A decent book to read for small business owner. There are a few misunderstanding that SMB should be aware of when they build their business. Each chapter comes with plenty of examples for analysis.
I couldn't give it a higher rating as it does not tell the common way to increase bigger margin or profit for a business. Might be a question out of the scope of the book since each business is different from others. This book corrects our understanding of cashflow & net income in a business instead of how to get more of them.
There are keynotes in each chapter. I think it's sufficient enough to capture each chapters' keynotes instead of going through them all. If you want to dig more in each topic, you can always go back and read the full chapter for details.
Chapter 1: Owner salary
- Know what your market-based wage is for your role. If the business cannot afford to pay you, keep track of the wages you are giving up.
- If you are profitable and you pay yourself wages that are too low, you run a high risk of an IRS audit. And no one an IRS audit.
- Value profitability over tax savings. Stop distorting your net income because of improper owner compensation.
- Use market-based wages for everyone in the business, including shareholders.
- Pay back your investors before you share profits, and create reasonable financial expectations for your investors.
- Consider working in a limited capacity at a lower wage as transition out of active management.
Chapters 2: Profit
- EBITDA is earnings before interest, taxes, depreciation, and amortization. However, as a small-business owner, you should always include interest, depreciation, and amortization as part of your pretax costs.
- Focus on pretax profit instead of EBITDA.
- Ignore revenue and focus on gross profit.
- Your breakeven point is 10 percent: 5 percent or less of pretax profit means your business is on life support. 10 percent of pretax profit means you have a good business. 15 percent or more of pretax profit means you have a great business.
- As a business grows from $1 million to $5 million in revenue, it will pass through the black hole. To survive, the business Owner must have adequate resources to hire additional staff to take responsibility for key functional areas.
- Learn how to hire the right people, then take time to train them.
- To get through the black hole, you will need a capital safety net. Prepare a cash flow forecast by month for the time period of the expansion to determine your capital needs.
- Raise your capital safety net either by reserving profits or by seeking funds from investors.
- Make a plan to live off your market-based wage and leave every dime of profit in your business as you grow from $1 million to $5M in revenue.
Chapter 3: Labor Productivity
- Maintain a minimum pretax profit of 10 percent or greater as grow to the $5 million revenue level, and leave any profits after taxes in the business to fund the growth instead of relying on debt or outside capital.
- To maximize your productivity of labor, avoid labor creep, and don't hire an employee for a function that you can do. Con sider what functions you can outsource, and refine your management team.
- Calculate and maintain your salary cap (including your own market-based wage).
- If You are exceeding your salary cap, decide what to do about it. Are you going to hold wages constant until you hit your profit target, are you going to cut staff, or are you going to do some of both?
- Get to 15 percent pretax profit before you raise your salary cap and drive your profit back down to 10 percent.
- The higher your pretax profit, the quicker you reach a cash-positive state. Control your profit by getting the most productivity out of every labor dollar you spend.
Chapter 4: Business Physics
- Discover where your cash goes (or ask your accountant to help you) by using a format similar to the example at the beginning of the chapter.
- Set aside your taxes in a separate account on a quarterly basis regardless of when it has to be paid to the tax agencies.
- Calculate how much cash you need to get your line of credit to zero.
- Borrow term debt only when you have a clear strategy about how you are going to generate the profits to repay the debt. Understand that you probably won't be able to take distributions while you are repaying the debt.
- Once you get your business out of debt, do the same for yourself. Yes, that means paying off the house!
- Build cash by retaining profits until you hit your core capital target. Remember, you can retain only about 60 percent of the profits because you have to pay taxes.
- Take distributions on a formal basis each quarter only after you have covered your taxes and hit your core capital target.
Chapter 5: Taming the tax monster under your bed
- Don't justify cheating with cocktail party advice, and watch out for areas of tax fraud.
- Understand if you should use a cash-basis system or an accrual- basis system in your business.
