients already love you. They already enjoy working with you. They wanna pay you. You already have a relationship with them. And they are often one of your best places for higher margin offers. They already have an established relationship with you. They're going to be open to new offers from you in ways that new clients might not be. And it's much cheaper to keep an existing client than to go find new clients. 

What cross selling opportunities do you have? What potential opportunities do you have to do upsells? Is there tier pricing that you can put in place? Are there subscription models? Especially for those who have very unpredictable cash flow, and I'll use coaches as an example, where they're collecting their income or their fee often upfront.  So they'll have a really big month, And then it might fall by 2 or 3 months with no cash. Finding a way to create some type of subscription model, which is just another way for recurring revenue, could also be a way to improve your margins. 

And how can you maximize your client retention? Because, again, it's much cheaper to keep an existing client. You have to go out and get a new client. So how can you maximize your client retention? So the whole purpose of this is before we add new complexity to our business through new offers, New niches, and things like that. Let's go out and let's really maximize your core business by looking at your whole pricing structure. This will often also get you a lot of clarity on okay, now this is the direction I wanna go in my scaling. So maybe you identify a newer higher margin offer. Maybe you're initially going to roll it out to your existing clients, but now this new higher margin offering is what you're going to really go focus on driving when you go to scale. 

So these are 3 things I really encourage you to do. By laying these foundation steps, you're going to avoid the scaling pitfall of overinvesting without a clear ROI. 

Thanks for listening this week. I'm always glad to have you here. If today resonated with you, I'd love to invite you to have a conversation about your business. I work with service-based business owners like you on things like this every single day. I work with a limited number of clients at a time, but I would love to have a discussion with you. You can go to www.carlamoats.com/workwithme to book your call. And I will see you next week.