Welcome to the next chapter in CFF university. And we’re talking about profit optimization. How do we make sure that the lemon that we call our business, the orange that we call our business, this thing that we can squeeze juice out of, and the juice is called profit.
How Do We Optimize Profits?
How do we make sure that we optimize profits? It reminds me of a story. When I was visiting a client in Fort worth, Texas. And during our meeting, he had a big glass window that overlooked the entrance to the yard, where the trucks would come in and come out. And during the meeting, a truck came in and he jumps up from our meeting and runs outside and gives the driver a good piece of his mind because the driver didn’t have the tarp over the back of the end dump trailer. They were a sand, dirt, gravel hauler.
When the driver pulled into the yard, the tarp was not extended over the belly dump. Then the customer came back into the office. And I said, if you don’t mind me asking, what, why did you, why did you think you needed to go do that? And he said, because our business is a business of pennies per mile. And we know that when that tarp is extended, we get better fuel economy in our trucks. So when that truck pulled in and it didn’t have the tar pulled over it, I knew we didn’t maximize the profit and fuel efficiency profit from that, from that route. So I wanted to go remind the driver of that by the way, driver had been trained driver just chose not to do that. Transportation is a business of pennies per mile in many situations.
This Fruit We Call Business
So we have to have this, this fruit That we called, our business, that we squeeze the juice out of and the juice is profit. So let’s talk about how do we optimize profit in our business? What metrics, what key factors should we be focusing on in order to make sure that every time we do the job that we’re maximizing the profitability from it, the first thing that that I want to talk about, there are eight topics here, eight, eight pieces of information, eight metrics that we think you should be tracking to optimize your profits.
Step #1 Reduce Customer Concentration
Number one, what is your customer concentration? How much of your business Comes from? What amount of customers does 80% of your business come from? One customer does 10% of your business come from one customer? How much of your revenue comes from what customers? The reason this is so important is because if you lost that customer, what would it do to your business? If you had one customer who generated 80% of your business, and you bought all this equipment and you’re hired all these people and you have the big yard and you’ve got the systems and the technology and the computers, and then that customer leaves you at the end of the contract, what does it do to your business?
So we encourage you when you’re looking at profit optimization to reduce customer concentration, do not have one customer that generates 80% of your business. I can tell you a commercial fleet at our finance company. The maximum client concentration that we have is 6%. The, the, the, the largest customer relationship that we have generate 6% of our annual revenue. And it gives us the comfort level that if for some reason we lost that account, we would still be able to survive. No problem. We encourage you to look at your business and your customer concentration in the same way.
Step #2 Revenue Attrition
Number two, revenue, attrition, how much revenue Are you not getting to come back to you? Your customers are not calling you again to do another load or another job. Why, why aren’t they wanting you to do more? Did you not give the service that you promised was the price too high? Did you take too long? What’s the reason that customers aren’t coming back to you is the step number two in profit optimization.
Step #3 Sales Pipeline
Step number three is what does the sales pipeline look like? What does next month and the month after, and the month after that look like for you. And we’ve talked about recurring revenue and why that really helps you in forecasting in a previous chapter, but this is where it matters. How much of your future bills are already covered by today’s pipeline? This is a really important element. It’s not just what business did we do? What work did we do? What did we bill? But what are we bidding on? How many quotes do we have on the street? What does the future pipeline look like? It’s a key component to profit optimization.
Step #4 How Much Did You Close
Number four, Obviously, how much did we close? How much business did we do this week? Today, this month, this quarter, of course, this year. And then how much of that business can we include in next year’s budget? Right? What are the booked orders? How much revenue has been raised?
Step #5 How To Increase Revenue
Number five, what way can we increase revenue? In other words Is the current business that we have Could we increase it? Could we put In, um, uh, an extra 3 cents per mile, could we tow instead of towing at a hundred bucks, could we tow it $110, do the same amount of business this month, this week, this quarter, this year, but make more revenue from it. And remember, once our fixed expenses are covered, any dollar in revenue becomes pure profit.
So if you were making money at a hundred dollars a toe and you took it to 110, that $10 goes right to the bottom line.
Step #6 What’s Our Gross Margin
Number six, what is our gross margin? In other words, how much does it cost us to operate our trucks, our payroll, our office, our phones, our utilities, our insurance. How much is that fixed cost minused from revenue equals your gross margin. What could we do to reduce expense, keep revenue the same, reduce those fixed expenses and increase our gross margin, which will eventually increase our net income.
Step #7 Cashflow
Number seven, which is cashflow, how much cash flow do we have coming in every day, every week, every month, that is above and beyond our fixed expenses, because cashflow
Is the name of the game. How long is It taking us to get paid, paid on our accounts, receivables? What would happen if we, instead of getting paid in 45 days, we started to get paid in 30 days, or instead of getting paid in 30 days, we started to get paid in two weeks, or instead of two weeks, we started to get paid within 24 hours because we made a policy that said, we no longer take checks. We actually only take ACH payments, wire transfers, or maybe even credit card payments. So we can get our money in faster from the work that we’ve already done. Potentially even the expenses we’ve already paid out, right? We can get paid faster. That’s cashflow management and the like last one in profit optimization is so simple, but yet not always focused.
Net Income On Your Product
John, what’s the net income. How much money are we actually making from this piece of fruit that we’re trying to squeeze what’s left at the end? You know, net income is a key driving factor. If you were to sell your business, no one buys you without net income, net income also improves your life. It improves your life at home. It allows you as the owner to take more money from the business, whether it’s in salary or in distributions, however you choose to take your money out of the business. Net income is what that is.
We Have To Make Money.
Work is too hard. The process is too difficult. The, the, the liability and the potential aggravation is too high to trade dollars to not make money. Now we’ll get into an a, in a later chapter in CFF university, what does it look like in valuing your business to sell it? How much could you sell your business? But if your business isn’t making real net income, that valuation is going to be much, much, much lower. So you got to focus on the net income. Those are the eight metrics is in order to maximize your profitability, that you need to go back to the office and figure out can I get their information? Can I get this information from my organization? And if you can’t just eat the elephant one bite at a time, start at number one and say, let me go ahead and pull a list of all my customers.
Do You Have A System – Recap
Maybe they’re just in your head. Maybe you don’t have a system that can pull it, but you as the owner, you know who you’re doing business with, write it down and then determine how much of that business is, is, um, the percentage of that business equals your, your revenue and then ask yourself, am I too highly concentrated with this 1, 2, 3 customers? And then how do I diversify? That’s how you eat the elephant one bite at a time of profit optimization. Great chapter here. Go do the work.
We’ll see you in chapter 17.