MBA2468 Q&A Wednesday: I am making more revenue than ever but I'm still not rich. Why?

0:08Heyo, welcome to the$100RNBA show, where we're all about giving practical business lessons, for the real world. I'm your host, your coach, your teacher, Omar Zenhom. And today's episode is Q &A Wednesday, where we answer a question from one of you, one of our listeners. Today's question is from Jamie. And Jamie asks, I'm making more revenue than ever, but I'm still not rich. Why? Great question, Jamie. This is something many entrepreneurs struggle with. So you're definitely not alone. You're making more sales. You're getting more customers. You're growing your team, you're making more zeros in your revenue than you've ever dreamed, but your personal wealth or even the health of your business is not where it should be.

0:50You don't feel comfortable. In today's episode, we're going to break down why this happens, what are some of the causes, and how to fix it. One of the things a lot of people talk about is that business is hard work. There's a lot of sacrifice. And if you don't get a reward for that sacrifice after a long period of time, you will get demotivated. If you don't see the wealth side of things where you're actually making more money, keeping more money, improving your life. It's just going to get really demotivating after a while. You just can't eat glass forever. So let's stop that from happening. Let's change things up.

1:20Let's make sure more money is ending up in your pocket. Let's get into it. Let's get down to business. First of all, I don't know the details of Jamie's financial situation. I'm not a financial advisor. I'm not an accountant. So I really can't advise him or give him financial advice that's specific to his situation. But his question and his pain is something that I've heard over and over and experienced myself over the years, where I'm making so much money in revenue, where I'm making sales. I have no problem moving product. I have no problem serving customers. I got plenty of customers. But if I look at my own personal wealth or I look at my own profit in the business, it's just not there.

2:00It's all kind of getting squandered somehow. So let's solve this. First of all, it's important to distinguish between revenue and wealth. Revenue is a total amount of money your business is bringing in before any expenses are taken out. Expenses like payroll, like services, like software, like servers, like office space, like taxes, like packaging, like delivery, whatever it might be in your business. Wealth, on the other hand, is what you get to keep after all your expenses, the profit. This distinction is crucial because a lot of people, especially in the business world on Twitter, on Instagram, on social media, they only talk about revenue.

2:38This business is doing seven figures. This business is doing eight figures in business. We're going to hit 100 million sales this year. That is not impressive if your expenses are$101 million a year. That's somebody who doesn't know how to run a business because the point of business is allowing your business and the money that you invest in it to work for you. Not the other way around. You're working so that you can just break even or lose money or barely, you know, kind of cover your expenses or pay yourself. That is not what you want. Maybe you can do that in the first year or two, but that's not sustainable.

3:13And this is why revenue and profit or revenue and wealth needs to be clear. Your goal is to make as much profit as possible because that is going to allow you to take a dividend and get wealthy, get rich, like Jamie said, because you can increase your revenue significantly and yet see little change in your personal wealth if you don't have a control over your expenses and have a clear plan for your margins. Did you know that according to the U.S. Small Business Administration report, and this is something that gets published all the time online for free, you can look this up, the average small business spends 70 to 80 % of its gross revenue on expenses.

3:50So up to 80 % of all the money they make just goes out the window because of expenses. So get this, if your revenue increases by 30%, let's say, but your expenses climb by the same or higher rate, your net profit, the real indicator of your wealth, doesn't just stall, it might even shrink. It's not about how much money you make, it's about how much you keep. This is why I actually admire a lot of smaller businesses that are maybe not making seven and eight and nine and 10 figures in revenue, maybe they're making$300 ,000 in revenue, but their expenses is$50 ,000. They're keeping a quarter million dollars in profit every year.

4:30That's impressive. Another thing to consider, because a lot of people forget about this, is lifestyle inflation, right? As your business grows, often, and I mean often, the personal lifestyle of the owners grow. Meaning, let's say your business starts out and you're making$150 ,000 in revenue the first year, the next year doing$500 ,000, the following year you're making$700 ,000. As you do this every year, you start to think, oh, I'm making a lot of money. I should move up my lifestyle. I should buy a bigger house. I should have a nicer car. I should be going on bigger and more outlandish vacations.

