Since the material in Greg Crabtree’s book “Simple Numbers, Straight Talk, Big Profits” has been so enlightening, I want to share more from his book to help us all out in the financial arena.  This is not the stuff they teach you in school.  It has real world understanding of how to look at your business financials from an entrepreneurial perspective.

As I read the book, I was most recently struck by his comparison between businesses and the NFL.  Like the NFL, we as business owners have salary caps.  The NFL created a salary cap to max out what each team can spend on their players in an effort to create a fair shot amongst all the teams.  Now, you may have not thought that you have a salary cap.  I didn’t either.  However, in reality, we cannot pay ourselves more than we generate in revenue, and we also shouldn’t pay out more than what would be a respectable profit margin.

Greg points out that every business needs to strive for profit.  In general, a company with less than 5% profit margin is on life support.  One that is greater than 10% is a good business, and a profit margin above 15% reflects a great business.  You need profit to pay your debt and to have cash flow to grow the business.

Let’s look at an example of how this works to determine what your salary cap would look like:

Revenue                              $ 1,000,000

Salaries                               $   XXX,XXX

Non-Salary Expenses       $    YYY,YYY

Pre-Tax Profit                    $    100,000 (10% of revenue, the percentage you want to have to be a good business)

Now you can determine your business’ salary cap.  Start by adding up all your non-salary expenses and plug them into Y.  Then, subtract your pre-tax profit and the non salary expenses (Y) from your revenue, and the number you have left over is your salary cap (X).  This is the number you don’t want to exceed in order to maintain the appropriate profit margin to increase your business.  Remember, breaking even is dying, and having less than a 5% profit margin means the business is on life support.  If this is not clear, get his book, and it will break it down for you very clearly.

What do you do if your salary number is higher than what it should be to maintain an appropriate profit margin?  You go back and look at the productivity of your people and determine who is getting it done and who is not.  As we grow, we tend to hire quickly and sometimes hire people into roles that do not meet their strengths.  As business owners or CEOs, we need to make sure we have the right people performing in the right roles for optimal productivity.

What is your salary cap, and does it give you the profit margin you desire and one that will grow your business?

I caught up with one of my long-time EO friends, Greg Crabtree, at the EO Nerve Conference in Atlanta.  We have hung out and experienced EO events around the world, and we are both passionate about EO and the people there that we learn from and grow with.  Greg served on the EO Board as the Finance Chair, which was a perfect fit since his unique perspective allows him to explain numbers in a more entrepreneur-focused way rather than typical accountant speak.

I was excited to catch up with Greg and learn about his first book release!  He wrote “Simple Numbers, Straight Talk, Big Profits,” and Nerve thought enough of it to share with all the attendees.  Greg told me a little about the book, so I have been eager to read it.

Greg opens the book with a really insightfully point:  Most entrepreneurs are not clear on the difference between their salary and the return on what they own.  Greg continues, “In fact, all of my clients have confused the profits of their business with their salary.”  You get paid a salary for what you do, but you get a return on what you own.  When you are not paying yourself a salary at market levels, you are distorting your true net profit margins.

When you are not looking at accurate numbers from this perspective, your financial data is worthless.  Making decisions from skewed financial data is, as Greg says, like having a compass that is five degrees off in every direction.  If you don’t get real with the numbers, then you won’t get where you want to go.

He gives an example of a client that thought they had at least a 20% net profit margin, but when he looked closer he found they were paying themselves a below market wage.  When it was adjusted, they realized that their true profit margin was 5% before taxes.  Shockingly, he found most of us entrepreneurs are underpaying ourselves.  This may be to show off our higher numbers to others or because we really didn’t know the difference.

Greg subscribes to the Economic Research Institute’s Salary Survey Assessor but says you can go to www.salary.com to compare your salaries with the industry averages.  After reading just the first four chapters of the book, I see many opportunities to share more insightful wisdom from Greg in future blogs.

Are your net profits where they should be, or are you over or under paying yourself?

In business we refer to a sandbox as the area in which you play or conduct business.  It consists of three things: your geographical boundaries, your products or services, and either your client description if you sell direct or your distribution channel if you sell there.

When determining your sandbox, one area of thought is to make sure that the sandbox you are playing in is capable of getting you to the goals you have created for yourself.  Problems could include not having enough customers or not having the right customers in your geographical boundaries.  The product or service may have saturated the market you’re in, and the client description could have changed or expanded.

In our situation, we found that to reach our goals we need to add a geographical boundary that is larger and more diverse than our existing one in Knoxville, TN.  We have the opportunity to open another office in a market that provides this, and we feel this will open the sandbox for us to get where we want to go.

