Simple Numbers: The Financial Discipline Every CEO Needs with Mike Maxon and Brandon Gray

In this episode of The Better Leadership Team Show, I sit down with Brandon Gray and Mike Maxon from Simple Numbers to talk about the financial blind spots that quietly undermine leadership teams.

We break down labor efficiency, salary cap strategy, cash flow management, and why revenue growth alone will not save your business. If you want to understand how to measure true financial health and make smarter hiring and growth decisions, this conversation will challenge and equip you.

If you want a great company, you need a great leadership team — and that starts with understanding your numbers.

Thanks for listening! Connect with us at mike-goldman.com/blog and on Instagram@mikegoldmancoach and on YouTube @Mikegoldmancoach

Transcript

Brandon Gray 0:02

You know, many folks believe, so long as my revenue is going up, we're great, but revenue's, vanity, it's not about revenue. You know, I, I've never bought anything with revenue. I've only bought it with profit.

Mike Goldman 0:21

You made it to the better leadership team show, the place where you learn how to surround yourself with the right people, doing the right things. So you can grow your business without losing your mind. I'm your host and leadership team coach, Mike Goldman. I'm going to show you how to improve top and bottom line growth, fulfillment, and the value your company adds to the world by building a better leadership team. All right, let's go.

Why Leaders Miss Finance

Traits of Great Teams

Mike 0:55

Mike Maxon and Brandon Gray are partners at Simple Numbers LLC. They both have a passion for teaching entrepreneurs how to make their numbers simple. They use the CRI, simple numbers, methodology, and financial modeling. To elevate their clients by showing them the key numbers to make actionable decisions such as labor efficiency, return on investment capital and salary cap. They're dedicated to helping entrepreneurs fine tune the economic engine of their business for maximum. True profitability. I was lucky enough to read their Simple Numbers book, man, 10 years ago. Is that, is that possible? It was a, it was a long, long time ago. I say, is it possible, like think you say no, Mike, it was just written five years ago, but I think I read it somewhere about 10 years ago. I share a lot of the concepts with all of my clients'cause they're so important and in fact. My, one of my longest term clients who I've been working with, man, going on 11 years, I think has been a, simple numbers client, in fact, one of Brandon's clients for, for many, many years. So, looking forward to this, Brandon. Mike, welcome to the show.

Brandon Gray 2:05

Thanks Mike. Yeah, it's been great, hearing about the changes and the things that you can make with leadership teams and getting'em to the next level and, you know, fits in nicely to the things we talk about in terms of, you know, you coach'em up and then we get to see the outcome.

Mike 2:18

Yeah, it, it's so important. you know, and I find that there are so many leaders that, that frankly don't even know how to read a P&L in, you know, let alone anything more sophisticated. And not only did they not know how to do that. They're, they don't admit to it.'cause it's kind of an embarrassing thing. It's like, it's like being a fifth grader and having to admit that you don't know how to read. Like, so I'm, I'm really interested in, in digging in, but before we do, you know, I always start with the same question, from all of your experience, and I'd love both of you to answer it. I may get different answers of the same answer. But from all of your experience, what's the one most important characteristic of a great leadership team? And Mike, since I like your name best, why don't we start with you.

Maxon 3:09

Oh, you know, I have this funny story. I say I'll, I will spare it, but, I, it relates to why I, I thought about the four a's of simple numbers. I have a whole funny thing behind why I thought of this, but it has to do with conferences and all this stuff. But, really, I see leadership teams commit to that. you know, one analyzing the business as a whole, whether it's the numbers or whatever. then they want to get aligned on it. Then they want to take action and they want to have accountability. And those four things, when you see a great leadership team that seems to resonate across the board with them is those four things right there. And so their commitment to those four things really, stand out and you can tell if they have them. You see a good, you see a good running business.

Mike 3:52

Excellent, Brandon. Tell Mike why he's wrong and what's your answer to that question.

CEO Profit Blind Spots

Brandon Gray 3:57

My mine would be they are proactive. So as we're on calls and working with entrepreneurs and their leadership teams, it's very easy to see the ones that are going to perform and excel in that they bring to the table. Problems along with ways to solve those problems and propose those to us and wanna know the impact that's gonna have on the numbers, versus us looking at the numbers and telling them there's a problem here. and the analogy, how many times give if, if you take a stone and you throw it into a lake, everyone can see the first ripple. But a great leader can see the 10th and 11th ripple. The impact that that's going to make. and, and you know, it, it, it really stands out when you've got a great leadership team who will come and they'll say, Hey, here's something we're we believe could happen or is going to happen. What impact is that gonna have on the numbers? What are, and then they bring potential solutions to that versus the ones who have no idea what's going on.

Mike 5:03

So to, to take that both of those ideas, I guess, forward from, from your work with simple numbers and your work with clients. What do you see as being the biggest blind spots in and let, let's talk at the CEO level. What are those biggest blind spots they have about their own profitability, their own financial health?

