How Much Profit Should Your Business Make?
Introduction:
This week, Shawn Busse, Paul Downs, and Jay Goltz go right to the bottom line. Shawn points out how easy it is for businesses to fool themselves into thinking they’re more profitable than they really are. Paul talks about how margins can vary from year to year, especially if an owner decides to invest in improving the business—as Paul’s doing right now. Jay says he’s long sought a 10-percent profit margin, but so far, he hasn’t managed to get there. Plus: Shawn explains how he solved his accounts receivable problem. And have you looked at the 401(k) accounts of your employees lately? If not, there’s a good chance you’re going to find that they’re not saving a whole lot. Is that just the employee’s problem, or is it also the owner’s problem?
— Loren Feldman
Guests:
Paul Downs is CEO of Paul Downs Cabinetmakers.
Shawn Busse is CEO of Kinesis.
Jay Goltz is CEO of The Goltz Group.
Producer:
Jess Thoubboron is founder of Blank Word Productions.
Full Episode Transcript:
Loren Feldman:
Welcome, Shawn, Paul, and Jay. Great to have you all here. To start today, I want to dig a little deeper into a question that Jay brought up a few weeks ago. And that’s how much profit a small businesses should expect to make.
Jay, you said you’ve raised this question in multiple business group sessions and never really gotten a satisfactory answer. I’m wondering why you haven’t gotten an answer. I mean, obviously, profit margins are going to vary across industries. But can’t you get a pretty good guideline for where you should be in any given industry?
Jay Goltz:
I’d say no. I think there are a lot of factors. First of all, what’s the highest bottom line? I’ve got a friend who owns a business. He’s got like a 30-percent bottom line.
Loren Feldman:
It’s not a picture-framing business, right?
Jay Goltz:
No, it’s not. There are businesses that have a 3-percent bottom line. I would think that most people would say, if you had a 10-percent bottom line, that’s pretty good. There are books out there that you can buy with a bunch of industries in it—of course, picture framing isn’t one of them—that you can look up what is the average profit of a printing company or whatever. And I’d say, 10 percent is probably good. Retail? If you look at the big retailers in America, they’re usually at 5 or 6 percent.
Loren Feldman:
Shawn, Paul, is this something you guys think about?
Paul Downs:
I do. I’m in a CEO group, where we have a number of different kinds of businesses. And the guy who’s got the best margins is doing about the same gross revenue as I do, but he takes home four times as much money. He’s in a $4 million business taking home a million dollars a year.
Loren Feldman:
What kind of business?
Paul Downs:
He runs a company that does business valuations, SBA valuations for banks, and he’s an extremely smart guy who really has everything buttoned down. And it’s just like, he’s my hero in terms of running a tight business, but he’s also running a business where you don’t have to buy materials. You just have to pay people.
Jay Goltz:
Well, let me ask you this, because running a tight business certainly is part of it. But from my observation of being in five or six groups over the years, people that have really big bottom lines—I’m going to give you the checklist, and tell me if this is true in any of these—they’ve got some proprietary products, or they’ve got a patent. That would certainly do it. Or they’ve got some business that’s been around for years and years, and it’s got a brand name, and everybody wants to buy that. Or they’ve got one big, or only a few customers, and they don’t do any marketing, because they sell the buns to McDonald’s or whatever. So they’ve got that advantage. Or they have got some market advantage that most people don’t have. Does this guy have a market advantage? Why isn’t there competition going and doing the same thing he’s doing and undercutting his prices?
Paul Downs:
Well, there is. He’s just winning the battle. I think that what you brought up, that different businesses are just different, is really the gist of it. And then the other thing would be, how do you define profit? Because I’m an S corporation, and I’m the major shareholder, I tend to think we’re looking for something like 8 to 10 percent profit on an accrual basis. But then if you fold in my compensation and look at something called seller’s discretionary earnings, which is all this stuff I pay money for but I don’t have to through the business.
Jay Goltz:
All those fancy clothes you wear? [Laughter]
Paul Downs:
Yeah, the fancy clothes, the heat for the office, all those fripperies. I was close to 15 percent on SDE last year, but I think you also bring up another very important point, which is that there’s a lot of times profitable businesses are profitable because they’re not actually doing something that they need to do to secure the business.
In other words, your example of someone who does no marketing but they happen to have a huge customer. It’s like, okay, if you’re not investing in the things you need to make sure it runs without you or it could survive without you or anything where you might have been spending money but you just take cash instead, and I think a lot of small business owners struggle with those decisions, particularly when they’re trying to get started. They need to support their family, and they just decide, “I can’t afford to upgrade my software,” or whatever it is that sets them up for the future.
Jay Goltz:
I think the guy you spoke of has got two things going for him. One is, that’s a lot of business for a service business. So I think like if you’re a lawyer or accountant, I think if you can get your sales up to that, and you’re doing a good job, yeah, you do have a really big bottom line. That’s one, and two is, the fact that he’s hooked up with the SBA, he probably doesn’t have any marketing expenses—
Paul Downs:
No, no, no. He does these SBA valuations for banks. He’s not directly involved with the SBA.
Jay Goltz:
Okay, but still, he’s probably got 10 banks he has relationships with.