April Cox, my partner and co-founder of Efficience, will be going to Dubai in the beginning of June to start our new office in that fast growing and dynamic city. April has contacts there from her husband and EO members that we have met over the years, so she will be off and running to network and increase our reach in our new expanded sandbox.

Not only will she be in fast growing market, it is also a modern city adapting to the latest technologies.  This will be a plus for us at Efficience because we believe there is a better way to leverage technology and growing in a new environment with other companies that believe this also will be mutually beneficial.  It takes four hours by plane to get to our office in India from Dubai, so working with our team there will be more  “local” for the companies we connect with as we work together.

We are excited for this expansion and the chance to open the door to new relationships, customers, and product opportunities.

Is your sand box big enough to get you where you want to go?

Have you thought about how fast things change and how really different things have become with how you work and live?  Think about the companies that you use every day that didn’t even exist ten years ago.  Think about how you use your smartphone today and access Facebook.  How different, both good and bad, was your life back then?

Consider all this from a business perspective.  What new companies have appeared or disappeared because of a new innovative idea?  Things move so rapidly!  A company can go from zero to hero in a flash, but one can also go from kingpin to trash bin in the blink of an eye.  What happened to MySpace, and what is occupying that building near you that was once Blockbuster?

The point is that technology and connectivity are changing the world so fast that items and companies we consider staples, such as Google and Facebook, may not even be around in 5 or so years.  I recently read a Forbes article that shared a perspective on this topic.

According to the article, companies in the early years of the web 1.0 like Yahoo, Amazon, or Google didn’t see the social aspects of web 2.0.  Now in web 3.0, the social companies have not adapted to the current world of the Smartphone.

Will Google face a challenge as better ways to search on smartphones appear?  Will Amazon and Facebook keep up as more people use their phones to shop and connect instead of the desktop?  Which one of these companies will be hit by a new idea brewing up in the  garage right now?

Is there an opportunity for you in this space?  If mobile can disrupt Google and Facebook what can it do to your business?

As discussed in the X-Factor Blog, I attended and spoke at the Nerve Conference in Atlanta just over a week ago and had a great time!  We listened to some interesting speakers and had a fun spending time with our EO friends and meeting some young aspiring entrepreneurs.  The breakout went well!  The X-Factor content leads to such powerful discussions and opens us up to the possibilities of creating breakthrough opportunities for our businesses.

The conference theme “Dream, Challenge, and Lead” was inspiring.  They kicked it off with video of Martin Luther King, Jr.  Then a gentleman came up on stage looking like a young Dr. King and orated the “I Have a Dream” speech.  What a powerful experience!

We later listened to the three young international workers that had been captured and held hostage for over a year because they had been hiking near Iran.  It was seriously challenging to listen to them share their stories, let alone be in their situation for that amount of time.  They spent much of the time in solitary confinement, and they spoke in depth about how incredibly difficult that was for them.  Their stories on this hit me hard and reinforced how social a species we really are.  When we don’t have human contact, we are driven to a psychological breaking point.

The natural instincts we have to be social would explain the success of social networking and the intrigue we have around the success of Facebook.  So when we were told the Winklevoss Brothers were speaking, we packed the conference room.  They came up with the idea of a social website and asked Mark Zuckerburg to try and build it, and then he went off and built one himself.  The twins talked about their work habits and the challenges of being Olympic caliber rowers.  They did a great job comparing Olympic sport to the business world and what they are doing today.

 They didn’t really break out into the issue we all wanted to hear about and what really happened with the Facebook before Q&A.  However, we jumped right in and asked when they took questions.  They shared that they felt it was pure fraud, and they were very disturbed by his actions.  I would say they don’t have much to complain about with Facebook stock getting ready to go public, and they also got rich while training for the Olympics.  They have new ideas (shhh it’s a secret) that they are exploring with all that money they have now.

I find it very beneficial to be at these conferences (being social) and to gain exposure to the experiences of proven and successful people, whether they are the speakers or the members attending.  I was excited to meet a couple of young entrepreneurs with that look in their eyes that says they’re ready to go after something big and create something from nothing.  Quinn and Michelle go out and make the world a better place with your budding entrepreneurial spirit!

What are you doing to let that inner entrepreneur to come out?

Something exciting has happened in the entrepreneurial world, and I want to share it with everyone.   The JOBS Act, passed by both houses of Congress in March and signed into law on April 5th, will generate big changes for the growth of small and mid-sized businesses.  One of the major amendments in this bill would allow crowdfunding.  I see this evolving into a significant means for companies to access increased funding, and it is a great way for small investors to find more opportunities to devote their money to companies with which they are more closely involved.  Given how connected we are through social media and the internet, this is ripe for the times!