Brandon Gray 5:33

A couple, couple come to mind. I, I would say the first is just understanding if they're healthy or not. You know, many folks believe, so long as my revenue is going up, we're great, but revenue's, vanity, it's not about revenue. You know, I, I've never bought anything with revenue. I've only bought it with profit. And so that, that's the first one that really jumps out. The second is an understanding of what the profit levers are inside of their business. So they have the revenue, but they don't have the profit, and they're scratching their head trying to figure out why. And so the leadership team gets together and they go, well, we need to cut expenses. So they tell each department lead, Hey, there's a 10% cut in your budget. Okay, well what, what does that entail? What does that mean? Is that, is that the best way of going about doing it? Is that the biggest lever inside my business? Is that the one that I should pull? And, and, and you know, they simply don't know it and much less know what impact just blindly going in and, and making a, a mandate or a statement like that's going to have not only with their own team members, but on the overall profitability and what impact it's gonna have with their customers or clients.

Sharing the Right Metrics

Maxon 6:42

I would, I would agree 100% with that. And to, to add to it. If I was asked the question first, I would've said their inability to project outside, past like a month. And so, they typically might set a budget. They might even have a forecast that they don't ever revisit, don't ever adjust based on those levers and things like that. So all of a sudden, hey, things are good. Oh, we had a bad month and then fast forward three months and they're outta cash, or I don't know what happened. And so those are, that, that forward thinking or view of the financials, can be a huge blind spot.

Mike 7:22

So I wanna dig in to, to both of those answers, kind of relate them together and, and dig in. Because when you talk about an understanding, the, the simplest understanding is, am I healthy or not? And understanding difference between revenue. Profit and cash. And the, to finish the, the quote, Brandon, you started, the way I've heard it is revenue is vanity, profit is sanity, but cash is king,

Brandon Gray 7:47

no doubt,

Mike 7:48

Because you can be profitable, but depending on how quickly you have to pay versus pay your vendors and how much inventory you need and all that, you could be profitable and run yourself right outta business if you've got no cash left. So what I want to dig into. In that understanding of health and in that projection. And, and Mike, I want to do, you didn't say, and this is probably part of what you meant, but you didn't say projecting revenue. You talked about projecting cash as well. And, and what I see that, that really can hurt a team is let alone a lack of understanding. There are some closely held businesses where the CEO slash owner. In that situation is very comfortable. Usually, sharing revenue numbers, but sometimes even with the senior leadership team, there's a hesitancy to share profit and cash numbers.

Brandon Gray 8:50

Right.

Mike 8:50

And there are a whole lot of reasons behind that, but, but what do you see, are you seeing that issue as well? And, and if so, what's, what's the right kind of coaching and advice for CEOs? Because if their leaders only understand top line, they can't help you manage to the bottom line.

Brandon Gray 9:08

right. It. It's all over the board. like you said, there, there, there's a lot of folks we work with who not right, we're not right, wrong, or indifferent here in, in what you wanna share. but, but they're, they're not giving the team members the information that they perhaps need. And I'm not saying that you gotta have profit to, to, to be able to, educate and help people understand, a term that we many times use is called contribution margin. Okay. And so think of it in terms of revenue less your non-labor, direct costs, supplies, materials, those kind of things.'cause we wanna isolate direct labor because that's an important lever in any business. And then subtract direct labor from that amount as well to get a contribution margin. we've got a ton of clients that we work with that we just share down to that level because their leadership team may not have any control of the operating expenses inside of a business. And so if they don't have any control over it, why do they need to know it? And they can't change any of the outcomes based upon it. So, you know, you, you can do more damage than good many times if you start sharing all the way to the bottom line in some instances. And so for whatever area that leadership team has responsibility, they need to understand from a financial perspective, what does winning look like.

Maxon 11:45

I think that, one of the things for CEOs to do, depending on, again, all companies are different where, how much you can share down to what level. I think it really helps though when you, when the organization sets for their positions and their people, that key number that moves the needle, right? And, and Brandon mentioned labor efficiency or if you're a manager, it's contribution margin, or it could be a guide on the line and it's like, Hey, how many widgets did you get through that day? I think it's setting that across the board that relates to the overall P&L. But the guy over here who might not have a great understanding of P&L, he knows that if, hey, if I pass through this many widgets today, you know, I did my job and it's gonna affect the overall numbers. And so yeah, it's great that, hey, I share, we did 10 million this year, but to the, to the. Team members down below. it's that key number that they can hone in on and know, Hey, this is where I move the needle. This is how I get paid. This is where I get my raise. And obviously it's simple numbers. We help identify a lot of those. And Brandon did down to contribution margin in terms of for the management team. But I think for CEOs out there, I think one of the things is, is what do your employees know their key number? Do they know what moves the needle? And then that ties to your overall financial model and analysis.

Brandon Gray 13:01

It's not, not about the outcome, it's about the inputs, profits and outcome. But you, your team has to understand what inputs do they have control over? How do they manage those and the importance of them.

Mike 13:13

You both mentioned the idea of labor efficiency, and I'm very familiar with, with that term from working with my clients on it, getting the idea from your simple numbers book, but talk about that, you know, a little, you know, the, the numbers, using the numbers right. Bottom line is it should help leaders not only understand their health, but it should help them make decisions. So when it comes to labor efficiency, talk a little bit about how CEOs could use their numbers and that one in particular and, and others, bring in others as as you need. But how could leaders. Use their numbers to better decide when to hire, when not to hire, when to restructure roles or teams.'cause I would tell you probably the most common thing I hear from the senior leadership teams I'm working with, not so much the CEO, but the senior leadership team that reports to the CEO is, I don't think I've ever seen a senior leadership team where half of them didn't feel like they were short staffed. And now that doesn't mean half of them are short staffed. It just means they always feel that way. So talk a little bit about how we know if we're short staffed, how do we use the numbers to decide when to hire, how many to hire, those kinds of things.

