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Future Proofing Your Business With Cathy Smith and Jackson Millan

Show Notes

Jackson Millan, the director of Aureus Financial, sometimes known as “The Wealth Mentor” has spent the last 15 years helping service businesses understand the language of money and manufacture financial freedom for themselves and their families.

He has successfully helped over 1,000 clients build in excess of $1.5 billion in combined wealth and has scaled multiple 7 figure businesses. He is a master of helping business owners make money work for them and turn their business profit into personal wealth.

Learning From History

When it comes to business, the market has definitely changed. It’s very much unprecedented for most of us who’ve been in business. The only really comparable period of time was the late seventies to early eighties. You can only talk through other people’s experience because you didn’t experience it yourself. But as a finance guy, it’s your job to understand the past because as Winston Churchill famously said, “If you fail to learn from history, you are bound to repeat it”.  And the time to learn is right now.

The economic tides are turning and the barrier of entry and the cost of doing business is increasing. And what that means is that through a very long amount of time, basically since the global financial crisis, so essentially for the last 15 years, businesses have pretty much got away scot free and they have been able to kind of just work casually through their business.

The risks have been relatively low, sentiment has been high. There have been free flowing capital. It’s basically the gold rush of business. And unfortunately, that is no longer the gold rush is done and people are handing back their shovels and picks in droves. So this is really where, to put it bluntly. Businesses need to transition from kind of boys to men, so to speak.

The Profit Pyramid

We need to understand how do we navigate the uncertain times and future proof our business. And how we do that is by creating a financial moat around our business. And we need to stop abdicating financial responsibility and start getting into that driver’s seat. I’m hoping to unpack that today and share some great value. That sounds great. And yes, it’s been an up and down cycle for business, hasn’t it?

It used to be very difficult to get into business, very expensive. You had to have lots of degrees. Then the Internet came along and it made it, like you say, gold rush time really easy for anybody, anywhere that was connected to the Internet to create that business and really get involved. And as you say, times are changing, particularly with finances and cyber and all the issues we have today.

The first thing we need to look at here is a framework that is called the profit pyramid. At its core, all businesses in order to presuppose profit for profit, to not just be a casual byproduct that just happens to come past them if and when we need three things:

1. Profitable Positioning

We need to be able to position ourselves in a marketplace where there is an asymmetrical risk versus return in the minds of your clients and customers. In a capitalist system, which is what we’re in, whether you agree with it or not, and a consumer in this market will pay anywhere up to the value that they believe they are receiving. And the issue is for the vast majority of service-based businesses, their value proposition or their position in the marketplace relies on a leap of faith.

2. Pricing and Packaging

We can be really creative around this and understanding that asymmetrical relationship whereby if your positioning is on on par and you can articulate that position and the value, then price is just a consequence of getting the outcome. It’s the exact same reason. Look, I’ve spent a lot of time studying luxury brands, for example, Bernard Arnold, who’s the managing director and founder of LVMH, is probably the smartest person when it comes to branding and positioning through Nike. People go crazy for these luxury items and they go on waiting lists for months, in some cases years, and then pay tens of thousands of dollars for a watch or a handbag or whatever it might be.

Is that a daylight robbery and price gouging? Some would argue that and or is that just a really great business model? Because I’m sure none of those people are disgruntled with their purchase. Have you ever met somebody who’s bought, say, a Louis bag or a Hermes bag and they’re infatuated with their raving fans, right?

Absolutely not that I’ve met that many of those kinds of people, but certainly the ones I’ve heard about have definitely enjoyed the purchase. The behind this is that when we understand their value and we understand what it’s worth to our clients and customers, we can package our pricing and our various offerings in a way that it makes it an absolute no brainer.

3. Parcel Intelligence

It’s knowing your numbers and the amount of businesses that were once very profitable and through changes in the market, through changes in their business, through growing and scaling, have seen their profits erode and they basically haven’t done anything about it is astronomical. It’s mind blowing. And it’s not because of not doing it. It’s just from a lack of not knowing. And when you can understand those numbers and they can remove the fear, then it’s like a light switch and that informs the positioning, that informs the pricing in the packaging and that drives the profit. Pretty simple, right? Yeah, absolutely. And especially with your profit and loss, because you might be seeing something that’s selling a lot of.

But if you’re not actually making a profit on that unless it’s a loss later and bringing in other stuff, then it’s a case of, is that worth it? If you’re only making one or 2%, which it’s a low profit in your area, is that worth it? And quite often you find that people will be spending all their time on a product or a service that is actually draining all their resources.

And unfortunately, the statistics of how long businesses last is horrifying. 4% last more than ten years and that doesn’t include all the pop ups that we’ve had in the last ten years. Unfortunately, so many businesses don’t know how to back the winning horse because that anyone know which horse is winning the race in their business.