Paul Downs:
No, he’s got more than that. He’s got significant marketing expenses. He’s just very, very good at everything he does. He runs his business using the Traction concepts, and really does it right out of the book. And he’s just a fantastically good business person.
Loren Feldman:
Paul, could you give us a quick sense of what the Traction concepts are?
Paul Downs:
The book is called Traction. I can’t remember the name of the guy who wrote it. But it’s a set of moves that anybody who’s running a small business could implement. It’s about setting goals and holding people accountable, basically, and then doing regular reviews to make sure you’re hitting those targets. And if you have no idea how to run a business, that’s a pretty good place to start.
There are a number of people who’ve implemented it in my group, and I’ve implemented a version of it. And it’s really effective. It makes you look at, “Okay, how do I actually run this business? How do I make sure everybody knows where we’re going? How do I make sure I have the right people here?” It just gives you some ways to go about that. And if you were looking for a set of ideas to guide your actions, it’s a pretty good place to start. You may not end up implementing every single thing, like I didn’t, but it certainly gave me a lot to think about.
Loren Feldman:
Shawn, how much thought do you give to what your profit margin should be?
Shawn Busse:
Yeah, so it’s a really critical number for, I think, any business. For us, we’ve tracked it every year pretty closely, for… I don’t know, well over a decade. I mean, we’ve been around for 23 years, but I really didn’t understand it probably until the last 13 or so. And that was a real eye-opener for me. And I think that the big breakthrough I had was—and we’re touching on this a little bit—the artificial ways that business owners influence profit, either from the income side or the expense side.
So examples are: Some business owners load up the business with lots of costs to make the business look not profitable, because they don’t want to pay taxes. But then that creates some artificial views of the business, which can make it difficult when you want to get a loan or if you want to sell the business. I think it also just clouds your vision of what’s going on in the business.
And then other businesses are clouded in other ways, in terms of what y’all have been talking about, which is organizational debt. So they don’t invest in things over time, like software, people development, etc, etc. So they may have really good profits, but the business itself is suffering. And that impact happens over the long-term. So for us, I use a really simple idea, since we’re a service-based business, and we don’t have a lot of product coming through us. For us, we kind of treat 10 percent as a breakeven mark. If we get below that, red lights are going off.
Loren Feldman:
What do you mean 10 percent is the breakeven point?
Shawn Busse:
The way I came about this idea was somebody talked to me about how there will always be a mistake that you make. There will always be some unexpected event. Somebody files a lawsuit against you. An employee makes a claim. You really screw something up with a client, and you end up having to refund their money. There are just so many ways that a business is vulnerable. And what the 10 percent allows you to do is to have those events happen—the things that are out of your control, maybe an economic downturn—and you can live to fight another day. You’re essentially creating enough of a buffer to build resilience into the business. And if you fall below that—at least in my world, in my professional services world—you’re just very tenuous, and you’re often having to act reactively and emotionally, which is never very good for business.
Jay Goltz:
Okay, so the question is, you use the phrase “breakeven.” Correct me if I’m wrong, that’s really not breakeven. Wouldn’t it be more accurate, entrepreneur-to-entrepreneur, to say, “That’s our loser line. If I run the business, and I have a 2-percent bottom line, I’m a loser.” Like, that’s stupid. Whereas in your case, if you get to 10 percent, okay. You’re doing okay. Could do better, but you’re doing okay. It’s the okay line. It’s not really a breakeven line, it’s your doing-okay line. Is that not true?
Shawn Busse:
Yeah, yeah. No, you’re right. I mean, technically, zero is breakeven.
Jay Goltz:
Right.
Paul Downs:
But I think that Shawn just laid out pretty much the perfect example of what you need to have in reserve, and that when you take all the money out of the business, you’re starving it of any kind of durability or ability to swing with the punches.
Jay Goltz:
That’s a completely different thing, though. That’s cash flow. I mean, if you pulled all the money out as salary, okay, well, then it’s mostly profit. It’s not really a salary. That’s really a whole different subject of how much money you’re pulling out of the business. If you had it to pull out, that’s profit. You did well. You should have left some in there for cash flow purposes. But that’s really a different subject: it’s strangling the business.
Paul Downs:
I disagree. And I think that a lot of people are not in a position to make fine distinctions. They’re just trying to keep the doors open. And I’ve met so many people who are starting up a business who are not paying themselves. And so the first goal is: Pay yourself, and then look at profit beyond that. And because you’re working in the business, you cost the business something. The business doesn’t even really exist if the owner isn’t… no, that’s not a good way to put it. The business has no future if the owner isn’t paying themselves.
Jay Goltz:
Listen, we actually are on the same page. I certainly agree you need the 10 in case you need it, and all that. All I’m saying is, to really look at a business properly, you’ve got to pull out your salary as the market-rate salary. If you’re pulling out a million dollars a year, and you can replace yourself for $200,000, you really had an $800,000 profit.
Shawn Busse:
Correct. Yes.
Jay Goltz:
People should distinguish between those things.
Shawn Busse:
That’s super important. And I think a lot of accountants have given owners bad advice over the years to say, “Pay yourself as little as possible.” So you take your money in distributions, so you pay less taxes. And so it just starts to build an artificial version of the business, or the business owner just fundamentally doesn’t know what it costs to replace themselves. And so those are the problems you run into when you go to sell the business, when you go to get financing, etc. So I really advocate that folks build a true financial picture of the business.
