So this is our first session today on the business,
the economics of business.
So it'll be a really fun session.
And we're also gonna discuss an empowering way
of measuring success.
It's a little different than most companies measure success.
We're gonna talk about the profit that we make,
the people that we reach,
and how alive is the team doing it?
Because if any of those three elements are missing,
we're not gonna be operating at our efficiency
that we can actually operate.
We're not gonna be reaching the world
and making a difference that we have the potential to make.
So my pro tip for today is that during our breakout session,
we'll have some great questions
to take what we're learning a step further.
And remember that we're only establishing
a starting point today.
Conversations will probably be longer
than just the breakout time.
We'll give you as much time in breakout as we can.
So don't expect to get it all dialed in today.
If you're guys, or if you're still going
and you're having a great conversation,
extend the session or do a second session
to really dive deep in this material.
So team leaders, when you are doing the session
in the breakout,
go ahead and jump to step four with your team.
Take some time to hear people out.
Even if you have a clear idea of answers in your own mind,
go ahead and let the team expand your perspective.
And sometimes they help us see opportunities
that we're not already seeing.
And remember, because we are equipping
and we're building an entire team of leaders,
not just a team that follows a leader.
And then solo members, I highly recommend
that you include your clients in this conversation.
If you don't have other team members
that you're able to discuss with, ask your clients.
Send a survey, give them some calls,
ask them to help formulate those opinions.
Because it's not just a one-sided relationship,
it's a reciprocal relationship we're building together.
And we're looking to meet actual needs
and solve actual everyday problems.
Okay, so is everyone ready?
Looks like we're ready and ready to go.
So go ahead and welcome Dion in the chat
and over to you, Dion.
Thank you, dear.
Yeah, it's very exciting.
I see we have somebody from Switzerland, I was impressed.
Very nice to have everybody join us again.
Starting to feel like family now, that's really good.
We wanna talk through today about,
and I'm just gonna put together a very simple slideshow
to help us understand this.
So you may remember that when we started this process,
we talked about that we want to build four pillars,
leadership, culture, innovation, and economics.
Today, we're talking about economics.
And if you say, oh, economics,
is it gonna be about accounting?
Yep, it's gonna be about money in general.
But what are we gonna do is,
I'm going to share with you some cheat sheet things
that I've learned in my career.
So one time, a group of CEOs asked me to come
and speak to them about how they were talking
about raising money for their business.
And they asked me to come in and show me
how private equity firms,
if you don't know what private equity is,
it's usually just a fund that invests in companies.
So usually, private money, hence equity,
private money gets together in a fund,
and then some group decides where the funds go
and they invest in other companies and so forth.
So in that process, they wanted to know,
how does somebody who wants to put money in my company
look at my company?
How would they understand my business?
You say, well, that sounds really complicated.
Well, actually, it's super simple,
because when you get 20, 30, 40 applications a week,
you develop a system that within the first two
or three minutes,
you're already deciding what you're gonna do, right?
You flip to a certain page,
your eye goes to a certain few things.
And there's a couple of cheat sheet things that we do
when we're looking at numbers.
And so for us, I wanna go today
through one of those cheat tips, if you like,
that quick way of looking at financials,
so that we as a team,
everybody can understand where we're at.
Now, it's not normal in most private or small businesses
for everybody to see financial information.
But I think there is a way
in which you can share financial information with a team
at a high enough level,
so that those cheat sheet elements,
just those most important bits
are quick to see how we're doing.
Because I think when everybody understands,
has a context for the financials,
they understand what we're doing,
they understand how much money we're making,
and they understand how what they're doing
is participating and contributing to the bottom line.
So I'm gonna put a quick little slideshow together
and up here on the screen, give me one second.
So let me share my screen.
All right, so as we said,
that there's four pillars that we're building, right?
So we've been talking about different components,
culture, leadership today,
we're gonna move to the bottom one.
on economics. So on the economic side of this, we want to talk about the triple bottom line.
How do we keep score as a business? How do we know we're winning? Right? So it would
be really weird if you went to watch, you know, the Super Bowl, and there was no scoreboard.