All About Pricing

For the most of these clients, having a small increase in price in some cases we found the sweet spot is between eight and 12% price increases and minimizes the likelihood of client churn. And what it does is it creates an asymmetrical relationship between profit and drop in top line revenue. And that actually gets them producing tens of thousands of cases, hundreds of thousands of extra cash flow in their business by a small, simple change. Yeah. And it’s it it’s amazing how we expect that to happen in our utilities.

We expect it to happen when we go to the grocery shop. We expect it to happen in a lot of other areas. But we don’t then flip it ourselves and give it to our customers and clients so our prices are going up. So shouldn’t that mean that we should be charging more as well? Correct.

So many founders and business owners are their own worst enemy when it comes to price. Yes, because let’s face it, right, we’ve got into businesses. We love what we do. We want to help people. We don’t want to be perceived as being an additional contributor to the cost of living crisis. And therefore, we think about ourselves last year.

However, in reality, like you’re doing yourself and your clients a disservice because when you are not profitable, you can’t hire the best people, you can’t deliver the best experience. And there may be an opportunity that your business may not be around to serve those people. And what injustice to your clients will it do next? You’re doing it quite a favor by charging what you are worth, assuming that you can deliver value above and beyond what you’re charging.

Otherwise, this just becomes a universal tax and it comes out of your palm and we’re seeing that a lot in the building industry where the builders have gone in with not enough margins. Their process, all of their suppliers have gone up, maybe their life is gone up as well. And now they’re literally imploding because they cannot sustain those costs.

Whereas potentially, if they had have gone in a little bit more on their pricing structures, they may have been able to ride that out. Yes, it’s really interesting. We look at a lot of trading construction businesses. Let’s assume they’ve got about a 60% gross profit. They can increase their price by 10% and they can lose 13% of their clients and still make the same amount of money.

Get a Cash Flow Operating System

If something’s working really well in your business, amplify it. If it’s not, should you look at it as something that you need to get rid of? You need to change or is it something you shouldn’t be doing at all? Yes, exactly. And I think that’s the next part of this, Kathy, is that most businesses lack a cash flow operating system.

And what we see is for the businesses who have gone insolvent and unfortunately, I’ve had a number of people try and reach out to me who their businesses have been too far gone, and there wasn’t really much that we could do to assist them, and it was because they did not have enough of a finger on the pulse to know that it was too late.

The unfortunate thing about insolvency is once you’re there, if you don’t take the appropriate steps, there are substantial risks and liabilities that are associated with that. And the simplest solution there, because let’s face it, tax and accounting is very complicated. The common complaint is “I looked at my financial statements my accountant gave me and it says, I made all of this profit. But where’s the bloody money?” Yes, this is normal because accounting generally accepted accounting principles and cash flow are two very different things.

To futureproof, implement a cashflow operating system which uses what we call bank balance accounting. In short, we set up a series of different bank accounts for different purposes, a cost of sales account, operating expenses, owners pay tax profit and we segment the cashflow in the business across those various buckets, meaning that they can pull out this beautiful thing at any minute of the day.

By doing this, you will know how you are doing or whether you’ve got enough money set aside for the specific purposes of your business. Yep. And it drastically changes things. On average. We find that when our clients implement this, they improve their profit by about 15%.

The North Star

In terms of future proofing your business in tough times, we need a beacon, we need a North Star. And the biggest challenge with small business owners and funnily enough, there are a lot of business owners who want to throw in the towel, and these are people who actually have good businesses. They just fed up. And I think it comes down to the fact that as a small business owner, our effort and our rewards aren’t necessarily always correlated. It’s not like I’m going to do this and then I’m going to get this, but it just doesn’t happen that way.

So the easiest way for you to create that North star, that beacon of light, is to build your business towards what I refer to as a liquidity event and which for many small business owners is a future sale. Now, when I speak to my small business, I’m never going to sell and I love this business.

It’s a lifestyle business. But the interesting thing is most people don’t want to sell until one day they do. Yes. And typically the business isn’t ready for sale now. Then they’ve got to add three years on to that, getting it ready for sale. And what do they say? That the best thing to do is to build it up, to sell and then not have to, because now you’re running it really well that you really don’t have to be fed up with it anymore.

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Future Proofing Your Business With Cathy Smith and Jackson Millan

And once again, this is all about having the right plan, having the right systems and then the right support to take action. So let’s recap. So understand the profit pyramid. This is a great opportunity for you to start revisiting your positioning in the marketplace. Other people should always be working towards being the most expensive and premium player in your market as opposed to being in the middle market or being the cheapest, which is often a race to the bottom.

Renovate your pricing and your packaging and understand that price should be a consequence of your clients getting that value. So if you want to put up your price, how do you better articulate and illustrate that value? And that should all come from a position of knowing your numbers. So that’s our pricing, our profit pyramid. Then we’ve got our cash flow operating system.

Listen to the full episode of Small Business Talk episode 210.

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Cathy Smith and Jackson Millian

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