Labor Efficiency Ratio

Brandon Gray 14:31

Definitely so there, there's two simple numbers, philosophies or components that you would say that you look at when you're making those decisions. So the, the, the first one's labor efficiency and the second one is salary cap. So let's, we'll, we'll talk a little bit about salary cap and then we'll talk about labor efficiency. So probably got some NFL fans on listening, right? given what the ratings were for the Super Bowl, most likely got some NFL fans. Th there is a rule in the NFL. That mandates the amount that you, the maximum amount you can spend in total salaries. So can't spend above it. You can spend under it. They don't care. They don't tell you who to spend it on, but at the end of the day, you can only spend X amount on salaries and a business is exactly the same. Whenever you look at the components that make up profit inside a business, you got, as we said earlier, you got revenue. You got your, your direct cost supplies, materials, contractors, those kind of things. You got labor and you got overhead. Which of those cost buckets do you have control over? And what we would argue is that you have minimum control over the direct cost. Supplies material, sure you can not negotiate or buy in bulk or what have you, but at the end of the day, the market pretty much sets that you have very little control of the overhead cost. And I would also suggest that it's typically not a big enough needle to really impact profitability, as we like to say. You can't go from two ply to one ply toilet paper and become profitable. You know, back during COVID Mike, everybody's scared. Right before PPP came along. We, we, you know, what's gonna happen, what do we need to do? And, inbox is full and, and the, voicemails are full and everybody's calling in. And so I'm taking those calls and I get on a phone call with an entrepreneur and they'd say, you know what? I, we, we gotta change. We, we gotta, we gotta save some money on expenses. I, I've been digging in and, we're canceling satellite radio. I'm like, okay, well that's$19 a month. Great. We, we only have 236,000 more dollars to do something with. You know, it's just not a big enough lever. But the biggest lever you have is labor. In any business. And so it becomes a mathematical equation if I have control over labor. And I'm gonna, we're gonna speak to how you measure that here in just a second with LAR. If I have control over labor, and by the way, it's the only cost that shows up every day with an attitude. Sometimes it's a good one and sometimes not so good, then I can just calculate, here's what I'm gonna bring in. Here's what I need to set aside for total expenses. Here's what I need to set aside for profit. The number left is your salary cap. And then compare that to what you're, you're actually spending on salaries. if, if there's room, I can add people. If there's not room, I can't, I got, I've got a problem somewhere if I can't and, and my team's telling me, ah, we're, you know, we're bleeding from our air, from our eyes and our ears. We gotta have help. Mike, any thoughts there on, salary cap before we talk labor efficiency?

Maxon 17:26

No, it's pretty. It is pretty self-explanatory. I mean, you gotta sell to the labor you commit to, and if you can't gotta adjust.

Brandon Gray 17:35

Yep, so, so then the second metric that we look at is, well, how effective and efficient is my labor? That's a little bit of a different view of labor because most folks look at labor as a percentage. I don't know many people who like to be thought of as a percentage, right? Labor is truly an investment. When you look at a piece of equipment, we always talk about the return on investment. I'm gonna get with it, right? If I buy the latest and greatest piece of equipment, this is all it's gonna create, and efficiencies and the return I'm gonna generate. Well, your team is the same way. They're an investment and I invest in them every time that we run payroll. And in return, I expect a return on that investment in the form of gross margin, contribution, margin, and ultimately profit. And so labor efficiency measures for every dollar I spend on labor. What is that labor generating in return, in the form of gross margin for us? If I put a dollar into the machine, does it gimme$2,$2.50$3? And you start to watch that over time and determine, okay. Where should I be at? When am I getting the highest returns? What was my team structure like then? What was my makeup like then? And so, Mike, going to your point, you know you're saying, Hey, and I agree with you a hundred percent. Most folks are saying we need more people. Well, the numbers may tell us something completely different, that you're spending plenty on the people. You might not have the right people, you might not have the right systems, processes, and that's where we gotta dig in and determine.

Mike 19:16

So what, tell me what's, what's the actual calculation of labor efficiency ratio?

Brandon Gray 19:21

solution? Great question. So I'm gonna throw a few terms out. and, and granted this is, again, we're on a podcast and so it's kind of hard sometimes to visualize these.

Mike 19:31

Everybody pull over

AI and Productivity Gains

Brandon Gray 19:32

Put yeah. Don't, don't have a wreck right now as you're, as you're, as you're mentally viewing your profit and loss statement. All right, so the first term we wanna cal, or the first number we wanna calculate is this term we call gross margin. And for you accounting nerds that are on, and by the way, I'm one of them, we're gonna define gross margin a little bit differently than the accounting textbook does. Okay? Very simple. Gross margin is revenue minus your non-labor direct cost. All right. I wanna take labor and I wanna separate it. Okay. So it could be supplies, materials, subcontractors. If you're a, a services based business, you may have zero there. You might not have any, any non-labor direct cost. Okay? So take my revenue less non-labor, direct cost, that gets me gross margin, all right? That that basically is what's being generated to pay for my labor and my overhead. We then divide that gross margin by your total labor. We will keep it real simple. You don't have to include taxes and benefits. Okay. Just salaries, just wages. Gross margin divided by total labor gives me my total labor efficiency. That tells me for every dollar I spend on labor, what is being produced in gross margin. Once you do that calculation, I'm gonna, I'm gonna give you a data point here, okay? For 90% of the businesses out there, you have to be between a 1.8 and a 2.1. To be, to reach a, your profit target to be considered a healthy business. So divide your gross margin by your, your, your labor spend. That number should be between a 1.8 and 2.1. So it tells me I get a$1.80 for every dollar I pay in labor, up to$2 and 10 cents for every dollar I pay in labor in the form of gross margin.

