From the Blog
Rising Profitability With Greg Crabtree
We at Deksia recently had the pleasure of sitting in on Greg Crabtree’s presentation, “How To Run Your Business Like It’s Moneyball.” Author of Simple Numbers, Straight Talk, Big Profits!, Greg is devoted to helping entrepreneurs build their “economic engine” through his firm, Crabtree, Rowe & Berger, PC. By calculating efficiency and creating company and individual benchmarks, Greg has founded a system for rising profitability.
Greg began his presentation by stating that a 10% profitability percentage, pre-tax, is the new break-even point for businesses. At 5%, a company is on life support; at 10%, you’re a good business; and at 15%, you’re a great business. Anything over that point, he advises to take it while you can. Greg also detailed various profit terms, cautioning business owners to be careful with the language they use. He singled out “earning before interest, taxes, depreciation and amortization” (EBITDA) as the most abused term in finance. He prefers “pre-tax profits,” as it’s easier to define and more traceable to true cash flow. He considers “revenue” to be a vanity number, preferring “gross profit” instead, as it includes revenue less direct cost.
In order to get your business up to a 15% pre-tax profit, Greg recommends knowing your current capacity and understanding the importance of being profitable and maintaining market growth in order to encourage growth. He also broke down the concept of cash flow force into four categories: taxes, debt, core capital, and distribution of profits. Regarding taxes, Greg says before you spend, put aside money for taxes to avoid surprises. To manage debt, he advises reducing the line of credit to $0 for 30 consecutive days in a 12-month period, and discourages “evergreen loans;” as far as long-term debt, Greg recommends repayment only with after-tax profits.
Greg defines core capital as 2 months operating expenses in cash after all lines of credit are paid off, trade payables are current, and estimated taxes are current and set aside. He concluded his talk by discussing distribution of profits. He encourages the safe removal of cash in the form of dividends when it won’t hurt the stability or growth of the business, and emphasizes the need to understand the difference between “tax” distributions and “profit” distributions