The Pareto Overlap


Manage Your Money for Maximum Profit


Lesson Info

The Pareto Overlap

I want over some ratios. Ratios are quick tools you can use to measure certain elements of your business. Here's five ones are really popular and I noticed actually, erin gross margin uh, the gross margin is your revenue versus your direct cost gross margin. This is what we were working on with kirsten. When went through a business, she had nine or ten thousand dollars a revenue and she's seven thousand dollars at cost. We can run this direct cost weaken too run this ratio, we can figure out the percentage of her her cost to the sale item, and we won't increase the gross margin when you increase your gross margin mere making more per product, you your business is going to do much better with the bottom line and that's kind of the analysis we're running through here. You sell every practice, same cost point. But if we can get the cost teo to make these price down more and more, the bottom line impact is going to be significant. So this is a great tool. If you run the gross margins on yo...

ur products and services you sell and you check back on this once a month or once a quarter you can see are you making a better margin? Are you making improvement that category in military turnover? If you are in manufacturing or you have product shows how quickly inventory turns when tim was presenting, I asked myself like, you know, this kind of frozen money on a shelf and that's a great analogy you take money to buy private it sits on the shelf for a period of time that's your money frozen up there it's going to get released again when when people pay for it so the faster you turn inventory the fast for that money comes back in I went to a manufacturer in lewisburg, pennsylvania, and they manufacture place sets but these big ones that they sell at play parks and stuff you miserable like cities and towns will buy these things the big the big place that system and remember going in there and this facility was huge they do seventy five or eighty million dollars of place sets so you can just imagine this place random forever hundreds of people working sparks flying everywhere he's big they called cnc machines swinging stuff around, cutting things, robots all this stuff moving around and I get to the end and I'm like, oh, thie guys walking around man because over there's, our inventory department where we ship all the products out, I said this is great because as I was going through the facility there was stuff going through, but there wasn't stuff piled up anywhere I couldn't wait to see this one particular room it was it was a massive room could tell from the door and you could see it going in there like I can't wait to see all these products stocked up and the opens the door and it could have been like, you know, when the drummer's ah big buildup I open the door expecting that just big drum roll and smashing things like, uh open the door and there's nothing like the drum set falls over like I know what I'm like in this massive empty room I said, what is this? Because that's our inventory room I said where's, your inventory he is oh, we moved to lean manufacturing about five years ago and we realize that inventory is killing us all the stuff we had piled up in this room was much frozen money, so once we decided that we can't have stuff sitting here, we got to move it and collect the money faster. We decide our biggest measurement of success would be the least amount of inventory, so this room is now our pride and we're proud of this room more than anything because there's nothing here that's the thing you want stuff moving through your business quickly, it points to efficiencies you could do with physical inventory but you can do with your people teo, if you're in a service space business and your people are just sitting there that's a iittle inventory you want activity? Want stuff moving so yeah that's the story yeah rena you give her something on that last slide there oh, like a minus one I don't know what the minus one was. Um so florrie move on on the gross margin what is the minus one? Oh, that makes a percentage so your revenues by bye cost will result in because revenues always should be always bigger than cost only one point something you subtract the one will make it into a percentage. Okay, cm saying um mara ways return on assets the total assets this stuff you have on the income you're having this shows you the ratio of it you want to get maura out of things you have current ratio shows how much money you have available in your business to pay your current liabilities this's a great number if this number is above one that means you maur assets more stuff available coming in more cash and accounts receivable thing you have that's going out. If this is below one it means you have more that has to go out then you have currently coming in. So when this numbers below one you have an issue once above one things were good. You want the number of the highest possible it quick ratio you'll see it's always the same as the current ratio but we subtract inventory this stuff on the shelf and so this current assets then becomes simply cash in your bank account and maybe accounts receivable but nothing seeing yourself because you're not guaranteed you'll sell it so the cash you have in your your bank account plus