Jay Goltz:
No, what you just said is the problem in the picture-framing industry. They go to sell the business, and it’s selling a job. They’re making $47,000 a year. That’s not a business, that’s a job. So they can’t find anyone who’s willing to give them any money. Because why would they buy a job?
So that’s the difference between pulling out what the market should be paying you and having anything past that. You said two things, though, that I’m really curious about. The first one, you said, “Well, people are burying it with expenses not to pay taxes.” What does that mean? What do you mean, they’re burying? Like, what? They’re putting their personal stuff on there?
Shawn Busse:
Yeah.
Jay Goltz:
Okay, that’s different. Okay, let’s call it the way it is then. Okay, then they’re putting a bunch of personal expenses on there. Okay. So the business looks bad, but it’s really because they are pulling out.
Here’s an interesting one. We all know you can’t deduct country club membership anymore. They changed that years ago. I’m talking to a person who does consulting, and he says, “Trust me, they bury it in there. They still do it.” That was interesting to me. I didn’t realize that. They just don’t call it country club membership. They bury it in their financials. To your point, Shawn, people are burying expenses in their business. And it looks like the business isn’t making money, but they’ve got cars for everyone in the family, and the country club, and the whole thing.
Paul Downs:
Well, that’s why there’s the concept of seller’s discretionary earnings. When someone’s picking apart your financials, looking for what the business is really doing, they start flagging those items and looking at, “Okay, well, if I bought this business, and I wasn’t paying for my brother-in-law, what would it really be doing?”
Jay Goltz:
I think the phrase they use—correct me if I’m wrong—they call it “recasting the financial statements.”
Shawn Busse:
Yeah. One other thing I think that’s really important: Are we talking the same language? Are we talking percent to top-line revenue? Or are we talking percent to gross profits? And that’s a whole other thing. I’ll run into a construction company that does $80 million a year, but so much of that is just passed through. And so, are you measuring your financials on the same thing as a service-based business?
Paul Downs:
Right, well you really have to compare to people in your own industry, doing similar things. And the rest of it is just a way to feel bad. Like, I’m a manufacturer. I’m comparing myself to a guy who’s not a manufacturer. He doesn’t have to buy materials. And yeah, his business is just different.
Shawn Busse:
But you can normalize that. I mean, if I run into a manufacturer who has a really high cost of goods sold, oftentimes, I’ll just figure out what their number is if you back that out, and then do the percentage of the profit of that number, the gross profit number. Because then you can start to compare different businesses to each other. And actually, it’s pretty telling, I have found.
Jay Goltz:
Well, there’s a new phrase that I just came up with called “ROM,” that would be called Return on Me. So let’s look at this picture. You’re in a business group. Paul, let’s use your guy, perfect example: Phenomenal, does 4 million, has a 25-percent bottom line, he’s making a million dollars a year. Great operators. So you can say, “God, I feel like such a loser. The guy’s got a 25-percent bottom line.” On the other hand, if you’re running a $25 million business, and you’ve got a 6-percent bottom line, you’re making a million and a half dollars. At the end of the day, you’re making a million and a half dollars. Now, it’s a smaller percentage of a bigger number, but you’re still making a million and a half dollars. So it’s not just about the percentage of the bottom line. It’s also: What’s the actual money you’re making?
Shawn Busse:
Yeah, and how complex it is.
Paul Downs:
The other way to look at it is, if I took the same money, and I bought McDonald’s franchises, what would I make?
Jay Goltz:
Okay, fair enough. But that’s why I say it isn’t simple. And then you could say, “How much aggravation does the guy with the 25…?” It’s not just the bottom line. It’s how hard you work, and how much grief do you have? How much financial exposure do you have? How much stress do you have? It’s complicated.
Loren Feldman:
Let me ask you, along those lines, when you guys are comparing percentages in a business group setting, are you asking what exactly the other owners are taking out? Or do you just accept the percentage they give you?
Paul Downs:
Well, in my group, each member takes a turn hosting the meeting. And that’s a pretty thorough look at their financials with the expectation that, yeah, you’re going to talk about how much you take out.
Jay Goltz:
I insist on it. I say, “Lookit, this is just a bullshit meeting if we’re going to sit here and put numbers up there and go, ‘Oh, look how much money I made’—but you forgot to tell us that you didn’t pull any income out last year.” Like, you cannot look at someone’s bottom line in a small business and not know how much money they’re pulling out to assess anything about the business. There are some people who are pulling out a million dollars a year, and there are some people who are pulling out $40,000 a year. So you have to know that.
Loren Feldman:
If you see figures for an industry, if somebody gives you guidelines—this is a reasonable profit margin for retailing, for manufacturing, for a marketing agency, whatever—do you assume that those businesses are being operated on the up-and-up, and that the owners are taking out a market salary, and not running their entire personal life through the business?
Paul Downs:
As soon as you meet the guy, after five seconds, you know the answer. [Laughter]
Shawn Busse:
That is so true.
Jay Goltz:
Like you, you look at Paul with his fancy clothes and his fancy car, and you think, “This guy is living high on the hog.”
