283. The Growth Trap That Nearly Destroyed a $30M Business

Speaker A: Welcome to the Productive Insights podcast where you can learn how to systemize, automate and scale your business via the Internet. To, uh, access previous episodes and useful productivity tips, go to www.productiveinsights.com. now here's your host, Ash Roy.

Speaker B: Did you know that your business could be growing by millions of dollars in revenue and you could still be going broke?

Speaker A: We're high fiving as only to realize that that same month we lost almost $2 million.

Speaker B: There's a hidden cost that's rarely discussed. Most businesses are so busy chasing revenue that they are hemorrhaging cash. Ryan Deiss talks about how he faced this challenge and solved it using his waterfall technique, which he shares in this video.

Speaker A: So within six months of appearing on the Inc. 500 list, uh, we had to walk into a room and let 180 people know a few weeks before Christmas that they weren't going to have a job in the new year.

Speaker B: So if you're tired of chasing vanity metrics and you're ready to build a calm business that brings in steady cash flow, then this video is for you. None of this should be construed as financial advice. I'm gonna cut that out. I'm just. No, leave it in.

Speaker A: It's fine. I did it. It's fine.

Speaker B: Uh, let's do this. Ryan, you've scaled multiple businesses above $10 million. Now, we see a lot of marketers talking about million dollar this, million dollar that. But something I've also noticed is they talk about top line revenue numbers. And putting on my CPA hat, I know that profit is more important than revenue and cash flow is more important than profit. So could you talk to us about that aspect of building and growing a business?

Speaker A: Sure. I mean, if there's one thing business owners are famous for, it's talking about vanity metrics that impress other business owners but that don't actually matter to their bank account. So whether you're talking about top line profit or you're talking about the number of employees you have, which is one of the stupidest ones ever, um, or, uh, you're talking about the size of your email list. These are all just vanity numbers that we as business owners like to throw around. But yeah, the thing that makes the difference at the end of the day is it revenue. It's really not even profit. Uh, it's really not even cash flow. It's how much distributable cash is actually able to leave the business and go into your. Now I get why people don't necessarily talk about that. That can be kind of a personal, uh, thing. But I'm all about business owners talking about taking lots of money out of their business. I think it's a good thing. And I think the ultimate sign of a healthy business is not revenue. It's not P and L profit, because P and LS like to lie. You as an accountant know this better than anybody else. It's not even like nps, like, net promoter score, customer satisfaction. The ultimate sign of a healthy business is that company's ability to distribute large chunks of cash to its stakeholder. That's the sign that you're creating excess surplus value. Uh, and so that should be the goal of every business owner.

Speaker B: Now. That's a lot harder than it would seem. I've been in business for 12 years now, and I reinvested a lot of my profits back into the business to drive growth. How do you walk that path of not reinvesting all your profit back to drive growth?

Speaker A: I think step one is to do exactly what you said and to decide that that is a viable option, because I think a lot of business owners don't actually make that intentional decision. We're sort of taught by the media and we're sort of taught by the Elon Musk and the examples that we see out there that the job of a business owner is simply to grow the company as big as you possibly can. Um, and we see this out there just in hustle culture. It shows up. So your job is just to go, go, go. Um, we also see this, funny enough, in the opposite end of the spectrum. So these people who are all about, oh, you need to have a company that's very mission driven and it's all about the mission. Right. And that now becomes this really almost religious type thing where your job is to kind of martyr yourself for the business. So the first thing that you've got to decide is that neither of those things are true. You're starting your business, first and foremost, to create a better life for you and your stakeholders. And I firmly believe that. I believe that that is the role of business. And, yep, it should create a great job for the employees. Yep. Hopefully you're making a dent in your little corner of the universe. A positive dent, of course. But I've never seen water flow from an empty cup, and I've never seen a broke person hire another broke person. Right. We have to make money if we're going to keep this thing going. And I can tell you, I experienced this firsthand. Roll back the clock to 2016. I had not one not two, but three companies simultaneously on the Inc. 500 list of fastest growing companies in North America. It sounds really cool when I go and speak on stages, I'll get introduced as a Multi Inc. 500 founder. Here's the other side of the story that people don't find out about. Two of those three companies failed. They completely failed. And the reason they failed is because they grew really fast in revenue so fast that they lost money. And so this idea, one company in particular did a half a million year one, three million year two, 30 million in year three.