stuff that money that people owe you divided by the money you owe others will tell you where you stand again if this number is above one, you're a healthy position things air good how do you make even better if this is below one it's a decimal that means you don't have enough money to cover your liabilities that could be indicative of an issue right now we're gonna do is called the prado overlap and, uh I'll explain it now and call you up for a hot seat. Ok, ok pretty overlap. Is this, um the eighty twenty rule tim referenced it. I've been talking about a lot twenty eighty twenty rule again was is this it's called paradas principal? There was an italian economist named vincent peredo. You can tell he's italian because his name is vincent and he was, uh asked by the king of italy, teo um study the wealth distribution of the italian economy because what he realized the king realized is that very small a portion of the population of italy dictated all the wealth so parada went, and investigators is sure enough twenty percent of the italian population dictates and controls eighty percent of property and wealth in this country strange phenomena. So they decided to study other countries, and he realized this distribution happened consistently that twenty percent of population dictated a percent of the wealth, then he's in his own garden, in his own house. And he looks at his garden, he says, wow, the minority of my plants are yielding the majority of the fruit. So this pea pods, the people as I planted, twenty percent of them are ewing, eighty percent of the peace and the rest are you living only twenty percent? He knew that knows that this distribution wasn't just with wealth and italy it was globally. He knows that doesn't wasn't with wealth it's with most things, the parade of principle applies to nature to and here's the bizarre fact it applies to every person this room. Think about your closet right now. The wardrobe in your house. Okay, all the clothing you have in your house, eighty percent of the clothing and there you were, barely ever twenty percent time, twenty percent. You were almost all the time, which means, statistically, you and you and you are likely wearing your favorite outfits right now. It's the tweety and I know you are because I saw you where that last time totally slept in it you slept in it? You mean you're addicted to this it's the twenty eighty principle that that the minority dictates the majority. So with our clients twenty percent of our clients are yielding a percent of revenue twenty percent of our clients are the most profitable clients we have. Then we have the middle and in the lowest twenty percent are yielding the least so the most important clients to our business are usually up here. When we did that analysis for that cringe factor we were looking for these folks up here that we like doing business with but there's another component to this it's the offering the products we have are the service we deliver rick does speaking but he also does consulting is so forth the speaking for a twenty rule twenty percent what rick does is you in the apron centers revenue maybe it's consulting suspected speaking but who knows uh maybe it will become that way but twenty percent what rick does yields the majority of his revenue. So say it's consulting is consulting yield. Okay, so right now you're consulting work, maybe you do a twenty centimes yielding a present your revenue the goal in the parade o overlap is to identify who were the best clients buying the best things so rick has certain clients that by his consulting repeatedly, and if we can duplicate these clients, his business potentially grow explosively he's been very successful consulting. Now, I know you're moving toward speaking because that's what you're really interested in. So this offering mix is going to change for you, and you should re investigate it. But if things stayed stack as they are today, we won't identify ricks best clients buying his best stuff this top is what we want to duplicate down here. These are your worst clients, the ones that don't spend much money with you. You don't like doing business with you, they're complaining, you're not happy I'm not paying you much. Uh, john, when he came up, we're talking about that this lower customers buying your worst offering if we go back to kirsten's um, product breakdown, you had one product, they all sell for twenty two fifty you'd one private cost you fifteen dollars. This is your lowest margin product. The question is, can you make this product will appear? Or if the product has to cost that much that's, maybe not a good prize to carry. And you may have bad customers buying bad products, customers that complain and pay you very little and buy stuff that'll make you money. These are the people we need to slough off and when we get rid of this stuff the route back proxima really bad customers it gives us the most important tool or ask that we all can have, which is time it gives us our time back to focus on these folks and it's not just the time we spend delivering this product in service it's the emotional weight too if you have a real crappy client by a crowd of product, we're not making money the time isn't just doing it it's at ten o'clock at night when you're seeing there going oh my god, I don't have to pay bills and I got this guy is a total