So what is crowdfunding?  It is the opportunity for your business to use a website and social media to allow others with an interest and small sums of money to invest.  Prior to this bill, the Securities and Exchange Commission (SEC) would only let a small number of people invest in one business, but once your business passed that limit, other investors were required to have a large income or net worth, or you would have to register as a security with the SEC.  Crowdfunding will eliminate all this red tape and provide the opportunity to truly democratize the investment process.

This can be compared to a New York law which passed in 1811, changing the liability requirements for corporations and making it easier to establish one with minimal requirements.  This allowed investors to hold a diversified portfolio of stocks without regard to the debts of the companies in which they invested.  This freed up money to move in areas it was needed, which at the time included textile mills due to our challenges with Britain (War of 1812) reducing trade.

That timely law allowed money to flow where it was needed.  Today, we have a similar environment where businesses can’t get the funding they need to grow because of all the bank problems.  Banks withhold lending because they fear the bad economy, have experienced many losses already, and must hold more money in reserves due to increased government regulation.  This starves the entrepreneur from the funding needed to take advantage of various opportunities.

Given my history with investments as well as the historical results when we democratize people, government, business, and investments, I see the start of a new era.  Investing in a portfolio of startups will become as common as mutual fund investments!  Does your business need capital to grow and could crowdfunding be the advantage you have been looking for to explore new opportunities?

I have been working on putting together some content for a breakout session I’ll be doing at the EO Nerve Conference in Atlanta next week. This content was created for Insignia and Quantum leap EO programs to help Forums engage in more stimulating discussions around your businesses with the other business owners. I really enjoy these events, catching up, and sharing with my existing EO friends and meeting new ones.

The topic has to do with discovering your X-Factor, which is not an easy task. Your X-Factor is a decision or strategy that solves an industry bottleneck and gives you 10 to 30 times the competitive advantage. This is something that is not visible to your customers. In fact, you don’t want to share it with anyone outside your organization. Treat your X-Factor like your company’s top secret magic ingredient, which will greatly increase your profitability compared to your competitors.

What are some of the industry bottlenecks? Bottlenecks can come from delivery, largest cost, innovation, process flow, customer retention, employee retention, selection, or people reduction. There are so many options, the ones listed and some that may not be thought of right now. That’s the beauty of it! Seize the opportunity to seek out and develop your X-Factor.

Now, what are a few examples of X-Factors? Outback Steakhouse created a compensation plan to retain restaurant managers (an industry bottleneck), keeping them for 5 years or longer when the average was around 6 months. AutoNation offered all the brands of the various cars to break the bottleneck of customers not returning four out of five times. Starbucks focused on higher prices, giving them unbelievable margins.

So, what process can you follow to help discover your X-Factor? This takes some analysis and digging. Sometimes, you discover it at the industry trade shows. Looking at all the breakouts, you will see the problems they are trying to solve, and that may be just the clue you need. You can brainstorm around these questions: What is the biggest cost in my industry? What are the people problems? Where is innovation not happening? And how do I keep my customers and employees happy? Once you think you have a handle on it, then ask yourself, “Why?” five times and watch the onion open up and reveal itself.

When you latch onto your X-Factor, you will be ready to jump on and ride the rocket, so be prepared to hang on. What are you doing to discover your X-Factor?

On my entrepreneurial path, I have realized many things come down to a few key decisions. Sometimes they are very tough decisions that can have a significant impact on people’s lives. This is what being an entrepreneur and leader of a company is all about. It is about making the big decisions that will either lead you to your success or demise. The demise part comes by not acting and putting off these tough decisions that need to be made.

These decisions can come in the form of people that should or shouldn’t be with your company, products or services that you should or shouldn’t have, or in the strategic direction of your company.

We have been having a challenge with our solutions sales manager in generating results. When he started, we worked hard to help him gain understanding of the marketplace, CRM, leads source, and messaging. We invested significant time and resources before he even started to make calls or send emails. Then after the calls and e-mails started, the volume of activity didn’t produce the needed appointments to create sales.

This left me with lots of discussions with my partners on what to do. You hate to make a change when you have made a large investment of time or money into something. You listen to the excuses that are made for why the results aren‘t there. You want to go with it, but your gut tells you something is still wrong. We even offered a commission only option as the last attempt to keep a relationship because a very small part of me said he may just need more time. Finally, my partners and I faced the writing on the wall and said enough is enough.

This is never an easy thing to do, and only a sadist would enjoy it. Afterwards, you often realize that your gut was right, and you wonder why you didn’t take this action before, especially when all this evidence surfaces supporting your decision when you finally make it.