Speaker B: Wow.

Speaker A: Made the Inc. 500 list. We're high fiving as a company only to realize that that same month we lost almost $2 million.

Speaker B: Oh my goodness.

Speaker A: We weren't a mega funded company and so losing $2 million was not good. So we're like, oh, we need to turn this thing around. Well, we didn't get it turned around fast enough. So within six months of appearing on the Inc. 500 list, uh, we had to walk into a room and let 180 people know a few weeks before Christmas that they weren't going to have a job in the new year. Again, we were all about growth, growth, growth, and we weren't about building a sustainable business. So I think the first thing that you have to do is just decide that I'm going to build a sustainable business. I'm going to build a business that creates excess value, that distributes cash not because I'm selfish, but because it's the sign of a healthy business. Now tactically, how you go about doing this, um, uh, what I create in all my business is something that we call a cash flow waterfall. Because again, I'm all about the cash. P and L matters. I'm all I love. I love my income statements and I love my balance sheets. Okay, I think they're great. But here's what I'm really looking for. When we set up a new business, we're going to have, uh, an operating account. And that's just a basic checking account. Everything's going to pour into that singular operating account. What we're going to decide as a team is how much do we need to keep in that operating account at any given time? And the most part, the number's about 1x, you know, one month opex. So however much it costs you to keep all the lights on to get everybody paid to run the business, buy the ads, however much that costs, we want to try to build that up just in that account. That's kind of job number one is to make sure that in that account we can survive for next month. Now everything over and above that amount, it's going to waterfall down. Now one of the first things that's going to waterfall down is taxes. And I got to tell you, pay your taxes. You only have one vendor that has missiles and can put you in jail. Okay? And that vendor is the government. Whether it's the US government or the Australian government or wherever your jurisdiction is, pay your freaking taxes. Um, so they get theirs first. And we put that, we siphon that off into a separate account. So talk to your cpa, figure out how much that needs to be. But you need to be setting that aside in that account. Do not touch it. Don't invest that in bitcoin, don't invest it in anything. I don't even like putting in a frickin money market, okay? I just want it there in cash because I want to get it gone quarterly. That sucker is going to be going somewhere. It ain't my money. So that's going in a separate account. Now everything else again over that one month opex. Now I want to waterfall into a separate fund. That is our emergency fund, that is the savings fund, that's that rainy day fund. And for most of our businesses we want to build that up to about a three month fixed expenses. So not total operating expenses, but just fixed. So now we're not buying ads and stuff like that. We're not doing anything extraordinary but just covering payroll, making rents and utilities, those kind of things. So if you think about it, between that and the main checking account, we got about four months worth. For some businesses, if they're a bit more seasonal, we might push it to six months. But I don't like to keep that much more in cash because what I know I can do is I can go to any bank, I can get a line of credit that is backed by that three months that's secured by that. And now I've basically doubled it to six months in terms of my cash available. Now everything over that once that is full is going to waterfall down into either of these. A specific investment account for future investment. So you said, how do we make sure that we're leaving money in for future investment? It's really simple. It gets budgeted for meaning it occupies an expense item on the chart of accounts on the P and L. Mhm. Or it gets planned for. We want to do a major equipment purchase, we got a big event that we need to save for. Fine. We're going to create a separate account that is earmarked for that. And we're going to allow some money to flow into that. If we don't have that or if that is full, we have another account that is the distribution fund. And everything that flows into that distribution fund, that's the account that I'm looking at. And if that account isn't getting bigger, there's a problem. And then what we do once a quarter is we distribute 80% of whatever is in that account pro rata to the stakeholders. And if people are saying, oh, but we want to leave some money in the account to invest, my solution is simple, great, let's distribute it out. And then if you want to put it back in, we can put it back in. But something magical happens when you take the money out. You start thinking really, really, really hard about what, what it means to put it back in. Right. You start getting a lot more intentional. Because in the past, man, we would just leave the money in the account and it would just have a way of going, going somewhere. And I'll tell you, an optimistic entrepreneur's ability to spend will always outpace their ability to earn.