Paul Downs:
Well, I’ll tell you what, Jay. I’m willing to answer the question of how much money I made here last year.
Jay Goltz:
Yeah?
Paul Downs:
Are you?
Jay Goltz:
No, absolutely not.
Paul Downs:
Okay. Well, there you have it. It’s a bullshit discussion, folks. I’m very sorry.
Jay Goltz:
No, it’s not, because I haven’t shared any financials to pretend like I’m making a gazillion dollars. So I’m saying, if you’re going to go ahead and show us your financials, it’s bullshit if you don’t tell me how much money you’re pulling out. I’m not sharing our financials, so I’m not giving any bullshit. I’m just telling you the truth as I see it.
Shawn Busse:
One of the things that has befallen me over the years—and I think this is pretty common—in the early stages of the business, the owner tends to use force of personality and will to motivate everything: Themselves, the employees in the organization, the new sales. And one of the things I notice is that those types of businesses, the kind of 4- to 10-person business, they’re usually underpaying their employees compared to the market. Because that charisma and the excitement of the new is motivating everybody.
And then what happens is, as the business gets more mature and starts to operationalize, the problem is, the payroll structure is really off. It just doesn’t match the market, and it starts to become really difficult to get really good people. And I see that catch a number of businesses, where they think their financials are really healthy, but if they were to do a salary survey, they’d realize that they’re 10 percent to 20 percent below market. And eventually, that artificial advantage catches up to them. It’s the same artificial advantage the second- and third-generation business owner has who owns his building, the same thing.
Jay Goltz:
I think that is very profound. I think that’s absolutely accurate. I would only add one more piece. I think they get away with it not just because of the force of the personality, but they’re finding people—you’ve just described me. You find someone who’s 22 years old, who doesn’t know anything, and you give them a job. And if you’re good at finding diamonds in the rough, while they’re still rough, you’re not having to pay them like diamonds. And they’re not there yet. And then as the business grows, and they evolve, yeah, you’re underpaying them. I’m paying everyone very well now. I’m not in that stage anymore. But no, you bring up an excellent point.
Paul Downs:
That’s an example of not actually taking money out that would be required to fund growth. Because if you don’t have good people, you really don’t have anything. You’re vulnerable to those people wising up at any given moment.
Shawn Busse:
Yeah, yeah.
Jay Goltz:
I read something really smart years ago. It said, “Most entrepreneurs con themselves to believe they shouldn’t be pulling any money out at the beginning of their business,” which certainly is a point of, “You can’t pull money out right away.” But some people go on like that for 10 years. And there is a point where you should be making enough money.
We’ve had this conversation with Laura. She admits she’s not pulling out anywhere near what she should be paying herself, for what she knows. She still does fine, but it’s artificially high, because she should be paying yourself more. And I’m not saying she needs to. You do need to readjust that.
Shawn Busse:
And probably her husband, too.
Jay Goltz:
Absolutely. Both of them.
Shawn Busse:
They’re like a two-fer.
Jay Goltz:
Exactly. So just to be able to monitor your business, know how you’re doing, use it to make judgments—I’m not saying you have to pull it out or not pull it out, but you do have to make that adjustment to make sure that you’re looking at it properly. What should you be paying? What would someone in your situation be paid? If you don’t do that, it skews the whole financials, especially if you’re only doing a million or two.
Shawn Busse:
I think this is such an important subject. Paul’s talked about this—and I’ve used this model too for a long time—is revenue per headcount. And that’s another good way to understand if the business is healthy. That really is talking about profitability. It’s just a different way. Once you get below a certain number, you’re in trouble. And above a certain number, you’re magical.
Jay Goltz:
That number varies dramatically, though, whether you’re making tables, framing pictures, or you’re an accounting firm. It needs to be done in the context of similar kinds of businesses.
Paul Downs:
Yeah, my sister owned a restaurant for years, and I ran the numbers on hers. And it just didn’t make any sense compared to mine, because there are a zillion people coming in and out of a restaurant, and there’s tips. You’ve got to understand how it relates to your industry, not that it’s universal.
Shawn Busse:
But you can, on the revenue per employee, take an accounting firm and compare it to an architecture firm, and you can compare it to a consulting firm. And those numbers are actually pretty close. Because they’re employing highly educated professionals in a market where there is an infinite supply. Just as you could probably compare a certain type of manufacturer, like, say, a manual machine shop to Paul’s cabinet business.
Paul Downs:
Yeah, all of the small manufacturing businesses do—because I ask everybody who I meet. And they run in a fairly tight range.
Loren Feldman:
What’s the range?
Paul Downs:
If you’re doing something like $80,000 per head, you’re almost dead. And if you’re doing $200,000 a head, you’re doing pretty well.
Jay Goltz:
So what’s yours?
Paul Downs:
Mine last year was $183,187 per head.
Jay Goltz:
Okay, mine—and I have a retail mix—
Paul Downs:
No, you’re in a different business with inventory as a significant part of it. If you just did the headcount, it wouldn’t actually tell you anything about a huge portion of where your money is going.
Jay Goltz:
No, for sure. But I’m not far off from you. I’m in the neighborhood. But you’re right. The reason why I can’t be $80,000 is simply, with minimum wage, what they’re at, and what people get paid—the typical lower-level employee now is making $35,000 year. So if they’re only bringing in $80,000, yeah, there’s not a whole lot left to pay the rest of the bills.