And we just saw a lot of activity on the field, a lot of cheering, I think they got the ball,
I think they got the ball, you know, and then people are saying, did we did we just did
we just score again, I don't remember, is that the third, you know, trying to remember
the score by memory? Well, that's hard for a team to be playing the game, and not knowing
what the score is. So we want to talk about how do we keep score. And one of the most
powerful ways is this idea of the triple bottom line. And so this is really redefining how
we measure success. And it comes down to money, impact and the team. Money, how much money
did we make, obviously, we'll talk a little bit about that in a second, impact, how many
people do we reach now? And then, of course, the last one is how alive is the team that
we lead. So we always talk about shiny eyes, we've talked about that in the first session,
how alive is the team, because if we're doing the first two really well, making money, you
know, impacting a lot of people, a lot of new customers, people are loving the products,
loving the service we provide, really making progress, but the team's burnt out, the team's
really struggling. And so a lot of what this training is about, is how do we move from
just having success financially, to a team that can really perform in a way that produces
a legacy, and in a way that really is sustainable. Because many times, the way we start a business,
the way a small business kind of gets going and reaches profitability is not actually
sustainable. In the long run, we do a lot of unsustainable things to get a business
to get going. And so today, we talk a little bit about the those top two elements. So we've
talked a little bit about the team's thing, we're going to get more into the team thing
later when we deal with some more of the culture stuff. But today, we want to look at the money
and impact side. So on the money side, I want us to have a very simple idea. So we
call this simple idea of how to understand how we're doing the rule of three, it's a
really easy way to understand financial statements. So maybe you've seen financial statements
that look like this, and you go, I have no idea what any of that means, that's fine,
we're going to really dramatically simplified, or maybe you've seen something, it looks a
bit more like this. And again, that's hard to tell what's really going on. So the real issue
is how can we make it much, much simpler. So the rule of three is that, because the mind can
really remember three, this is also an easy way for you to manage your business as a leader or
your area of the business, or just to know as a member of the team, how you're doing. If you're
a solopreneur, then maybe you can use this as a simple way, remember three numbers in your head.
And that way, you can really run the business from your head, an easy way to do people often
say to me, how do you remember, you know, the numbers of the company, because, you know, I have
memory for that. It's not really that I have a memory is that I've just figured out how to create
three groups of three. So let's talk about how we do that. So there's three groups of three,
the first three elements of a financial statement, tell us our profitability,
how profitable are our goods and services, the next three, tell us how much of the money we made
that we keep our efficiency. And the last one is about environment taxes, and you know, what state
you're in, or what country you're in, and so forth. I'm not really going to concentrate much on that.
But just for completeness sake, I'll throw that in. So you know, it's there. So let's take a second
and do a very elementary beginnings of a, you know, profit and loss statement. So profitability
is if we take the revenue, and we subtract the cost of goods, the cost to make the goods,
so there was 20,000, we made 100, it cost us 20,000 to make it. And so we had a gross profit
of $80,000. That's an 80% gross profit. So what does that mean? So the revenue is easy. That's
all the money that came in that sales, cost of goods sold refers to the cost to make the sale.
So that's got nothing to do with rent, or people's salaries, or any of those kind of expenses.
What it's got to do with is what we call a variable cost. So let's say that I sell pencils,
and each pencil costs $1. And it costs me 20 cents to make it, then the cost of good goods is 20
cents. In other words, I made $1, it cost me 20 cents to make
for pencil. So my gross profit is 80 cents. So the cost of goods
refers to the more of those I sell, the more pencils I have to
make, right. So the more so it's called a variable cost, because
it's directly connected to the revenue. So if you do an online
business, then cost of sales will include things like your
ad cost, if you ran a lot of ads, and there's a correlation
between how much money you spend on ads and how much revenue you
got. So whenever this whenever the the cost is connected to the
revenue, then that's cost of goods sold. So in other words,
what did it cost you to generate the revenue? So ad costs, or
maybe if you gave commission sales commissions, some people
put that on expenses, I personally, from a financial
management point of view said, did, did that cost me something
to get the sale, if it costs me something to get the sale, I put
it in here, the cost of itself. So in this little example, we
have revenue of 100,000, the cost of goods sold was 20,000.