Speaker B: Absolutely. Always.

Speaker A: So you gotta take it out. Gotta take it out.

Speaker B: Okay, this is great, great advice. Now, something I'm, um, probably legally required to say is none of this that Ryan is saying or that I am saying should be construed as financial advice. You must speak to your financial advisor. We are only talking about our experiences. I am a cpa, but I am not practicing and I am not your cpa.

Speaker A: So please keep talking to you right now. Kevin. I want Kevin. You know who you are. Go buy Tesla stock. I'm just kidding. That's a joke. We're giving individual investment advice. We're going to completely throw caution to the wind. If you're a Kevin out there listening to this. That was a joke. Please, for the love of God, don't do what I said.

Speaker B: I'm going to cut that out.

Speaker A: Leave it in. It's fine. I did it. It's fine. Um, funny enough, I was actually. The only job I had was, um, was a registered investment advisor. So I actually completely know what you're allowed to do and not allowed to do still. And I know that you're not allowed to do that.

Speaker B: Yeah. So look, I think that's such a good point, Ryan, that as entrepreneurs, we tend to really, uh, put our foot down on the accelerator and don't even think about the brakes equally. The reverse is also true where if there isn't enough cash flow or cash in the bank, we can go into these really dark places in our minds and it can kill the enthusiasm or the drive that we have. It's a bit of a fun balance, isn't it, to be able to have enough cash flow, make sure that we have money to pay our taxes and money to pay our operational expenses and so on, but yet also make sure that there is enough cash for us to feel a certain sense of abundance and optimism. Um, by the way, so a lot of the stuff that you talk about is also touched on in the book Profit first, which is a great book and I recommend checking it out.

Speaker A: Yeah, Mike McCallow, I was going to say Mike Michalowicz is a good buddy of mine. I had been doing the cash flow waterfall and I read his book. I was like, haha, you stole it from me. And he's like, I wrote this long before. And I was like, I know, I'm just screwing with you. Um, so yes, completely agree. Because people will say this is a great concept, but I don't have enough profit to waterfall down. And my comment is always the same. You have to decide ahead of time what your profit is going to be. Profit doesn't just magically happen. Profit is a decision. And so as a business owner, you have to decide what your profit is going to be and work backwards from that. Certainly once you're beyond just kind of the initial product market fit stage, when you're still trying to figure out what am I selling and what are, you know, who am I selling it to? And you're doing that like, yeah, I mean, you're probably not going to be profitable. You don't deserve to be profitable because you're not creating excess value yet. But once you are beyond the product market fit stage, you're beyond that initial point of traction. You're selling to somebody other than like your mom and your old college roommate, you really should be profitable because that's a sign that you're creating surplus value. But you have to decide to be profitable. And so, uh, we're going to put a minimum 20% profit on there. Like let's just figure it out and work backwards from that. So who can we hire? And I'll tell you, man, with AI and stuff like that now, it's gotten easier than it was before, uh, to hit that number.

Speaker B: Okay, great. This is a great jumping off point for AI. Okay, so that was the end of the first part of my ongoing series with Ryan Deiss. Be sure to subscribe to learn how Ryan Deiss is using artificial intelligence and turning AI into an employee that's coming up next. If you found this useful, please do consider sharing it with somebody else. And if you'd like to watch the full conversation with Ryan Dice right now, then consider joining our, uh, YouTube membership where we release early access to our members. And this video has been in the membership now for almost four weeks. So I'll see you inside the membership. Bye for now.

Speaker A: Thanks for listening to the Productive Insights podcast. You can find all the links in the show notes below this episode on productive insights.com you can also ask questions in the comment section that Ash personally answers. How can Ash help you today?