Mike 21:13

And that becomes so important because the clients I have that use that number. The conversations they're able to have are so much more powerful, where, you know, someone, you know on the leadership team says, well, you know, we're not able to do those things because we're short staffed. We just need more people, you know, and, and the CEO could look and go, wait a minute, you know, our LER is 1.78, you know, last year at this time we were at 1.9. Help me understand why we're short staffed. You know, are we, maybe we're over servicing our clients. Maybe we've got the wrong people. There are a whole lot of que, but maybe we're prioritizing too many damn things. But short staff doesn't ring true. If you've got or, or at least you can challenge that now that you've got number that actually tells you what your ROI on labor is.

Brandon Gray 22:09

Definitely.

Maxon 22:10

I believe that it's the ultimate equalizer of helping you ask the questions around, do I have the right person in the right seat, doing the right thing at the right rate? And when you see LER, that's either really good or really bad. It makes you look at those four things. So if it's really bad, do I have the right person? Maybe have a really high price person when I could have used maybe two.

Brandon Gray 22:32

maybe two,

Maxon 22:33

Maybe instead of like senior people you use associates, then the right seat, it's like, is that person making a lot of money doing downright work? and then you have, the, you know, the, the work they're actually doing. Are we actually billing high enough for it? Or maybe, maybe we're, we we're under pricing on a service. and so you, you. That, that labor efficiency number brings about several questions that make you examine the inner workings of your business in ways that I, you know, as, as me, I've been doing this for a while, as ways when I started going, wow, that really, that number right there makes me ask all kinds of questions. It's not just, is my labor inefficient? Is the things around the labor potentially inefficient as well?

Cash Flow Shift

Mike 23:15

Are, are you finding in this. Age of AI that we're living in. And depending on when you're listening to this, maybe robots are doing all of our jobs now anyway. And, none of this matters anymore. You're just listening to this for fun. it's like a history lesson. But in this age of AI where, you know, I just a few weeks ago created myself and I'm not a programmer, an app that. It is better than something I spent 10 grand on and took a month of a developer's time. I did it myself in about three hours. And you know, there, there's some amazing things, some scary things too, but some amazing things we can do in ai. Are you finding that people are raising their LER. Targets because they're able to be more productive because of all the, the opportunities AI brings, or are you not quite seeing that linkage yet?

Cash Flow Reality Check

Recording Glitch Break

Maxon 24:16

From my experience, the clients that I work with are. Heading towards that, they haven't fully there yet. So what, what I'm saying is that they maybe purchased the ai, you know, components to help them do that, or they're working that in. They haven't, they haven't got there yet. But it is a major, I, I don't have one that, that isn't a major initiative in 2026 is to get that implemented. and so yeah, it's gonna happen.

Trade Capital Explained

Brandon Gray 24:44

I would say the same. I mean, there's, there, there are a handful of cases to where something has been completely automated and the, the human labor has been removed, and I haven't seen a lot of cases to where folks have downsized because of it. They have been able to grow and not have to add talent, or they've been able to take that talent, move it to other areas. Mike, I kind of, I kinda compare it to when computers first came out. You know, when they, when, when they become more wide stream and, and popular there, there was a time period there to where the early adopters were able to do some things and it would just blow your mind away, right? I mean, the calculations they could do and you know, you using Lotus 1, 2, 3 and this, that, and the other, and so much faster. But there was a learning curve and it took some time for everyone to fully understand how to use the tool. And, you know, in some cases they spent as much time trying to get the tool to do the work and do it properly as they did just doing the work the old way. And that slowly started to erode after, you know, the technology improved. And I think that's kind of where we are in a lot of instances with ai. you know, it, it's definitely has some pretty substantial impacts and potential for impacts. Is it being widely used and a large deal of efficiency generated? Not just yet, but it's coming.

Mike 25:55

Yeah, so I want to shift focus from labor efficiency to cash flow. So we mentioned before this, you know, revenue is vanity, profit is sanity, cash is king, and.

Brandon Gray 26:09

And

Mike 26:10

I find when I'm working with a leadership team, they've got their P&L and some are sharing, some not most, most are sharing it, but when we start to talk about cash, people's eyes glaze over a little bit or they get confused looks. Even the CFO, I'm like, all right, I understand what your margin target is. I've got, you know, you're EBITDA target, you know, we've got that. But, you know. What about, what about cashflow? Like, what is, what is success in cashflow? And they're, they're, even the CFOs are sometimes confused about how they should measure it. So how do you, how do you find, how do you suggest. leadership teams, CFOs, how should they be thinking about measuring, monitoring, setting goals and targets for cash flow?