pain about like, why am I doing this? So when you free yourself of these low clients and these low products, it avails time but also mental energy to the emotional weight and I'm not suggesting these are bad people I'm not saying these are like bad people I'm not saying they're bad business there's not good for you, I'm a friend. The reason I wear this bracelet is he made my friend manufacturers these were in a mastermind group and he manufactures these things he sells these braces and if you can't see him on the camera over there, these bracelets are the ones like lance armstrong you know makes these my friend makes the knockoff and who wants a lance armstrong bracelet nowadays anyway? You know, saying uh he makes these these bracelets, his customers he was doing this analysis, his biggest one his biggest customers was wal mart tons of revenue, but actually they were mohr coming down this way because wal mart has very specific demands that he couldn't meet if wal mart ordered ten thousand units big revenue they were also cringed, though, because they say those ten thousand years have to arrive on monday morning at ten a m between ten am intento five a m if they don't arrive that time at our docking station at the distribution center, we're goingto charge you a penalty and if the skew is not a certain point on the box, we're going to charge your penalty so walmart, I wouldn't argues a bad company necessarily they've actually done some I think some good things, but they were very bad client for him, so they were down here so and they were buying some products that they demanded that he couldn't make effectively. So what joe did was once he realized he had a customer there's down this range buying bad products, he built a process to uh to clean things up he put a note above his dad asking every employee at about nine or ten employees of the time and said if the phone rings and it's wal mart answer the phone. The first ring if the phone rings and it's any of our other customers, these customers dollar tree was one of them. The dollar stores another one, he says the answer. The first ring, our policy's always answer the first ring if one were the first to call and the phone starts ringing, why you're talking to wal mart and stahler store? Tell walmart there's an emergency and hang up with him and answer that one. The first ring, he say. Conversely, if the dollar store calls first answer on the first ring, and when walmart calls now let it go to voice mail, that was the subtle change he made that was a so changing made by making that change, he simply prioritized the best clients buying the best things he didn't say wal mart, go go where the sun doesn't shine is that he just didn't prioritize them anymore. And so what happened is these best customer started buying more jobs cos an interesting case study in this, his company was doing two to three million time by just focusing on the best clients buying the best things. By the next year, business was doing four million customers had never been catered to so well before and the products we're getting better and better because he was focused on doing these next year. Four, two, eight, eight I think it was like seventeen or nineteen. He sold the company at twenty five million dollars. He had been in existence for twenty five years prior to this. Just eking out too. Three million dollars, twenty five years and four years grew explosively by simply applying the overlap. This matching your best clients to your best products. What do you want to come on up? I want to do this. Parade is overlapped for your business. Okay? Khun j k, I'll get you tea. Coffee, that's. Okay, your business. Um, I want to talk a little bit about your client's. Andi want what you're offering, but I want to start back with your offering first because you said you have three businesses effectively, right? Which means you've atleast three off rings tell us, just really succinctly where do the things you do? So, um, the first thing is, uh, this is sort of the newest business. I consult, um, cities on howto act more like start up. So I do customer development. I come in and teach them how to prototype, um, new products and meet their challenges. I talked to them about win, too. Create custom software for swing by commercially available software, okay, and just use design thinking processes to help them okay that's cool so you so you coach cities to be almost more entrepreneurial exactly what this was next thing you know I am the founder of a nonprofit slash before profit groups for african american entrepreneurs okay what what does what it has the benefit african american nationals like what's the esso we do hackathons on hbc you campuses we do events that educational it's educational plus community building so networking is that was really really means we have a conference that we d'oh okay and what's the third thing you do and then I have a mobile app in the app store that I've been sort of ignoring mobile after I've been so was the mobile app it's called speak chic and it helps you correctly pronounced fashion brands correctly pronounce it yeah oh that's pretty cool yeah um if you don't know how to pronounce armani or says really that is while ok what is if you have a aa typical project for a city startup in teaching them how to do startup mentality what kind of revenue or profit