And we made a gross profit at 80,000. This tells us we have an
80% margin, that means that we have a very profitable service,
we have a very profitable product. And so typically, once
it starts dropping below 60%, it starts to get harder and
harder. So if you have an online business, this number should be
very high. I mean, there are companies like Red Hat, if you
know who Red Hat is, Red Hat is, you know, a company that very
few analysts can really understand, because they give
away their software. And so they give away their software. And
people say, how do you make money, I think 37 of the world's
largest banks and insurance companies and so on, use Red Hat
software, I think the New York Stock Exchange and Toronto and
several of the world's stock exchanges run off Red Hat
software, but they give the software away. So how on earth
do they make money, they make money by providing services,
it's all the customer services and support is where they make
the money. Now, the interesting thing about Red Hat is over 90%
margin. So that means it's a very profitable business. So
exercise number one, for you as a team is to look at these three
simple numbers, and say, what's our total revenue, total cost of
goods sold, total gross profit, you know, do we have a profitable
product. So they may need some adjustments, either we need to
get the goods made more cheaply somewhere else, or we need to
find, you know, a way to reduce the cost of sales, maybe you
need to increase your prices, there, we have to run the
business above a certain profit margin. And so this is the first
element of the of everybody understanding these first three
numbers. So the group of three, the first group of the group of
three is this element. Okay, if you've got questions, be
throwing them into the chat session, we'll grab them here in
a second. The next group of three is efficiency. So notice
that when we took the gross profit from the last slide, I'm
going to bring it up as the first item on the next slide.
And now we group these three together, we made a gross profit
of 80,000, we had expenses of 70,000, it leaves us $10,000 of
net profit. So that's 10%, 10% of the 100,000 of the original
total amount of money that came in. So what, why do we call it
efficiency, we call it efficiency, because really, it's
how much money that you made, did you keep, and expenses, if
expenses run away, and expenses include all what we call fixed
costs, these are costs you have to pay, regardless of whether
you make any sales or not, right, you have to pay the rent,
you can't go to your landlord and say, sorry, I can't pay the
rent this month, because there were no there was no revenue, I
didn't make enough money. So you have to pay your salaries, the
rent, there are fixed costs, you have to pay your internet costs,
whatever these fixed costs that exist, those are your expenses.
So those costs exist, no matter how much money you make. So
that's what makes expenses different from cost of sales. This
is usually where people get a bit confused is the difference
between those two, because they both seem like expenses, right?
So expenses are fixed costs that you incur, whether you make a
sale or not. And then it leaves you your net profit, and your
net profit is, you know, and so what we're looking for, to give
you an example, and I'm sure you understand the concept is
simple enough. But the real trick, the idea I was telling
you about is, what we're looking for is a company just dropping
back a second, we're looking for a company with a very high gross
margin, we like to see 80 90% gross, but that's really good.
And secondly, we want to see a company that runs very
efficiently, and is keeping some of its profit.
it. So if you ran a pizza franchise, you can expect if it's extremely well run, maybe 15%
on this bottom line number, right? Maybe eight, 9%. It's very tough when you're doing because
the pizza business has a very low margin. So the problem with the pizza thing, the pizza franchise,
and I worked with franchise groups as part of my career, and I found that it's a very tough
business because it relies on volume on a low margins. So going back to the first thing of
profitability, what can we do for our business? If we're struggling to get the margin up? Well,
he has three ideas on what you can do to make your business more profitable. To do that,
I want to just bring up the simple idea. I think yesterday, somebody asked me about
exclusivity or is there a way to how do we price products? Should I be raising my prices?
And here's the whole concept of revenue and pricing. Idea number one is if you can control
some element of your pricing, if you have price control, in other words, you do something that's
so unique that you can push your prices up and the market will still sustain that, then that's
called price control. That means you have something unique and therefore you can charge
more and have a better margin. The other side of that scale is if it's what's called a commodity,
that means pizza. If you're selling pizza, you can't say, well, you know, our pizzas are really
good. We're going to charge $50 per pizza because you're going to sell exactly zero of those,
no matter how amazing you think those pizzas are. So it's not about the quality, it's do you have
price control? And one of the things investors look for, and you are the primary investor in
your own business and your team by giving their ability and energy and time are also investing
in your business. So as a team, we're investing in something. So you have to think like an investor.