Speed Up Cash In

Dell and Negative Cycle

Brandon Gray 27:04

So, Mike, I, I'll have to start with a quote from one of our clients about cashflow.'cause I think this really summarizes it. He says. Cash is like my waiter when I'm waiting on the check, they are nowhere to be found profitable. Business, it's running, everything's great. And you look at the bank account and you go, where, where'd the cash go? What's happening here? and, and so I'll, I'll give you a couple things we like to look at. Obviously when we back, you know, like we talked about with profitability and the levers and, and what have you, it's really important to understand. The impacts of an activity on the P&L and what that's going to do on your cash as far as cash flow. And that, you know, like I said earlier, at the very beginning, I mentioned the ripples of a great leader. You know, cash flow's like the ninth and 10th ripple. You know, a great leader can kinda look at and go, oh, if we bring this new service or product to market, here's what it's gonna produce. But can they walk that all the way through to the cash flow implications?'cause it, it could be great for profit and terrible for cash flow. So what do you wanna look at? I'm gonna start with this concept we call trade capital. So if, if, if you, per we, we, Mike mentioned the Simple Numbers book. We have two books, simple numbers, straight Talk, big Profits, and then the second one is pretty creative in name. It's Simple Numbers 2.0. if you look in Simple Numbers 2.0, we talk about this concept that we call trade capital. So when you're running a business. There are certain things from a cash flow perspective that you have to fund inside that business. So I'll give you an two examples. The most, two most common accounts receivable, let's say you're a service-based business. You work for 30 days. You pay your rent, you pay your employees, pay all your, your marketing expenses, pay all your general overhead. At the end of those 30 days, you send that, that client an invoice, and they have 30 days to pay. So for another 30 days, you pay your team, you pay your vendors, you pay everyone. We're 60 days into this of you paying for everything, waiting on that receivable to come in. So we call that funding receivables. Most businesses have that, okay? So that's something you have to fund inside your business. You need cash for that. The second most common one is inventory. Whether you're manufacturing or you're in retail or in distribution, you have to go buy the product or the materials. You have to sell it or produce it, and then hopefully you get paid at that time. Some, not always, but hopefully you get paid at that time. Well, that might be a 30, 45, 90 day process. So you have to fund the inventory inside your business there. And there can be a handful of other little things like prepaid expenses and what have you that you have to find. So think of the things you have to cover inside your business, and then there are things that others cover for you. You get terms on them. So. Some, some of your, vendors give you terms, they give you payables, right? So on those supplies and materials I mentioned earlier, you might have 30 days before you have to pay them. You know, others you might only have 15 days. your landlord may give you two days, right? So those are things other people fund for you. You also get to use a credit card, right? So you get to, rack up all the expenses and get all the miles and, and all the fun stuff there, and, and then you pay 30 days later. So if we look at what you have to fund in your business, minus what other people fund for you, that gives us what we call trade capital. Okay? Now that number in and of itself doesn't have a any connotation to it. But if I compare that trade capital to a percentage of my annual revenue, and let's just say it's 6% of my annual revenue, and then I compare my profit to a percentage of annual revenue. And let's say that's 4%. I got a problem. It takes more capital to fund the business than I can generate in profit. And doesn't mean I'm not profitable, it just means it requires more for me to cover up front. So now, anytime I grow, I've got a gap. I need capital. On the other hand, it could be my trade capital is 6% and my profit's 10%. Well, guess what? You generate cash. Whenever you grow, you, you add dollars to the bank account. And so that's a very high level understanding of it, but it kind of helps you to know very easily am I, do, I have a, a cashflow profile that requires capital to grow or produces capital when I grow. And I then can start to use that information in making decisions. And you can even break it down by activity. You can say, okay, if we, if we were to start offering this new service or product, what kind of trade capital requirement is it going to produce? And am I gonna be, as it grows? Is it gonna eat cash or is it going to produce cash? Mike, any thoughts on that before we go through the next one?

Maxon 31:56

Yeah. I, I just think that how people get creative in getting their dollars in quicker is the key point of that trade capital signature. And everybody, you know. Hey, it's nice. I want to give 30 day terms, but maybe you can give 15 and they can pay you quicker. Maybe, hey, down the credit card. We auto charge every month. Or, hey, there's, it's just due upon receipt. Or we bill it, you know, for example, I got a couple law firms I work with where they were billing their clients just once a month, and so the invoices went out on the first. Well, I'm like, how about every time you got a new client? You send those out for the new ones on the 15th of every month, and now we got stacks of cash coming in at different times on a, on a better cycle of, of money coming in the door. So the trade capital that Brandon's referring to, when it's looking at, Hey, how do I improve my trade capital? Just get that money in the door quicker upfront deposits, whatever you need to do, that'll address that trade capital issue pretty

Mike 32:56

Yeah, I think, I think a great example. It's an old example, but, but I think it's a good one, although you guys will tell me.'cause what we're talking about to some degree is like shrinking the cash conversion.

Brandon Gray 33:05

right?

Maxon 33:06

Correct. Yep.