does that make? I'm your best gas so I've I kind of kind of screwed myself in the r o p process so it's roughly one hundred dollars an hour but okay and so for this instance for the city of san francisco it ended up being something like a ten thousand dollar contract but then they spread it out over a longer time than I was really comfortable with okay, so they took advantage of a little bit but you normally make a hundred bucks an hour and what would be the typical engagement? How many hours I would say eighty hours okay, so these are babies of eight thousand ten thousand projects okay, so I'm just a thousand to one hundred hours. Okay, so eight, eight thousand ten thousand dollars and I seen the profits pretty high because you're the individual consultant you're doing it's your time there's no products involved, okay? The educational community services for african americans entrepreneurs um what do you generate in so we we've actually run this without a profit and we're kind of trying teo to go back and and change that now, ok eso for instance where you would dio eh we would do a conference and then charge people ten thousand dollars for a sponsorship so a conference would make something like forty thousand dollars. Okay, so you make forty thousand dollars for a conference how many hours would you put into for a conference of that size like this, you see is eighty, two hundred hours I feel conferences I find there extremely involved. Yeah and difficult. Yeah. How many hours? Um she's I kinda want to say about one hundred hours really kind of yeah oh or more I have probably picking up more but okay, so even if one hundred hours to you then is all that stuff profit or uh do you have to pay venue costs and other stuff there's venue cost there's there's definitely costs entertainment yeah, you hired d j okay, so what's the profit on some like that for my experiences about one third but yeah, we've been running really kind of close to the bone on profit for for the organisation period so I mean, there could be even in the red so forty thousand but the prophet number is about zero all right? Okay. And you're trying to amplify that this the probably on this I assume is pretty high because it's it's just okay and in the mobile app no revenue, no profits, right, no revenue and the red okay zero who's the best customers that over the last year you've dealt with just people you've enjoyed with and paid you very well um city of san francisco is a great customer. Um I did a hackathon with hackers and founders who they were great and, um there is another partner on that hackathon that was, um a little bit more challenging. Okay? Hacker too. Okay, so and we could I'm sure you've more clients and we get but just for expediency steak what we'd start doing is we start developing over thie overlap so city of san francisco is a big smiley face or one of your great hackers was a smiley face. This guy sounds like he was a kind of flat face. Yeah. Okay. Oh, are you maybe have some frown he's down here? So what we're looking for is now we want a duplicate. Can we target these customers? But what? The private by its most profitable, right it's very clear. This is your most profitable thing. Hands down, it's very clear that your mobile app is generating nothing and this is even worse because this generates nothing but it costs at least a hundred hours. This the causes nothing is a stagnant. So actually just in this quick, really rough analysis and we would dig into more detail. But this is your worst product for your financial benefit, this's. The second does and this is your best. And this is your best client. So the parade overlap makes it very clear that we want to sell mohr of these see, like city training them the start of mentality and that we have to. And this is where most people go wrong. It's okay, it's very obvious. I want some more of this. They don't realize that this is was actually hurting you, so I would suggest from this quick sit down is can we eradicate this type of work and even though it may be like fun to do and stuff it's costing you one hundred hours of time if we took the hundred hours to find another city if you've spent for forty three solid weeks doing nothing else but just calling on cities could you find one more client like that and if you could you bring in enough money to cover right everything does that make sense that's how the parade overlap works doesn't make sense to you totally cool well you're done you past the hot already I don't know that I'm going to be able to eliminate number two um why I have four partners and the business hasn't been run effectively and so now someone needs to step in and run it and I'm now that person to step in and run it oh here we go now this is a hostage to get hot right this is the barber wants there is a robbery but it wasn't crying it ain't gonna be made here's the deal I know you have partners here but you got it we got to make you money exactly and this is not making you money right now you're partners is are they devoted one hundred percent that this is now okay so let me get this straight they make money elsewhere yes they want you this is not making nice they want you to fix it invest your time and fix it for them well someone has to make a time investment in it and take our our best performing program in that bucket and make it does