In other words, can we do something to our product to make it unique enough so we can get a little
bit of price control? And so that's idea number two, is that what if you added something to your
product or your service that makes it unique, that you bundle things together. And if you bundle
things together, you create a bigger sense of value. So can you bring, you know, better value
to your customer? Can you bring something unique so that it's not so easily comparable to anything
else in the market? And the third idea is uniqueness. Can we be unique in something that we do?
Somebody once said, you know, if you're the only hot dog stand in town, your hot dogs don't have
to be that great, right? Because you're the only one, you're the one with the hot dog. So can you do
something unique? So everybody says all about quality, quality, quality. This is true. We do
want quality, we do want excellence of service and excellence of products. But when it comes to
understanding margin, the real question is, can you do one of those three ideas?
How are we doing on questions? Are we good? We have a couple questions. We have a question from
Elaine who asks, what if your prices are fixed because you're in a contract?
Somebody's contacted you to do something for some price?
Yeah. Elaine, do you want to clarify in the chat? We build insurance companies and we're network
providers. And so we have to, we were set. I mean, I'm negotiating every couple of years to
make higher prices and the UCRs go up and all that, but there's not, we're set. We can't change
that pricing. I mean, what you said afterward helped me realize like, okay, what other things
can we do besides just what we do to more unique in our market? So I got to think of other revenue
streams to add that, but it is a fixed, it is really fixed for us in insurance billing.
Yeah. So one of the things Warren Buffett says is that the value of a business is, if you think of
a sliding scale where commodity fixed, you have no control, which you've just described you're in,
there's a commodity element all the way to the other one where you have what he calls a franchise
control. That means you have control of your own prices. Most companies don't have a clean spot on
that line. They're a blend. So you've just said, you've got something that's very commodity,
whether you have no control of the pricing you, so they, the only thing you can control there is
volume, right? So, but then you want to balance that with good service and so forth. So that's
a limited aspect of the business. The question is, can you bring something that's unique,
something that can be packaged in,
something maybe that the customer can pay for separately.
Is there a different revenue source that you can bring in
that would pair it up?
So, you know, can we provide a special training or a class
or, you know, you have to think about
what other thing you can do.
And what this does is it moves so that the combined,
the combination of the two will move you down.
Obviously you wanna be way off on having price control.
You don't wanna be in a strictly commodity business.
And a strictly commodity business like, you know,
pizza franchise, you're very much controlled, you know,
when your competition is saying, you know, $10 for a pizza,
it's very difficult to justify why yours wants to,
why you wanna charge 15 or $20.
So, but if you added other services in to that,
into that, you can usually have some form of, you know,
maybe a very unique topping that,
some exotic toppings and whatever it is.
I mean, I don't, I'm not a chef.
Or it could be an experience, right?
It could, you could be a movie,
a movie place that has pizza, right?
You could do an experience where we do a high-end vendor
or we deliver, we set up a date night.
You know, there's things that you could do,
or if you did children therapy,
you could offer a night out for the parents
where they could drop their kids off,
especially if they're more difficult children
to get a night out, you know?
So there's different innovative out of the box things
that you could combine in there
that may not usually be with your current product.
We do have another, two more questions.
We have one from Steven who says,
would you put marketing teams, your media buyers,
or your vendors that are running the ads,
would you put them in cost of goods sold
because they're tied to revenue?
Yes, absolutely.
I think in the online services space,
I think all ad generational elements
need to be under cost of goods sold
unless there's a retainer.
For instance, if you're paying your marketing organization
$10,000 a month, which you have to pay them
regardless of whether you make money or not,
that's the key.
That's the key question.
That's the differentiator.
Do I have to pay this whether we make money or not?
Now, if you have to pay it, then it's expenses.
If you only pay ads because it's connected to revenue,
then it's cost of goods sold.
So ad generation, you know,
the more money they spend, you pay them a percentage,
which is a crazy notion I've never understood.
But nonetheless, I would put under cost of goods.