Buffer Capital Targets

Mike 33:07

and the, the story I always used to tell was Dell back in, I dunno, is it the nineties? Or, or, but, but when they went from, you know, way back, the way people used to buy computers was you go into a store and, and buy a computer and Dell had to make that computer, get it out to comp USA or whatever. They were selling computers back then, and, and they may. They may fund that whole computer, build the computer, and they may not see that money back from the retailer for another 60 days when they changed their business model to be one of the first places to go online and have people go in and customize the computer they wanted. But, but what did they do right before they left the website, after they ordered it? They paid for the damn thing before Dell even built it. And in some cases before they had the raw materials. So they went from a cash conversion cycle of 60 days or whatever it was, to a negative cash conversion cycle, which means they were actually bringing money in before they had to, to get money out. And is, am I right in saying

Brandon Gray 34:16

you're spot on. Yeah. They, they would have negative trade capital or very low trade

Maxon 34:20

Yeah.

Market Trends Data

Brandon Gray 34:21

and, and you know, as you kinda look at, what are some, some moves that you can make to achieve that? You know, Mike mentioned, you know, can you bill faster? Those kind of things Without a doubt. we've got, we've got a client who, if you wanna buy their product, you pay for it upfront. The industry norm is that we pay you in 30 days. And so everyone goes, well, how did you pull that off? And he said two things. The first is that we asked if you don't ask the answer's, always no. And secondly, we deliver a product that's superior to everyone else's. So if you want the best, that's how it works. So you gotta be able to very effectively communicate that competitive advantage. Most companies can't do that. if you can put those two together, you can go a long way. And then the other way is, you know, let's say you're dealing with the bigs as we call'em. You know the apples, the Googles, GE, you know these massive conglomerates. Well, you can tell them you're gonna have to pay half up front and they're gonna tell you have a Coke and smile and you can tell'em how much better you are. And they go, I don't care. Right? And so that's where many times you go to your vendor partners. And go, Hey, I got this massive contract with Apple and here's what they want and here's what I need from you. I'm gonna make a massive order with you, but you gotta help me in this. You know, I can't be the bank on my own. We're, we're we, we have what we, we refer to as a US problem, not a me problem, right? And so, and many times your vendors are willing to work with you, but, but you gotta go and ask and talk to them. And those are just a handful of ways. There's some other things, that can be adjustments there with trade capital to help improve it. And of course, getting profitability up is the other one.'cause if I'm more profitable than, as I compare those two metrics, I generate more in profit to be able to cover that cashflow gap. the other metric. Is what we would call core or buffer capital, which is basically your sleep well at night number, how much cash do I need to have on hand? Not every business is gonna be able to hit this because some just have an extremely high trade capital requirement. They gotta carry a lot of inventory and they carry receivables. I'll tell you if you have to, if you have to carry inventory and you have receivables, it's a really tough game when it comes to cash flow. But if you don't, what you need to aim for is I need two months of opex and direct labor. A zero balance on my line of credit and my taxes set aside separately. And that that data point came from studying thousands of businesses. And what we found is we plotted out their cash flow cycles, is that if you had that two months off, x plus direct labor and zero on your line of credit, your taxes set aside, the market could throw just about any storm it wanted to at you and you would survive. You had plenty of runway. On the flip side, if you have that amount of capital, you can go do some really fun things. You can look and say, Hey, I wanna try a new marketing technique. I wanna launch something new. I wanna take a risk on a salesperson. I wanna expand into another territory. Well, if you have that capital, you can make those bets, but if you don't have that capital, you don't get a choice.

Mike 37:27

Yeah, and I've seen too many companies. Put in, put in, in a situation where they have to make dumb short-term decisions based on the fact that they just don't have enough capital to make the right decision. And it kills'em. And it, and it's, you know, it's, it's the most important thing you've got is, is, is how much cash you've got. And it's the thing that most leadership teams screw up in, in terms of measuring it. They figure, well, if I'm profitable, everything's gonna be okay.

Brandon Gray 37:56

Right. And, and most of the time. If you're a solid business that is profitable, but it's growing and you have a large amount of trade capital requirement, I mean, you gotta buy inventory, flow signals, those kind of things, right? The bank or a lending partner typically will work with you. You, you can. You can make a pretty good argument. It becomes a great win-win. If you're not profitable, good luck. And that's why that labor efficiency's so important and that salary cap's so important and why your leadership team is so important because you really start getting your hands tied. Whenever that happens,

Discretionary vs Necessity

Mike 38:32

Both of you work with and others in your organization. You work with a lot of, you know, founder led, owner led, entrepreneurial types of, of, of companies, and. You know, I see in, in my work, I work with a small number of companies in a, in a really deep way. So it's hard for me to see the bigger trends. I can tell you what's going on at my companies, but, but you guys see a lot more companies. So what's, what's going on these days in kind of the entrepreneurial economy that may be important for, for us to know about?

Brandon Gray 39:10

Mike, we could talk two days about this. and I love it. I love it. so a little background. We have a model that we track that has a hundred of our clients in it, going back pre COVID. I think it actually goes back to like 2018, 2017, somewhere in that neighborhood. and to our knowledge, it's some of the best information available around how entrepreneurial companies are performing.'cause you think about it, that data's not readily available, you know? Right Now what does the government know about your business? very little. If anything, they probably know what payroll was

Mike 39:43

we, and we want, and we wanna keep it that

Brandon Gray 39:45

Oh, no doubt. No doubt. And, and sometime this year they'll find something out when you file a tax return. Depending upon how accurate all that information is. Right? But this is data that's coming right from under our clients. And so it's, it, we've cleaned it up in terms of, you know, it's accurate, it's correct. and so, and it is geographically diverse. It's across the country. it's industry diverse, multiple industries. it's from companies that are$2 million to a hundred million dollars, right? So you put all these together and you look at'em as one big company. Here's what we're seeing. Revenue continues to grow. It's somewhere between 8% and 10%. Typically speaking is kinda what you're seeing year over year. But what did we talk about earlier? Revenue is what?