Loren Feldman:
Jay, do you try to manage to a specific profit margin?
Jay Goltz:
Yeah, and I’ve struggled with it.
Loren Feldman:
Is it possible?
Jay Goltz:
No, I’ve struggled with it. I do the entrepreneur lullaby, which is, “Okay, this year is tight. But next year, when extra revenue comes in, it’s all going to fall to the bottom line, because our fixed costs…” I’ve been telling myself that lullaby for 40 years. My business has gotten bigger. The problem at the moment is I’ve scaled.
My business is a much bigger business than it used to be, but, my God, trying to keep up with the real estate taxes alone. My real estate taxes are a fortune now. The business model has changed. Minimum wage has gone up. I’m not complaining about that. You’re paying sick days. My business model has changed significantly in the last five to 10 years. And I have to look at my business model and say, “Okay, I need to charge more for this or that,” and it’s a constant struggle, but I’ve never had a 10-percent bottom line.
Loren Feldman:
Paul, do you manage to a specific margin number?
Paul Downs:
Yeah, 10 is a pretty good target. Eight is not a terrible target for my situation. What I’m talking about is the margin on accrued revenues. And this is beyond my own salary.
Jay Goltz:
Now, the way capitalism works, Paul could say, “Oh, I would like to have a 20-percent bottom line.” And the reality is, that would be difficult, because then someone else will come in and be cheaper. That’s how capitalism works. I mean, if you try to go too high, you’re going to price yourself at a point that it’s going to make it easy for someone else to come in. But I think a 10-percent bottom line for your business, yeah, you’re doing really well. And I would say the same thing about myself. Would I be happy with eight? Yeah, sure. I’d be happy with eight.
Paul Downs:
Yeah, we did 8.24 percent on accrued revenues. The revenues were $4.75 million.
Jay Goltz:
Now that we’ve had this conversation, though, about professional service firms, like your other guy in the group, I would say, “Yeah, I don’t think that is high enough for someone in a professional services firm.” It probably does need to be in the 20 range or something.
Paul Downs:
Yeah, there’s another guy who’s got some kind of insurance agency, and his margins are in that range, too. Now, one of the other things is your margins change year to year, depending on whether you invest. So a concept that we’ve seen play out over and over in our group is that you have a couple of years of profitability, and then you decide, “You know what? I want to get to the next level,” and you’ve got to splash out some money to do it. And in those years, when you’re implementing that, you have lower profits. I’m going through that. We’ll be going through that this year with all this new marketing I’m doing. And hopefully it works, and then you ride for a little while, and then you make a decision about whether to repeat that or not.
Jay Goltz:
Here’s the question. I don’t know if you have the answer to it: Your friend from the group—is he working really hard? Is he doing the proposals? Is he sitting in his office doing podcasts like us? Or is he out there in the field doing the work?
Paul Downs:
No, he has set up a system. And this is where Traction was very useful, as it helped him build his team and operationalize all of the minute-by-minute work, set up training paths so that he can hire new analysts as they need them. And he spends his time—first of all, this is only one of several businesses that he’s running. The other two are software plays. One is, the best way to describe it would be Zillow for small businesses. If you’re running something like any of us, we could go to a website, punch in some parameters, and get a business valuation that would be reasonable, which I think is a fantastic idea. And I think this is the guy who could make it work.
Jay Goltz:
I’ll tell you what I’ve noticed lately. People who are my age who are starting to [decide]: Are they going to retire, not retire? You could take two people making serious money, like $700,000 a year. One’s a lawyer and one runs a business. The person running the business might be doing very little and sitting around doing nothing half the day. The lawyer has got grief and clients calling them and working. That’s a profession.
There’s a huge difference between being in a profession, and owning a business. And that’s why most people in professions, at some point, decide they don’t want to deal with it anymore. Whereas if you own your own business, and you’ve got it running well, it’s really not much stress. And you can come in when you want and leave when you want. Very different.
Paul Downs:
Yeah, my buddy, he just jumped a plane and went to Barcelona with his friends for a few days last week and came back and was like, “Yeah, it was awesome.”
Shawn Busse:
If you look at the failure rate of businesses, part of the reason I think you need to make it 10 percent or more—you need to focus on profitability—is that businesses can be really volatile. I know, Jay, you’ve built yours to a pretty high degree of stability. But you’ve been at it for many, many years.
Jay Goltz:
No, no, believe me, I’ve had plenty of rough years. Plenty of them.
Shawn Busse:
So what profit allows you to do is to survive to fight another day. What the 2008 recession showed us was how many businesses were out over their skis. And the truth is, that recession, while it was severe, it didn’t last that long. Maybe a year, six months for some. It hit me really hard in early 2010. And it was dramatic, but by the end of the year, I was moving again. But if you don’t have any profits to survive off of, you’re screwed.
Paul Downs:
Well, that’s always true. You need to have resources to survive in small business. You just need to be able to get them, somehow.
Jay Goltz:
You just brought up a very important point. This conversation started with, “What do you want your bottom line to be?” And you’re both absolutely right—there’s also the need for having a decent bottom line for all those reasons. So it’s both.
