Simple Numbers, Straight Talk, Big Profits!

Simple Numbers, Straight Talk, Big Profits! Plot Summary

Introduction

Every business begins with a seed of an idea, but transforming that seed into a flourishing enterprise requires more than just passion and hard work. Entrepreneurs often struggle with critical financial decisions, finding themselves caught between wanting growth and needing stability. The challenge isn't merely generating revenue—it's creating sustainable profit while building a healthy business structure. The principles outlined in this book emerged from studying hundreds of real businesses, not from theoretical models or cocktail party advice. Whether you're launching a startup or guiding a company toward the $5 million revenue mark, these strategies will help you understand the delicate balance between owner compensation, profit targets, labor productivity, and cash flow management. By seeing beyond the numbers to their true meaning, you'll develop the foundation needed to build your dream business—one that generates consistent profits and real wealth over time.

Chapter 1: Determine Your True Market-Based Value

At the heart of business success lies a fundamental truth that many entrepreneurs overlook: you get paid a salary for what you do, and you get a return on what you own. This distinction is crucial because when you don't pay yourself a market-based wage, your financial data becomes worthless—like having a compass that's slightly off in every direction. Greg Crabtree discovered this pattern when working with a couple who co-owned a business. They believed they were making an impressive 20 percent profit on sales. However, after adding their minimal salaries and distributions together and treating this as a true market-based wage, their actual profit was only 5 percent. This is a common scenario because entrepreneurs often underpay themselves to show better numbers. In fact, about 90 percent of business owners underpay themselves, creating distorted financial metrics that lead to poor decisions. This practice creates problems beyond just misleading internal data. The IRS considers paying artificially low wages in S corporations a tax scam, putting such businesses at high risk for audit. As Crabtree advises his clients: "If you're not paying taxes, there are only two possibilities: You didn't make any income or you're cheating." Your tax bill should be viewed as your key performance indicator—the larger your tax payment, the healthier your business. To determine your appropriate market-based wage, consider what you would need to pay someone to replace you if you couldn't work. Salary survey websites like Economic Research Institute's Salary Survey Assessor or Salary.com can provide benchmarks, though you might need to adjust these figures downward by 10-20 percent. For businesses approaching $1 million in revenue, CEO salaries typically reflect a blended approach across multiple functional roles, since the CEO position alone might only account for 20 percent of the owner's time. When establishing market-based wages, this principle applies to everyone in your organization, not just shareholders. Using fair (but not necessarily equal) compensation creates a healthier business environment. Remember that a fair economic exchange between you and your business forms the foundation for accurate financial planning. By paying yourself what you're truly worth, you'll gain clarity about your actual profitability and set your business on the path to sustainable growth.

Chapter 2: Set 10% Pretax Profit as Your New Breakeven

Profit is the lifeblood of every business—without it, you're simply taking business from others before eventually fading away. The traditional definition of breakeven (when income equals expenses) is fundamentally flawed. By the time you reach traditional breakeven, your business is already in trouble. After studying countless businesses, Crabtree discovered that pretax profit percentages tell a clear story about business health: 5% or less means your business is on life support, 10% indicates a good business, and 15% or more signals a great business. Consider the experience of one of Crabtree's clients who was running a construction company doing $20 million in revenue. After subtracting payments to subcontractors and materials, the operation was essentially a $2-3 million service business. The owner had been focusing on revenue rather than profit, believing bigger numbers meant greater success. Once he shifted focus to profit percentages, he realized his business was barely surviving despite impressive revenue figures. By trimming underperforming services and focusing on high-margin work, he transformed his company into a consistently profitable enterprise. This transformation required understanding the eight functional areas every business must cover: CEO, Sales, Marketing, Operations, IT/Technology Development, Finance, Customer Service, and HR. At $1 million in revenue, a business owner can no longer personally manage all these functions effectively. Between $1 million and $5 million lies what Crabtree calls "the black hole"—where businesses must add infrastructure and staffing before they can truly afford to, often driving down profitability and risking failure. To navigate this challenging growth phase, entrepreneurs need both a capital safety net and the right people. When hiring, Crabtree advises: "Hire slowly, fire quickly." He recommends using personality profiles during screening and investing in young talent rather than always seeking those with "been there, done that" credentials. Equally important is having adequate capital reserves—calculated by estimating how much cash you need to hire necessary staff and how long before your business can pay them while remaining profitable. The path to profitability through the black hole requires maintaining at least 10% pretax profit at every stage of growth, even if it means growing more slowly. By paying yourself a market-based wage and living off that salary rather than distributions, you can reinvest profits to fund growth instead of relying on debt or outside capital. This disciplined approach creates the foundation for sustainable business success.