- Spending a dollar to save 40 cents in taxes is not a wise choice!
- Calculate your tax liability each quarter whether you are required to pay it in or not.
- Know whether you should use the safe harbor or pay-as-you-go approach to making tax payments. Be aware that the right approach for you could change each year.
- Set your market-based wage, have your taxes taken out of that and take care of your lifestyle using your net pay. Leave your distributions in the business to first cover business taxes and then build wealth.
Chapter 6: How to maximize your labor productivity
- Your gross profit per labor dollar is the second most important key performance indicator for your business. All labor must be productive, and you must establish your labor efficiency ratio so you can hit your profit target.
- Culture, productivity, and profitability must all live in harmony. Culture becomes extinct without profitability. Profitability becomes extinct without productivity.
- Set wages based on the market, not on cost of living, Wages should change only on the basis of market forces or on performance, such as moving to a new level.
- Evaluate talent based on productivity, not on years of experience.
- Use performance appraisals to set honest expectations of your employees and give them real feedback. Identify the top three to five core competencies you need for each role in your business.
- Know what numbers you can share and defend, or just keep your books closed.
- Design incentive plans that guarantee net profit increases. Forecast the financial impact of incentive plan payouts, and have a fallback plan in case the market changes.
Chapter 7: the three sources of capital
- Do not fall into the trap of thinking that debt is capital.
- Save your own money whenever possible and use it your business.
- If you accept investment money, you must meet the expectations of the investors. If you are unwilling to do that don't take their money.
- Document your investors' expectations and hire a professional lawyer to draft your shareholder agreements.
- Put sweat equity into your business whenever possible. It will always give you the best possible return on investment.
- Make fair sweat equity arrangements when multiple shareholders are involved.
- Whenever employees want to earn their way into the business, make sure they are motivated by returns on their investments.
Chapter 8: Reporting Rhythm. The right data at the right time
- Find your reporting rhythm and hold your team accountable for report production.
- It is not the quantity of data, but the right data at the right time that matters.
- Never take your eye off your cash balance.
- Project your cash flow over a two-week period so you can plan for shortfalls.
- Monitor your labor productivity by watching your gross profit and your cost of labor.
- Use rolling-twelve data to see the macro trends of your business.
- Keep your P&L thin; look at seven or eight key lines of data.
- Never print a P&L without looking at your balance sheet to make sure there are no glaring errors.
Chapter 9: Economic value
- Knowing the economic value of your business gives you a baseline to make decisions about either selling or keeping your business.
- The fair market value of your business sets the baseline for ons in 50/50 shareholder deals. Generally, if you can buy out your partner for less than the economic value, you should take the deal. If your partner is offering more than the economic value, consider selling.
- Beware of agreeing to a deal that does not have a chance of succeeding. Even if you have already been paid, the buyer can come back and seek damages from any possible overstatements.
- The five elements of value lead to a profitable business that is well capitalized.
- Beware of using rule-of-thumb methods to calculate the value of your business because they can introduce both positive and negative distortions.
- Profit really matters in the value of a business and in profit distributions, Position your business so you can be patient, and keep profits in the business until you are debt free.
- Set realistic expectations whenever you offer stock to key employees. Do the math on what your stock is really worth today and what you expect it to be worth if the employee leaves before the company is sold.
- Do not give away your stock! Your cash is cheap; your stock expensive.
Chapter 10: Skip the budget, learn to forecast
- Use regularly updated forecasts instead of budgets. Budgets are a license to spend, forecasts are a license to make profit.
- Keep your forecast at high level. Detailed forecasts do not encourage regular updating, and they'll take so much time to maintain that you won't have time to evaluate them.
- Evaluate your key metrics to understand the movement of your data.
- Your forecast must connect your P&L to your balance sheet. Keep your eye on how your cash lags your profitability.
- Rolling-twelve data gives you the best sense of mega trends in the business. The sooner you detect a change, the sooner you can fix it.