Loren Feldman:
Jay, let me ask you this: If you’re disappointed in your profit margin, and it sounds like there certainly have been times where you have been, what’s your first thought? Can you cut to a better profit margin?
Jay Goltz:
No, I’m living it right now. There are only a couple of numbers, or three numbers, that I have any control over. I have no control over the insurance—not much—the real estate taxes. The first usual suspect is always, “Gee, I think we aren’t charging enough.” That’s always the first one for me, and I’ve talked about that before.
The second one now is—and I just figured this out yesterday, talking about bought business models—I don’t spend a lot on advertising, but even the little I’m spending, I’m not so sure it’s worth it, because the world has changed so dramatically. Putting magazine ads in the upscale designer magazines costs a lot of money, and I’m just not so sure that pays for itself anymore, if it ever did.
And then, I’ve got something like, “Do I need a receptionist?” The phone calls are a fraction of what they used to be. People use their smartphones now. People email. I’m not taking in anywhere [near what I used to], but I still have a full-time receptionist sitting there. And I’m wondering whether I can’t move that around somehow.
So the first ones to look at, for me, are pricing and advertising, because those are the easiest to move. Cutting my way to it? Not happening. I’ve got solid people who have been here for years. If I hired some consultant, they would come in here and say, “You’ve gotta fire five people.” And like that ain’t happening. They’re doing something, they’re all doing something.
Shawn Busse:
You’re talking about such an important idea, which is: Do you cut your way to success or do you build something? And what Paul’s doing with going into the B2B space, after having gone kind of direct to the buyer for a long time, he’s creating something new, and he’s investing in that. It’s so rare you can kind of cut your way into winning.
Paul Downs:
It’s a bad model. It’s a model for a mature second- or third-generation business. But if you’re trying to grow something, you start at zero. What do you cut, right? There’s nothing to cut.
Jay Goltz:
There are a lot of businesses out there—I just deal with them—they’ve knee-jerked, and they cut their service back so bad. Like, I’m done. I call them. They don’t call you back. So there are companies where you can’t even find a phone number on their website. They decided they’re going to save some money and not have anyone answering the phone.
There are some companies making some really bad decisions now. They’ve gone past cutting fat. Now they’re cutting into the bone. And one day, someone’s going to find out, they put themselves out of business—though they’re not going to blame it on the service that they’re giving or not giving. They’re gonna blame it on the economy. They’re gonna blame it on their bank. There are a lot of companies giving horrible service now that rationalize it because, “Oh, I can’t find people,” which, give me a break. I mean, from my experience of being the customer, I would say 75 percent of my experiences now dealing with anyone are disappointing. And it’s gonna catch up to them. Am I wrong?
Shawn Busse:
No. I mean. Well, sort of. [Laughter]
Paul Downs:
Well, Jay, I’m staying the hell away from your lawn. I’ll tell you that. [Laughter]
Shawn Busse:
I think you’re putting your finger on something that’s been going on for a while now, which is market consolidation and monopolization. So it’s like, have you ever tried to call Google to get something done? You’re never gonna get a hold of anybody there, but they don’t care because they’re the game. They’re it. You don’t have a choice.
Loren Feldman:
This is not a consumer hotline. Let’s move to another topic. This is another thing that Jay triggered in his conversations about his interest in looking at going in the direction of employee ownership and an ESOP. He mentioned that one of the triggers was looking at his 401(k) statements and realizing how little money his employees were putting aside. I’m curious, Paul, Shawn, have either of you looked at your 401(k) accounts that your employees have?
Paul Downs:
Boy, well, we have a SIMPLE plan, which is a little bit different. So I don’t look at their accounts, but I see how much they’re taking out of their paychecks. I mean, first of all, despite multiple offers, half of my employees just won’t sign up for any retirement plan. And I haven’t gotten around to making it mandatory, because the minute I do that, it’ll cost me quite a bit of money. And I’m like—
Loren Feldman:
I don’t think you can make it mandatory. You can make it the default position, right?
Jay Goltz:
No, he means he’ll put some money in it. But I’m curious: You just said that’s not the kind of plan you have. Correct me if I’m wrong, but you could get a report.
Paul Downs:
Well, I could answer the question to the penny if you give me a minute, but it’s just a question of people don’t save that much money. I don’t actually understand what the long-term plan is for those people. And I don’t understand how any of us are going to survive, honestly. Like the guys who sell their business for 20 million bucks? Got it. I can see a way forward on that. But I have a feeling that that part of the answer is that… Oh, this is a stupid thing to say. I’m not gonna say it. Okay, nevermind. [Laughter]
Jay Goltz:
That’s part of your magic Paul. Give it to us.
Paul Downs:
All right, my feeling is we could all probably get by on a lot less than we think we can. And that when the moment comes, and you’ve got X amount in your retirement account, and you get real, you’re just gonna make it go.
Jay Goltz:
Okay, I don’t think that’s stupid. But here’s the problem, because I’m a little older than you, and I’ve been in business for longer. I’m not at all getting on a soapbox. Everybody should do what they want. If it doesn’t bother someone that their employees are going to retire or be disabled, can’t work, and they leave with not a penny, not their fault. Not their problem. Okay, I’m not gonna soapbox.