5:04And there's nothing wrong with shooting yourself, but sometimes people move up the ladder way too fast. They don't give themselves a chance to earn some profit and allow that money to work for them instead of just spending it. I found this report from the National Endowment for Financial Education. They found that 70 % of people who receive a windfall of cash, like an inheritance of a lot of money or winning a lottery or something, they found that 70 % of these people end up bankrupt within a few years. It's all too easy to let your spending on new luxuries creep up without realizing. And here's a secret I learned over the years of being around a lot of rich people, to be honest, people that are wealthy.

5:46The wealthy think differently about money. As soon as they make money, whether they get a windfall of cash because they had a huge year in profits or they're retiring or maybe they sold a company, right? The first thing they think about is not how can I spend this money? That's how poor people think about money. Unfortunately, people that are not financially educated and go bankrupt like in this statistic, the first thing they think about is like, how can I spend this money? Whether it's buying a house or a car or whatever it might be, the luxuries that you always wanted. It's not that the wealthy people don't want these things.

6:18It's not that they don't want to have a good life. They're willing to delay gratification because they see that when they have this lump sum, they have some money, they have some profits, they see it as an opportunity. I have this opportunity where this money can work for me and fund all those things I want over time. So the first thing they think about is how can I use this money to allow it to make me more money? How can I invest this money? Whether they're going to be conservative and go through the path of real estate, or they're going to put some money in the stock market, or they're going to buy a bond or a fund or invest in startups or whatever it might be.

6:54They're thinking of ways of using that money to allow it to work for them. And that's what you got to start doing if you want to start growing wealth. It's a combination of one, making sure there are profits. And then once you have those profits, you allow that profit to work for you. It could be within the business. It could be outside the business, like I mentioned, like real estate or the stock market or whatever it might be. Again, I'm not a financial advisor, but I'm just sharing with you what I have learned from other wealthy people. So how do we take action? What are the steps we got to take?

7:22Number one, we have to understand the principle of profit. We only make profit in our business and therefore able to take a dividend and make some money and have some personal wealth when our revenue outpaces our expenses. Most of us, we are spending more in our business than we are making in a lot of ways. Or I should say it's easier to spend than to make. So there are two ways, just two ways to make sure your revenue outpaces your expenses. And it's make more revenue or lower your expenses. That's it. Now, if you want to go bonus round, if you want to be a real pro, you're going to do both. You're going to be aggressively increasing your revenue while really being conscious of lowering your expenses all the time.

8:06Once you are starting to make more and more revenue and your expenses are being lowered or at least not changing, they're not going higher, you're increasing the gap between revenue and expenses and therefore increasing your profits. It's actually that simple. And this is why margins are so important because every sale allows you to make more profit if you have high margins. To illustrate this because it's so important, I'm going to give you a very simple example. Let's say your business makes 10 sales a month and each sale has a profit margin. Let's say you have a low profit margin and you only make$1 ,000 on each sale.

8:41Let's say this is a service or some sort of consulting or something like that. You make 10 sales in that month, you make$10 ,000 that month. That is your profit. But let's just say your profit margin is not three or four X more, but 50 % more. You're making$1 ,500 in profit for each sale. You went from$10 ,000 a month in profit to$15 ,000 a month in profit. At the end of the year, that's$60 ,000 in additional profit, right? But here's the kicker. It becomes exponential with each sale you make. Because let's say the next month, you instead of doing 10 sales, you do 15 sales. And now instead of making$15 ,000 in profit each month with$1 ,500 in profit margin each sale, you're making$22 ,500 in profit each month.

9:28That's$270 ,000 in profit for the year. And now instead of making$60 ,000 in extra profit, when you had the$1 ,000 versus$1 ,500 in profit margin, you're making$90 ,000 in extra profit, A 50 % increase. That is so powerful. So get your margins right. Make sure you have as fat as margins as possible. This means increasing the value of your products or services so that you can increase the price. Pricing is all about experimentation. This is something I learned from my good friend, Patrick Campbell, who sold his company for over$200 million over at ProfitWell. They sold it to Paddle. And his job was being a pricing expert.

10:11And he taught me that pricing is all about expectation. You got to see what is the maximum willingness to pay I can charge so I can make the most sales and make the most revenue. So you got to keep on trying different things with your business and with your pricing so you can make the most margins. That's the revenue side. That's the margin side. But you also got to keep your budget and your expenses tight. Every business should have a spreadsheet called the P &L, a profit and loss sheet, where they could see all their expenses for every single month, month over month. Nicole and I review our P &L every single month.