What was the second one, Dea?
Robin asked if you can reduce your cost of goods sold
to increase your gross profit.
Absolutely.
So you want to reduce your cost of goods sold.
So if you got those pencils instead of for 20 cents each,
you can get them for 10 cents each or eight cents each.
Obviously, you're always looking for improvement
in your gross profit.
So if your business is running at a gross profit
below 40%, survivability is going to be tough.
I can tell you it's very tough.
You're going to have very little cash
to be able to pay yourself, a team,
because your team costs are going to be your biggest number,
biggest expense, right, in a small company.
So you're really going to limit the kind,
you end up hiring people you can afford
rather than people you need.
And so, you know, you have to think of it.
I want to make an earlier comment about
if you have a commodity business,
don't go and add another commodity to it
to try to expand it.
Try to do something that gives you more price control, right?
Don't add one, don't connect two commodity
because you want to bundle.
It can work, but I don't think it moves the needle.
The bottom line is, will it move the 80% and by how much?
That's the bottom line.
So that's the trick here,
is we're taking the top three of the financial statement
and we're getting the numbers down and we're saying,
can we turn that dial, right?
So gross profit is the first dial.
The second one, when it comes to expenses,
and this is what's really helpful to the team.
If everybody knows and we put it all together and we say,
hey, this is the bottom line, right?
What we're doing is we're looking at the top three numbers
and we're saying, hey, those top three numbers,
we have an 80% profitability
and the bottom three numbers,
we have a 10% net profit.
So we're only keeping 10% of all the money we're generating.
10% isn't particularly bad,
but we still got taxes, depreciation,
other costs that you have to apply to that
before you get to what's actually operating income.
So the question you want to do is you want to look at,
can we reduce expenses?
How can we do this more efficiently?
Can we automate?
Can we outsource?
So here's three ideas on how you can reduce your expenses.
Idea number one, outsource.
elements that are not core to your business. One of the first
things I did when we when I came to Brilliant is we were also a
book publishing house. We're a book publishing house, and we
had all the other stuff Brilliant provided. And so the
first thing we did is all the warehousing. So all that we
found a company in Pennsylvania, called Stone Rooster, and we,
you know, we went met with them, and we put a structure together.
And so what that did is it allowed us to scale because we
took something that really wasn't core to our long term
vision, and we outsourced it was a bit more expensive, but it
allowed us to reduce expenses. So now we had, you know,
shipping and so on was was allowed us to, to scale. So
that's first thing is can we outsource elements that we
don't? Second thing, can we insource things that shouldn't
be out? So there are elements of your business, you need to
have internally in your organization, that you need to
control because they're key to your business. So for us, we
kept hiring at Brilliant, external companies to help us
with ads. And we realized, that's a really bad idea. Ad
generation is very core to what we do. So we invested
specifically in there, to and myself and the team, to learn
how to do this internally, so that we were in control. Now,
can we get external help? Can we, you know, maybe your
company's grown to the point that what started as an internal
necessity, at some point can be outsourced? Can we outsource?
Can we insource? And then can we just delete? You know, sometimes
we'd get things in our minds, stuff gets a life, right? I'm
sure you all have this in your business, you've always paid for
this, we've always had this office, or we've always had this.