It bothers me though. And I’ve got lots of people who have been here for 20 years, who I care deeply about, who have helped me build the business. And it bothers me, because I’d never looked at the 401(k) balances, and many of these people have $4,000 in it. And that is extremely troubling to me. My friend told me when I told him, “Why is that your problem?” Okay, it is my problem because I’ve made it my problem. So I don’t think that it’s a case of, “They’ll make it work.” No, I think they’re going to be screwed.
Paul Downs:
But Jay, here’s how I look at that. I control what happens in my building. And I control my relationships with my employees, and I pay them above market, and we get bonuses, and I do everything I can to make this a good place to work. What happens when they leave? I can’t control that. I’ve had a couple of employees where I’ve really tried to sit down with them and say, “You know, I’m paying you a lot of money for a young single man. Why are you always broke and complaining about it? And I’d be happy to sit down with you and make a budget, blah, blah, blah.” And just was told basically, “Bug out. It’s none of your business.” So, okay.
Jay Goltz:
Well, you’re partially right. You say you can’t control it, but you certainly, if you choose to—and I’m not telling you you should—you could just say, “All right, we’re doing well, now. Everybody’s gonna get $1,000 in their 401(k) plan at the end of the year.” You could do that if you chose to, and you wanted to. That would be a little bit of a control thing. At least they’d have 40 grand when they retire—
Paul Downs:
The ones who bother to sign up—and believe me, I’ve tried to get everybody to sign up, and some simply will not do it—they get that money in there when we pay bonuses. Yeah, some of it goes in there. I’m not sure that the actual issue of people not having resources when they retire is something that a business owner can control. What you can control is what you pay people and what kind of workplace it is. And how they spend that money, save it, do this, do that, buy this car, buy that car: I’m not getting into that. Because it’s a waste of time.
Jay Goltz:
But you can’t say you can’t control it. You can help.
Paul Downs:
Okay, the decision to buy a $90,000 loaded pickup, as opposed to a $17,000 used Prius, amounts to way more than any thousand bucks I’m gonna put in somebody’s 401(k). And I‘ve got no control over that, and I have no desire to even get into that conversation. So yeah, you can tinker with these mechanisms. You can do what you should do, which is whatever the customary contribution from the company should be, and having the program available, but I can’t fix people’s finances. I just can’t, because I don’t control how they spend money or what they think about it.
Jay Goltz:
Clearly, none of us can. I’m just suggesting, just from my personal thing, I would feel better if, when they went to retire, they had 50 grand in the 401(k). Literally two blocks from my factory, there are 10 or 20 tents underneath the bridge. I don’t want to leave work one day and realize my employee can’t work anymore. They’re too old to work, whatever, and they’re living in a tent under the bridge. Now, I certainly can’t make them all great, lovely retirements in Florida, but at least if they had 40 grand, 30 grand, 20 grand, something. That’s totally my choice. I can’t fix their retirement. I’m not telling anyone else to do it.
Paul Downs:
Forty grand is peanuts, too.
Jay Goltz:
You know what it is though? It’s 40 grand better than nothing. That’s what it is.
Paul Downs:
Okay. But again, the real answer is a holistic approach to somebody’s finances over their whole life. And when I give people a good job and pay them well, I feel like I’ve done my part. And the rest of it is up to them.
Loren Feldman:
Shawn, how are your employees doing? And what are your thoughts on this?
Shawn Busse:
I mean, I always try to remember that I’m in a different position than business owners who have roles in their business that pay, I don’t know, $40,000, $50,000 a year. We’re just in a different market space. The cost to employ the type of folks who work in our business is just much, much higher. So as a consequence, you just have a different cohort. But something I think does bridge the gap between this conversation is, I’ve been thinking a lot about financial education, and where do we learn how to think about money? And most of us don’t get that training.
I grew up in a household where the lessons I took were terrible, if I had just followed those lessons my whole life—you know, living off of credit, living beyond our means. I don’t blame my family for it, but we just don’t do financial education in this country at all. And so some of us get lucky, and along the way, we meet the right people, or we self-educate, or we’re motivated. Some of us are just blessed to have good fortune from the beginning, and then we fritter it away, like some wealthy people do.
But I think there’s an opportunity for business owners to help, not only on a financial front—which I really admire how Jay thinks about this—but I think also on an education perspective, of helping people understand the value of an emergency account, helping people understand the value of compounding interest. And I’m trying to work on that in our company, because even though I have, like I said, highly educated, very smart people who make good money, it’s all over the map. Some of them are contributing to their 401(k), and some are not. And they totally should be and could be, but they aren’t. So I think about that a lot.
Loren Feldman:
Do you talk to them about it?
Shawn Busse:
We do. Yeah, constantly. But I also think there’s something to be said for outside expertise, and you know, not their boss. I think a financial coach to help folks, that’s a goal of mine in the company—to create resources for that so folks can do some lightweight financial planning, thinking about kids, and do I contribute to a college fund?
The problem is that the industry is very predatory. So there are a lot of folks out there who are trying to sell financial products, and they’re incentivized by the commission they make on those products. And so to help an employee to have access to an RIA, a registered investment advisor—that’s a fiduciary, meaning that they’re required by law to put your interests ahead of theirs—I think a business providing that to its employees would be tremendously valuable and not very expensive. So that’s something I’m thinking about.