anyone have to fix it? Well, then the other option is that it dies okay that's not really a great option. Um I don't know nobody wants it your baby oh, give me that baby benefit for what she's doing I mean, what do you mean? I mean, it does add some benefit doesn't help others I mean it's it's hard to be like okay, I'm not gonna help those people anymore that's what it is that was calling using I'm abandoning people yes, quite a bit it but you have been out of these people and your abandon these people and their investors who call and they're like, oh, what entrepreneurs do you know and entrepreneurs you call and they're like uh what what investors are investing right now and there's media who called it? And and it is very stressful. Yeah, so there's an emotional decreasing I gotta do is emotionally but there's no financial benefit and so you're going toe for my experience you're gonna pay for this for the rest your life stress but I'm not getting by not making money sometimes cutting bait on this means you freed up for someone else to do it and go all in on it so I hear you and using the baby now I get it it's something you created it started you can't abandon it but sometimes like you failed it okay that's not but sometimes your baby right demented baby jeffrey dahmer's a baby parents like oh my god he's such a great person no sometimes is demented I don't know why the family walked like that that's why I anticipate they walked like I think you're right what you don't think a serial murderer who eats people would walk to you like that he might yeah what do you say in connection with the baby analogy I mean you could put up for adoption there are a lot of other programs there are a lot of other programs out there that work with other different you know demographics and could maybe incorporate a program like what you have so far into that I don't know if you could pay for it but at least it would not die it would just take on a a different lifestyle I wonder if there is an opportunity and where you're making money to bring this other thing into the cities that's the other option I do often get asked to speak about diversity and things like that I so that becomes so you deliver that same benefit for the same people you care about are servicing in away up here that is a that's a great really good that's what I'm doing I mean coming out thing is I'm coming bringing that whole message to different audiences now not just a gay and lesbian thing it's talking about how are you coming out to be an entrepreneur and and make more money, right? Yeah because if you're not making money money is the lifeblood of your business yeah you need this and for you to have the impact you're you're from this plant have a big impact you know it you know I know for you to have the impact money is a critical component I obsessed me when people put shame around money money I have no shape well, money is a tool it's a vehicle it allows you to do more of this I love the idea if you feel a calling what you're here how do you embed it in what your customers were decreeing they want because here you're the money's demonstrating that you shouldn't be doing this I love pulling that then well last thing I want to share is always the analogy the parent child like we're parent child my business is my baby and it's growing and one day will have its own legs I call b s on that I think it's more siamese twins I believe we are so in sync their business that we actually share a soul and when we separate ourselves it's not letting the baby go it's it's surgical disconnect from our business so I realized, dropping this is very easy for me to say. I realized the emotional and soul connection you have to it is a total, different game. I just wanted to realize that this has become a leech on your financials, right? And this one is was providing, so we need to get you here. And the question is, how can your soul make to be moved into this? Okay, okay, awesome, he rock. Thank you, thank you, thank you all right.

Class Description

Ready to take full control of your business’s financial health? Join Mike Michalowicz, author of The Pumpkin Plan, The Toilet Paper Entrepreneur and his newest book Profit First, for an immersion into understanding the shockingly simple principles behind financial management and leveraging it to grow your business.

In this course, you’ll learn the core four principles of financial health and how to use them to create a profitable "rhythm" for your company. You’ll also learn about the psychology of managing your debt, whether you’re struggling with credit card debt, loans, or personal guarantees. Mike will also cover ways to bring new money into your business through cost-cutting, renegotiating, finding lost revenue opportunities, and much more.

By the end of this course, you will have escaped the panic-driven cycle of operating check-to-check and you’ll have a foolproof way of ensuring that your business becomes permanently profitable... from the very first day that you watch this course.


Ella Heath Photography

Wonderful class!! Not only is the content very impactful and life-changing but Mike's funny character made the class very entertaining - the marker on the forehead story made my husband and me laugh to tears!! We are implementing Profit First right away. Thank you CL for hosting such an amazing class.