And then somebody says, well, why do we need them at all? And
it's a very helpful conversation to just say, do we actually need
this? And can we delete this? So, you know, sometimes the
deleting is joining several things together, instead of
having product A, B, and C, what if we just bought D, which is a
bit more expensive, but replaces the cost of the other three. So
expenses can be very, I think, being creative, that's why we're
going to talk about innovation at every level. It's innovation
on revenue, how do we make more money, innovation of cost of
goods sold, can we manufacture cheaper or get, you know, a
better way to do that make it more efficient? Can there be
innovation around expenses? Can we outsource, insource, combine
things, delete things. So when the team has this picture of
just these five numbers, these five numbers, in the groups of
three that we've just explained, builds trust, because it gives
the team context to what we're doing as a business, how we're
making money, when I am as a team member, are calling less
meetings, and therefore driving less expenses. So in one of our
teams, we worked out that the average one hour meeting costs
us $2,300 per person. That's one of the quick exercise I always
do, by the way, I walk in, just take the total salaries, and
divide it by and get it down to an hourly rate. And then ask
that I asked the leaders just for one week, track the number
of meetings you have meetings is one of the first things you can
delete. In fact, most meetings can be deleted, and reduced with
down to a 10 minute, you know, stand up connection very easy. I
know some companies have completely done away with
meetings, it's actually possible. So you know, it's
death by meetings. And we'll talk about that in another
session, session, how meetings are one of the most expensive
elements, because we often don't think of meetings. I know that
in a big consulting firm I was talking to, they say they can
have anywhere between 40 and 80 people on a meeting on an online
call. And I'm thinking, what on earth does that call cost? And
they say, Oh, you can go for two hours. So I'm thinking we're
blowing through hundreds of thousands of dollars in
meetings, right? So we'll talk a lot more about meetings. But
that's a quick, easy way to get rid of expenses. How many
meetings do we have, try to figure out, you know, look at
the people attending it, take a quick guess at you know, what
the total salary is, and have a cost per meeting. And so what I
did for the 100x group is when we worked at our meeting cost,
we realized that every time we ran a meeting with so many X
amount of people, we had just blown through six of our
products we sold at conference. So I reduced instead of saying
dollars, I divided it by, like, if you have $1,000 product, and
and you're burning
through $2,000 in a meeting, you just burn through two products. You burn through two sales.
It's a fun way to help you understand your expenses. How many sales did we just burn
through in that meeting? Very, very. We do have one quick question and then we've got to
get onto the triple bottom line because we need to get to breakout rooms. But the question was
really briefly, what are your recommended percentages to shoot for for gross profit and net profit?
I mean, I think that, as I said earlier, 60% would be the lowest gross profit that I'd like to see.
And on the net side, I mean, 10 to 20% is a great number. You can do a lot better if it's
like an online business or it's a very efficient company with low expenses. If you're a sole
preneur, that can be because normally sole preneurs don't put their own salaries. That's
just their profit is their salary. So that number should has to be a lot higher if you're just new.
So let me go through a couple of things. So we talked about how much money we make and we talked
about the rule of three and then how many people we reach. We're going to talk
about that just very, very briefly because you're going to discuss some of these questions in
your breakout session. So is what we're offering bringing real value to people?
How can we make it better and how can we make it more convenient? So you can see what we're
focusing on here is can we increase the top of that the first group of three? So I'll take
another question or two and then we can go into the breakout. Okay, actually, Dion, if you
were a little over time, so do you want to just go ahead and continue on that or are we
ready to go to breakout now? Yeah, so I think we're okay time wise. We can probably take it
for another two minutes and then we'll go into breakout. So maybe take another question or two.
Okay, anyone have any other questions?
I think there's some just looking through. Yeah, I think the,
yeah, sounds like you guys have your questions on. Anybody else?
Cool, so does that help you understand what you're doing and have these are sort of like the quick,
you know, the best role if you're an accountant or a bookkeeper or a CFO in a company,
the most powerful thing you can do for your team members is give them these metrics. Tell them
how they're doing financially. Your job isn't just to collect the receipts and file the taxes
and so on. Your job is to empower leaders with the numbers they need to be successful. Empower
your team with numbers so they can see what's going on. Robin? Yeah, I had a quick question
regarding the expenses. The expenses are one number and yet how would the rest, if that's
the only number that's shared, how would the rest of the team know where the fat is, quote-unquote,
in the expenses? I think that the expense, keeping it as one big number, I mean, if you want to and
you want to break it out as like team costs versus other costs or, you know, G&A and admin
costs, you can do that. But I found that at the end of the day, expenses are expenses and people
will understand that the biggest part of that is going to be team costs based on the nature of the
business. So I think that, you know, it's less about, you know, trying to keep this short. So
I think we'll talk about other strategies later about what we can do with team costs when things
get tough, you know, in a market. Maybe we can bring that up as a special question. And there
are things you can do with team costs that can be a lot smarter. Later on we'll talk about how
to structure compensation, bonuses, incentives, that kind of thing. In that space is a great time
to talk about how to lower team costs.