Jay Goltz:
I want to be very clear. I’m suggesting if one owns a business, and they either say, “I have no control over what they do with their money,” or, “It’s not my problem,” I’m not arguing with that. In my situation, I’ve done well enough that just like people get joy out of buying a boat, or they get joy out of buying a condo somewhere, I will get joy out of knowing when my people retire, there’s something there. I certainly don’t think that I can fund their retirement properly. But I’m trying to figure out what I can do.
Because if I’m going to think about it—hopefully I’m around for 30 years—every year for the next 20 years, I’m going to have one to two people retiring or disabled and can’t work. I don’t want to keep going to their going-away parties thinking, “My God, are you screwed.” Like I said, even if it’s only 40 grand, better than zero. That’s all. And I’m not preaching it to anybody else. That’s just my personal feeling. And it’s worth it to me, and that makes me feel good. That’s all.
Loren Feldman:
We’re almost out of time. Last topic. There’s a lot of talk about possible recession, a lot of headlines about layoffs. Are you having any trouble—or more trouble than usual—getting paid for what you do, especially from larger companies that you might deal with? Has that started to be a problem for any of you?
Paul Downs:
Not me.
Loren Feldman:
Not you, Paul?
Paul Downs:
No.
Jay Goltz:
No, Loren, you do owe me 30 bucks, though, from a couple years ago, when I said you were gonna pay me back from that lunch thing. Other than that, everyone else has paid me.
Loren Feldman:
I’m working on it, Jay.
Paul Downs:
We got paid early by a very, very large corporation who just wanted to get rid of the cash before the end of last year. So, I don’t know what to make of that. I was happy about it.
Loren Feldman:
Shawn, how about you? Are you getting paid?
Shawn Busse:
Yeah, I mean, I’ve worked really hard to make the issue of payment not an issue.
Loren Feldman:
What do you mean? How have you done that?
Shawn Busse:
Well, I think getting friction out of how you collect money is a massive competitive advantage. So to the conversation earlier, “How do you generate better profits?” I’ve always believed that the mechanism of collecting money is low value, moderate cost. And so I get paid before we do the work. So it’s not like we do a bunch of work, and then we go asking for the money. We get paid before we do the work we do. Most of our clients are now on ACH, so it just comes straight out of the account.
I just learned some really good lessons in the recession around collecting money and to not count on accounts receivable. And so, how do you get rid of the accounts receivable number, or make it really, really low? Or the day sales outstanding number, or make that very, very low? So that’s not my issue. What I see in the market isn’t that people aren’t paying us or so forth, it’s more the kind of uncertainty that gets created by the nonstop conversation about recessions that makes it difficult for me to get new customers. So, that’s been my biggest challenge.
Jay Goltz:
I can see that. The whole inflation thing. It’s like all they can talk about.
Loren Feldman:
Was it hard for you to make the shift to getting paid upfront?
Shawn Busse:
It took time. It’s weird, you have to kind of go get new customers in order to pull something like that off. Because existing customers are used to paying you in a certain way, and they don’t want to change. But when you get new customers, you just set the expectation in the beginning. I would say it’s actually not been that hard.
It’s part of a larger philosophy. It’s a blue ocean strategy of getting to buyers that are not typical buyers. Because if you’re competing in a known market with customers that have an expectation of how things work, then they’re going to also have an expectation of how things work from a payment perspective. I know many businesses that are in an industry where it’s net 30, or it’s net 60. And that’s just the expectation in the industry. It’s really hard to break that. But if you use a blue ocean strategy of creating new customers, then you have an opportunity to set the terms of how you get paid.
Jay Goltz:
You know what, if I hired you, and you told me you needed 50 percent? I wouldn’t think anything of it. Fair enough. Why should you take all the risk? I would have a problem if you said, “Just pay it all upfront.” But I don’t think that’s an unreasonable expectation.
Shawn Busse:
Well, then you back it up with a warranty. So that’s the trick. And I was talking to somebody about this recently, of how you basically say, “Look, if you’re not happy, I’ll refund your money.” And then you do this every month. So it’s not like I’m asking for six months’ worth of work or a year’s commitment. You’re just doing it month to month, and so you’re reducing the risk. But at the same time, you’re not spending energy trying to collect money, which is huge.
Jay Goltz:
How many times have you refunded the money? Tell us.
Shawn Busse:
Zero.
Jay Goltz:
Okay. A little hesitation there, but okay.
Shawn Busse:
Nobody’s ever asked.
Jay Goltz:
I believe you.
Shawn Busse:
I’ve had relationships go south and I’ve made the offer. Like I’ve said, “Hey, look, if you’re not happy, = we’re happy to refund what we’ve done.” And then that’s when people are like, “No, actually, what you’ve done is valuable. It’s just, we don’t want to keep going in this direction. That’s okay.” But, yeah, zero.
Loren Feldman:
All right, my thanks to Shawn Busse, Paul Downs, and Jay Goltz—and of course, to our sponsor, the Great Game of Business, which helps businesses implement open book management and employee ownership. You can learn more at greatgame.com. Thanks, everyone. Have a great week.