Mike 40:28

Vanity.

Brandon Gray 40:30

profit has been flat to declining. So I'm gonna give you a data point here that's gonna blow your mind. If we go back to 2021. Those hundred companies have increased revenue by$300 million. Profit is unchanged.

Mike 40:54

Wow.

Brandon Gray 40:56

Okay? And you go, wow. Well, the increased revenue, most of that revenue increased was through pricing inflation, right? Profitability is not changing. It is a difficult marketplace without a doubt. now there's a couple of things if you dig a little bit deeper into the data that start to, to show that are really interesting. So the first in the current marketplace, and I'd say this has been the case for about the past 12 months or so. What you do is more important than how you do it. Okay? So let me explain that a little bit. You can be one of the best online retailers or best mid-level restaurants out there. You can be operationally efficient. You, you can follow everything to a t. It is going to be extremely difficult for you because consumer spending is tight. People just don't have the extra money to go spend on a, on a discretionary item. Okay?

Maxon 41:53

if it is a business that people can defer or they have a deferred mindset with it, you know, I use examples of trees if you're, if you're a company that cuts down trees for people, residential tree care or something like, look, unless that tree's roots are wrapped around my pipes. I can wait a few months to, to do it. if I wanna, build that shed, I could wait a few months potentially to do it if it's, you know, just something I wanted to do. Anything that is adopting a deferred mindset has been an issue.

Profitability Before Growth

Brandon Gray 42:25

Yeah. So if, if you're in a necessity type of business, so think like plumbing, hvac, those kind of things. Hey, if the toilet's clogged, you gotta have to, it's gotta be fixed. It doesn't matter if you're getting no overtime. It doesn't matter if I didn't get my 40 hours this week, it doesn't matter if I'm not getting a, I gotta fix it. So those businesses are actually doing quite well, even if they're not operationally as great as some other businesses out there. so that's the first thing that really stands out in the marketplace. the second thing is the difference between companies that are a hundred million and above in revenue, I'm sorry, 10 million and above in revenue, versus those that are below 10 million in revenue. If you're below 10 million in revenue, it has become extremely difficult. To leverage operating expenses, and in many cases, extremely difficult to actually grow top line revenue. So those bucket of companies, we're seeing them down in profit from 24 to 25. Our data's through December of 25, they're growing by less than 1% in top line. And you look at that and you kinda go, why? Why is that the case? Well, we got some theories. And looking and talking to those, those clients. So the first theory is just kind of the economies of scale. You know, if you send three people to a conference and a, a competitor that's$20 million since three people to a conference, it's the same cost, but it's much more expensive to you as a, as a$2 million business, right? And so as inflation continues to impact overhead spend, they're just not able to absorb it. Secondly, when you look at leadership teams. For companies that are above 10 million in revenue, they typically have a stronger, more diversified leadership team. And so when it's difficult to go and get a sale, when it's difficult to figure out your, your competitive advantage and communicate that effectively when it's operationally more complex, you need that level of horsepower in the current marketplace to compete. And they're doing it. They're taking market share.

Mike 44:32

Are you seeing a difference, I guess, from both of those standpoints, from that 10 million level you talked about and also the, the revenue growing, but profit. Not growing and profit is a percent of revenue shrinking. Are, are you seeing a difference between B2B and B2C? Some of the examples you gave, you know, the, the HVAC company, the, the company that's cutting down trees are more B2C examples. Are you finding the same thing in the B2B world?

Brandon Gray 45:03

Yeah. If, if it's a discretionary service, B2B, it's still tough. Maybe not quite as tough as B2C discretionary, but it's still really difficult. I don't consider this an the discretionary expense, but a lot of entrepreneurs do marketing, marketing stuff. and the, and the, you know, the companies that are not growing marketing is down 7%, and the companies that are growing marketing's up 10%. So things like that, you know, they're, they're cutting, insurance, it's, you know, it's a necessity. You gotta have it right. Insurance is going up 15 to 20% in most cases. So, yeah, I would say, Mike, that it might be a little bit more difficult if you're B2C. Just because there's less flexibility with consumers than there are businesses, but pretty much anything discretionary is tough.

Mike 45:50

So interested in your takeaway from all that. I'll tell you what my takeaway is, and you could challenge mine or, or, or, or agree, agree with mine or not, and then add your own. My takeaway from, from what? You just said is, that doesn't mean well I guess if you're listening to this and you're a business leader, you're shit outta luck. That's not what it

Brandon Gray 46:12

no, not at all.

Mike 46:13

What it means is in order to be successful, you better be doing everything you can to. Know your financial health, to be able to project your financial health, to be able to make the right decisions on, you know, on labor, you know, and the other big spends. And, and, and that's all your world. And then from my world, you know, you better be surrounding yourself with not only people that get you to your labor efficiency numbers, but you better surround, be surrounding yourself with the right people because mediocre ain't gonna cut it.

