Before we get started… |
I'm running a live workshop this Thursday, May 21st called Double Your Take-Home™…with the goal of maximizing your margins and (as the name suggests) 2X’ing your personal take-home pay. |
You bring your P&L, and by the end you'll know exactly how much you should be taking home every month, plus you’ll have a 90-day plan to actually hit it. |
The average founder who runs through this exercise finds $50K – $120K in “hidden” profit (and at just $100 to attend, the math kind of speaks for itself.) |
Click here for the details and to grab your seat. |
Ok, back to this week’s issue… |
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One of our portfolio companies had been stuck at $5M – $6M in revenue for two years… |
Not declining. Just…stuck. |
Even worse, there had been ZERO distributions in 2 years. Nada. Zip. $0. |
Every dollar just kept getting "reinvested" right back into the business “for growth,” and even when the business was growing… there was still not profit. |
Eventually I got sick of it and said… |
"Figure out how to distribute $50K a month by the end of the quarter…or figure out a different place to work." |
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(Okay, what I actually said was, "What needs to be true to distribute $50K a month by the end of the quarter?" …but they got the idea.) |
It wasn’t easy (or painless), but they eventually made the hard choices that needed to be made to get the company profitable again. |
Fast-forward 90 days: |
Distributions are now $100K+ per month (and climbing) Revenue is UP 40% over the prior year, because… Projects are getting done faster (and with fewer resources) because the company is leaner and less chaotic
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The lesson? |
Profit never happens on its own. You have to plan for it. Budget for it. Force it. |
That's why we built The Hidden Profit Playbook…a four-step system (and a free Google Sheet we call the Expense Ratio Analyzer) that we use inside our $200M portfolio to surface profit that's already hiding inside the business. |
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Because the part nobody tells you is this: the cash you need is almost always already there. It's just “hiding” in the wrong buckets. |
Here's how to find it… |
Step 1: Budget Profit FIRST |
Most owners think the profit equation is: |
Revenue – Expenses = Profit |
It's not. The actual equation is: |
Revenue – Profit = Expenses |
(Shout out to my homie, Mike Michalowicz for teaching me this.) |
In other words, you bake the profit in first…then work backwards to figure out what you can afford to spend. Because here's the iron law of business ownership: |
An optimistic entrepreneur's ability to spend will always outpace their ability to earn. |
So set your target profit margin as a percentage of revenue before you spend a dollar on anything else. |
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Decide your target profit margin FIRST! |
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Not sure where to start? Default to 20%. It's achievable in most industries, and it gives you enough margin to actually take distributions, fund taxes, and build a reserve. |
Want to get more strategic? Use the Rule of 40 (the rule that your profit margin plus your growth rate should equal at least 40). If you're growing 15%, your profit margin should be at least 25%. If you're only growing 10%, push for 30%. |
But don't go below 20% as a floor. Crap happens. Markets shift. Refunds spike. You need the cushion. |
If you don't decide your profit, the business will decide for you…and it always picks $0. |
Step 2: Build Expense Buckets |
Once you've claimed your profit, every other dollar needs a home. A category. A “bucket.” |
If a dollar doesn't have a bucket…it's a leak. |
Some common expense buckets include: |
People (Salaries & Benefits) Cost of Goods (COGs) Marketing & Advertising Facilities (Rent & Utilities) Technology & Tools Commissions Fulfillment / Contractors Admin & Fees Merchant Fees Misc
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The more buckets, the more clarity. |
Step 3: Establish Expense Ratios |
Now we decide how much of the remaining 80% gets allocated to each bucket. |
If your profit is set at 20%, every other dollar has to fit inside the remaining 80%. How you carve up that 80% is what's known as your expense ratio. |
Here's a baseline that works for most businesses: |
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Add it up and you get 80%. Tack on the 20% you reserved for profit, and every dollar coming into your business officially has a home…including the dollars flowing into your pocket. |
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Set your target expense ratios for each “bucket.” |
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A few pro tips… |
Your People bucket is usually the biggest. That's normal. But if it's over 35% of revenue, you probably won't be profitable. Same with COGs…over 35% is usually a problem. |
Technology & Tools is the bucket that quietly destroys margins. SaaS subscriptions compound silently, and most companies have 30 – 50% of their software spend going to tools nobody actually opens. |
And the leakiest bucket of all? "Miscellaneous." If any single expense inside Misc accounts for more than 2% of your monthly revenue…pull it out and give it its own bucket. |
Money doesn't hide in the buckets you watch. It hides in the buckets you forgot to make. |
Your exact ratios may differ (sometimes a lot) depending on your business model and industry. A service business runs different numbers than an e-commerce brand, and an agency runs different numbers than a SaaS company. |
If you're not sure where yours should land, Google it…or ask Claude or ChatGPT for benchmarks. Just make sure your total expense ratios PLUS your profit margin equal 100%. |
No more. No less. |
Step 4: Find The Hidden Profit |
Now compare your targets to your actuals. That's where the missing money shows up. |
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Compare actual expenses to target expenses to see where to cut. |
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When we ran the Expense Ratio Analyzer for one of our $10M portfolio companies, they were overspending by $135,000 a month, and $43,000 of that was hiding in Technology & Tools alone. |
The cash they needed was already in the business, it was just sitting in the wrong buckets. |
They didn’t have a sales problem…they didn’t have a marketing problem… |
…they had a budgeting problem! |
But finding the leak isn't enough. You also have to know HOW to cut. |
Most owners cut the wrong things first. They slash marketing, fulfillment, or customer-facing services because those are the easiest line items to measure. But that just kicks off a death spiral…because you're cutting the things that make the business work. |
The right cut order goes from the edges in…the expenses farthest away from your customers. |
First, cut perks. Free lunches. Off-sites. Gym memberships. The stuff your customers never see (Facilities, Admin, and that overstuffed Misc bucket). These cuts rarely have any impact on the experience your customers actually pay you for. Second, cut tools nobody uses. Audit your SaaS. Most companies find 30 – 50% of their software spend is going to tools nobody has logged into in 90 days. Third, cut middle management. Roles that exist to manage other roles (instead of directly serving your customers or acquiring new ones) can usually be cut.
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Customer experience should be the LAST place you cut…never the first. |
So, here's the question… |
Is your business actually short on revenue, or is it short on a plan for profit? |
In my experience, when you solve for profit first, growth and revenue has a way of showing up all on its own. |
⚡️ Action Step: Grab a free copy of the Expense Ratio Analyzer (the same one we use inside our $200M portfolio). Plug in your average monthly revenue. Set your target profit margin at 20% or higher. Build out your expense ratios so the total equals 100%. Then drop in your actual expenses for the last three months. The buckets bleeding the most cash are where your hidden profit is sitting. Cut from the edges in. Repeat monthly until your take-home doubles. |
Give it a shot and let me know how it works… |
-Ryan |
Ryan Deiss
Co-Founder and CEO, The Scalable Company |
P.S. If this issue resonated, you're going to love what's coming up this Thursday, May 21st. |
I’m running a live, 90-minute workshop called Double Your Take-Home™ where we plug your real numbers into the Expense Ratio Analyzer, identify your biggest leaks, and calculate exactly how much more should be hitting your distribution line every month. |
Click here for the details and to register. |
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