10:45We have our eyes on the numbers all the time because the numbers is what make a business. And when the numbers are right, you are laughing. You're having a great time because everything is going well. When the numbers are wrong, your life is miserable. So you gotta make sure you review all your expenses, see if there's anything you're not using or you're not utilizing to its full potential, you cut it out, a software, a tool, a service, whatever it might be. Is there anything you can consolidate? Is there something that can do more than one thing and you can move to that tool or move to that option or that service and save some money instead of paying for two or three things?

11:20And then once a year, we look at all our expenses and say, is there something that we're doing in our business that is costing us money? Maybe it's making us money, but is it actually worth the cost? Why? Because sometimes we might want to invest that money somewhere else that will give us a better return on investment. Maybe that's marketing. Maybe that's product. Maybe that's sales. Maybe we're spending too much money in a different area. That's not really giving us the best ROI. We can spend it somewhere else in the business that can get us a better ROI. Next, invest in growth. People don't invest in growth enough.

11:52And when I say growth, I mean direct ROI growth. Direct ROI means you can see a clear return on investment. One of the easiest examples to see clear ROI are ads. You can actually run ads and track how many sales you get for the ad. So say, for example, you spend$1 ,000 on an ad, and from that ad, you get three sales. And each sale, you get$1 ,500 in profit from that sale. You spent$1 ,000, but you made$4 ,500 in profit. Great ROI. You do that until it doesn't work anymore. Here's a little statistic I found from the Bureau of Labor and Statistics. Most successful small businesses allocate at least 10 % of their budget towards marketing and sales.

12:33At least a lot of people are not spending any money on marketing and sales. In my opinion, personally, I'm hyper aggressive when it comes to marketing and sales because I see a return on investment. I spend 30 to 40 to 50 % of all my expenses in my business on marketing and sales. Why wouldn't I? Because it makes money. If I got a great product, I got a great service, I got a great whatever, and I'm offering it to the world, I want to put some fuel to that fire. I want to get as many people to see it and to know it and to taste it because I've done all the work already. Now I just got to get more people to buy it.

13:09And that's where marketing sales comes in. And this is why it's such a worthy way to grow. As long as you can see the ROI, the return on investment. I want to give you one more tip when it comes to making sure you're keeping more of the money you make in your business. Be cautious of business debt. Interest payments can eat up a lot of your revenue and a lot of your profit, of course. According to the Federal Reserve, small business owners in the U.S. carry an average debt of$195 ,000. Now, I'm a big believer that if you can keep debt to a minimum, this will allow you to have a much healthier business and a much stressless business, a stress-free business.

13:51Because debt is a monster, okay? If you are paying off some sort of business loans or credit cards, try to contribute as much as you can to pay off that loan so that way you're not paying more interest. This is one of the easiest ways to save money is to pay off that loan as quickly as possible. If the cash flow allows, do it. To sum up and to answer Jamie's question in today's Q &A Wednesday, earning more revenue is fantastic, but it's not the same as being rich or being wealthy and making healthy profits. You should focus on making as much profit as possible. Use the strategies I suggested today.

14:26Experiment, see if they work for you. They sure work for me and others that I've helped. Thanks so much for listening to the$100 MBA show and being a listener of this podcast. If you're a subscriber, if you're a follower of this podcast, thank you so much. It means so much to us that you are listening to this podcast, you're using this knowledge to build your business. I've done this because I had a rough road building my businesses over 20 years. without much guidance. I had to kind of hodgepodge my information from books and courses and maybe some shady characters even. And I had to kind of throw away the garbage and try to keep the goodness.

15:01It's not easy out there. So I built this podcast for you. And if you love the show and you want to show your support, just hit follow on your favorite podcast app right now if you haven't done so already. Thanks in advance for doing that. Before I go, I want to leave you with this. Being profitable is a habit. Once it becomes a habit, you want to become more and more profitable. But when you're not profitable and you're spending more than you're earning, that's also a habit and it's hard to break. So start this habit now so it becomes the norm and becomes something that you're known for as an entrepreneur.

15:34Thanks so much for listening and I'll check you in the next episode. I'll see you then. Take care.

15:45Thank you.