Simple Numbers Wheel

Brandon Gray 46:52

it. Yeah. Me mediocre will put you into bankruptcy right now. No doubt about it. I mean, it, it, the, there is no margin for error in the marketplace, you know, used to. From 20, let's call it 2009 to 2021, 2022. If you're CRO, if you're your revenue manager, whatever you wanna call'em, if they weren't doing a great job, it didn't even show up because there were so many people lined up to buy your service or product. it masked it, and now it'll stick out like a, like a sore thumb. So in the current marketplace, we'd love to say you have to be profitable with what you have. Meaning at your current level of activity, you gotta be profitable. It's really difficult to grow into your footprint, meaning I got a couple extra people. We're just gonna absorb it and grow into it. I can't tell you the number of folks that are running losses every month, buying hope that they're gonna be able to grow into it. It's really difficult to do that. So you gotta be profitable with what you have. You have to have tight control over the business. Like I said earlier, the days of it being easy are gone. As Warren Buffet said, it's when the tide rolls out, whenever you find out who is swimming with no shorts on, if you don't have great control right now, you're, you're going to, be one of those folks that that has no shorts on.

Resources and Wrap Up

Mike 48:12

So I, I wanna repeat, I wanna repeat what, what Brandon just said because it's so important and, and I see, you know, my clients falling into this trap all the time as leaders, you know, we're, we're, we're very optimistic about our, our businesses. We, you know, we believe there's, and, and, and that, and that's great. You know, I hope you are, but. The days of saying revenue is gonna solve my profitability problem. Which is always the first place people go, how we, how are we gonna increase revenue to solve the profitability problem? It's like, yeah, increase your revenue, let's figure that out. But don't do it to solve your profitability problem, solve your profitability problem at the current revenue. And, and it's just, it, it's sounds like an obvious, logical thing. But it is not people wanna solve their profitability problem by increasing revenue by 25%. And yeah, go increase your revenue by 25%. That's great, but, but that doesn't mean you're solving, you've solved your profitability problem.

Brandon Gray 49:13

Exactly.

Maxon 49:15

One of the things that I try to hone into people to help this, and I'll try to make sure everyone visualize it. So imagine a wheel, and this can move real fast or real slow, but. We call it our simple numbers playbook. When we work with clients and engage, and Mike, this hits right on your point. You gotta assess the market conditions for profitability and scale. You gotta clear distortions. Number two, we're moving around the wheel. Then get profitable with what you got, what comes after that? Get capital efficient and get fully capitalized for those out there that, that you gotta stack cash is what I'm trying to say, and then come around to that wheel. How do we use that cash grow or do we hold onto it to then take, make a big play in the market for, for some sort of action. And so you move around that wheel and what Mike was saying there and and Brandon is, is, Hey, how's that market looking for us right now? How is everything in our data? Have we fixed our labor efficiency? Have we done the right things within our current data set? And then are we profitable with, can we get there? Can we get the double digit profits, 10, 15% with that? And then, hey, get the cash. Move back around, what do we do with it? And you just move around that wheel and you gotta ask yourself, in a market where we don't have a lot of market growth, so it's a lot of people going after market share, you're gonna be really digging into each one of those, points on that wheel there of going, Hey, can I get it? Can I get that here? Or can I get profit and just hold my cash until bam, I can make a, a major play to, to beat my competition.

Mike 50:46

So, so as we start to wrap this up, you know, I'm hoping what. You are taking from this as a listener is, you know, there was certainly some specific concepts that I hope you, you grab and learn from, like labor efficiency ratio, like the idea of, of trade capital and core buffer and, and you know, all that stuff. But, in addition to that, I hope, and I think more importantly. What you take out of this as a leader is that you got some work to do and maybe a more positive way to say it is there's some real opportunity to understand your numbers at a much more. actionable level, then you probably understand it to make sure your leaders understand how they can take actions based on the numbers, whatever numbers are important to them as well. you know, that's what I hope you're getting from this and saying, oh crap, you know what? There's a lot of opportunity. I've gotta dig in and understand this more. And that being said, let, let me ask you guys if. You know, as people say, Hey, there's an opportunity here. I've gotta dig in, you know, you've mentioned both of your books, simple Number 2.0, and the older books, you know, simple numbers, straight talk, big profits. where else should people go if they wanna find more out about you, your company and and, and how you might be able to help them?

Brandon Gray 52:18

So, a couple places, obviously you got the website right? SimpleumbersCRI.com. Mike was on a, a podcast with us a couple of weeks ago, and so the, the simple number's, profitability playbook. is another great place to go and, and get some chunks of, of, information and hopefully some, some things that can, can help you improve as an entrepreneur and run a better business. and then, you know, I got myself, Brandon Gray and Mike Maxon. We're both active on LinkedIn, so you can message us on LinkedIn as well. But, you know, I think one, one of those three ways is probably the easiest way to either learn more or find out more about us.

Mike 52:52

Beautiful. Well, I always say if you want a great company, you need a great leadership team. Understanding your financials is a big part of that. So Brandon, Mike, thanks for helping us get

Brandon Gray 53:04

thank you. It's been great.

Maxon 53:05

Thank you. Appreciate it.

Brandon Gray 53:06

you. Appreciate it.