Chapter 3: Maximize Labor Productivity for Success

The teams that win are those that get the most productivity for every dollar spent on labor. When businesses face tough times, the first instinct is often to cut random costs, but the real key to profitability is labor productivity. Nothing of value happens without efficient human effort, and even minor inefficiencies like overspending on office supplies can be traced back to unproductive labor management. This principle is perfectly illustrated by Company A and Company B, two businesses that took different approaches to growth. Company A started with revenue just under $2 million and minimal equity. Believing growth would solve their profit problems, they rapidly expanded to $4 million in revenue. However, they failed to maintain profitability during this expansion by inefficiently adding labor. They had field employees taking too long on simple tasks, people on payroll who weren't billable, and salespeople wasting time chasing the wrong customers. Eventually, they had to scale back to $3 million and rebuild properly. In contrast, Company B maintained profitability throughout their growth journey. Starting below $2 million in revenue, they consistently achieved 10-15% pretax profit each year. They carefully managed their labor costs and resisted "labor creep"—the common tendency to hire someone else for every unpleasant task. The owners continued handling both management responsibilities and productive work in the business until absolutely necessary, maximizing their labor productivity. To implement this approach in your own business, think of it like an NFL team operating under a salary cap. Crabtree explains that if you have $1 million in revenue and aim for 10% pretax profit ($100,000), you need to calculate your nonsalary expenses (perhaps $400,000), leaving $500,000 for all salaries—including your own market-based wage. This becomes your salary cap, and the total of all W-2s at year-end cannot exceed this figure, regardless of whether employees are part-time, full-time, or family members. If you're currently making only 5% profit, you must either cut $100,000 in salaries or generate $100,000 more in gross profit without adding any labor cost. Once you reach 15% pretax profit, you can add employees to drive profit back toward 10%, then grow again toward 15%. This cycle of controlled expansion creates a healthy upward revenue curve while maintaining essential profitability. The higher your pretax profit percentage, the faster you'll achieve positive cash flow, giving you the foundation for sustainable growth.

Chapter 4: Master the Four Forces of Cash Flow

Cash is the most powerful opportunity magnet ever created, yet many entrepreneurs don't understand where their profits go. You might think, "I made $100,000, so shouldn't I see $100,000 in the bank?" The gap between profit and available cash creates confusion and often leads to what Crabtree calls "cash cow disease"—failing to keep your business healthy enough to produce ongoing profits. Understanding the four forces of cash flow helps prevent this problem. These forces operate in a strict priority order: paying taxes, repaying debt, reaching your core capital target, and taking profit distributions. This hierarchy is non-negotiable, though many entrepreneurs try to rearrange it to their detriment. Consider one of Crabtree's clients who started the year with $100,000 cash and made $125,000 pretax profit (12.5%), but ended with only $25,000 cash despite paying just $50,000 in taxes. After analysis, they realized they'd bought a $50,000 SUV, made a $50,000 condo down payment, and paid $50,000 toward a line of credit. By not following the proper cash flow priorities, they'd mismanaged their resources. The first force—paying taxes—must come before any discretionary spending. Crabtree recommends setting tax money aside immediately in a separate account. He tells entrepreneurs, "Don't pay taxes until you absolutely have to without incurring a penalty," but always ensure the money is reserved and removed from operational funds. This prevents the common crisis of buying assets or taking distributions, then scrambling to find tax money when it's due. The second force—repaying debt—acknowledges that you can't build wealth until you're debt-free. Crabtree distinguishes between two types: lines of credit (which he calls "entrepreneurial crack cocaine" because they're so addictive) and term debt. A true line of credit should go to zero for at least thirty consecutive days every year. Term debt, while sometimes necessary for essential equipment or property, should be approached cautiously since it can only be repaid with after-tax profits. The third force—reaching your core capital target—means having two months of operating expenses in cash plus nothing drawn on your line of credit. This creates resilience during inevitable business cycles. One of Crabtree's clients in the building supply business maintained over a million dollars in cash reserves and told him, "I love a recession because I've got cash and can buy stuff cheaper than anybody. I can work deals while all my competitors go out of business." Only after satisfying these three forces should you consider the fourth—taking profit distributions. These distributions should first cover taxes, then build personal wealth through debt repayment and investments. By following this disciplined approach to cash flow management, you create a business that attracts opportunities and builds sustainable wealth for its owners.