I’ve had to do this more times in my career than I would like to admit. When I have to let someone go, I feel like I’ve failed, like I didn’t do a good enough job in the hiring process, which should have prevented this. Efficience has a very stringent hiring process, but it isn’t foolproof, so these things happen.

Whenever you have a parting of the ways, it seems to be inevitably in the best interest of all involved. The person let go learns from the situation and moves on to seek an opportunity better suited for them, and the company also learns from the circumstances and refocuses to find someone better suited for their needs. Obviously, some people deny responsibility and blame the employer, but typically I have seen people move on to positions in which they were able to excel and advance their careers.

We all have strengths, and we just need to be freed up to find them sometimes. Are you holding back and avoiding making a decision that would be in the best interest of all involved?

Let’s continue our discussion from last week’s blog.  How does Abundance solve the future problems that seem to loom before us like population growth, water needs, hunger, and power?

Abundance Thinking holds the understanding that we have the capability to solve our pains with the technologies we have already created.  Those technologies are at such a level that the continued connectivity of each of them creates exponential opportunities for solving all the issues of the day and the problems out ahead of us.

Click Image below for TED Talk.

When I talk about technologies, I am referring to ubiquitous broadband networks, nanomaterials, digital manufacturing, synthetic biology, artificial intelligence, robotics, and infinite computing.  These areas of exploration are a game changer for the world in which we live.  For those skeptics out there, let’s look at a few examples.

Consider the issue of water needs, which is a major one.  Dean Kamen was working to get sterilized water to dialysis patients, when he realized he could solve a problem of clean water for billions of people by creating the Slingshot.  This device is the size of a dorm room refrigerator and has an intake hose and an outflow hose, so you could stick it into anything wet, and out would come pure pharmaceutical grade injectable water for dialysis.  Great for drinking also!  Anything wet includes salt water, arsenic-laden water, and even the latrine.  Can you imagine that?

This ultimately translates into helping to solve the population explosion.  How?  Most people that have large families are rural farmers that need more people to work their farms.  They have more children because they tend to have a higher mortality rate in rural areas without clean drinking water.  Solve the water problem, and you take huge steps toward the over-population problem.

Next, let’s tackle food.  Vertical farms will change the game here.  This would consist of utilizing buildings that would be immune to weather changes, so crops could be grown year round.  It would take ten to twenty soil-based acres to produce the same amount of crops as one acre of skyscraper or vertical farm.  This also means no pesticides or herbicides to runoff and effect the environment.

Now, we will take a look at the power issue.  An updated version of the stirling engine can burn almost anything, and it is being used to power things like cell phones and lights.  This engine can also power the Slingshot.  Guess what powered it during a six month trial in a Bangladesh village?  Cow dung!

All these examples prove that we really can solve huge problems and realize how abundance will raise the living standards, save resources, and provide ecological benefit to all on the planet.

If you are wanting to explore this more or still not convinced check out the TED Talk by Peter Diamandis or read the book.

The pervasive worldview today suggests limitations and scarcity, and this restricted perspective seems to be spreading with all the negative feedback we are continually inundated with at every turn.  When human civilization and technology repeatedly prove the limited and scarcity thinking wrong, why do we let it consume our consciousness?

If this scarcity mindset was accurate, we would have mostly starved to death by now after all the cries in the ‘70s that insisted the exploding population would consume all the food.  Have you been to a grocery store lately?  What about how we were scheduled to run out of oil a decade ago?  We should all be walking now and burning our furniture to heat our homes.

This is scarcity thinking, and it gets the best of us because our minds were built to think this way in order to save us when we lived in a day of surviving off the land and running from predators.  However, we really live in a world of abundance!  A little more awareness and understanding of this could take a lot of stress off our shoulders.

In previous blogs, I have discussed how an abundant mindset opens people up to achieving the success and goals they desire.  It also prevents us from getting so depressed by the world’s problems and issues, which Peter Diamandis and Steven Kotler explain in their new book “Abundance:  The Future is Better Thank You Think.”  In this book, they discuss that resources are open to the benefits of technology.  Few are truly scarce; they are mainly inaccessible.  They show this by the analogy of an orange tree.  If I pluck all the ones I can reach from the lower branches, then I am out of usable fruit until technology kicks in, and someone builds a ladder.

Diamandis and Kotler say “humanity is now entering a period of radical transformation in which technology has the potential to significantly raise the basic standards of living for every man, woman and child on the planet.  Within a generation, we will be able to provide goods and services once reserved for the wealthy few to any and all who need them.”

Are you letting the negative messages get to you, or are you looking at the world with all the abundant opportunities?

Next week we will explore how abundance will make this happen!