The E Hustle 38: My opinion doesn't matter - neither does yours.

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At the end of the day, opinions are just that.

I'm not chasing opinions, I'm chasing facts, because I always play the averages, and facts play a big part in this.

If you've worked with me, you might have heard me say this before: "It doesn't really matter what I think - the numbers don't lie".

Nine times out of ten the numbers will tell me exactly whether or not a business is going to succeed.

Recently I held a workshop in Sydney, Australia, and at the end of the workshop I spent 10 minutes talking to a couple who owned a brand that was spending 30% of their monthly sales on advertising.

My ears pricked up. Did I remind them that it's been proven that brands waste enormous amounts of money on paid media on sales that were already theirs? No.

I wanted to hunt for the facts.

So I asked them what they wanted out of their business in the next 3 years, and like many entrepreneurs, they said they wanted to make tens of millions of dollars a year.

Next question: What net profit did you want to target. The reply? 30%.

Next question - what is your gross profit margin?

You see where I'm going here?

The answer was 60%.

Business goals debunked. 

Why?

Well, at a 60% gross profit margin, to achieve a net profit margin of 30%, they will need to operate their business on 30%.

Let's break that down.

Gross profit = 60%

Operating Expenses = 30%

Gross Profit - Operating Expenses = Net Profit

60% - 30% = 30%

So if they're already spending 30% on advertising, then they have a grand total of $0 to spend running the rest of their business, you know, rent, subscriptions, and those things called wages that founders (but more often staff) sometimes take.

Realistically this business has to either bring their ad spend down to 10-15%, to allow a further 15%-20% to operate their business. Or, continue spending 30% on advertising but realise that their goal of a 30% net profit is just not going to happen.

So, don't bury your head in the sand. Ask yourself how much money your business should be making, and remember that making sales is not making money - profit and cash is making money. Once you've set yourself that goal, of say 30% net profit, understand that the difference between your net profit %, and your gross profit %, is how much money you have left to operate your business.

Chances are that number isn't 30%.

Until next week,

Paul

PS, if you think you need help with strategies like these reply to this email.

PPS, here's a link to setting your gross profit margin based on your net profit targets, and how much you're spending to run your business.

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