Chapter 5: Implement a Simple Forecasting System

A budget is a license to spend, but a forecast is your road map to profitability. Many entrepreneurs believe they need elaborate budgeting systems to control costs, but Crabtree discovered that these often become ineffective constraints rather than useful tools. After visiting Springfield ReManufacturing, he was amazed to see machine operators, clerks, and shippers who could explain financial statements better than most accountants—and they updated their forecasts weekly! This experience transformed Crabtree's approach to financial planning. Rather than creating rigid annual budgets that quickly become irrelevant, he advocates for regularly updated forecasts that adapt to changing business conditions. Springfield ReManufacturing's model involved creating an annual plan but then updating projections monthly as actual results became available. Each month, they would incorporate the latest data and reforecast the remainder of the year, creating a rolling picture of business performance. Crabtree implemented this approach with a struggling client whose business had potential but lacked consistent profitability. The client grasped the concept of the salary cap and began managing labor costs for maximum productivity. As profits improved, he eliminated debt and built toward his core capital target. When tax time arrived, he faced his largest tax bill ever—but unlike previous years, he had the cash to pay it and understood this signified success. Within eighteen months, the business transformed from struggling to thriving. The client described himself as a "fourteen-year overnight success," noting that the potential had always existed but needed the right approach to unlock it. The forecasting system that enabled this transformation is surprisingly simple. It starts with understanding how one month's profit translates to cash flow by tracking changes in accounts receivable, payables, debt, and equity. Once you grasp these basic relationships, you can project them forward into future months. The model requires just a few inputs: revenue, gross profit percentage, operating expenses, accounts receivable days, payables, debt changes, and distributions. From these figures, you can calculate key metrics like labor efficiency, days sales outstanding, and progress toward your core capital target. Most importantly, a good forecasting system should take less than an hour to update each month. It shouldn't require complex software or excessive detail—just enough information to drive decisions. By spending 25% of your time looking at what has happened and 75% looking forward at what you want to make happen, you create a dynamic roadmap for building a profitable business. This approach helped Crabtree's client finally achieve consistent success after years of struggling with traditional budgeting approaches.

Summary

Building a successful business requires mastering fundamental principles that many entrepreneurs overlook. The concepts presented in this book provide a framework for creating both a profitable enterprise and personal wealth. As one client put it after implementing these strategies, he became a "fourteen-year overnight success"—the potential was there all along, but he needed a clear game plan to harness it. The foundation begins with proper owner compensation and extends through maintaining at least 10% pretax profit, maximizing labor productivity, following the four forces of cash flow, and implementing simple forecasting systems. As Crabtree emphasizes, "Profit is like oxygen—your business can't hold its breath very long without it." Your immediate next step should be calculating your true market-based wage and adjusting your financial reporting accordingly. This single change will provide clarity that ripples through every aspect of your business, revealing the true path to sustainable profitability.

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Greg Crabtree

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